August 23, 2012
California Supreme Court Adopts All Sums Allocation Allowing Stacking of CGL Policy Limits
In a case of first impression, on August 9, 2012, the California Supreme Court issued its long-awaited decision in State of California v. Continental Insurance Company, et al. California policyholders with long-tail environmental liabilities are now able to recover more money from their historic commercial general liability insurers.
Rejecting the insurers’ arguments that a pro-rata allocation methodology should be applied, the court ruled that the State of California was allowed to recover up to the total limits of all triggered policies over multiple policy years. But the court did not stop there. It extended its holding to allow the stacking€? of limits across all triggered policy years. The California Supreme Court concluded that the fact that all policies were covering the risk at some point during the property loss is enough to trigger an insurer’s indemnity obligation. As a result, the insurers on the risk were ordered to pay all sums for property damage attributable to the Stringfellow Superfund site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was on the loss.
The Supreme Court of California determined that the all sums language in the excess policies’ insuring agreements meant that the insurers had to cover all damage up to their policy limits, even damage that occurred before or after their policy was in effect. The court further held that the during the policy period language that the insurers relied on to limit coverage does not appear in the insuring agreement section of the policies and, therefore, is neither logically [n]or grammatically related to theall sums’ language in the insuring agreement.
The court next found that the State of California could stack the coverage limits of all policies in the absence of any anti-stacking provisions. The court noted that 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 period of injury. The court found nothing unfair or unexpected in allowing stacking in a continuous long-tail loss.
In reaching its decision, the California Supreme Court reasoned 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. . .If such evidence were required, an insured who had procured insurance coverage for each year during which a long-tail injury occurred likely would be unable to recover.
The court asserted that extending coverage throughout the entirety of the ensuing property damage best reflects the policyholder’s expectations and the insurers’ indemnity obligations under their respective policies. Stacking generally refers to the stacking of policy limits across multiple policy periods that were on a particular risk. In other words, [s]tacking policy limits means 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 California Supreme Court found that an all-sums-with-stacking rule has numerous advantages because:
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.?
Today, liability insurers typically include anti-stacking provisions in their policies to avoid an outcome like the California Supreme Court’s decision. Consequently, the State of California v. Continental Insurance Company, et al., ruling is not expected to have a major impact on more recently issued coverage. However, the decision presents significant exposure implications for historic insurers of California insureds. The court’s reasoning could also be extended to apply to other types of long-tail situations such as asbestos bodily injury exposure claims. Further, while many states have already adopted allocation rules, the State of California v. Continental Insurance Company, et al. case may be influential in states without settled insurance allocation coverage law.