BY THE BOARD:

This order concerns a petition challenging a final division decision issued by the Division of Clean Water Programs (Division). Thrifty Oil Co. (petitioner) petitions the State Water Resources Control Board (Board) to review the Division’s final decision that denied petitioner payment for a portion of its third-party compensation claim submitted to the Underground Storage Tank Cleanup Fund (Fund). After review of the record, the Board upholds the Division’s decision in part and reverses in part.

This petition presents the issue of whether the Fund may reimburse petitioner for a third-party claim that the petitioner has no obligation to pay the Metropolitan Transit Development Board (MTDB) absent payment from the Fund. The Board finds that the legislation creating the Fund, the Board’s regulations governing the Fund, and sound policy dictate that a claimant must have an obligation, independent of the claimant’s reimbursement from the Fund, to pay a third party before Fund staff can evaluate whether the types of costs claimed are eligible for reimbursement.

A litigation settlement between petitioner and the MTDB provides, in part, that petitioner will submit a claim to the Fund for $500,000, and remit to the MTDB any money paid by the Fund as a result of the claim. If the Fund denies the claim, the settlement limits the petitioner’s liability to the MTDB to $50,000 of the $500,000 claim. This order upholds the Division’s decision with respect to the $500,000 claim insofar as it concludes that, because the settlement limits the petitioner’s obligation to the MTDB absent payment from the Fund to $50,000, the Board may pay only $50,000 of the $500,000 claim.

The litigation settlement also provides that, independent of the $500,000 claim to the Fund, the petitioner must pay the MTDB an initial $50,000. The settlement requires this initial payment in addition to any amount the petitioner must pay the MTDB as a result of the Board’s action on the $500,000 third-party claim to the Fund. With respect to the $50,000 initial payment, the settlement neither required the petitioner to submit a claim to the Fund nor made petitioner’s liability to the MTBD contingent on the Board’s action on the claim.

Because the Division erroneously concluded that the parties intended as part of the litigation settlement that the initial payment was for expenses that were not eligible for reimbursement from the Fund, this order reverses the Division’s decision insofar as it denied reimbursement for the initial $50,000 payment. Petitioner is therefore eligible to file reimbursement requests against the Fund for a total of $100,000 in third-party costs under its existing settlement agreement. This order directs the Fund staff to process the petitioner’s reimbursement request and to determine whether the request contains at least $100,000 in eligible third-party costs.

The Board administers the Fund pursuant to the Barry Keene Underground Storage Tank Cleanup Trust Fund Act of 1989 (Act). (Health & Saf. Code, §§ 25299.10-25299.99.) Subject to statutory requirements, owners and operators of petroleum underground storage tanks (USTs) may request reimbursement from the Fund for their corrective action costs incurred cleaning up contamination from petroleum USTs. (Id., §§ 25299.54, 25299.57.) In addition, the Fund reimburses certain types of compensation that an eligible owner or operator has been ordered to pay third persons. (Id., § 25299.58.)

The Legislature directed the Board to make certain findings before the Board may reimburse a claimant for compensation to a third party. Most of the findings necessary to reimburse a third-party claim parallel the findings necessary to reimburse corrective action claims. Among other things, the Board must find (1) that an unauthorized release occurred from a petroleum UST, (2) that the claimant complied with applicable permitting and financial responsibility requirements, and (3) that the claimant has been directed to take corrective action. (Health & Saf. Code, § 25299.58, subds. (b)(1), (b)(3-4).) Before reimbursing a third-party compensation claim, the Board must also find that "the claimant has been ordered to pay a settlement or final judgment for third-party bodily injury or property damage arising from operating an underground storage tank." (Id., § 25299.58, subd. (b)(2).)

