State of California v. Continental Insurance Co.
California Supreme Court
No. S170560 (August 9, 2012)
California sued insurers (policy periods 1964-1976) for indemnity under first party property coverage for contamination stemming from the notorious Stringfellow acid pits. The state had overseen the construction of the hazardous waste dump, which opened in 1956, and then accepted over 30 million gallons of industrial wastes before closing in 1972. The dump ended up leaking and causing broad contamination estimated to cost up to $700 million to fix. After the state was ordered by a federal court to clean up the site, it sought property coverage for all the years that damage could have occurred.
The state argued that each year of coverage, including all policies for each year, was collectible. The insurers argued that coverage was limited to one year and one policy.
The trial court first ruled that each insurer was liable for its full policy limits due to the continuous nature of the damages. The state was entitled to “all sums” coverage, which meant the full policy limit of liability. Further, the state could recover “all sums” from any of the insurers who provided coverage – even outside of the beginning of the “occurrence” that triggered coverage because of the continuous nature of the losses – but not all of them. The trial court agreed with the insurers and held there could be no “stacking,” so the insured was not able to add up all the policies’ limit of liabilities for indemnification.
Both the Court of Appeal and Supreme Court affirmed the “all sums” ruling, and both reversed the “stacking” ruling.
In a unanimous Supreme Court decision written by Justice Ming Chin, the Court held the “continuous injury trigger” and “all sums” rule applied to the insurers’ duty to indemnify. As part of its analysis the Supreme said it is often impossible for an insured to prove what specific damage occurred in any particular policy period during a continuing loss case.
The Court said the policies left unanswered the critical question for “long-tail” injuries: “when does a continuous condition become an ‘occurrence’ for the purposes of (triggering) insurance coverage?” It noted part of the question was answered in Montrose (a third party or liability policy), which involved similar policies. That Court held “property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods.” The limitation on coverage was that the damage must occur during a policy period and result from an accident or continuous and repeated exposure to conditions (summarizing the applicable policy language).
The Court then noted its decision in Aerojet (another third party case) in which it held that an insurer on the risk when a progressive loss first manifests is liable for the entire ensuing loss. Although Aerojet involved an issue of the insurer’s duty to defend, the Court concluded the same “all sums” rule applied to the indemnity question at issue here. The fact that all policies covered the risk at some point in time was enough to trigger the indemnity obligation of all.
The insurers argued, instead, for a pro-rata rule, which would limit the insured to the proportionate damage occurring within each policy period. The Court found no such limiting language in the policies and held each insurer was liable for its full limit of liability.
Finally, the Court approved of “stacking” in the case of multiple policies over many years, which allows an insured to call upon each policy up to its full limits of liability. Again, the policies here did not contain any limiting language. The result is that an insured has a giant “über-policy” with coverage equal to the total of all policies purchased.
This case resolves a long-standing battle by insurers over the extent of available coverage to insureds. The result is a huge and proper victory for insureds.
Prepared by John Reaves