• Water Rights in the 20th Century: Certainty or Flux
  Theodore A. Chester, Jr., Esq.

Editor: Albert M. Cohen, Esq.

On October 14, 1998, the United States Environmental Protection Agency ("EPA") sent "General Notice Letters" to approximately 750 potentially responsible parties ("PRPs") informing them that they are potentially liable for the costs of remediating the Casmalia Disposal Site in Santa Barbara, California ("Casmalia"). While EPA states that it considers all parties receiving the letters "de minimis" (i.e., small) contributors to the site and will present a settlement proposal in December, it estimates each one's "cash-out" figure at up to $750,000. EPA also states that it will not negotiate with individual parties. Based on experience at other sites, there is a serious question as to whether EPA's proposed settlement figures are equitable to de minimis parties.

Casmalia was a licensed hazardous waste disposal facility which operated between about 1973 and 1989. Over 10,000 California businesses legally sent billions of pounds of waste to the site during that period. The facility shut down in about 1989. The owner/operators abandoned efforts to properly close and clean up the site. As a result, EPA took emergency action and in 1997 entered into a settlement with about 54 large-volume waste generators to perform the cleanup. All funds received from third parties--including those who received the de minimis letter--will go into an escrow account to fund the remaining site work. Therefore, it appears that the funds obtained from de minimis contributors will serve to reduce the liability of the 54 large-volume generators. Indeed, it may be possible for those generators to avoid any further liability if the amounts collected from de minimis contributors are sufficient. EPA now estimates that the cost to close the site will be about $500 million. However, it is possible that the real cost will be well below this figure.

Based on prior experience at other sites such as the Operating Industries, Inc. ("OII") site in Monterey Park, California, where PRPs were made a de minimis settlement offer, it appears likely that EPA will try to require each PRP to pay a sum far in excess of its "equitable" share in order to participate in the settlement. For example, at OII, EPA based the settlement figure on an estimated remedial cost of $600 million and then imposed a 100% premium, even though the realistic estimate was only $150 million. Therefore, the amount sought was up to eight times the volumetric share of each of the PRPs. Thus, for example, the volumetric share for a party whose de minimis settlement figure was $250,000 was only about $30,000, so that the premium was in excess of $200,000. PRPs should therefore carefully consider the figures EPA uses at Casmalia to determine the fairness of its settlement proposal.

EPA's letter comes at a troubling time for many parties which hope to look to their insurance carriers for assistance. Recent developments have made recovery for such claims more difficult. For example, most general liability policies require insurance carriers only to defend "suits" and not other types of "claims." However, as noted in the accompanying article "Absolute May Not Be Absolute," the California Supreme Court recently ruled that demands from regulatory agencies (such as EPA's demand at Casmalia) are not "suits" under such policies and, therefore, do not trigger a duty to defend. Other cases have also had a negative impact on the ability of insureds to obtain a defense at hazardous waste disposal sites such as OII and Casmalia. See, e.g., Travelers Casualty and Surety Co. v. Superior Court, 63 Cal.App.4th 1440 (1998); Standun, Inc. v. Fireman's Fund Insurance Co., 62 Cal.App.4th 882 (1998). If PRPs are going to maximize their ability to obtain insur-ance coverage, they must carefully consider these recent developments in formulating a response to EPA's letter.

EPA has stated that it does not intend to negotiate with individual parties. Nevertheless, it may be in the interests of all of the de minimis parties to work together to formulate a response and to negotiate with EPA. If you are involved in the Casmalia site and have any questions, please feel free to call Albert M. Cohen of our firm at (213) 891-1010.

Be Prepared for an Air Quality Inspection
KNOW YOUR RIGHTS AND CONSIDER COMPLIANCE ALTERNATIVES
by Ivan Tether, Esq.

Pressure for increased air quality enforcement grows in the Southland and elsewhere. The U. S. Environmental Pro-tection Agency ("USEPA") has criticized the South Coast Air Quality Management District ("SCAQMD") for lenient enforce-ment. The USEPA has also adopted the "any credible evidence" rule ("ACE"), which means that they will use any evidence they find credible to try to establish a violation. Beyond this, Vice President Al Gore has tied his political future to the issue of the environment. All these and other developments lead to the threat of increased and more aggressive air quality inspections. Yet, with a little preparation and a few procedures, you can welcome the inspectorCand you can sleep better.

DURING THE INSPECTION

Does the Inspector Need a Warrant? While California environmental statutes require inspectors to obtain administrative warrants, warrants for "non-criminal" searches are readily available and you will only create inconvenience by requiring the inspector to obtain one. The better course is to welcome the inspector, once you check credentials, and develop a positive relation-ship.

