## Facts

- Aerojet-General Corporation operated facilities that used and disposed of hazardous substances, resulting in soil and groundwater contamination at multiple California sites.
- Government regulators and private parties pursued Aerojet for cleanup and related property-damage liability.
- Over roughly 1956–1984, numerous insurers issued occurrence-based CGL and related policies to Aerojet providing coverage for “property damage” caused by an “occurrence” during the policy period and promising to defend suits seeking potentially covered damages.
- Coverage disputes arose over (1) when and how the insurers’ duty to defend is triggered in contamination cases involving continuous or progressive property damage and (2) whether environmental site-inspection and investigation expenses are “damages” (indemnity) or “defense costs.”
- Insurers sought declaratory relief regarding obligations under the policies; Aerojet cross-complained seeking determinations of defense and indemnity duties.
- The trial court entered judgment allocating responsibilities and addressing the characterization of site-investigation expenses; the Court of Appeal affirmed in part and reversed in part.

## Issues

1. Under occurrence-based CGL policies, does the duty to defend extend to suits alleging property damage that is continuous or progressive and may continue or be discovered after the policy period, so long as there is a potential connection to damage occurring during the policy period?
2. Are costs to inspect, investigate, and monitor environmental contamination properly treated as indemnity “damages,” defense costs, or a mix depending on their role in the insured’s defense?

## Decision

- The California Supreme Court affirmed in part and reversed in part, and remanded for further proceedings.
- The Court held the duty to defend is triggered whenever the underlying action seeks damages potentially within policy coverage; once triggered, the insurer must defend the entire action.
- In long-tail contamination matters, the duty to defend may be triggered even if some damage continues after the policy period, so long as there is a plausible basis that property damage occurred during the policy period and coverage is at least potential.
- The Court held environmental site-investigation and monitoring expenses may constitute defense costs when reasonably necessary to evaluate, prepare, or present a defense to potentially covered claims.
- The Court rejected categorical rules labeling all investigation costs either indemnity or defense; classification turns on the expenditures’ purpose and function, requiring fact-specific determinations and, where appropriate, allocation.

## Legal Principles

- The duty to defend is broader than the duty to indemnify and arises when a suit seeks relief potentially within the policy’s coverage.
- The duty to defend may be triggered by the complaint’s allegations and by extrinsic facts showing a potential for coverage; it continues until the insurer conclusively establishes no possibility of coverage.
- For occurrence-based CGL coverage, the relevant focus is when property damage occurs; continuous or progressive damage that includes damage during the policy period can trigger defense obligations.
- Environmental investigation, testing, monitoring, and related site-assessment costs are defense expenses when their function is to support legal defense (including evaluating allegations and developing litigation strategy), even if the work also relates to remediation.
- Whether a particular expense is a defense cost or an indemnity obligation depends on its function in relation to defending potentially covered claims and may require allocation.

## Conclusion

The court reaffirmed California’s broad duty-to-defend standard in occurrence-based CGL policies for long-tail environmental property damage and held that site-investigation expenses can be defense costs when reasonably necessary to defend, with classification determined by a functional, fact-specific inquiry on remand.


Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38 (Cal. 1997)