[00:00:00] Speaker 00:
Good morning. Good morning, Your Honors.

[00:00:04] Speaker 00:
If I may, could I please reserve five minutes for rebuttal?

[00:00:15] Speaker 05:
You may proceed.

[00:00:16] Speaker 00:
Thank you. And good morning again. My name is Terry Kilpatrick. I'm one of the attorneys for Paula Farms, who's here pursuing a bad faith insurance claim on behalf of Gemini's insurance companies insured Dole Oil Company.

[00:00:36] Speaker 00:
What I would like to do is start with a quick recap of how we got here today.

[00:00:42] Speaker 00:
Dole Oil Company is a small oil company in the Central Valley run by Karen Dole, who took over when her husband had passed away. And they're in the business of pulling oil and salt water out of the ground, separating it out, and then re-injecting that saltwater back into a well bore underground. And unfortunately, what happened is that saltwater broke through some formations. It got into the fresh groundwater that Paula Farms used to irrigate its crops.

[00:01:14] Speaker 00:
And it killed and harmed thousands of trees and cost millions of dollars.

[00:01:23] Speaker 00:
Well, Mrs. Dole contacted the Gemini Insurance Company and said, I've been sued. Please defend me. And Gemini wrote back and said, no, we're not going to do that because we have a pollution exclusion. We do not ensure pollution incidents.

[00:01:42] Speaker 00:
And.

[00:01:45] Speaker 00:
The the original letter that Gemini wrote and in the briefs to your honors submitted in this case, Gemini spent a lot of time saying you're not covered. under Section 2B of the policy. That is pollution costs. Well, Dole Oil Company never sought coverage under 2B. Dole Oil Company was seeking coverage under 2A. That's the property damage section. And I'm going to get into that in just a little more detail in a moment.

[00:02:22] Speaker 05:
Well, the main argument in your opening brief appears to be that saltwater is not a pollutant because it is exempted from the definition of waste, which in turn exempts it from the definition of pollutant. However, under McKinnon v. Truck Insurance Exchange, it seems to me that the initial question is whether a reasonable layperson would commonly understand saltwater to be an environmental pollutant. Do you concede that a reasonable layperson would think that saltwater is an environmental pollutant?

[00:02:58] Speaker 05:
Did you argue this in your opening brief, or if so, where?

[00:03:02] Speaker 00:
It's a good question, Your Honor, and I will find that site for you. But that is the issue, and I don't think it's essential that we answer that question, to be quite honest. I think it's just another reason to reverse the decision in this case. But saltwater is a natural element pulled up into the ground. People typically don't treat, and then it's re-injected underground.

[00:03:33] Speaker 00:
I don't think a reasonable layperson would consider saltwater as a pollutant.

[00:03:37] Speaker 04:
I thought you acknowledged in the proceedings below that saltwater is an irritant or contaminant. I mean, isn't that the case?

[00:03:45] Speaker 00:
Yes, we did concede that, Your Honor. Okay.

[00:03:50] Speaker 00:
Again, I don't think that's the essential question for this case. So I will concede it again that saltwater can be considered as a contaminant. Now, I will say in the truck exchange case, they do address that issue, and I do believe that is a basis still. We have argued it below, and we argue it again in this court, that saltwater really should not be considered a pollutant. But even if it is, it's the definition of pollutant that is the problem here for Gemini. Because pollution is defined as a contaminant or irritant and soot and vapor and waste.

[00:04:29] Speaker 00:
And waste is defined as recyclable or unwanted material, not saltwater.

[00:04:36] Speaker 01:
But why can saltwater not be waste and still be an irritant and contaminant?

[00:04:43] Speaker 00:
Well, because that's how the policy terms are defined.

[00:04:47] Speaker 00:
That's what Gemini decided how they were going to do this. So, you know, I think it was the truck case too, saying anything in an extreme could be a contaminant or irritant. You know, enough water will kill somebody. You drink too much water, you can die from that. Well, it doesn't make fresh water a dangerous chemical or a contaminant or an irritant.