Criminal inspections are a different matter. To get a criminal warrant, an inspector must show to a judge that the inspector has "probable cause," i.e., a good reason to believe that evidence relevant to a suspected criminal violation will be found at your facility. Even where a search begins as an administrative search, if the inspector begins to suspect criminal activity, the courts have held that the inspector must obtain either a warrant or consent to search before continuing.

Talking to the Inspector. Even under a criminal warrant, you do not have to talk to the inspector. You may tell your employees that they are not required to talk to the inspector. But you may not tell your employees not to talk to the inspector. If the inspector discovers a violation, do not give any explanation until you have had time to investigate. Then, work with counsel to make your best case.

BEFORE THE INSPECTION

Planning Ahead to Avoid Problems. There are several ways to take care of your compliance challenges in advance and avoid being in violation when an inspection occurs. These include: (1) reporting breakdowns, (2) obtaining variances from the Hearing Board, (3) performing your own inspections or environmental audits, and (4) disclosing your violations, in advance, to the agency ("self disclosure").

Reporting Breakdowns. The SCAQMD and other air districts have rules allowing you to avoid violation status by immediately (e.g., within one hour) reporting breakdowns of equipment which lead to violations. Check your local rule.

Variances. Variances, obtained by appearing before the Hearing Board of an air district, temporarily re-write the rules for your facility by suspending control or other requirements and by imposing new conditions to minimize any environmental impacts. The need for a variance may arise because you are having unforeseen difficulty meeting a new deadline or have had equipment failure. File a petition for a variance as soon as you find a problem.

Environmental Auditing and Self-disclosure. Develop a program of routine inspection for compliance, and you are prepared for self-disclosure. Both the SCAQMD and the USEPA have programs that reduce or eliminate penalties for a self-disclosed violation.

CONCLUSION

Welcome the inspector, check credentials, make clear that consent is limited to an administrative inspection, accompany the inspector, report breakdowns immediately, petition for variances as early as you can, develop a routine auditing program, consider self-disclosure, and sleep better.

Absolute May Not Really Mean Absolute
-- and Other Environmental Insurance Matters
by Albert M. Cohen, Esq.

Many insureds, faced with environmental problems, are often told that they do not have any possibility of obtaining insurance coverage for an environmental claim because their policy contains what is commonly called an "absolute pollution exclusion." In a very important decision, a California appellate court recently ruled that an "absolute pollution exclusion" clause may not be as "absolute" as previously thought.

Since 1985, most policies have contained so-called "absolute pollution exclusions"--which ostensibly bar any coverage for pollution--and insurers generally refuse to defend all environmental claims under such policies. However, in Charles E. Thomas Co. v. Transamerica Ins. Group, 62 Cal.App. 4th 379, 72 Cal.Rptr.2d 577 (1998), the California Court of Appeal held that a carrier had a duty to defend despite the existence of such a clause.

In that case, an insured which manufactured leak-detection devices was sued after a device failed to alert a customer that a tank had leaked. The customer was required by the local fire department to conduct testing, analyze the soil, test the tank, and assess the site. The customer sued the manufacturer to recover damages caused by a leakage of fuel from the tank, including the costs of clean-up and repair. The manufacturer's carrier refused to defend against the customer's lawsuit because the policy contained an "absolute pollution exclusion" which barred coverage for "loss, cost or expense arising out of any . . . request, demand or order that any insured or others test for, monitor, clean-up . . ., or in any way respond to, or assess the effects of pollutants." The court held that the carrier was required to defend because its insured's alleged losses did not arise out of a "request, demand or order." Specifically, the court found that the damages sustained by the customer in having to remove and replace the tanks, excavate, dispose of and recycle contaminated soil and repair damage to its property were not activities requested, ordered or demanded by the Fire Department and, therefore, were not covered by the exclusion. This decision indicates that insurers may be required to defend lawsuits by private parties to recover environmental damages which are not based upon regulatory demands even if the policies contain so-called "absolute pollution exclusion" clauses.

In our last newsletter we reported on another California appellate decision, Foster-Gardner, Inc. v. National Union Fire Insurance Company of Pittsburgh, et al. The Court of Appeal had held that insurance carriers which issued policies requiring them to defend "suits" were required to defend insureds who received orders and demands from environmental regulatory agencies, even if suits were not filed in court. However, in August, the California Supreme Court, in a close 4-3 decision, reversed the lower court. In Foster-Gardner, Inc. v. National Union Fire Insurance Company of Pittsburgh, et al., 18 Cal.4th 857, 77 Cal.Rptr.2d 107 (1998), the high court held that demands or orders by regulatory agencies where no lawsuit is filed do not constitute "suits" triggering an insurer's duty to defend.

