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In a legal battle of immense proportions, a California federal judge has refused to discard a crucial bad faith claim in Sempra Energy and its subsidiary Southern California Gas' settlement coverage suit against CNA unit Continental Insurance Co. The decision was handed down by U.S. District Judge Sunshine S. Sykes, who declared that the companies had credibly argued that Continental's denial of coverage was unreasonable.

Plausible Argument for Unreasonable Denial

Sempra and SoCalGas are pursuing a remarkable $50 million contribution from Continental, an attempt to gain some reimbursement in the wake of a staggering $1.78 billion natural gas leak settlement. Their contention revolves around their claim that the insurer, Continental, not only inadequately investigated but also denied their claim in bad faith. Court filings substantiate this bold assertion.

While the account of the investigation provided by the companies may seem somewhat fragmented, Judge Sykes held that their allegations sufficiently establish that Continental acted unreasonably in denying coverage. As a result, Judge Sykes ordered Continental to submit a response to the remainder of the second amended complaint by the end of October.

"Per insureds' account, Continental's lone explanation for its refusal to indemnify was flatly inconsistent with evidence timely supplied to it by the insureds," Judge Sykes wrote. She further emphasized that Continental's vague "disputes (as to) the veracity and completeness" of facts presented in the insureds' amended complaint were not appropriate considerations at this stage of the litigation.

A Setback for Punitive Damages Claim

However, while the companies secured a victory in their pursuit of a bad faith claim, Judge Sykes opted to dismiss a claim for punitive damages. The reasoning behind this decision was that Sempra and SoCalGas had failed to demonstrate that Continental had malicious intentions or had acted without due care regarding the potential hardships they could inflict.

"None of the conduct described in the complaint appears outrageous enough to meet these statutory requirements, nor do insureds suggest that Continental or its agents acted with the requisite intent to inflict harm," Judge Sykes explained.

Sempra Gas Leak Coverage Suit : The Catastrophic Gas Leak Saga

The Sempra and SoCalGas saga dates back to 2015 when they discovered a significant gas leak near a natural gas storage well at Aliso Canyon. This discovery unleashed a wave of personal injury lawsuits stemming from the effects of the gas leak. This Aliso Canyon blowout would go on to become the largest natural gas leak in U.S. history, spewing nearly 100,000 tons of methane over a period exceeding 100 days.

The aftermath saw more than 35,000 individual plaintiffs and over 250 businesses consolidated into a single state court case in February 2016, as they sought damages not only for the 2015 leak but also alleged previous leaks. Finally, in September 2021, Sempra and SoCalGas reached a groundbreaking $1.78 billion settlement with the consolidated plaintiffs.

The lawsuit against Continental and Associated Electric & Gas Insurance Services Ltd. was initiated in March 2019. Sempra and SoCalGas asserted that Continental owed $50 million in contributions under policies issued by its predecessor. Their claim was that Continental had unreasonably prolonged its investigation and acted in bad faith by refusing to cover the settlement without clearly denying coverage. The insurer's repeated requests for information that had already been provided and its delayed response to coverage inquiries were among the company's grievances.

The insurer's denial was primarily rooted in an unreasonable interpretation of the underlying facts. Between December 2019 and July 2020, Sempra and SoCalGas furnished Continental with statements from "tens of thousands" of plaintiffs, some of whom claimed injuries dating as far back as 1972. Yet, as of October 2020, the insurer persisted in its position that all the underlying claims had arisen from the 2015 leak.

The legal skirmish took a turn in July when the court granted Continental's motion to dismiss the bad faith and punitive damage claims. Nevertheless, the power companies were given an opportunity to rectify the issues in their first amended complaint, which they promptly did by filing a second amended complaint in August. The insurer, not backing down, once again sought to dismiss the claims in September.

In response to Continental's motion, Sempra and SoCalGas reminded the court of its prior ruling in July 2020, which upheld Continental's duty to defend them.

"Under California law, the settlement of a claim that is potentially covered shifts the burden to the insurer to establish that the settlement is not covered," the companies argued. "Continental has not done so here."

No comments were provided by counsel for Associated Electric, while representatives of the other parties remained silent in response to requests for comments.