In a long-awaited and potentially controversial decision, the Supreme Court of California has added its voice to the ongoing dispute over how to allocate coverage in cases of continuous loss spanning multiple policy periods. The Court's decision, issued last Thursday, adopts an "all sums with stacking" methodology, which maximizes coverage for policyholders: permitting them to obtain coverage across all years when injury or damage occurred, up to the full limits of all applicable insurance policies in effect during any part of the loss. State of California v. Continental Insurance, et al., No. S170560 (August 9, 2012) ("Stringfellow III"). The Stringfellow III ruling has the potential to affect coverage for suits in a variety of long-tail contexts, including environmental, toxic tort, and construction-related exposures. It may also have implications for excess carriers, and for the method by which primary coverage must be exhausted before excess coverage can be triggered.
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The coverage dispute at issue in Stringfellow III arose out of the Stringfellow Acid Pits: an industrial waste disposal facility operated by the State of California beginning in the mid-1950s. The facility was unsuitably designed and sited, and was closed in 1972, after releases of contaminants into groundwater and surrounding soils. Following lengthy legal proceedings, the State was eventually held liable for cleanup costs at the facility, which reportedly could be as much as $700 million.
In 1993, the State sued a number of its insurers, seeking coverage up to the combined limits of all liability policies in effect in each year when contamination occurred. (A later suit, naming additional insurers, was consolidated with the main action in 2003.) By stipulation, the insurers agreed that the property damage at the Stringfellow site had taken place continuously throughout multiple consecutive policy periods from 1964 to 1976. In a series of rulings, the trial court held that the property damage had been the result of a single occurrence, and that coverage under certain insurers' multi-year policies could not be annualized.
In 2004, the trial court ruled that the State’s coverage could not be "stacked," i.e., the insurance available in one policy period could not be added to the insurance available in a second policy period, to create a combined coverage limit equal to the sum of all purchased insurance policies. Rather, citing FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (6th Dist. 1998), the trial court determined that the State was required to choose one policy period and could recover from all of its various triggered insurers, across the coverage block, only up to the amount of the limits of the policies in effect during that period. See State of California v. Underwriters at Lloyds London and Other London Market Insurers, et al. (Amended Trial Order) (Cal. Super. Mar 5, 2004) (NO. CIV239784, RIC38155) ("Stringfellow I"). Various parties appealed, and in 2009 the California Court of Appeal, Fourth District, reversed in part. State of California v. Continental Insurance Company, 88 Cal.Rptr.3d 288 (4th Dist. 2009), rev. granted, 203 P.3d 425 (Cal. 2009) ("Stringfellow II"). Applying California's version of the "continuous trigger," seeMontrose Chemical Corp. v. Admiral Ins. Co., 10 Cal.4th 645 (1995), the Court agreed that the State was entitled to seek coverage for long-tail claims across the coverage block, i.e., in any year that coverage was in effect. Stringfellow II, 88 Cal.Rptr.3d at 297-303. However, the Court did not limit the State to the amount of insurance purchased in a single policy year. Instead, the Court construed California's "all-sums" jurisprudence, Aerojet-General v. Transport Indemn. Co., 17 Cal.4th 38 (1997), to mean that the State could "stack" years of coverage, and could seek indemnity up to the full policy limits of every insurance policy in effect during the period of property damage. Stringfellow II, 88 Cal. Rptr.3d at 303-306. Although the court acknowledged FMC and other anti-stacking cases, it rejected those holdings as "flawed and unconvincing." Id. at 306-311.
The California Supreme Court decision last week upholds "all sums with stacking," on essentially the same reasoning applied by the Court of Appeals. See Stringfellow III, slip opin., pp. 1-2. As to "all sums," the Supreme Court reaffirms Montrose, and notes the CGL policy language obligating the insurers to pay "all sums which the insured shall become obligated to pay . . . for damages ... because of injury to or destruction of property . . . ". Id., p. 13. The insurers had argued that this "all sums" language was modified by the pertinent policies' definition of "occurrence," which limited coverage to property damage taking place "during the policy period." They argued that a pro rata approach was consistent with this language; was fairer and more reasonable; and was consistent with other recent rulings by state supreme courts addressing this issue. See, e.g., Boston Gas Co. v. Century Indemn. Co., 910 N.E.2d 290 (Mass. 2009). But the Supreme Court disagreed. It found that the relevant definitional language -- "during the policy period" -- did not appear in the insuring agreement of the policy, and was “neither logically nor grammatically” related to the “all sums” language in the insuring agreement. Stringfellow III, slip opin. at 13. Moreover, the Court found, an "all sums" approach better reflected "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." Id. at 14.
As to the stacking of limits: the Supreme Court concurred with the Court of Appeal that "standard policy language permits stacking" across multiple triggered policy periods. Id. at 16. The Court noted the policy language in question – requiring each insurer to pay "all sums" -- did not limit the insurers to paying “all sums” at issue during a particular policy period. Rather, “[t]he fact that all policies were covering the risk at some point during the property loss is enough to trigger the insurers' indemnity obligation" in full, up to the entire amount of the loss. Id. at 11. The Court did note, however, that the policies' "standard language" could be altered through non-cumulation and anti-stacking provisions, id. at 17, suggesting that policies with such provisions will be enforced.
The Supreme Court's ruling will be viewed -- in most circumstances – as a setback for insurers, and -- in most circumstances -- a victory for policyholders, who will now be permitted to "effectively stack 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. Id. at 15 (quotation omitted). As with most allocation issues, however, the effects of the ruling may not be uniform, and may be felt differently by different carriers within a particular policyholder's coverage block. Primary carriers may be most affected by the ruling, which may allow policyholders to trigger multiple primary limits across successive policy years.
Excess carriers, by contrast, may be less affected. Such carriers generally sit above primary policies, and generally argue for "horizontal exhaustion" of all primary coverage, retentions, etc., in long-tail claims before any excess coverage is triggered. As the Court of Appeal noted, a rule permitting "stacking" is consistent with a general rule requiring horizontal exhaustion. Stringfellow II, 88 Cal.Rptr.3d at 302-03. By contrast, under FMC’s anti-stacking jurisprudence, some policyholders had argued that they could trigger excess coverage after exhausting only the single primary policy or retention immediately underlying the excess policies in a single triggered year. See Kaiser Centent & Gypsum v. Ins. Co.of the State of Pennsylvania, Cal. Ct. App. Second Dist. No. B222310 (June 3, 2011), review granted and briefing deferred pending decision in State of California appeal (Cal. Supr. Ct Case No. S194724). The precise implications of the Stringfellow case for excess carriers remain to be seen; they will continue to be worked out in Kaiser, and similar California cases, for some time.