In State of California v. Continental Insurance Company., et al., No. S170560, 2012 WL 3206561 (Cal. Aug. 9, 2012), the California Supreme Court, applying California law, held that an “all-sums-with-stacking” allocation rule applied to the State of California’s (State) long-tail first party property loss claimed under multiple successive commercial general liability (CGL) policies, where the policies did not require a pro-rata allocation and there were no prohibitions on stacking.
The case arose out of an indemnity claim made by the State for the court-ordered cleanup of the State’s Stringfellow Acid Pits waste site. Id. at 1. The State sought indemnity under multiple excess CGL policies that were issued to the State between 1964 and 1976 by several different insurers. Id. The parties stipulated that the property damage caused by the negligent selection, design, and construction of the Stringfellow site took place continuously throughout the multiple consecutive policy periods from 1964 to 1976. Id. However, the parties disagreed on two key points: (1) how payment of the loss should be allocated between the respective insurers, and (2) whether the State could “stack” the coverage provided by the consecutive policies and recover up to the combined limits or had to choose a specific policy period and could only recover up to the specific limit for that period. Id. at 2-3. With respect to allocation, the insurers argued that the court should apply a “pro-rata” rule and require that “allocation of loss to a particular policy be proportionate to the damage suffered during that policy’s term.” Id. at 6. However, the court concluded that the coverage language in the policies at issue compelled the insurers to pay “all sums” that the policyholder shall be obligated to pay, and that grant of coverage did not limit the policies’ promise to only pay sums “during the policy period.” Id. Accordingly, the court held that the policies obligated the insurers to pay “all sums” for the property damage caused at the Stringfellow site, up to policy limits, “as long as some of the continuous property damage occurred while each policy was ‘on the loss.’” Id. at 7. The court went on to hold that the State could “stack” its coverage limits from the different policy periods to effectively form a single policy with a coverage limit equal to the sum of all policies purchased between 1964 and 1976. Id. at 7. The court reasoned that, where a covered loss is continuous across two or more policy periods, the insured has paid for two or more policies and should be allowed to recover up to the combined limits of those policies. Id. at 8.
The Continental Insurance Company decision is important because it potentially expands coverage provided to California insureds making claims for long-tail losses. However, the court also made it clear that insurers can take steps to prevent the expanded coverage seemingly provided by the Continental Insurance Company decision. Specifically, the court noted that insurers can avoid “all-sums-with-stacking” indemnity allocation by adding policy language that requires “pro rata” allocation and prohibits stacking. Id. at 8. Thus, although the Continental Insurance Company decision exemplifies how policy language can unexpectedly be expanded by a court, it also provides guidance to insurers on how to prevent such unexpected expansion in the future.