In addition to the findings identified above, the Act also restricts the types of third-party claims the Board may reimburse. The Act limits Fund-reimbursable third-party compensation to (1) medical expenses, (2) actual lost wages or business income, (3) actual, eligible corrective action expenses, and (4) the fair market value of property rendered permanently unsuitable for use. (Health & Saf. Code, § 25299.58, subd. (c).) As a result, in order to reimburse a third-party compensation claim, the Board must make an affirmative finding that a claimant has been ordered to pay a third party (id., § 25299.58, subd. (b)(2)) for any combination of costs identified in Health and Safety Code section 25299.58, subdivision (c).

The Legislature empowered the Board to adopt regulations governing access to and reimbursement under the Fund. (Health & Saf. Code, § 25299.77.) Regulations governing the Fund are codified in Title 23, California Code of Regulations, division 3, chapter 18, section 2803 et seq. The regulations define "third party compensation claim" to mean "a claim for reimbursement from the Fund as a result of payment or incurrence of a court-approved settlement . . . imposing liability upon an owner or operator for bodily injury or property damage to a third party as a result of an unauthorized release of petroleum from an underground storage tank." (Cal. Code Regs., tit. 23, § 2804.)

Section 2812.2, identifies allowable reimbursable costs permitted in a claim against the Fund. In general, section 2812.2 authorizes the Fund to reimburse reasonable and necessary "third party compensation claim costs." (See, Cal. Code Regs., tit. 23, § 2812.2, subds. (a) (reasonable and necessary third-party compensation claim costs shall be paid), (b) (reasonable and necessary third-party compensation must be incurred by or on behalf of a claimant).) Section 2812.2, subdivision (e), parrots the Act by limiting the types of third-party compensation claim costs to the four categories identified in Health and Safety Code section 25299.58, subdivision (c).

The Act provides for the Board to review a final decision of the Division within 90 days after receiving a petition challenging the decision. (Health & Saf. Code, § 25299.37, subd. (c)(8)(B); Cal. Code Regs., tit. 23, § 2814.3, subd. (d).) Fund regulations allow the Board and petitioner, by written agreement, to extend the 90-day time limit for a period not to exceed 60 calendar days. (Cal. Code Regs., tit. 23 § 2814.3, subd. (d).) If the Board does not take action on a petition within either the 90-day period or the 60-day extension period, the Board has continuing jurisdiction to review the petition on its own motion.

Between June 27, 1972 and May 27, 1997, petitioner owned and operated five USTs at 9811 Mission Gorge Road, Santee, California (Site). The MTDB is a public transit development agency in San Diego County. The MTDB holds various interests in real property adjacent to the Site. As part of an expansion to San Diego County’s light-rail system, the MTDB contracted for and managed construction activities in the property adjacent to the Site.

In May 1993 the MTDB encountered petroleum contamination during excavation activities on its right-of-way for the light-rail project. The MTDB allegedly incurred substantial expense remediating the petroleum contamination and suffered lost business income from construction delays. Information submitted by petitioner and the MTDB purportedly shows that the MTDB paid $383,997 in remedial action costs. In addition, the MTDB has claimed more than $55,800 in lost ridership income attendant to the construction delays.

To recoup its losses, the MTDB filed a complaint against petitioner, its predecessor, and other persons who either owned or operated the Site or owned or operated USTs in the vicinity of the Site. The MTDB filed its lawsuit on May 1, 1996 seeking $1.78 million for property damage, remedial action expenses, lost business income, and delay damages. Between May 1996 and November 1997, the court or the MTDB dismissed all of the defendants from the litigation, except for petitioner.

During settlement negotiations between the MTDB and petitioner, counsel for the parties requested guidance from Fund staff. Counsel submitted a letter to the Fund on July 28, 1997, "concerning the application and meaning of third-party ‘property damage’ and ‘lost business income’ as defined by Health & Safety Code § 25299.58(c) and 23 Cal. Code of Regs § 2812.2(e)." (Letter from Robert M. Howard & Mark B. Gilmartin to David Deaner, July 28, 1997 (Howard & Gilmartin Letter).) In the absence of a claim, and because the Act, Fund regulations, and the Board’s orders did not address the issue of what constitutes property damage and lost business income, the Fund declined to issue an advisory opinion. The Fund manager also noted that Fund reimbursement should not factor into the settlement "because Fund eligibility should not be a factor in the parties’ dispute over liability." (Letter from Dave Deaner to Robert M. Howard & Mark B. Gilmartin, September 5, 1997 (Deaner Letter).)

