Policyholders with environmental liabilities dating back to the 1960s, 1970s and early 1980s were handed a major new weapon to use in their efforts to collect indemnity from their insurers by the California Supreme Court in the recent decision of State v. Continental Ins. Co., No. S170560, 2012 WL 3206561 (Cal. Aug. 9, 2012). California has long been considered a policyholder-friendly state, due to prior judicial decisions that have allowed a policyholder to select any single year during which its environmental exposure was triggered to collect from its insurers under the “all sums” allocation method. However, California can now be considered among the most policyholder-friendly states as a result of the Continental decision, which held that a policyholder can seek indemnification from all of its insurers that were on risk during the period of time of exposure for a loss that occurred over a period of many years for the full limits of every policy that each insurer issued during the exposure period.

The holding in Continental was not based on any supporting legal authority or policy language.  Instead, the Court seemed to draw on its own sense of equity to place the economic burden on the insurance industry. While the merits of the Continental decision can — and will — be debated for years to come, the result for policyholders with major long-term environmental exposures was the best it could possibly be. The key for these policyholders now will be to file coverage actions against their insurers in California courts, if possible, and argue that the ruling in Continental should extend to liabilities nationwide, not just in California.

In Continental, the insured was the State of California (the “State”), and the insurers were carriers that had each issued one or more excess commercial general liability (“CGL”) policies to the State between 1964 and 1976. The CGL policies provided coverage for property loss related to the State’s clean-up of a hazardous waste site. Each of the policies at issue provided that the subject carrier would pay “all sums which the insured shall become obligated to pay... for damages... because of injury to or destruction of property...” Continental, 2012 WL 3206561, at *6.

The Continental Court held that, where a CGL policy provides coverage during a period of continuous exposure and contains the type of “all sums” language found in the CGL policies at issue, California law requires the subject carrier to indemnify the policyholder for any occurrence of the covered loss taking place within the continuous exposure period, regardless of whether the loss occurred before, during or after the respective policy period(s). Continental, 2012 WL 3206561, at *6, *7. This is an extension of the “all sums” rule articulated by the California Supreme Court, first in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995), and later in Aerojet-General Corp. v. Transport Indem. Co., 17 Cal 4th 38 (1997), which cases predominantly involved an insurer’s duty to defend similar claims.

Next, the Continental Court held that California law permits and insured to stack policy limits of all policies on a particular risk. Continental, 2012 WL 3206561, at *7. Thus, absent express anti-stacking language in the policy, id., at *8, where more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to its full limits. When the policy limits of one given insurer have been exhausted, the insured can seek indemnification from any remaining insurers that were on the risk. Id., at *7. The Court explained that, combining this stacking principle with the all sums rule “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.” Id. The Court did note, however, that an insurer may avoid application of the stacking principle by including anti-stacking language in its policy(ies).

As a result of the Continental decision, a California policyholder that chose to procure insurance for some, but not all, of a continuous exposure period may still be able to shield itself from liability for loss that occurred during the uninsured portion of the period. If the policyholder has not reached the full limit of its applicable insurance, it can apply the remainder of such limit to indemnify it for loss that occurred during the uninsured portion of the period.