Although this decision is likely to have a negative impact on insureds, those who carefully approach such claims may still be entitled to coverage when a regulatory agency brings a claim. To begin with, insureds must now carefully review their insurance policies since some policies require carriers to defend "claims" as well as "suits." In such cases, an insured should be entitled to a defense to a regulatory demand or order. For example, we are currently assisting several insureds who have policies which require their carriers to "defend any claim or suit against the insured." In those cases, despite the holding in Foster-Gardner, the carriers have agreed to defend their insureds.

Where a policy does not require the carrier to defend "claims," insureds must carefully consider their options. For example, to obtain a defense, an insured might wait and be sued rather than comply with a regulatory demand. However, insureds must be very careful in considering such a course of action because the penalties for not complying with a regulatory order can be significant. In addition, while carriers may not be required to defend regulatory actions, if litigation erupts between various potentially responsible parties --such as neighboring businesses or landlords and tenants--a carrier will likely be required to defend the action. A carrier may also have to pay investigation costs as defense costs.

Thus, the lesson is clear: insureds faced with claims brought by regulatory agencies must carefully review their policies and develop a strategy to maximize their ability to obtain insurance coverage.

Water Rights in the 21st Century:
Certainty or Flux
by Theodore A. Chester, Jr., Esq.

On August 26, 1998, the California Supreme Court granted review of the appellate court's ruling in Barstow v. Mojave Water Agency (previously published at 64 Cal.App.4th 737 (1998)). The case squarely presents the Court with a critical question: are existing water rights legally protected or are they subject to continued redefinition at the discretion of judges and governmental agencies? How the Supreme Court resolves this issue is likely to have a major impact on water rights well into the next century.

For more than a century, water rights, as property rights, were constitutionally protected. United States v. Gerlach Live Stock Co., 339 U.S. 725, 752-54 (1950). Both the California legislature and the courts recognized the importance of "certainty in the definition of property rights to the use of water . . . ." Water Code § 109. For example, in In Re Waters of Long Valley Creek & Stream Systems, 25 Cal.3d 339, 354-57 (1979), the California Supreme Court stated that "certainty to the existing economy and reasonable predictability to the user of water" is a "compelling policy consideration[]." Id. at 354. The Long Valley court stated that "uncertainty [is] one of the major problems in contemporary California water rights law" because, among other things, it "inhibits long range planning and investment for the development and use of waters," "fosters recurrent, costly and piecemeal litigation," and "impairs the state's administration of water rights." Id. at 355-56.

However, in the two decades since Long Valley, state and federal court decisions have departed from historical precedent and upheld abrogations of pre-existing private water rights in the name of serving the public interest as determined by the political branches of government. The cases have destabilized the definition of water rights in order to reallocate water for politically preferred purposes. See, e.g., United States v. State Water Resource Control Board, 182 Cal.App.3d 82, 129-30 (1986) (the State Board may determine what is a "reasonable use" of water and, thus, it is free to modify any right based on what "is essentially a policy judgment requiring a balancing of the competing public interests"); National Audubon Society v. Superior Court, 33 Cal.3d 419, 444-48 (1983) (water rights incorporate the public trust doctrine into their definition); O'Neill v. United States, 50 F.3d 677 (9th Cir. 1995) (CVP rights to water are subject to reallocations mandated by the Endangered Species Act and the 1992 Central Valley Project Improvement Act).

Perhaps the most notable of these cases is Imperial Irrigation District v. State Water Reservoir Lake Beal, 225 Cal.App.3d 548, 573 (1990), wherein the court held that "[a]ll things must end, even in the field of water law. It is time to recognize that this law is in flux and that its evolution has passed beyond traditional concepts of vested and immutable rights."

The trial court in Barstow followed this line of cases, apportioning water rights without regard to legal priority.

The trial court assumed that under Article X, Section 2 of the California Constitution, which limits water rights "to such water as shall be reasonably required for the beneficial use to be served," it was free to redefine water rights by use of an "equitable apportionment" of available water.

The Barstow appellate court reversed, expressly rejecting the holdings in Imperial that water law "has passed beyond traditional concepts of vested and immutable rights" and that such rights are subject to "an evolving process of governmental definition." Instead, it relied heavily on the need for certainty recognized by the Supreme Court in Long Valley and held that "the trial court could not overlook well-settled principles of water law to establish its own system of groundwater allocation." The court found that neither the constitutional provision nor any court decision under it "[h]as been interpreted to allow the trial court to disregard existing water rights in order to fashion an allegedly equitable solution" and held that the constitutional provision did not supersede or supplant pre-existing water rights.

In reviewing Barstow, the California Supreme Court will be faced with whether it should affirm and implement the policy of Long Valley, promoting water-right certainty, or accept the logic of Imperial, leaving water rights in a state of flux. Its decision is likely to have a major impact on water rights for many years to come.