On November 24, 1997, petitioner and the MTDB entered into a settlement agreement (Settlement Agreement). Pursuant to the terms of the Settlement Agreement, petitioner admitted no fault or liability. As a condition of the settlement, petitioner and the MTDB agreed to resolve the "MTDB’s claims for the sum of $550,000." (Settlement Agreement, ¶ 1.) The agreement required petitioner to pay the MTDB $50,000 within thirty days of settlement. (Id., ¶ 2.)

Petitioner agreed that it would prepare and submit to the Fund a claim for the Site. (Settlement Agreement, ¶ 3.) The agreement further provides that upon issuance of a letter of commitment, "Thrifty shall promptly submit a Reimbursement Request or other appropriate application to the UST Cleanup Fund seeking payment of the MTDB’s third party compensation claim of $500,000" (Third-Party Claim). (Id., ¶ 3.c.) In the event the Fund reimburses petitioner for the claim, the Settlement Agreement compels petitioner to remit the reimbursement to the MTDB within thirty days. (Id., ¶ 3.d.)

If the Fund denies the reimbursement request, the Settlement Agreement establishes various rights and obligations for petitioner and the MTDB on appeal. Petitioner and the MTDB may agree to appeal the Fund’s decision jointly. (Settlement Agreement, ¶ 3.e.) If they proceed jointly, the parties split the costs of appeal equally. (Ibid.) Alternatively, if the MTDB alone opts to appeal the Fund’s denial, the parties agree to share the appeal costs under different formulas depending on the appeal’s outcome. (Id., ¶ 3.f.)

Paragraph 3.g of the Settlement Agreement places a $50,000 limit on the amount of the Third-Party Claim that petitioner is personally responsible to pay the MTDB. If the Fund denies the reimbursement request and appeals prove unsuccessful, the Settlement Agreement requires petitioner to pay the MTDB 10 percent of the unreimbursed Third-Party Claim, however, under no circumstance is petitioner’s payment to the MTDB to exceed $50,000 for the Third-Party Claim. (Settlement Agreement, ¶ 3.g.) Provisions in paragraph 3.f. governing appeals similarly require petitioner to pay the 10 percent of any unreimbursed settlement amount plus a percentage of the attorneys’ fees incurred appealing the Fund’s decision. The $50,000 limit under the Third-Party Claim is in addition to petitioner’s initial $50,000 payment under the Settlement Agreement, resulting in a total cap of $100,000.

The Fund received petitioner’s claim (Claim No. 12895) on January 28, 1998. On February 5, 1998, Judge Herbert B. Hoffman signed an order determining good faith settlement. Judge Hoffman’s order approved the terms of the Settlement Agreement as provided by section 877.6, subdivision (a)(2) of the California Code of Civil Procedure. Further, the order purported to "approve" the settlement as meant by section 2811.3, subdivision (a) of title 23 to the California Code of Regulations.

On May 8, 1998, Dave Deaner, the Fund manager, issued a final staff decision concerning the Third-Party Claim. The final staff decision found that the agreement constituted a valid third-party agreement entitled to reimbursement for eligible third-party compensation claim costs. However, the staff’s decision limited the amount of the third-party claim to $50,000 – the maximum amount of the Third-Party Claim for which petitioner could be personally liable.

