Insurance Law Alert: California Supreme Court Approves “All Sums With Stacking” Allocation Rule For Continuous Losses

In State of California v. Continental Insurance Company (filed 8/9/12, No. S170560), the California Supreme Court resolved a decades-long conflict over insurance coverage for continuous and progressive property damage that spans several policy periods. The dispute involved two issues: (1) When continuous property damage occurs during the periods of several successive liability policies, is each insurer liable for all damage both during and outside its period up to the amount of the insurer’s policy limits; and (2) if so, is the “stacking” of limits — i.e., obtaining the multiple limits of successive policies — permitted?

The State of California was seeking liability insurance coverage for damages awarded against it in a separate federal court action for continuous and progressive environmental contamination emanating from the Stringfellow Hazardous Waste containment facility in Riverside County. The State’s insurers had issued successive liability policies over a span of many years. The policies were triggered by an “occurrence” during the policy period, and promised to pay “all sums” for damages because of property damage, up to the policies’ stated limits.

Following trial, the court of appeal had ruled against the insurers, holding that each policy separately promised to indemnify “all sums” of the policyholder’s liability, with each required to pay up to the full limit for which the insurer had calculated and collected a separate premium. The appeals court also held that the State was entitled to stack the policies’ limits.

In petitioning the Supreme Court, the insurers argued that the appeals court had effectively rewritten their contracts, by holding that there could be indemnity coverage for the State’s liability for property damage that occurred before and after a given policy period, even though the policy wording limits the basic scope of coverage to property damage that occurs during the policy period.

The State said this was confusing the trigger of coverage — the event that activates the insurer’s defense and/or indemnity obligations — with the ultimate scope of coverage. The State said trigger was more properly addressed to defense, while scope applied to indemnity. In addition, the State found the “all sums” position consistent with recognized principles of equitable allocation and concurrent causation. The State also invoked “fairness and justice,” arguing each successive policy constituted a separately negotiated contract, and that the insurers were attempting to engage in post-claim underwriting.

Regarding “stacking,” the insurers argued that the State was not entitled to indemnity up to the combined limits of all policies in effect during the periods of continuous and progressive damage but, instead, was limited to the coverage purchased during a single policy period. They found support for this position in the “occurrence” definition, the limits of liability, and the policy period provisions. Essentially, the insurers argued that the fundamental limitation of coverage to a sum certain “per occurrence,” for property damage during the policy period, precluded stacking of multiple policies’ limits for the same occurrence.

The Supreme Court came down squarely on the side of the policyholder, adopting an “all sums with stacking” allocation rule. The Court stated 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. Citing Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Ca1.4th 38, the Court stated that as long as the property is insured at some point during the continuing damage period, the insurers’ indemnity obligations persist until the loss is complete, or terminates. The Court concluded that the insurers were obligated to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, as long as some of the continuous property damage occurred while each policy was “on the loss.”

The Court also approved stacking, meaning that when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy. The Court stated that: “The all-sums-with-stacking indemnity principle properly incorporates the Montrose continuous injury trigger of coverage rule [Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Ca1.4th 645] and the Aerojet all sums rule, and 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. Instead of treating a long-tail injury as though it occurred in one policy period, this approach treats all the triggered insurance as though it were purchased in one policy period. [Thus,] [t]he insured has access to far more insurance than it would ever be entitled to within anyone period.”

According to the Court, “[t]he all-sums-with-stacking rule means that the insured has immediate access to the insurance it purchased.” Further, “[a]ll-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. As the Court of Appeal recognized, if an occurrence is continuous across two or more policy periods, the insured has paid two or more premiums and can recover up to the combined total of the policy limits. There is nothing unfair or unexpected in allowing stacking in a continuous long-tail loss.”

Having sided with the policyholder, the State of California Court nonetheless left open the possibility for contracting around its rule, stating that “[t]he 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. Of course, in the future, contracting parties can write into their policies whatever language they agree upon, including limitations on indemnity, equitable pro rata coverage allocation rules, and prohibitions on stacking.”

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

August 9, 2012