California High Court Rules in Favor of Policyholders for Cleanup Claims

Date: August 17, 2012

Source: News Room

In what could set a national precedent, the California Supreme Court ruled that insurers can be held liable to pay cleanup claims at waste sites outside of their respective policy periods. The court ruled that "policy stacking" as it is called is the "correct" and "equitable" way to allow insureds the ability to collect up to the policy limit for continuous injury cases. The court's ruling in "The State of California v. Continental Insurance Company" said policyholders can "stack" consecutive insurance policies in order to recover up to the policy limits across multiple policy periods. At issue are cleanup costs at a California Superfund site that had been covered under comprehensive general liability insurance policies issued to the state between 1964 and 1976. The problem is that the environmental damage caused by the site is taking place over many years, if not decades, and could cost as much as $700 million to remediate, according to the state. The ruling holds insurers liable for damages even outside of the policy period under what is called the "all sums approach." This approach differs from the pro rata method favored by insurance companies, in which they are only responsible for damages that occur during the period in which the policy is in force.

"As the Court of Appeal recognized, if an occurrence is continuous across two or more policy periods, the insured has paid two or more premiums and can recover up to the combined total of the policy limits," the state Supreme Court says. "There is nothing unfair or unexpected in allowing stacking in a continuous long-tail loss."

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

August 9, 2012

California Supreme Court Adopts "All-Sums-With-Stacking" Rule for Continuous Injury Cases

In a unanimous and long-waited decision, the California Supreme Court today (August 9) adopted the "all-sums-with-stacking" approach to addressing indemnification for continuous injury cases. The decision is The State of California v. Continental Insurance Co., as authored by Justice Ming Chin.

The specific facts of the case addressed the State of California's ability to obtain insurance coverage for environmental remediation at the Stringfellow Acid Pits waste site. The State operated the waste disposal site from 1956 to 1972, and the various insurers that were parties to the case provided the State with excess commercial liability insurance coverage from 1964 to 1976. Property damage occurred over the course of many years, including those in which the insurers provided coverage.

The Court addressed two issues: (1) when continuous property damage occurs during the periods of several successive liability policies, is each insurer liable for all damage both during and outside its period up to the amount of the insurer's policy limits? and (2) if so, is the "stacking" of limits permitted?
The Court of Appeal had answered both questions in the affirmative. An earlier Court of Appeal decision, FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), ruled that the State could not stack the policy limits of successive insurance policies, but rather had to pick a single policy year and recover the full amounts of the limits from that period.

In deciding these issues, the Supreme Court relied on an interpretation of the policy language that was found in the insurers' commercial general liabilility policies, as well as rules announced in two of its past decisions, to find first that each insurer who provided coverage to the insured when some property damage occurred would be "on the loss" and its indemnity obligations triggered up to the extent of its policy limits:

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 was "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.

The Court explained that it was not writing on a blank slate on this issue and observed that its decision was in line with a "growing number of states [that] have similarly adopted this interpretation of the all sums language." It rejected a contrary line of cases from other jurisdictions that have adopted a pro rata allocation of the damage.

In terms of allocating that continuous loss among all similarly implicated insurers, the Court found that allowing the insured to "stack" its policies and recover up to the policy limits of all the triggered policies was not only the correct rule based on the policy language but also the equitable result and one that can be achieved "with a comparatively uncomplicated calculation." In so doing, it expressly disapproved of the FMC Corp. decision. The Court did note, however, that insurers may be able to add "anti-stacking" provisions in their policies to avoid such a result, and indeed such provisions have been used for a number of years.

The Court also accepted for review, but has held pending the decision in Continental, another Court of Appeal case in which the issue of "stacking" was not permitted, Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania. We commented on that case shortly after it was decided in June 2011. Presumably, now that the Continental decision has been issued, the Kaiser Cement case will be returned to the lower court to issue a decision in line with Continental.

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