Augusts 14, 2012
P.K. SCHRIEFFER LLP
STATE OF CALIFORNIA V. CONTINENTAL INSURANCE COMPANY,
No. S170560, 2012 Cal. Lexis 7324
Dear Clients and Colleagues,
On August 9, 2012, the California Supreme Court issued a landmark decision in State of California v. Continental Insurance Company, No. S170560, 2012 Cal. LEXIS 7324. The court had granted review to consider the following issues: (1) when continuous property damage occurs during the periods of several successive liability policies, is each insurer liable for “all sums” both during and outside its period up to its policy limits? (2) If so, is the “stacking” of limits, i.e., obtaining the limits of successive policies, permitted? The court answered each question in the affirmative, in favor of the policyholder, the State of California.
In the case, the State sought indemnity from several of its insurers in connection with a federal court-ordered environmental cleanup of the State’s Stringfellow Acid Pits waste site in Riverside County. The site was an industrial waste disposal facility that the State designed and operated from 1956 to 1972. In 1998, a federal district court found the State liable for negligence in investigating, choosing, and designing the site, overseeing its construction, failing to correct conditions at it, and delaying its remediation. The State was held liable for all past and future cleanup costs. The State claimed that remediation costs could exceed $700 million.
The State then brought a coverage action against its insurers in September 1993, seeking indemnification for its liability in the underlying federal action. A key issue in the coverage action was whether the policies covered the State for damages which began shortly after the time the site was opened in 1956, and continued until well after the site was closed in 1972. The State had primary coverage for only one year, and that insurer settled with the State. The California Supreme Court’s recent decision, therefore, addressed only the obligations of excess insurers who issued commercial general liability (“CGL”) policies to the State from 1964 to 1976. The site was uninsured before 1963, and after 1978.
The coverage action was tried in several phases. The trial court made several rulings preceding the final phase, including: (1) the policy limits under policies with multiple-year periods applied “per occurrence” and not annually; (2) the property damage took place continuously throughout the insurers’ multiple policy periods from 1964 to 1976; (3) each insurer was liable for damages, subjects to its policy limits for the total amount of the losss; (4) the State could not recover the policy limits in effect for every policy period; (5) the State could not “stack” or combine policy periods to recover more than one policy’s limits for covered occurrences; and (6) the State had to choose a single policy period for the entire loss, and it could recover only up to the specific single policy limit in effect at the time the loss occurred. (Slip Op., pp. 4-5). The trial court relied on FMC Corp. v. Plaisted & Companies, 61 Cal. App. 4th 1132 (1998), where the Court of Appeal prevented an insured from stacking multiple consecutive policies in a case in which the insured had caused toxic contamination over a period of many years.
In May 2005, a jury in the final of the trial rendered special verdicts finding the insurers had breached their policies. By that time, the State had already entered into settlement agreements totaling approximately $120 million with several other insurers. The trial court required that these settlements reduce the insurers’ liability as setoffs. Under the trial court’s one-occurrence, no-annualization, and no-stacking rulings, the most the State could recover from all insurers was $48 million. Because the State had already recovered $120 million, the trial court entered judgment nominally in the State’s favor, but in the amount of “$0.”
The State appealed. The Court of Appeal reversed the trial court’s anti-stacking ruling, stating that the FMC decision was “flawed and unconvincing.” State of California v. Cont’l Ins. Co., 170 Cal. App. 4th 160, 169 (2009). In its decision on August 9, 2012, the California Supreme Court affirmed the Court of Appeal, and specifically disapproved of FMC. (Slip Op., p. 16).
The California Supreme Court rejected the insurers’ contention that it would be “objectively unreasonable” to hold them liable for losses that occurred before or after their respective policy periods. The court reasoned that the “during the policy period” language that the insurers relied on to limit coverage does not appear in the “Insuring Agreement” section of the policies and therefore is neither “logically [n]or grammatically related to the ‘all sums’ language in the insuring agreement.” (Slip Op., p. 13). The court, relying on Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal. 4th 645, 655 (1995), concluded that the insurers were obligated to pay all sums for property damage attributable to the Stringfellow site, up to their respective policy limits, as long as some of the continuous property damage was “on the loss.” The coverage extends “to the entirety of the ensuing damage or injury.” (Slip Op., p. 14). The court noted that a growing number of states, including Delaware, Indiana, Ohio, Pennsylvania, Washington, and Wisconsin have similarly adopted this interpretation of the “all sums” language.
The California Supreme Court then explained that its all-sums-with-stacking approach incorporates the continuous injury trigger of Montrose with the all-sums rule of Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38, 55-57 (1997). The effect is to stack insurance coverage from different policy periods to for one giant “uber-policy” with a coverage limit equal to the sum of all purchased insurance policies. (Slip Op., p. 15). The court explained:
An all-sums-with-stacking rule has numerous advantages. It resolves the question of insurance coverage as equitably as possible, given the immeasurable aspects of a long-tail injury. It also comports with the parties’ reasonable expectations, in that the insurer reasonably expects to pay for property damage occurring during a long-tail loss it covered, but only up to its policy limits, while the insured reasonably expects indemnification for the time periods in which it purchased insurance coverage. All-sums-with-stacking coverage allocation 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.
(Slip Op., p. 16).
The California Supreme Court did state, however, that in the future, insurers are free to modify their policy language to limit their indemnity obligations and prohibit stacking.