D.C. No. 3:04-cv-00034-LRH-RAM District of Nevada, Reno
CERTIFYING QUESTIONS TO CALIFORNIA SUPREME COURT
Before: Ronald M. Gould and Consuelo M. Callahan, Circuit Judges, and Edward R. Korman, Senior District Judge.*fn1
On New Year's Day, 1997, the Truckee River in the Sierra Nevada Mountains flooded. The flood destroyed the Farad Dam, which was owned by plaintiff Sierra Pacific Power Co. ("Sierra"), and used in connection with its hydroelectric facility in Farad, California. Insurers Hartford Steam Boiler Inspection & Insurance Co. ("Hartford") and Zurich American Insurance Co. ("Zurich") (together "Insurers") insured Sierra's facilities, including the Farad Dam, with $200 million in total coverage.
In this coverage dispute, a primary issue is whether, as a matter of California insurance law, the building ordinance or law exclusion excludes increased costs of replacement due to building ordinances following a loss caused by a covered peril. If it does exclude such costs, a secondary issue is whether, again as a matter of California insurance law, other costs that are prerequisites to building, such as costs of obtaining permits and environmental impact studies, are excluded by the building ordinance or law exclusion. The California Supreme Court has not ruled on these questions, and the California Courts of Appeal have reached conflicting conclusions. As these questions are dispositive of a primary issue in this appeal, we respectfully request that the California Supreme Court exercise its discretion and decide the certified questions presented below.
Pursuant to Rule 8.548 of the California Rules of Court, we request that the California Supreme Court answer the following questions:
1. Whether, under California insurance law, a building ordinance or law exclusion, found in the Perils Exclusions section of a property insurance policy, effectively excludes coverage for increased costs caused by complying with ordinances and regulations if the underlying loss was caused by a covered peril.
2. Whether, under California insurance law, the costs of obtaining building permits or conducting required environmental impact studies are considered costs excluded by a building ordinance or law exclusion, or whether these costs are better considered as part of the replacement cost under the policy.
The phrasing of the questions set forth above should not restrict the California Supreme Court's consideration of the issues involved, and we understand that the court may reformulate our questions. Cal. R. Ct. 8.548(f)(5). We will accept the decision of the California Supreme Court. Cal. R. Ct. 8.548(b)(2); Hayes v. Cnty. of San Diego, 658 F.3d 867, 868 (9th Cir. 2011). There is no controlling precedent to these questions because there is no California Supreme Court decision relevant to the issue, and the California Courts of Appeal appear to be divided. See Cal. R. Ct. 8.548(a)(2). The California Supreme Court's decision on these questions of California law will determine the outcome of the primary issue in this appeal. Cal. R. Ct. 8.548(a).
II. Factual and Procedural Background
A. The Dam and the Insurance Policies
Sierra is a publicly traded, investor-owned public utility engaged in the sale, distribution, transmission, and generation of electrical energy and natural gas. Sierra's public service territory includes most of Northern Nevada and parts of Eastern California. Sierra is both a California public utility and a Nevada public utility and its businesses are regulated by the California Public Utilities Commission and the Public Service Commission of Nevada.
For many years prior to 1997, Sierra operated the Farad Dam, a hydroelectric dam on the Truckee River just west of the California-Nevada border. The Farad Dam consisted of nearly two miles of wooden flume, a forebay, a diversion dam, and a power generating facility with related structures, substation and transmission lines. On January 1, 1997, the Truckee River flooded, destroying the Farad Dam. Sierra insured the Farad Dam, along with the rest of its facilities, using two identical insurance policies, one issued by Hartford and one by Zurich (hereinafter, the "Policy"). The Farad Dam is covered property under the Policy, and flood is a covered peril.
The "policy insures against all risks of direct physical loss or damage to the property insured from perils not otherwise excluded, subject to the terms and conditions" contained in the Policy. The Policy is divided into three sections. Section A contains coverage for property, Section B contains coverage for boilers and machinery, and Section C contains general provisions applicable to both. Section A also contains its own exclusions section for both excluded property and perils. This section does not contain an exclusion for increased cost of construction due to changes in building ordinances.
Section C also includes a section containing perils exclusions. The particular exclusion at issue here regarding build- ing ordinances or laws is contained in this section (hereinafter the "Building Ordinance Exclusion"), and states:
This policy does not insure against loss or damage caused by or resulting from:
E. any increase in the loss due to any ordinance, law or regulation, rule or ruling restricting or affecting repair, alteration, use, operation, construction or installation; or by any injunction or process of any court, unless endorsed hereon.
The Policy is a replacement cost policy covering the full cost of repair or replacement of covered property for covered losses subject to the limits and sublimits of the Policy. However, recovery for property not repaired or replaced is limited to the actual cash value ("ACV") of the property. This limitation is ...