The Fund staff reasoned that the first $50,000 paid by petitioner to the MTDB could not be reimbursed because pursuant to the terms of the Settlement Agreement, petitioner would not seek reimbursement for the first $50,000. As for the remaining $500,000, staff contended that the Settlement Agreement made petitioner liable for at most $50,000 (10 percent of whatever the Fund declined to pay). Staff concluded that, as to the $450,000 balance of the settlement amount, the Settlement Agreement only created a debt contingent upon Fund payment. The Fund staff reasoned that third-party compensation claims are only eligible for reimbursement to the extent a claimant is liable to a third party (i.e., only those costs a claimant can be ordered to pay a third party pursuant to a settlement agreement are eligible for reimbursement).

The Chief of the Division of Clean Water Programs, Harry M. Schueller, upheld the staff decision in a Final Division Decision dated July 10, 1998 (Decision). Petitioner timely submitted a petition for review to the Board.

The petitioner challenges the Division’s decision on numerous grounds. The petitioner contends that the Division misconstrues the governing regulations and misconstrues the purposes of the Settlement Agreement. First, petitioner argues that the Board’s regulations do not require a claimant to pay third-party compensation claim costs, only to incur the costs. Second, petitioner maintains that the Settlement Agreement with the MTDB reflects an attempt to accommodate petitioner’s liquidity problems. As such, petitioner argues that the Settlement Agreement comports with the requirement in the Board’s regulations that a claimant can be eligible for payment of third-party costs if the claimant incurs costs to a third party. Third, petitioner contends that to the extent the Fund failed to provide guidance when petitioner drafted the Settlement Agreement, the Board should not deny reimbursement based on the agreement being unacceptable. Finally, petitioner contends that the Division should have considered petitioner’s initial $50,000 payment to the MTDB in evaluating third-party costs.

1. Contention: Petitioner maintains that the Division misconstrued the applicable regulations controlling the payment of third-party compensation claims from the Fund. Petitioner contends that the Board’s regulations only require a claimant to incur the third-party claim costs, not that a claimant must pay the costs first before submitting a reimbursement request.

Findings: Although the Division did not specifically address the issue in its Decision, a claimant does not need to pay a third-party claim before seeking relief through the Fund. The regulations provide latitude for claimants with liquidity problems, such as petitioner, to resolve litigation against them without first paying the settlement amount. The Board’s regulations do not require a claimant to have made payment to the third party before submitting a reimbursement request, so long as a claimant has incurred the amount claimed pursuant to a judgment, litigation settlement, or similar order determining that the claimant is liable for the amount.

The Act provides that as a condition for paying a third-party claim, the Board must find that a "claimant has been ordered to pay a settlement or final judgment." (Health & Saf. Code, § 25299.58, subd. (b)(1).) The Act’s requirement for an order to pay ensures that the claimant is legally obligated to pay the third-party costs claimed before the Board evaluates the costs to determine if they are eligible for reimbursement from the Fund.

The Board’s regulations implementing Health and Safety Code section 25299.58, subdivision (b)(1), track the Act’s language, allowing Fund payment if the claimant has paid or incurred a settlement or final judgment. (Cal. Code of Regs., tit. 23, § 2804 (defining "third party compensation claim").) The Board’s regulation is a reasonable interpretation of the Act because it ensures that a claimant has effectively been ordered to pay the amount contemplated in a settlement, while not requiring the formality of reducing a settlement to an order or judgment.

For the Board to pay a claimant for eligible third-party costs, the claimant must incur eligible third-party costs. A claimant incurs a cost when the claimant becomes liable for payment of the cost. "It seems well fixed and delineated in the case law that ‘incurred’ means ‘to become liable for’ as distinguished from actually ‘pay for.’ " (See Board of Education v. Commission on Professional Competence (1980) 102 Cal.App.3d 555, 563 [162 Cal.Rptr. 590, 594-595] (relying on plain meaning and citing numerous cases for the principle that "incurred" means "to become liable for").)

