Court Holds That Self-Insured Retentions Exhaust Vertically And Awards Insured Mandatory Prejudgment Interest in Stringfellow Site Coverage Dispute

In State of California v. Continental Ins. Co. (No. E064518; filed 9/29/17), a California appeals court ruled that after Continental was ultimately held to pay its policy limits for remediation of the Stringfellow hazardous waste site, the insured State of California was entitled to mandatory prejudgment interest on the full amount dating back to 1998, when a federal district court had issued a judgment under F.R.C.P. 54 declaring the State liable under both the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and state law. To get there, the state appeals court held that vertical exhaustion applied to the attachment of Continental’s excess policies.

The State and federal government had commenced an environmental action against potentially responsible parties in federal court in 1983, resulting in counterclaims that the State tendered to its insurers, including Continental. In 1998 the district court entered a judgment finding, among others, the State liable to the counterclaimants. The State then entered settlements under which it assumed liability for the cleanup, and it paid off the federal government for the response costs federal authorities had incurred to date. The State’s coverage action was initiated in 1993 to recover all of its cleanup costs.

The coverage case subsequently resulted in three appeals, two of which went on the California Supreme Court. In 2015, Continental was held to pay, and paid, the State its full policy limits of $12 million. The trial court then ruled that the State was entitled to mandatory prejudgment interest on that amount at seven percent, dating back to 1998, thus totaling $13,914,082.09. Continental argued that it was not obligated for prejudgment interest because the federal district court’s 1998 judgment was not for “damages,” and in any case the State’s damages were not sufficiently “certain” for the purposes of awarding prejudgment interest.

Under Civil Code section 3287(a), “A person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in the person upon a particular day, is entitled also to recover interest thereon from that day….” Continental argued that the State’s damages could not have become “certain” until specific issues were adjudicated, including: (a) Whether horizontal exhaustion or vertical exhaustion applied; (b) How many occurrences there were; (c) Whether the policy limits applied per occurrence per policy period, or per occurrence per year; or (d) Whether the policies could be stacked.

The appeals court disagreed. The court cited Collins v. City of Los Angeles (2012) 205 Cal.App.4th 140, for the proposition: “[A] legal uncertainty concerning the measure of damages rather than a factual uncertainty … does not prevent damages from being ascertainable.” The State v. Continental court went on: “At least in insurance cases, what has been treated as controlling is whether the uncertainty is legal or factual. What portion of a loss will be allocated to a given insurer has been treated as a matter of the extent of liability, not a matter of damages — at least when it does not turn on disputed factual issues.” (Citing Hartford Accident & Indemnity Co. v. Sequoia Ins. Co. (1989) 211 Cal.App.3d 1285; Fireman’s Fund Ins. Co. v. Allstate Ins. Co. (1991) 234 Cal.App.3d 1154; and Shell Oil Co. v. National Union Fire Ins. Co. (1996) 44 Cal.App.4th 1633.) Further, the State v. Continental court said that: “What is critical is not whether the defendant actually knows how much it should pay; rather, it is whether the defendant could have calculated how much it should pay, if it had known how a court would ultimately rule on the legal issues.” (Citing Olson v. Cory (1983) 35 Cal.3d 390, 402.)

The State v. Continental court then moved on to hold that because the policies were written in excess of a retention, vertical exhaustion applied. While acknowledging that the principle of horizontal exhaustion had been applied to continuous and progressive losses and, further, that it was even an issue in earlier parts of the same case, the State v. Continental court noted that the State’s insurance program was based upon significant levels of self-insurance. The court quoted Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, stating: “‘[A]pportionment among multiple insurers must be distinguished from apportionment between an insurer and its insured…. ‘[T]he availability of allocation among multiple insurers is essentially irrelevant to each individual insurer’s obligation to its insured under the terms of the parties’ insurance contract.’”

Relying on Dart Industries, the State v. Continental court distinguished the key horizontal exhaustion case Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, which held that, in the case of a continuous loss across multiple policy periods, horizontal exhaustion ordinarily applies to primary insurance: “Community is not controlling, because here the applicable policies were not neatly divided into a primary level and an excess level. With one negligible exception, all of the applicable policies were excess to a retention.”

The State v. Continental court dismissed as irrelevant that the State had in fact purchased insurance to satisfy some of its self-insured retentions, saying: “Here, the “Other Insurance” clause permitted (though it did not require) the State to buy other insurance covering some or all of its retention.” Thus, “no policy was written as excess to any other specified policy, although some became excess to another policy or policies as the result of the State’s decision to purchase other insurance to cover its retention.” The State v. Continental court concluded that “[u]nder these circumstances, Montgomery Ward & Company, Inc. v. Imperial Cas. & Indem. Co. [(2000) 81 Cal.App.4th 356, 368] — which held that in the case of a continuous loss across multiple policy periods, vertical exhaustion ordinarily applies to self-insured retentions — is more apropos.”

The State v. Continental court went on to reject a judicial estoppel argument – that the state had taken a contrary position on exhaustion earlier in the case because “in the previous appeal, we did not adopt or accept as true the position that Continental attributes to the State.”

The State v. Continental court then found that although it was not a money judgment per se, the federal district court’s 1998 Rule 54 judgment against the State nonetheless represented an award for damages capable of being made sum certain for purposes of prejudgment interest. And because it deemed the dispute over vertical versus horizontal exhaustion purely legal rather than factual, that likewise did not render the damages uncertain for purposes of an interest award. Nor was a question regarding offsets attributable to other insurers’ payments or settlements sufficient to preclude the damages from being considered “certain or capable of being made certain” as regards prejudgment interest.

This document is intended to provide you with information about insurance law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

October 2, 2017