[00:05:13] Speaker 05:
So hypothetically, if we agree with the district court that saltwater is a pollutant for purposes of the exclusion, there still seems to be one remaining question, namely whether your underlying claim against Dole could still potentially fall within the policy. So assuming saltwater is a pollutant, does your complaint against Dole potentially give rise to liability that could be covered by the policy? or could your complaint against all be amended to give rise to liability that would be covered under the policy?

[00:05:47] Speaker 05:
Please explain that to me.

[00:05:49] Speaker 00:
Well, I guess I want to be careful about what we're talking about because what I think that the district court did, what the magistrate judge did, was try to divide the meaning of pollutant and the meaning of waste, and that they're used two different ways and they mean two different things. We have always contended and we still contend that the definition of pollution includes pollutants and waste.

[00:06:20] Speaker 00:
So when we're talking about a pollution exclusion, if waste is part of that definition and waste excludes saltwater, then saltwater is not a pollutant.

[00:06:35] Speaker 00:
Now, what the district, what the magistrate judge did, which I believe was erroneous, and it's why I was pointing out these two sections, sections 2A and 2B. Section 2A is a straight property damage claim.

[00:06:51] Speaker 00:
The damages in property damage are the repair or the replacement of the property. The damage and pollution costs are investigating the causes of the pollution and the remediation and removal of the pollution, the monitoring of the pollution. Plus, it has all these other conditions. You need to know about the leak within 30 days. You need to notify Gemini about it within 90 days. So these two sections for property damage and pollution costs, they're different.

[00:07:25] Speaker 00:
They have different risks. They have different conditions. And that's important because what Gemini and the magistrate judge were saying is hey, we're taking on all these risks. Well, yes, you are but you you've Resolved that in the way you're going to deal with it because you have two separate sections section 2a on Property damage has to stand on its own And I want you to imagine for a moment imagine if this policy written and there was no to be all it was was to a sing we'll pay for property damage caused by an occurrence and And clearly, this is an occurrence.

[00:08:02] Speaker 00:
This is an accident that saltwater broke through. And we're going to define pollution as soot and vapor and waste, and waste isn't saltwater. What ordinary layperson would think that saltwater somehow is a pollutant?

[00:08:20] Speaker 00:
Why would that word, why would the word waste be in the definition of pollution?

[00:08:27] Speaker 00:
but for to define pollution, that's its whole purpose, right?

[00:08:32] Speaker 00:
When word A uses word B to define its terms, the terms and meaning of word B become part of word A. That is how definitions work.

[00:08:46] Speaker 00:
So we need, Section 2A is a standalone provision in terms of coverages. That's how the policy deals with it, right?

[00:08:57] Speaker 00:
I think an ordinary person and the reasonable expectations of an insured looking at that policy would go, it sure looks like saltwater is excluded from the terms of pollution. And if you go to the policy too, I mean, in the actual exclusionary language, I'm looking at page 1347 of the volume nine of the excerpts of record.

[00:09:23] Speaker 00:
It says, this is the pollution exclusion. We don't cover for the discharge of pollutants.

[00:09:31] Speaker 00:
Caps on bold and it goes on. We we don't cover for any disposal or treatment of waste.

[00:09:42] Speaker 00:
And it goes on again. We don't. Pollution doesn't mean waste handled or treated by you. Well, I'm an insured person in my job, my business.

[00:09:55] Speaker 00:
is re-injecting waste into well bores. I'm looking at this policy going, again, it sure looks like saltwater is being singled out as being a non-pollutant.

[00:10:13] Speaker 00:
What Gemini has done, the engagement is very complicated analysis about buyback provisions. Well, I don't know much about the oil business, but what I do know is the buyback provision, that's nowhere to be found in this insurance agreement.