Petitioner contends that the payment mechanism described in the Settlement Agreement is necessary to address the concerns of a claimant facing liquidity problems. The preceding discussion, however, demonstrates that claimants with liquidity problems may still seek reimbursement for the eligible third-party costs incurred by the claimant. The crucial issue for the Board to evaluate is whether a claimant "has incurred," meaning that the claimant has "become liable for," a third-party cost before evaluating the claim. Subject to other provisions of the Act, the regulations, and the Board’s orders, if a claimant has become liable for a third-party cost, the Fund staff can evaluate a third-party claim and authorize reimbursement from the Fund before the claimant pays a third party.

2. Contention: Petitioner contends that the Settlement Agreement comports with the requirements of the Act and the Board’s regulations. The petitioner argues that, even though it has no obligation to pay the MTDB $450,000 of the settlement amount absent reimbursement from the Fund, the petitioner has incurred these costs pursuant to the Settlement Agreement. As a result, the petitioner maintains that the Board should process the entire Third-Party Claim amount.

Findings: The Board cannot process the Third-Party Claim based on the present Settlement Agreement because the Settlement Agreement does not establish any legal obligation for petitioner to pay $450,000 of the Settlement Amount to the MTDB absent a determination of eligibility by the Fund. The Act, the Board’s regulations, and sound policy support the requirement that a claimant’s obligation to pay a third party must exist independent of any payment the Board makes to the claimant from the Fund.

The Settlement Agreement fails to create the legal obligation necessary for the Board to find that the petitioner has incurred liability for $450,000 of the costs claimed under the Third-Party Claim. As set forth above, a claimant incurs a cost when the claimant becomes liable for payment of the cost. (See Board of Education v. Commission on Professional Competence, supra, 102 Cal.App.3d at 563 [162 Cal.Rptr. at 594-595].) To become "liable" means to become "[b]ound or obliged in law or equity; responsible; chargeable; answerable; compellable to make satisfaction, compensation, or restitution. Obligated; accountable for or chargeable with." (Black’s Law Dict., (6th abr. ed. 1991) p. 631, col. 2.) In sum, a claimant must be obligated to pay a third-party cost before the Fund can pay the claimant.

To find that a claimant has incurred eligible third-party costs, the Board must conclude there is a legal obligation on the part of the claimant to pay the eligible costs, regardless of whether the Board reimburses the costs from the Fund. The preceding definition of liable provides two tests Fund staff may use to assess whether a claimant is liable for an amount specified in a settlement agreement. First, is there an obligation for the claimant to pay? This concept goes to the essence of liability. As expressed in Black’s Law Dictionary, this is an unconditional requirement. The claimant must be bound or obligated to pay for eligible third-party costs.

Second, can the claimant be compelled to satisfy the amount specified in the settlement agreement? This is a mirror image of the first test, but it provides a useful insight in assessing settlement agreements. Namely, if a settlement agreement is valid for purposes of the Fund’s third-party compensation requirements, the third party should be able to enter court and reduce the amount in a settlement agreement to a judgment. In other words, the third party should be able to compel the claimant to satisfy (i.e., pay) the amount of third-party costs contemplated in the settlement agreement.

The Fund staff and the Division Chief correctly concluded that the Settlement Agreement does not form the basis for a valid third-party claim as to the $450,000. The Settlement Agreement only requires petitioner to pay costs to the extent the Fund pays petitioner. Petitioner has no obligation to pay $450,000 of the claim submitted to the Fund. If the MTDB wished to enforce the terms of the settlement, it could not compel petitioner to satisfy $450,000 of the costs described in the settlement, because the costs are contingent solely on the Fund first paying the costs to petitioner. Based on the structure of the agreement, petitioner is not liable for $450,000 of the settlement amount.

To the extent petitioner is not liable under the terms of the Settlement Agreement, petitioner cannot submit a third-party compensation claim for the $450,000. Petitioner clearly has not met the Act’s requirement that it be ordered to pay the $450,000. Further, because petitioner is not liable for the $450,000 it has not met the Board’s reasonable interpretation of the Act that the claimant need only "incur" the settlement amount. As a result, the Fund cannot process a third-party claim for the $450,000 based on the present Settlement Agreement.

