An insurer on the risk at any time when covered damage occurred was obligated to indemnify the insured for “all sums” the insured owed up to the policy limits, and the insured was entitled to “stack” the limits of all triggered policies. ( State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186)
Facts
In 1955, the State of California designed and approved the Stringfellow Acid Pits in Riverside, California. Between 1956 and 1972 private parties operated the Stringfellow site, and during that time the site accepted more than 30 million gallons of industrial waste. In 1972, upon discovery of groundwater contamination at and around the site, the State closed the site.
In 1998, a federal court found the State negligent in choosing, designing and failing to remediate the site. The federal court thus held the State liable for all past and future cleanup costs (which could reach $700 million).
The State sought indemnity from various insurers which had issued excess liability policies to the State between 1964 and 1976. Each policy provided that the insurer would “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 …” (italics added). Each policy covered “ultimate net loss [of] each occurrence,” and defined an “occurrence” as “an accident or a continuous or repeated exposure to conditions which result in … damage to property during the policy period….” It was undisputed that property damage had continuously “occurred” during all policy periods, and that it was impossible to prove what specific property damage had occurred during any one policy period.
After proceedings in both the trial court and the California Court of Appeal, the California Supreme Court agreed to review the matter. Specifically, the Supreme Court agreed to determine the indemnity obligations of successive liability insurers when their common insured becomes liable for continuous and progressive property damage that spans multiple policy periods.
Holding
The Supreme Court began by holding that each insurer whose policy was in effect while any of the continuous property damage occurred is obligated to pay “all sums” for which the insured becomes liable because of the property damage, subject only to the insurer’s policy limits. The insurer’s obligation is not affected by the fact that the property damage also occurred before or after the insurer’s policy period. The Court rejected the insurers’ proposed “pro rata” allocation method, which would have required that the allocation of loss to any particular policy be proportionate to the damage suffered during that policy period. According to the Court, the specific policy language under consideration did not contemplate that method.
Next, the Supreme Court held that, absent policy language to the contrary, the insured may “stack” policy limits in a continuous injury case. In other words, the insured is entitled to indemnity under all policies that were in effect while the property damage was occurring, up to each policy’s limits. According to the Court, stacking comports with the parties’ reasonable expectations in that the insurer reasonably expects to pay up to its policy limits for property damage occurring during the policy period, and the insured reasonably expects indemnification for all time periods in which it purchased coverage. In adopting a rule allowing stacking of policy limits, the Court specifically disapproved a prior California appellate decision that had refused to permit stacking.
Comment
With regard to the “all sums” ruling, the Supreme Court noted that the policies at issue contained insuring agreements that did not restrict the insurers’ indemnity obligations to property damage occurring “during the policy period.” Note that most modern policies do contain insuring agreements that limit coverage to bodily injury and property damage occurring “during the policy period.” Thus, if this case had involved modern policies with insuring clauses restricting coverage to injury and damage occurring during the policy period, it is possible that the Court would have rejected the “all sums” approach and would have instead adopted the “pro rata” approach. Thus, it is possible that the result in this case will be restricted to the specific policy language which was before the Court.
With regard to the “stacking” ruling, the Court emphasized that it was dealing with policies that did not include “anti-stacking” provisions. The Court made it clear that insurers can include “anti-stacking” provisions in their policies, as long as such provisions are conspicuous, plain and clear. Thus, according to the Court, “an insurer may avoid stacking by specifically including an ‘anti-stacking’ provision in its policy.”