[00:10:35] Speaker 00:
All this, there is nowhere in the insurance agreement that says, hey, layperson, hey, insured person, be sure that when you're making a claim, read through not only A, which you're making a claim under, read through B, figure out if there's going to be coverages under B. Oh, and by the way, this This presumes all this knowledge of the oil business.

[00:10:56] Speaker 01:
I guess is the is the question. I mean, we're all reasonable people. But is the audience here is the insured, right? Not the not the plaintiff who's bringing a suit against the insured. And this is a policy that's targeted towards energy production, is it not? So I guess it. It doesn't strike me that that does all of the work. I mean, the insurance – there's insurance contractors not with any potential plaintiff if the insured is a tortfeasor.

[00:11:29] Speaker 01:
The audience is the insured. We're trying to understand where was the meeting of the minds between those two. So the fact that it has these energy terms of art doesn't seem to be disqualifying of their interpretation.

[00:11:39] Speaker 00:
Well, it's a great question, and Jim and I and the magistrate judge both talked about that. hey, these insurance policies have to do with negotiations and industry standards and allocations of risks and reserves.

[00:11:55] Speaker 00:
Look for that anywhere in the record. There is nothing in the record. I mean, first of all, it's inadmissible parole evidence, but there is nothing about, you know, Mrs. Dole's sophistication, her negotiations.

[00:12:08] Speaker 00:
We're left with the meaning of this contract, and I think it is inappropriate and inadmissible for the magistrate judge to rule that all these industry standards, none of which I know about, none of which are in the record anywhere that I can see, had something to do with how Mrs. Dole would read that contract. So I see I've used up my time. I will reserve any time. Thank you.

[00:12:52] Speaker 05:
Good morning.

[00:12:52] Speaker 03:
Good morning, Your Honors. I'm here to please the Court. Alex Potenti for Gemini Insurance Company, defendant and appellee.

[00:12:59] Speaker 03:
I guess a couple of points. The first is that Palla did waive and concede the issue of is saltwater a pollutant? It did not raise this issue in the underlying case. It did not raise it in its opening brief. It raised it for the first time on appeal.

[00:13:17] Speaker 03:
But on the merits of that issue, this is not just salt water, it's produced water. Produced water is water that's withdrawn from a wellbore that contains not only salt water, but boron, sometimes metals and other dissolved solids. The problem, of course, is that salt water and the other produced fluids that were re-injected into the wellbore leaked. They leaked not in a way that was covered under this policy, but in a gradual way.

[00:13:49] Speaker 03:
That's the record.

[00:13:50] Speaker 05:
It wasn't an incident.

[00:13:52] Speaker 03:
Right. It wasn't an eligible pollution.

[00:13:54] Speaker 05:
I mean, there's no doubt that a whole bunch of trees got destroyed and that it was caused by this leak, but it was a leak that gradually went into their water source and then... Right.

[00:14:07] Speaker 03:
It contaminated the water source and killed trees. This is the exactly...

[00:14:13] Speaker 03:
the exact situation that McKinnon is talking about as what is the commonly understood definition of pollution.

[00:14:22] Speaker 05:
So McKinnon instructs us to put ourselves in the position of a layperson and understand how they might reasonably interpret the exclusionary language in the policies. So why would a layperson not believe that by excluding saltwater from a definition of waste, the policy also excluded saltwater from a definition of pollutant? After all, a pollutant is defined in part as waste.

[00:14:47] Speaker 03:
That's an excellent question, and it has a simple answer that's in the plain language of 2A, the very policy provision that PALA seeks recovery under. Pollutants, as applies to 2A, means any solid, liquid, gaseous, or thermal irritant or contaminant. And we know from McKesson, from McKinnon rather, that this is an irritant or contaminant. It meets the definition of common understanding of the word pollute indicates that it is something that creates impurity, something objectionable and unwanted.