Aside from the Act and regulations, as a matter of policy the Board should not pay third-party claims unless a Settlement Agreement obligates the claimant to pay the settlement amount whether or not the Fund provides reimbursement. The Fund’s resources are limited. With respect to third-party claims, the Board must rely on a claimant to vigorously defend the claimant’s legal rights. If a settlement agreement obligates a claimant to pay without regard to the Fund, the Board can presume that the claimant vigorously defended its rights. The Fund can then process a claim for the amount that the claimant must pay under the agreement. The Board’s presumption is reasonable because the claimant accepts the unconditional obligation to pay the settlement amount.

If there was no requirement for a claimant to incur the third-party costs before submitting the costs to the Fund, then a claimant would have no incentive to test the veracity of a third party’s claim. Claimants could resolve any litigation by agreeing to pay the third party $1 million subject to the Fund determining there are eligible third-party costs. Although Fund staff could still evaluate whether the costs are eligible third-party costs, the claimant’s vigorous defense of the action is important for resolving issues of causation and apportioning legal responsibility for the damages claimed by the third party.

Petitioner argues that the Settlement Agreement limits the MTDB’s potential compensation to a maximum of $550,000 and requires documentation to substantiate that the compensation is for costs eligible for Fund reimbursement. The petitioner reasons that because the staff’s independent review of the MTDB’s costs will provide an upper limit to the petitioner’s reimbursement, the actual settlement amount does not increase the maximum, potential payment from the Fund. (See Petition at p. 8.) In other words, the petitioner contends that the Settlement Agreement does not impose a debt against the Fund greater than what the Board could be legally obligated to reimburse the petitioner.

Petitioner’s argument ignores the first step of a logical, two-step process. First, an obligation by a claimant to pay in the first instance helps ensure that the claimant vigorously defended the underlying action. The claimant’s defense helps guarantee that issues of fault, causation, and ultimate liability have been properly resolved. Second, if a claimant accepts responsibility by becoming obligated to pay a third party a fixed amount, then the Fund staff can proceed to ascertain whether the costs claimed fall within the classes of reimbursable costs. The Board cannot conduct the required, two-step analysis when reviewing certain costs under the existing Settlement Agreement because it entangles the assessment and valuation of the damages with the assignment of legal responsibility to pay the damages.

3. Contention: Petitioner argues that to the extent it sought guidance from the Fund before drafting the Settlement Agreement and the Fund staff failed to provide the requested guidance, then the Board should not deny reimbursement based on the agreement being unacceptable.

Findings: The fact that the Fund staff did not provide petitioner guidance on the eligibility of certain types of third-party costs does not make petitioner’s third-party claim eligible. Petitioner sought guidance on the types of third-party costs the Board can reimburse from the Fund. The Fund staff’s analysis, the Division’s Decision, and this order deny payment of $450,000 for a reason unrelated to the issues for which the petitioner sought guidance. Even if the Fund staff had been able to provide the guidance sought and the costs petitioner sought were within the classes of eligible third-party costs, the Board would still deny payment because there is no legal obligation for petitioner to pay absent payment by the Fund.

Petitioner contends that to the extent it sought assistance from Fund staff before settling, the Board should not penalize petitioner by failing to pay the Third-Party Claim. On July 28, 1997, counsel for petitioner and the MTDB submitted a request for clarification on the meaning of "property damages" and "lost business income." (Howard & Gilmartin Letter.) The Howard & Gilmartin Letter went on to describe certain types of costs for which counsel sought an advisory opinion as to whether the costs would be eligible. The letter did not include a draft settlement agreement and provided no indication that the parties intended to limit the petitioner’s obligation to pay the MTDB. By letter dated September 5, 1997, the Fund manager indicated that because (1) there was no request for reimbursement before the Fund and (2) the letter raised new issues that neither the Fund staff nor the Board had addressed, it would be inappropriate for the Fund staff to evaluate the types of costs described. (Deaner Letter.)

