In California v. Continental Insurance Co., S170560, 2012 Cal. LEXIS 7324 (Cal. Aug. 9, 2012), the California Supreme Court extended already favorable California allocation law, holding that an insured may "stack" coverage limits from policies covering losses spanning multiple years (e.g., environmental or asbestos cases). The insured may thereby combine the limits of all its coverage to respond to such losses even if part of the loss is deemed to take place outside of the combined coverage period.
California concerned insurance coverage for the court-ordered cleanup of California’s Stringfellow Acid Pits waste site, which the State designed and operated from 1956 to 1972. The insurers in the appeal issued excess insurance policies to the State between 1964 and 1976, but the site was uninsured prior to 1963. In 1998, a federal court found the State liable for negligence in designing the site, overseeing its construction, failing to correct hazardous conditions causing groundwater contamination, and delaying remediation. As a result, the State was liable for past and future cleanup costs allegedly reaching $700 million.
Pursuant to the pertinent language of the policies at issue, the insurers agreed "[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law…" The insurers and State stipulated that the property damage took place continuously throughout the insurers’ multiple consecutive policy periods from 1964 to 1976. In the coverage action that ensued, the trial court held that each insurer was liable for damages based on the "all sums" language in the policies, but that the State could not "stack" or combine policy periods to recover more than one policy’s limits for each covered occurrence. As a result, the court concluded that the State had to choose a single policy period to cover the entire loss, and the State could recover only up to the specific policy limit in effect at that time. The Court of Appeal affirmed the trial court’s ruling regarding the interpretation of the "all sums" language, but reversed the trial court’s ruling that prohibited the State from stacking the total policy limits in effect for any one policy period.
The Supreme Court of California acknowledged the complexity of coverage disputes for long-tail cases: "It is often virtually impossible for an insured to prove what specific damage occurred during each of the multiple consecutive policy periods in a progressive property damage case." Such cases raise the following question: "When does a continuous condition become an ‘occurrence’ for the purposes of [triggering] insurance coverage?" The court cited the holding of Montrose Chemical Corp. v. Admiral Insurance Co., a California appellate decision, that, in the context of a third party liability policy, "property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods." The court also cited Aerojet-General Corp. v. Transport Indemnity Co., a California Supreme Court decision, for the proposition that "as long as the property is insured at some point during the continuing damage period, the insurers’ indemnity obligations persist until the loss is complete, or terminates." The court therefore found "[t]he fact that all policies were covering the risk at some point during the property loss [was] enough to trigger the insurers’ indemnity obligations," and each insurer was severally liable on its own policy up to its policy limits. Id. at *19-*20.
The court cited the plain language of the policies in support of its holding. The court rejected the insurers’ argument for a "pro rata" rule of indemnity allocation, noting that the insurers were obligated to pay "all sums" under their policies, not just the sums occurring "during the policy period." Additionally, in response to the insurers’ suggestion that it would be "objectively unreasonable" to hold them liable for losses that occurred outside of their policy periods, the court noted, again, that the "all sums" language was not restricted to damages occurring during the policy period, and it cited cases from other jurisdictions that have adopted similar interpretations of the "all sums" language.
Next, the court affirmed the appellate ruling that applied the "all-sums-with-stacking" indemnity principle, which "effectively stacks the insurance coverage from different policy periods to form one giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies." The court explained that, as a result, the policyholder may have immediate access to the insurance it purchased. The court noted that absent an anti-stacking provision in a policy, an anti-stacking statute, or judicial intervention, "standard policy language permits stacking." Furthermore, the court recognized several advantages of the "all-sums-with-stacking" rule – i.e., it comports with the reasonable expectations of the parties (the insurer is liable up to its policy limits); the coverage allocation may be determined by an uncomplicated calculation that considers the injury as a whole; and the policyholder receives all the coverage it purchased by paying multiple premiums.