A California appellate court recently ruled that propulsion manufacturer Aerojet’s payment of approximately $175 million to settle regulatory enforcement actions over liability for groundwater contamination cannot be recovered under certain excess policies absent a final adjudication of liability.  Aerojet-General Corp. v. Commercial Union Insurance Co., No. C-051124, 2007 WL 2671279, *1 (Cal. Ct. App. Sept. 13, 2007) .

The court’s decision appears to be limited to and highly dependent upon the policy’s specific language limiting coverage to “damages.”  The policies at issue in the case obligated excess insurers to indemnify Aerojet only for sums which Aerojet “shall become legally obligated to pay, or by final judgment be adjudged to pay, to any person or persons as damages.”  The policies contained no language suggesting indemnity for anything other than “damages.”  Moreover, the policies did not obligate the excess insurers to pay until Aerojet was held liable by final judgment for an amount which exceeded the underlying insurance.

Relying on the California Supreme Court’s decision in Certain Underwriters at Lloyd’s of London v. Superior Court, 24 Cal.4th 945 (2001), commonly known as the Powerine I opinion, the Aerojet court concluded that the “clear and literal” definition of the term “damages” in the excess policies “means only money ordered by a court to be paid.”  Since Aerojet was never ordered by any court to settle the regulatory actions, Aerojet’s settlement costs were outside the scope of coverage.