The guidance sought in the Howard & Gilmartin Letter had no bearing on the Division’s decision not to pay the third-party costs. The Division based its decision on the ground that petitioner had no obligation to pay the $450,000 claim, absent a payment from the Fund. Even if the Fund could have fully answered the questions posed in the Howard & Gilmartin Letter and if petitioner had conformed its Settlement Agreement to the staff’s recommendations, the Division’s decision would not change because petitioner had no obligation to pay the $450,000. As a result, petitioner’s request for lenience rings hollow.

The petitioner further maintains that to the extent the Board failed to provide guidance, the Board is in a position akin to an insurance company that fails to defend an insured. Because California courts will require an insurance company to prove that a settlement is unreasonable if the company previously failed to defend its insured, the petitioner reasons that the Board should evaluate the merits of the costs underlying the $500,000 claim. Petitioner relies on Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500 [42 Cal.Rptr.2d 295] to demonstrate that California courts will enforce a stipulated judgment against an insurance company when the insurance company previously denied coverage and defense to its insured. Pruyn is inapposite.

A liability insurance policy creates a duty for the insurance company to defend and to indemnify an insured. (Id. at 514.) The duty to defend is much broader than the duty to indemnify. (See Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 57-58 [70 Cal.Rptr.2d 118, 129-130] (discussing the scope of duty to defend).) The Pruyn court’s decision focused on the insurance company’s failure to execute its contractual obligation to defend the insured. (Pruyn v. Agricultural Ins. Co., supra, 36 Cal.App.4th at 514-517.)

In fact, the Pruyn court acknowledged that if the insurance company had defended its insured, as required by the insurance contract, then the outcome might have been different. (Id. at 516.) The Pruyn court discussed, in dicta, that when an insurance company provides defense and where without the participation of the insurance company the insured "‘stipulate[s] to a judgment without evidentiary support and with no potential for personal loss, such judgment is insufficient to impose liability on the insurer. . . .’ " (Ibid. (quoting Wright v. Fireman’s Fund Ins. Companies (1992) 11 Cal.App.4th 998, 1024 [14 Cal.Rptr.2d 588, 603]).) The Pruyn court continued:

Moreover, the Board’s position is more analogous to the Wright case discussed by the Pruyn court in that a claimant could escape the potential for personal loss by making payment contingent upon reimbursement from the Fund and the potential for fraud and collusion is evident. The court’s reasoning in Wright provides further justification for the Board’s requirement that a claimant must have an obligation to pay independent of any reimbursement from the Fund. Simply put, without the requirement of an independent obligation to pay, a claimant would have no incentive to challenge a third party’s assertion that the claimant is responsible. If petitioner and the MTDB subsequently resolve their dispute in a manner that obligates petitioner to pay eligible third-party costs to the MTDB irrespective of the Fund staff’s assessment of the costs, then the Fund staff will review the eligibility of the underlying costs claimed.

4. Contention: Petitioner submits that the Division failed to include petitioner’s initial $50,000 payment in evaluating third-party costs. Petitioner maintains that the Board should factor the petitioner’s initial $50,000 payment into any calculations for eligible third-party costs.

Findings: The petitioner’s contention is correct. Fund staff and the Division should have added petitioner’s initial $50,000 payment to the $50,000 maximum the MTDB could recover from the petitioner with respect to the $500,000 Third-Party Claim. The Board authorizes payment of up to $100,000 in third-party costs to petitioner under the existing settlement agreement.

