In Long-Tail Property Damage Claims, All Policies On The Risk Owe Indemnity Up To Their Limits And The Limits Stack

State of California v. Continental Insurance Company
(Cal. Sup. Ct.), filed August 9, 2012

KEY FACTS

The State of California operated the Stringfellow Acid Pits, an industrial waste disposal facility from 1956 to 1972. Due to various negligent acts and omissions, waste from the site leaked into the groundwater. This leakage was continuous from the time the site opened to the time it was closed.

The State was subject to a federal court-ordered cleanup of the Stringfellow Acid Pits. The State sought indemnity under the policies for the cost of the cleanup.

The State was insured under a variety of comprehensive general liability (CGL) insurance policies, issued by a variety of insurers between 1964 and 1976.

Various insurers 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.” Liability limits were 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 . . . .”

HOLDING & REASONING

The California Supreme Court ruled that (1) every insurer that had issued a policy to the State during the period of the loss was liable, up to its policy limits; (2) the limits on the policies “stacked;” and (3) the insurers could seek contribution from each other to the extent any of them felt it was paying more than its fair share.

In reaching this conclusion, the Court noted that it is often “virtually impossible” for an insured to prove what specific damage occurred during each of the multiple consecutive policy periods in a progressive property damage case and that if the insured had to do so, an insured who had procured insurance coverage for each year during which a long-tail injury occurred likely would be unable to recover from any of the insurers. Since the particular policies did not include language addressing such injuries or addressing stacking of limits, the equitable thing to do was to hold all insurers liable and to let them sort it out among themselves.

As to stacking, the Court stated:

An all-sums-with-stacking rule has numerous advantages. It resolves the question of insurance coverage as equitably as possible, given the immeasurable aspects of a long-tail injury. It also comports with the parties’ reasonable expectations, in that the insurer reasonably expects to pay for property damage occurring during a long-tail loss it covered, but only up to its policy limits, while the insured reasonably expects indemnification for the time periods in which it purchased insurance coverage. 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.

ANALYSIS

While this result seems to follow naturally from cases such as Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645 (1995), the Court’s opinion does go further in terms of protecting policyholders where the only uncertainty relates to the covered period damage actually occurred in.

As the Court noted, however, “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 ‘antistacking’ provision in its policy.”