California Permits Stacking and the “Uber-Policy”, Insurance Policyholder Advocate

The California Supreme Court has issued a landmark ruling expanding the insurance coverage available for environmental clean-ups and other “long-tail” liabilities in State of California v. Continental Ins. Co., Case No. 170560 (August 9, 2012).

Continental is the latest chapter in decades of litigation regarding the Stringfellow Acid Pits. Stringfellow was a waste disposal site constructed in the 1950s, in a canyon lined with impermeable rock—or so it was believed at the time. Millions of gallons of industrial waste were deposited at Stringfellow until 1972, when the State of California closed the site after detecting groundwater contamination. Current estimates for remediating the site range as high as $700 million.

The Supreme Court’s recent decision marked the second time in three years that the Court has taken up the Stringfellow coverage dispute. (The prior decision is discussed here: The Stringfellow site is covered by comprehensive general liability (“CGL”) and excess policies issued from 1963 to 1977. Because groundwater contamination occurred progressively throughout this time period, the policies in every year were triggered and at least potentially liable to pay for the clean-up. Aerojet-General Corp. v. Transp. Indem. Co., 17 Cal.4th 38, 55-57 (1997).

What remained unsettled was whether the State of California would be confined to the policy limits available in a single policy year, or whether the State could combine—or “stack”—the limits of every policy year. The availability of “stacking” has been a critical issue in the context of environmental and other “long-tail” claims, as stacking would provide more in insurance assets—in many cases, exponentially more—to pay for the liabilities. Insurers have sought to minimize or even avoid their coverage obligations by arguing that only one policy year could be accessed. Alternatively, insurers have argued that if stacking is permitted, then indemnity should be spread pro rata—and the policyholder should absorb shares of the indemnity for each year in which it didn’t purchase insurance. In Continental, the Supreme Court rejected these approaches, holding that stacking was permitted by the plain language of the policies. The Court concluded that stacking properly results in the “forming of one giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies,” quoting a law review article.

Each of the policies at issue provided that the insurer would be liable for “all sums” that the policyholder “shall become legally obligated to pay . . . for damages . . . because of injury to or destruction of property, including loss of use thereof.” This is standard language in CGL policies. In the prior Aerojet decision, the Supreme Court relied on this language and held that “an insurer on the risk when continuous or progressively deteriorating [property] damage or [bodily] injury first manifests itself remains obligated to indemnify the insured for the entirety of the ensuing damage or injury”—that is, including damage or injury occurring before or after the policy period at issue. 17 Cal.4th at 57 n.10. In Continental, the Court extended this reasoning to the issue of stacking. It held that the insurers must pay “all sums for property damage attributable to the Stringfellow 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.’” In other words, each insurer must pay indemnity up to its limits—even for damage occurring before or after its policy period—so long as some of the damage occurred during its policy period. In so doing, the Court expressly disavowed a prior Court of Appeal ruling to the contrary, FMC Corp. v. Plaisted & Companies, 61 Cal.App.4th 1132 (1998).

The decision in Continental means as much as $120 million in additional policy proceeds for the Stringfellow clean-up according to media reports, and should increase the available limits for environmental and other “long-tail” liabilities under other “uber-policies” governed by California law. In addition, the Continental decision may be influential in the many states in which this question remains unsettled. Policyholders should reexamine their available coverage in light of Continental.

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