California Supreme Court Holds That an Adjudicative Administrative Proceeding Is a 'Suit' for Purposes of Liability Coverage
Insurance Law Flash
The California Supreme Court today issued its long-awaited opinion in Ameron International Corp. v. Insurance Co. of the State of Pennsylvania, 2010 WL 4643779 (Nov. 18, 2010), concerning the scope of the term "suit" in commercial general liability policies. The court reaffirmed the validity of Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857, 887 (1998), where it established the "bright-line" rule that a "suit" is "a court proceeding initiated by the filing of a complaint." Nevertheless, the court, in a decision authored by Justice Ming Chin, found that a proceeding before the U.S. Department of Interior Board of Contract Appeals (IBCA) was a "suit" under policies that did not define that term. As the court stated: "This quasi-judicial adjudicative proceeding, employed to resolve government demands against insured parties, is a 'suit' as a reasonable insured would understand that term."
The insured, Ameron, subcontracted for the fabrication and installation of concrete siphons used in the Central Arizona Project aqueduct, a project of the U.S. Department of Interior, Bureau of Reclamation. The Bureau discovered defects in the siphons that necessitated their replacement. The Bureau's contracting officer issued a decision finding Ameron and the general contractor responsible for the defects and seeking almost $40 million in damages. Ameron challenged the decision before the ICBA. After a 22-day proceeding before an administrative judge, the parties agreed to mediation, and Ameron settled the Bureau's claims for $10 million. Ameron sued a number of primary and excess insurers to recover the costs of defense and settlement of the claims.
In determining whether the ICBA proceeding was a "suit" under policies that did not define that term, the Supreme Court focused on three main factors: (1) the pleading requirements under the ICBA, which the court found were equivalent to the requirements for a complaint under the California Code of Civil Procedure; (2) the "due process" available before the ICBA, which was equivalent to a court proceeding, including the ability to subpoena witnesses and cross-examine them under oath, and that evidence was subject to generally accepted federal rules of admissibility; and (3) the power of the ICBA administrative judge award damages, which was the same relief as would be available to a litigant in the Court of Federal Claims. Based on these considerations, the court concluded that "[a] reasonable policyholder would recognize such proceedings as a suit and would expect to be defended and, if necessary, indemnified by its insurer."