[00:15:24] Speaker 03:
And no one could possibly say that salt water and the other produced fluids that leaked into the aquifer were something that were unobjectionable or unwanted. They killed the trees. They rendered the potable aquifer unusable for that purpose. They were unwanted, unobjectional, and they constitute classical pollution.

[00:15:47] Speaker 01:
Thank you for drawing us for 2A. That is the provision at issue.

[00:15:51] Speaker 01:
Where are we finding the text where 2A points to that definition of Waste and pollution rather than the plaintiff's preferred one?

[00:16:00] Speaker 03:
Well, there is only one definition of pollution in the policy.

[00:16:05] Speaker 03:
If you look at the exclusion for pollution, that's the exclusion number 13. It applies to Section 2A bodily injury and property damage liability. So the exclusion that we're talking about that we're relying upon for this case applies only to 2a and and it excludes bodily injury or property damage arising out of or resulting from the actual alleged or threatened discharge dispersal seepage migration release or escape of pollutants uh one at or any premises site or location which is or was at any time owned or occupied or rented or loaned to any insured so we meet that standard there's no dispute about that okay now um help me with uh

[00:16:56] Speaker 01:
Do the same for waste.

[00:16:57] Speaker 03:
All right. So there is an exception in the pollution exclusion under one for an eligible pollution incident. And that eligible pollution incident has to be basically sudden, accidental, learned of within 30 and reported within 90 days, not met here. So there are some times in which when you re-inject salt water or produce water into a well board, that they would be covered if it wasn't eligible for pollution. But hold on, I'll get there.

[00:17:28] Speaker 03:
So if you look at two and three under the pollution exclusion, they exclude waste without exception. So if something is waste, it's never covered. If something is pollution, it's covered sometimes, just not here. So we intended, under the plain language of the agreement, and by the way, this This contract is an ISO form. It's not written by us. It's not a manuscript form. It's a form that is drafted by the Insurance Services Organization.

[00:18:00] Speaker 03:
It's designed for specifically oil producers.

[00:18:08] Speaker 03:
but they exclude waste expressly without exception.

[00:18:12] Speaker 04:
So if you get saltwater under both definitions, you're getting something that's illogical, like saltwater can both be excluded and both be covered, is that?

[00:18:21] Speaker 03:
No, not at all, Your Honor. So the definition of pollutant is an irritant or contaminant, and it includes smoke, vapor, soot, fumes, acids, alkalides, chemicals, and waste. And we know from Garamendi versus Golden Eagle and a half dozen other cases that the word including includes is merely illustrative. It's not restrictive. Right.

[00:18:41] Speaker 04:
I'm saying if you have saltwater, if you don't exclude saltwater from the definition of waste, you can end up with illogical, I think, results under the policy.

[00:18:53] Speaker 03:
You would have rendered, and that's exactly right, you would have rendered as mere surplusage the exception to the pollution exclusion because you would be saying that if If it is waste, it's never covered, but we have these exceptions that are going to never be in play because waste can never be covered.

[00:19:11] Speaker 05:
I know two people that do insurance all the time. There's very logical things to you, but going back to the layperson part of things, let's say if we find it reasonable that a layperson would not consider saltwater, I'm saying hypothetically, an environmental pollutant, do you lose?

[00:19:32] Speaker 05:
If salt water – well, first of all, this is – If we find that a layperson would not consider salt water an environmental pollutant, do you lose?

[00:19:41] Speaker 03:
No, because this is not just salt water. It's produced water. So this is salt water and chemicals that are drawn up and re-injected. So it's not just – it's not like you went out to the ocean and got a bucket full of salt water. It's got boron in it. It's got heavy metals in it. It's got a whole host of things.

[00:19:58] Speaker 05:
Because you have a couple of things going on here. It's obviously – You can win under the policy, but the duty to defend is a different situation. And if things are, you know, you can have a duty to defend and still win, right?

