California’s Supreme Court Addresses Trigger of Coverage and Stacking of Limits

By decision dated August 9, 2012, the Supreme Court of California handed down its long-anticipated holding in State of California v. Continental Insurance Company, 2012 Cal. LEXIS 7324, a ruling that now further defines California law concerning trigger of coverage, allocation of loss, and stacking of policy limits in matters involving continuous or progressive loss.

The State of California decision relates to insurance coverage for environmental contamination emanating from the Stringfellow Acid Pits waste site, which had been operated by the State from 1956 through 1972.  The insurance coverage dispute involved the State’s right to coverage under excess general liability policies issued during the period 1964 to 1976.  The State estimated site remediation costs could reach $700 million.  Each of the State’s insurers had policies requiring them “to pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law … for damages … because of injury to or destruction of property, including loss of use thereof.”  Relevant to the State of California decision was a trial court ruling that each of the insurers on the risk during the period 1964 to 1976 was liable for the total amount of the State’s loss, subject to its particular policy limits.  The court based its ruling on the “all sums” language in the policies.  The trial court further held, however, that the State could not recover insurance proceeds in each policy period, nor could it stack policy limits across multiple periods.  In other words, the trial court held that the State was confined to a single policy period in which to recover the entire loss.  On appeal, the California Court of Appeal reversed the lower court’s ruling with respect to stacking of policy limits, allowing the State to recover insurance proceeds in multiple policy years.

On appeal, the Supreme Court first addressed the issue of trigger of coverage, looking to its decisions in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4^th 645 (1995) and Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4^th 38 (1997).  These decisions, noted the court, addressed issues of continuous or progressive damage happening during several policy periods.  Montrose, explained the court, articulated the general rule that as long as there is any damage during the policy period, i.e., an occurrence, then each insurer’s indemnity obligation persists until the loss is complete or terminates.  Aerojet, in turn, set forth the “all sums” rule that any insurer on the risk at the time of a continuous or progressive loss is obligated to pay the entire loss, not just the loss limited to the insurer’s specific policy period.  The State of California court held that while these decisions arose in the context, they also apply in the context of the insurers’ respective duties to indemnify.  In doing so, the court rejected the insurer’s argument that they should only be responsible for the loss that happened during their respective policy periods.  The court found no justification for a pro rata allocation methodology favored by the insurers, concluding that the phrase “all sums” in the policies’ respective insuring agreements required the insurers to pay all amounts for which the insured became legally liable, not just for property damage happening during their respective policy periods.  As the court stated:

We therefore conclude that the policies at issue obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy as “on the loss.”  The coverage extends to the entirety of the ensuing damage or injury and best reflects the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.  (Internal citations omitted)

Turning to the issue of stacking of policy limits, the court noted the potential for a shortfall in insurance proceeds if the insured is limited to a recovering proceeds of only a single policy period.  Stacking limits across multiple policy periods, the court observed, avoids this problem:

The all-sums-with-stacking indemnity principle properly incorporates the Montrose continuous injury trigger of coverage rule and the Aerojet all sums rule, and “effectively stacks the insurance coverage from different policy periods to form on giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies.  Instead of treating a long-tail injury as though it occurred in one policy period, this approach treats all the triggered insurance as though it were purchased in one policy period.

The court further explained that:

The all-sums-with-stacking rule means that the insured has immediate access to the insurance it purchased.  It does not put the insured in the position of receiving less coverage than it brought.  It also acknowledges the uniquely progressive nature of long-tail injuries that cause progressive damage throughout multiple policy periods.  (Emphasis in original.)

In reaching its holding, the court rejected disapproved the decision in FMC Corp. v. Plaisted & Companies, 61 Cal.App.4^th 1132 (Cal. App. 1998) which held that stacking of policy limits was not permitted.  Thus, as a result of the California Supreme Court’s decision, stacking of policy limits across multiple policy periods is permissible and will be allowed absent specific anti-stacking language within a policy, or a statute to the contrary.  The court explained that such an approach is both equitable and fulfills the insured’s reasonable expectations.  The court further observed that an all-sums-with-stacking approach “ascertains each insurer’s liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.”  The court did acknowledge, however, that insurers can avoid this allocation methodology by incorporating specific anti-stacking provisions into their policies.