Last week, the state Supreme Court issued its long awaited decision in State of California v. Continental Insurance Co., 2012 DJDAR 11033 (Cal. Aug. 9, 2012), ruling that the state may secure the full policy limits of each applicable policy to cover damages which accrued over many decades. After considering the matter for three long years, the Supreme Court affirmed the "all-sums-with-stacking" rule articulated by the Court of Appeal. Thus, after 19 years of litigation the state can finally secure the limits of each policy to pay for the enormous costs of one of the largest pollution clean up sites in California.
At issue was whether California was covered for damages which began shortly after the time that the state opened the Stringfellow Acid Pits in 1956 and continued long after they were closed in 1972. Despite good intentions to operate the site as a safe place where industrial waste can be deposited and stored, it was later determined that the state was negligent in selecting, building and operating the site as an industrial waste facility. In 1998, a federal court found the state was negligent in failing to identify the aquifer below the site, not taking into account that the rock quarry was lined with fractured rock allowing seepage, and in constructing a barrier dam which proved ineffective to contain the waste during heavy rains. The state was held liable for the ground water contamination and its liability insurers predictably resisted paying for the estimated $700 million clean up cost. The insurance case, initially filed in 1993, took many twists and turns.
Primary insurance had covered the state in only one year. That insurer had exhausted its policy and settled, so the decision addressed the obligations of the excess insurers who issued policies from 1964 to 1976. The state's lawsuit against its insurers involved no less than three phased trials beginning in 1999.
By the time of the final phase three trial, it had been determined that (1) policy limits applied per occurrence, not annually, on multi-year policies; (2) the state's failure to remediate and delays in remediating the site were not a breach of a duty to mitigate the insurers' damages; (3) property damage was continuous throughout the insurers multiple consecutive policy periods from 1964 to 1976; (4) each insurer was liable for damages subject to policy limits for the total amount of the loss; (5) the state could not recover the policy limits for every policy period or stack the policy periods for covered occurrences; and (6) the state had to choose a single policy period for the entire loss coverage and could only recover up to the specific single policy limits in effect at the time the loss occurred, relying on FMC Corp. v. Plaisted & Co., 6 Cal App 4th 1132 (1998), and setting into motion this appeal.
At the last trial phase in May 2005, a jury determined the insurers had breached their policies. The state had already recovered $120 million from insurers who settled along the way. Because the trial court allowed set-offs, under the court's oneoccurrence, no-annualization and no-stacking rulings the most the state could recover was $48 million. So after a dozen hard fought years, several bench trials, a victorious jury trial, and with the state facing $700 million in clean up costs, the trial court awarded $0.
The Court of Appeal reversed the trial court's anti-stacking decision and rejected the FMC decision as "flawed and unconvincing." Reviewing the Court of Appeal decision, the Supreme Court restated all the basic rules of insurance policy interpretation and then turned to the "long tail" injury claim - a series of indivisible injuries attributable to continuing events without a single unambiguous cause." The court noted the claim involved progressive property damage that took place slowly over years - indeed, decades - and that it is "virtually impossible" for an insured to prove what specific damage occurred during each of the multiple consecutive policy periods in a progressive damage case. The court reviewed the Montrose Chemical Corp. v. Admiral Insurance. Co., 10 Cal. 4th 645 (1995) and Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38 (1997), holdings in the context of the "trigger of coverage" analysis and in regard to the "all sums" insurance policy language. Applying the analysis to this case, where the parties did not dispute that progressive damage to property occurred during numerous policy periods or that it is impossible to prove precisely what damage occurred during any given policy period, the court concluded "The fact that all policies were covering the risk at some point during the property loss is enough to trigger the insurers' indemnity obligation."
The court also explained that while not "jointly and severally liable for the full amount," each insurer is severally liable on its own policy up to the policy limits - rejecting the insurer's suggestion for a pro rata rule for indemnity allocation that some states have adopted. States which adopt the pro-rata allocation method also assign liability to the insureds for those years the insureds chose not to purchase insurance. (There is a long list of states adopting some form of a pro rata rule: New Jersey, New York, New Hampshire, Vermont, Louisiana, Massachusetts, Utah, Vermont, Kentucky, Kansas and Minnesota.)
However, this court felt "constrained by the language of the applicable policies ... which supports the adoption of the all sums coverage principles articulated earlier in Montrose and Aerojet." The court rejected the insurers' contentions that it is "objectively unreasonable" to hold them liable for losses that occurred before or after their policy periods, because the "during the policy period" language is not in the "Insuring Agreement" where the "all sums" language appears. A growing list of states have similarly adopted this interpretation of the "all sums" language (Delaware, Indiana, Ohio, Pennsylvania,Wisconsin andWashington).
When a loss is entirely within the limits of one policy, the insured can recover from one insurer who may then seek contribution from other insurers. However, where the loss exceeds the limits of any one period in a long-tail circumstance, this method would leave an insured "vastly uncovered" for a significant portion of the loss. Thus, the Supreme Court determined that the insured is permitted to stack the consecutive policies and recover up to the limits of each. "Stacking policy limits means that when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy."
Referencing a law review note, the court found that "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 one giant "uber-policy" with a coverage limit equal to the sum of all purchased insurance policies' ... the insured has immediate access to the insurance it purchased. This rule takes into account the uniquely progressive nature of long-tail injuries that cause progressive damage throughout multiple policy periods."
The decision expressly disapproved of the FMC holding where the policies do not contain anti-staking language. Of final note is the court's statement that "Of course, in the future, contracting parties can write into their policies whatever language they agree upon, including limitations on indemnity, equitable pro rata coverage allocation rules, and prohibitions on stacking."We expect in the future that CGL policies will uniformly be so endorsed.
Joan M. Cotkin is a partner at Nossaman LLP. She has helped her corporate and public sector clients recover hundreds of millions of dollars in insurance coverage. Ms. Cotkin's name appears among those representing the State in State of California v. Continental Insurance Co. She can be reached at (213) 612-7828 or firstname.lastname@example.org.