[00:20:16] Speaker 03:
At issue currently is both the duty to defend and the duty to indemnify. We declined both. And the Ninth Circuit case, Surfing, says that if If the language of the policy is clear and unambiguous and doesn't cover the laws, then we do not owe a duty to defend where there's no factual dispute. Here there is no factual dispute.

[00:20:36] Speaker 01:
Well, I guess it strikes me that you've walked us through two different definitions of waste.

[00:20:43] Speaker 01:
And so isn't that the very definition of ambiguity? There's the waste that for one purpose that is in which saltwater doesn't matter. And then there's the waste, the exact same word with, as you said, only a single definition that does all the work with respect to the pollution incident. So if there are two definitions, why isn't it ambiguous?

[00:21:09] Speaker 03:
I'm sorry, I'm not following that, Your Honor. Waste has one definition.

[00:21:13] Speaker 03:
Waste means a discarded, unusable, or unwanted substance or materials. And it says also that produced fluids are not waste.

[00:21:25] Speaker 03:
All that means is if you have a Venn diagram of pollution, right, and then you have waste, all waste is pollution, but not all pollution is waste. And the reason for that is because pollution is sometimes covered and waste is never covered. Waste is excluded under 2A, 2 and 3, but pollution has – an exception that allows an eligible pollution incident to be covered if certain things are met.

[00:21:53] Speaker 05:
Sometimes it occurs to me if we have to explain things on so many layers, could it be ambiguous to a lay person?

[00:22:00] Speaker 03:
No, that's street surfing, Your Honor. There is no other reading of this, particularly with regard to an environmental policy that's issued to an oil producer.

[00:22:12] Speaker 05:
But I guess what I'm saying, hypothetically, if there is another, or if it's ambiguous at least to a lay person, wouldn't that trigger your duty to defend?

[00:22:21] Speaker 03:
But in ambiguity, there must be a reasonable reading based on the plain language of the policy. And I would submit there is no reasonable reading here. Waste excludes produced fluids. Pollution is an irritant or contaminant, which Martinelli says in other cases, McKinnon among others, that something that's unwanted and that contaminates aquifers, that's a classic pollution. So there's really no dispute And Paula Farms conceded that, it seems to me, at a number of occasions.

[00:22:52] Speaker 03:
That's right.

[00:22:54] Speaker 05:
Let me understand. I always like to understand the implications of things. Let's say, hypothetically, that I thought you had a duty to defend, but that you're ultimately right in your interpretation. But if I thought you had a duty to defend and you didn't hear, that puts you on that hook for that default judgment, doesn't it?

[00:23:16] Speaker 03:
That's a Bit of a dispute. I think there still has to be coverage for the indemnity, but we would certainly owe defense costs, and they would seek bad faith damages.

[00:23:24] Speaker 03:
So that would be – I mean, that does – A question on the hook for something.

[00:23:27] Speaker 02:
Yes, absolutely. Something.

[00:23:29] Speaker 01:
Absolutely.

[00:23:29] Speaker 02:
Something a lot, possibly. Possibly, yes, you are.

[00:23:33] Speaker 01:
Can I pick up more on the – I guess on the implications kind of industry-wide? So why is it important with respect to these policies that some saltwater – you know, count some saltwater, dozens? What's the policy behind the policy for these sorts of contracts?

[00:23:50] Speaker 03:
I mean, there is a case law in California that technical terms are to be read in the way that a person understanding the technical term would read them, a technical insured, right? So an oil producer is the audience for this policy. But here, the issue is you have a contaminant, you know, saltwater and a collection of other that leaked into the aquifer and poison trees.

[00:24:16] Speaker 03:
So that's the pollutant that's causing the pollution, and that pollutant is not waste, so it's subject to the exceptions in the pollution exclusion, but they are not met here, so there's no coverage.

[00:24:28] Speaker 01:
So the idea of an example in which the produced fluids would trigger coverage, what's an example in the business where – What was reinsured getting into this policy?

