A California Court of Appeal has held that an insured is entitled to combine or “stack” the policy limits of all applicable policies across all applicable policy periods in cases of continuous and progressive property damage and bodily injury, thus creating a split of authority with the “no-stacking rule” previously adopted by another California appellate panel. ( State v. Continental Casualty Insurance Co. (2009) 170 Cal.App.4th 160)
Facts
The coverage dispute at issue in this case arose out of claims of groundwater contamination stemming from the 1950s conversion of a quarry in Riverside County into an industrial waste disposal site. A state geologist inspected the quarry for suitability in 1955, and the State of California proceeded to design the site and supervise its construction. Over the next two decades, numerous flaws in the site’s design and construction allowed contaminants to escape. In 1998, the State was found liable for all past and future remediation costs, estimated to be as high as $700 million.
Seeking indemnification, the State filed suit against its excess liability insurers, each of which covered a two- or three-year period in the 1960s and 1970s. The trial court concluded, among other things, that every policy in effect for any policy period during which the loss was occurring covered the entire loss (subject to the policy limits). However, the trial court also ruled that that the State could only recover up to the policy limits of the policies in effect during a single period to be selected by the State. This “no-stacking” holding was one of several issues on appeal.
Holding
The Fourth Appellate District reversed the trial court, holding that the State was not limited to a single policy period and that the State could combine or “stack” the policy limits of all applicable policies across all applicable policy periods. First, the Court examined the language of the policies, noting that they only limit each particular insurer’s liability under each particular policy (that is, not in reference to other policies), and that nothing in the policy language expressly prohibits stacking. The Court also noted that, with the exception of uninsured motorist policies, stacking is generally the rule. For example, the fact that California follows the “horizontal exhaustion” rule (whereby excess policies are not triggered until the limits of all underlying primary policies are exhausted) necessarily implies that the insured (like the excess carrier) is entitled to stack primary policies; otherwise, the primary policies could never be exhausted.
The Court then rejected the “no-stacking” rule previously adopted by the Sixth Appellate District in FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4th 1132, and identified several arguments against such a rule. First, the policy language is susceptible to the meaning that stacking is allowed and should be construed against the insurer. Second, FMC ‘s finding that stacking affords the insured more coverage than it paid for is circular: it assumes what it is meant to prove – that the policies do not provide for stacking. Moreover, if an occurrence is continuous across two policy periods, the insured has paid two premiums and can recover up to the combined total of two policy limits – something that is neither unfair nor unexpected. Finally, even if stacking somehow resulted in a windfall to the insured, courts would not be authorized to cure it through “judicial intervention,” as FMC suggests, because courts cannot rewrite contracts.
Notably, the Continental Casualty holding applies even if there is only a single “occurrence,” but it is limited to cases to where there is continuous and progressive bodily injury or property damage. The Court openly acknowledged that one reason to prohibit stacking is that the insured should not be better off when an occurrence is continuous across multiple policy years. However, the Court also noted that “a continuous loss spanning two or more policy periods is fundamentally different from an instantaneous loss, such that it is appropriate to place a greater contractual obligation on the insurers.”
Comment
As is evident, the Continental Casualty decision created a district split with the FMC decision regarding the permissibility of “stacking.” In order to resolve the conflicting appellate decisions on this issue, the California Supreme Court has recently granted review in the Continental Casualty case. Until the Supreme Court renders its decision in this case (which may not be until sometime in 2010), this will remain an unsettled area of the law.