In State of California v. Continental Insurance Co. et al. S170560 (August 9, 2012), the California Supreme Court ruled that policyholders involved in long-tail environmental claims can “stack” coverage limits over multiple policy years and can take an “all-sums” approach to indemnity allocation. This unanimous decision by the Court affirms an appellate court’s decision against the positions of several insurance companies that issued policies insuring the state of California's Stringfellow Acid Pits waste site. “All sums with stacking” is the rule in California – at least as to policies without express anti-stacking language.
The Stringfellow site was an industrial waste disposal facility that the state designed and operated from 1956 to 1972. The site proved to be unsuitable for multiple reasons, including fractured bedrock and an underground aquifer located 70 feet below the surface. Also, a barrier dam was ineffective and permitted contaminants to escape in 1969 and 1978. The result was a plume of toxic waste that extended for miles. The state closed the facility in 1972. Each insurer that is party to this appeal issued one or more excess commercial (also known as comprehensive) general liability (CGL) insurance policies to the state between 1964 and 1976.
The policies contained similar language. Significantly, each provided that the insurer agreed “[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law . . . for damages . . . because of injury to or destruction of property, including loss of use thereof.” Policy limits were stated as a specified dollar amount of the “ultimate net loss [of] each occurrence.” “Occurrence” was defined as meaning “an accident or a continuous or repeated exposure to conditions which result in . . . damage to property during the policy period . . . .” In addition, “‘ultimate net loss’ [was] understood to mean the amount payable in settlement of the liability of the Insured arising only from the hazards covered by this policy after making deductions for all recoveries and for other valid and collectible insurances . . . .”
Based on the “all sums” language, the trial court held that each insurer was liable for damages, subject to its particular policy limits for the total amount of the loss. It also held that the state could not recover the limits for every policy period and could not “stack” policy periods to recover more than one policy’s limits. Rather, the trial court ruled that the state must choose a single policy period for the entire loss coverage, and it could recover only up to the specific limit in effect for that period.
The Court of Appeal affirmed in part and reversed in part the trial court’s ruling. The Court of Appeal upheld the trial court’s ruling that the insurers could be liable for property damage occurring outside their respective policy periods and that once coverage was triggered, all of the insurers had to indemnify the insured for the loss. However, the Court of Appeal reversed the trial court’s ruling that prohibited the state from stacking the policy limits. In its decision, the California Supreme Court upheld the decision by the Court of Appeal.
Looking back to its previous decisions in Montrose (continuous trigger) and Aerojet (all sums) relating to the duty to defend concerning “long-tail” environmental losses, the Supreme Court found that “similar” reasoning applied to decisions involving the duty to indemnify. This is because of the complexities and uncertainties that make it difficult for an insured to determine in which policy period environmental damage occurred. The Court then rejected a “pro rata” rule that would allocate an equal share of the damage to each year over which a long-tail injury occurred – including years during which there was no insurance coverage in place.
The insurers argued that a “pro rata” rule would be more equitable and that it would be reasonable to allocate some damage to the policyholder for uninsured years. Moreover, several other states have adopted the “pro rata” approach, including Massachusetts and New York. The California Court held, however, that the “pro rata” approach is inconsistent with the “all sums” language in the policies’ insuring agreement. The Supreme Court also stated that the “All-sums-with-stacking coverage allocation ascertains each insurer’s liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury."
Insurers Look to Anti-stacking Provisions
While the Supreme Court decision represents a major disappointment for insurers, the opinion offers one glimmer of hope. That is that California courts should still enforce specific “anti-stacking” provisions when they appear in liability policies. According to Justice Chin’s opinion, “The most significant caveat to all-sums-with-stacking indemnity allocation is that it contemplates that an insurer may avoid stacking by specifically including an ‘anti-stacking’ provision in its policy.” As such, the line of cases, including Safeco Ins. Co. v. Fireman’s Fund Insurance Company ((2007) 148 Cal. App. 4th 620), that reject stacking of limits based on specific anti-stacking provisions is still available to insurers facing claims in California.