[00:24:45] Speaker 03:
So if the produced fluids were injected into the Bell War, the whole, if they leaked in a manner that triggered the four criteria, which are essentially sudden, accidental leaks, discovered within 30 and reported within 90 days. If those criteria had been met, there would be coverage. So we fully admit that produced water, and that's why it's not included in the definition of waste, and it is included in the definition of pollutant, is covered in those circumstances when it leaks slowly.

[00:25:22] Speaker 03:
It has to be reinjected into a wellbore, and it has to leak out slowly, and then the insurer has to learn of it in 30 days. The leak has to happen during the policy period. And they have to report it.

[00:25:34] Speaker 01:
It can't be too slow if it has to be.

[00:25:36] Speaker 03:
No, no, it can't be slow at all. It has to be sudden.

[00:25:38] Speaker 01:
Oh, it has to be sudden. That's right.

[00:25:40] Speaker 03:
That's right. Yes. Yes. I miss I miss. It has to be sort of a catastrophic.

[00:25:44] Speaker 01:
OK. And that's the sorts of risks.

[00:25:46] Speaker 03:
That's that's that's the risk that this that this policy won't provide coverage for.

[00:25:51] Speaker 01:
That's right. Thank you for that.

[00:25:53] Speaker 03:
I've made my points. Any other questions from the court?

[00:25:56] Speaker 05:
I don't think so. Thank you.

[00:25:59] Speaker 03:
Thank you. Your arguments.

[00:26:19] Speaker 00:
Just a couple of points I would like to address.

[00:26:25] Speaker 00:
My friend defense counsel had mentioned that this is a standard foreign policy everybody uses. Again, I don't know that. I'm not an oil guy. I don't think that's anywhere in the record.

[00:26:37] Speaker 00:
And what I do know, however, is there is not one case, one case we could find that they could find, the magistrate judge could find, where the offending chemical that we're talking about is excluded in the definition of terms of the policy.

[00:26:56] Speaker 00:
So no case that says we're here arguing whether pollution exclusion applies for saltwater or produced water or chlorine gas or whatever it is. But by the way, we're going to exclude that in this definition. And we're going to include that exclusion in the definition of the word pollutant. So to me, that's a dispositive issue. In this case, I also believe that this going into the eligible pollution incident issue, I don't understand that.

[00:27:37] Speaker 00:
Section 2A is Section 2A. It defines pollutants. Pollutants includes waste. Waste excludes saltwater and produced water.

[00:27:51] Speaker 00:
And as my friend said, you know, the list is illustrative. It's not exclusive. But definitions can be inclusive and exclusive, right?

[00:28:03] Speaker 00:
I don't agree with the Venn diagram. I don't think the waste is inside pollutants and it swallows everything. Because if it does, what is the exclusion for saltwater there for at all?

[00:28:14] Speaker 00:
What does that mean to a regular person? I just I don't think people think in terms of Venn diagrams and reading to policy provisions, one of which doesn't even apply to them. So if a definition says it's A and B, but not C and not D. Well, that's the definition. And that's really what this definition says. Instead of just using the word waste and making us turn a page to go to that, they could have just written it all out. under the term pollutants when they were defining the term, right?

[00:28:45] Speaker 00:
It's the same thing. So right there in the definition of pollution is an exclusion of saltwater and produced water. That's what Doyle Oil Company did. That's their business. That was their reasonable expectation, that this insurance policy is going to cover my business, which is separating oil from produced water and saltwater. And I get it. If I dump a bunch of oil on the ground, that's a pollutant, and that's not covered. not so with saltwater, not so with produced water.

[00:29:16] Speaker 00:
So we would ask that you reverse this decision. And, Your Honor, as you also said, worst case here is we've got some ambiguities and confusion about this policy. Thank you very much.

[00:29:28] Speaker 02:
Thank you. This matter will stand to manage.

[00:29:32] Speaker 00:
All right.