California Court Holds That Historical Insurance Coverage Forms “One Giant Uber-Policy”

by Perkins Coie
Contact

Corporate policyholders seeking insurance coverage for “long-tail” claims in California and elsewhere have reason to cheer.

On August 9, 2012, the California Supreme Court granted corporate policyholders the right to fully access and to recover from insurance policies spanning multiple policy periods for claims involving damage that progressed over those periods. In California v. Continental Insurance Co., No S170560 (Cal. Aug. 9, 2012), the state’s highest court approved an “all-sums-allocation-with-stacking” rule permitting a policyholder to obtain coverage from the sum total of insurance that the policyholder purchased throughout the years or decades that damage continued. Furthermore, the court recognized that each insurer that participated in the policyholder’s insurance program during those years is separately liable to cover the policyholder for damages up to its respective policy limits, even if some of the damage occurred before or after the insurer’s policy period. In so doing, the court rejected the insurers’ argument that the damages should be spread “pro rata” across all of the years that the loss continued, including years in which the policyholder lacked insurance.

Background

California v. Continental addressed the State of California’s (“State”) pursuit of insurance coverage for environmental clean-up costs at an industrial waste disposal facility that the State designed and operated from 1956 to 1972. The State purchased insurance policies that covered the site from 1964 to 1977 but did not have insurance for the site before 1963 or after 1978. In 1972, the State discovered groundwater contamination at the site and ceased operations. After closure, heavy flooding caused contamination from the site to flow into a nearby waterway. The federal government held the State responsible for past and future site remediation costs, estimated at $700 million. The State filed suit against its historical insurers seeking coverage for the clean-up costs. A multi-phased trial followed, in which a jury ultimately concluded that the insurers were obligated to pay the clean-up costs. The trial court, however, refused to award the State any damages on the theory that the State had already recovered through settlements with its insurers an amount greater than the potential jury award. This appeal followed.

All Sums Allocation With Stacking

The key issue before the California Supreme Court was whether the State could “stack,” or combine coverage from multiple policy periods, to increase the amount of insurance coverage that it could call upon to pay the clean-up costs. As the premise for its decision that the State could stack its coverage, the court affirmed its prior decisions in two landmark insurance cases: Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995) (holding that “property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods”), and Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38 (1997) (holding that any policy covering a risk at some point during a property loss bears liability for all resulting damages, up to its policy limits, including damages that took place before or after the policy period). The court also confirmed that the insurers bore responsibility for unclear or imprecise language in the policies that they sold to the State. Relying on these points, the court concluded that “each successive insurer is potentially liable for the entire loss up to its policy limits,” and that in order for a policyholder to reap the benefit of this rule in the context of long-tail claims, the policyholder must be allowed to pursue coverage from “consecutive policies and recover up to the policy limits of the multiple plans.” Quoting a law review article, the court described this result as creating “one giant ‘uber policy’ with a coverage limit equal to the sum of all purchased insurance policies.”

In affirmatively adopting stacking as the law of California, the court disapproved a 14-year-old decision by a California intermediate appellate court that reached a contrary result. In FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), the California Court of Appeals had ruled that California law did not allow a policyholder to stack its coverage, so that the maximum amount that a policyholder could recover for a loss spanning multiple years was the highest limits the policyholder had purchased in any single policy year. The California Supreme Court concluded that FMC disregarded the actual policy language at issue and expressly rejected it.

The court also rejected the insurers’ arguments in favor of pro rata allocation, under which damages are spread across all of the years in which the long-tail loss took place, with the policyholder liable for damages assigned to periods in which it chose not to purchase insurance. Pro rata allocation may involve a simple calculation of the number of years the insurer sold policies in comparison to the overall loss period, or may be more complex, taking into account the perceived amount of risk related to specific time periods. After thorough discussion, the court concluded that neither pro rata option comported with the language of the policies at issue, as discussed in Montrose and Aerojet.

Practical Application

In practical terms, California v. Continental grants a policyholder the opportunity to call upon the sum total of insurance that it purchased over years or even decades to respond to claims that involve damage that develops or progresses over time. This all-sums-allocation-with-stacking approach will vastly expand the pool of insurance coverage available for claims of environmental contamination, such as were at issue here, and also for other claims involving progressive damage that takes place slowly over years or even decades, such as asbestos exposure claims, breast implant or DES pharmaceutical suits, construction defect actions, and other toxic exposure claims.

Of equal importance, the case makes clear that allocation of losses among multiple policies is an inter-insurer issue rather than a matter for litigation between or among a policyholder and its insurers. The insurers are obligated to make the policyholder whole for its losses and may not assign to the policyholder damages for periods in which the policyholder failed or was unable to purchase insurance for any reason. Once the insurers have paid all damages due to the policyholder or on the policyholder’s behalf, the insurers may seek indemnification or contribution from one another to reapportion the damages among themselves as they see fit. This secondary apportionment does not involve the policyholder, however.

Finally, this decision is apt to have ramifications beyond California’s boundaries. Courts across the country are split on how best to allocate damages among the insurers potentially liable for long-term claims, with a number of state and federal courts yet to rule on the subject. California cases historically have provided influential and persuasive precedent to courts nationwide as they have grappled with complex insurance issues. As the allocation debate continues, California v. Continental appears certain to take its place alongside Montrose and Aerojet as oft-cited and relied-upon authority.

Corporate policyholders with long-tail liability and years of successive coverage should contact counsel to pursue the benefits of this ruling.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Perkins Coie | Attorney Advertising

Written by:

Perkins Coie
Contact
more
less

Perkins Coie on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!