The Division should have included petitioner’s initial $50,000 payment when calculating the amount of third-party compensation eligible for reimbursement from the Fund. The Settlement Agreement unequivocally requires the petitioner to pay an initial $50,000 to the MTDB. In addition, the Settlement Agreement places an upper limit of an additional $50,000 that the petitioner may personally be responsible to pay the MTDB absent payment from the Fund. The Division reasoned that because the Settlement Agreement did not explicitly require the petitioner to seek reimbursement for the initial $50,000, the initial $50,000 must be for costs that otherwise could not be reimbursed from the Fund.

The Division’s approach to the initial $50,000 adds to the Settlement Agreement terms that do not exist. First, nothing in the Settlement Agreement explicitly identifies the costs or damages the parties intend the initial $50,000 payment to cover. Second, nothing in the Settlement Agreement prohibits petitioner from seeking reimbursement for its initial $50,000 payment. The Division inferred that because the $50,000 was not referenced in the reimbursement request explicitly authorized by the Settlement Agreement, the petitioner could not seek reimbursement for the costs. However, nothing supports such an inference. The petitioner enjoys the same rights to seek reimbursement from the Fund as any other claimant to the Fund.

As set forth above, the Act and the Board’s regulations authorize reimbursement of certain costs when a claimant is legally obligated to compensate a third party absent payment from the Fund. Once a claimant pays or is subject to an order to pay a third party, the Board then evaluates whether the costs fall within the categories of third-party costs authorized by the Act. Here, the Settlement Agreement unconditionally obligates petitioner to pay $100,000 to the MTDB. This is compensation paid to a third party as meant by the Act. Fund staff must evaluate materials submitted by petitioner to determine how much of the costs claimed, up to $100,000, are eligible for reimbursement as third-party compensation costs under the existing Settlement Agreement.

1. A claimant is only eligible for reimbursement from the Fund for third-party costs to the extent the claimant incurs eligible third-party costs.

2. Third-party costs may be incurred through either a settlement agreement or final judgment.

3. Before the Board reviews a claim for third-party costs to determine whether the costs fall within the categories of eligible third-party costs, the Board must determine that a claimant has incurred the third-party costs claimed.

4. A claimant incurs third-party costs when the claimant is liable for the amount claimed to the Fund. To be liable the claimant must have an obligation to pay the third-party costs claimed without regard to whether those costs are reimbursed by the Fund.

5. A claimant does not have to pay third-party costs prior to submitting a claim to the Board.

6. With respect to $450,000 of the settlement amount, the Settlement Agreement conditions petitioner’s liability to the third party on the Board determining the costs claimed are eligible third-party costs. Petitioner has, therefore, not incurred third-party costs for $450,000 of the settlement amount.

7. The most the third party could compel the petitioner to pay under the Settlement Agreement is $100,000.

8. Fund staff shall review the costs claimed by petitioner as third-party costs to determine where there are at least $100,000 in eligible third-party costs and shall reimburse petitioner, under the terms of the existing Settlement Agreement, not more than $100,000 for eligible third-party costs.

9. Nothing in this order limits the petitioner’s and the third party’s ability to revise the terms of their settlement to conform their agreement to this order.

IT IS THEREFORE ORDERED that the Decision denying the petitioner’s claim is upheld with respect to the Division’s determination that petitioner has not incurred third-party costs for $450,000 of the settlement amount. The Division’s decision to deny consideration of the first $50,000 of petitioner’s payment to the MTDB is reversed. Fund staff shall review the MTDB’s damages submitted by petitioner to determine whether there is at least $100,000 in eligible third-party costs. To the extent Fund staff determine petitioner has incurred eligible third-party costs under the existing Settlement Agreement, the Fund staff shall reimburse the eligible costs in an amount not to exceed $100,000.

The undersigned, Administrative Assistant to the Board, does hereby certify that the foregoing is a full, true, and correct copy of an order duly and regularly adopted at a meeting of the State Water Resources Control Board held on July 15, 1999.

AYE:

NO:

ABSENT:

ABSTAIN:

_____________________________________
Maureen Marché
Administrative Assistant to the Board