State of California v. Continental Insurance: California Supreme Court Ruling Paves the Way for “Stacking” Multiple Insurance Policy Limits in Response to Certain Environmental Cleanup Claims

On August 9, 2012, in State of California v. Continental Insurance, S170506, the California Supreme Court applied the “all sums-with-stacking” rule to allow the State of California to “stack” the policy limits of several successive insurance policies to recover for continuous environmental property damage incurred over a twelve year period. This ruling, which was based on the plain language of the commercial general liability (CGL) policies involved, allows the State of California to recover the aggregate amount of the individual policy limits up to the entire amount of the property damage, instead of limiting the State’s recovery to the pro rata allocation scheme proposed by the insurers.

The case arose out of the court-mandated cleanup of the Stringfellow Acid Pits waste site in Riverside County, a waste disposal site designed and operated by the State from 1956 to 1972. Several different factors in the location and design of the site caused continuous groundwater contamination from 1964 through 1976, which the State estimates will cost as much as $700 million to clean up. The State sued each of the insurers that issued a CGL policy covering the site during the twelve-year period of groundwater contamination for indemnity.

This case involves, and the ruling directly affects, a particular kind of property damage referred to as a “long-tail” injury. A “long-tail” injury is continuous and progressive property damage that is not attributable to one identifiable cause but, rather, to a continuing series of events. For that reason, identifying which insurance policy is responsible for covering a “long-tail” loss is difficult, if not impossible. Such “long-tail” claims regularly arise in the context of environmental damage, products liability, and toxic tort actions. Thus, the Supreme Court’s decision will have significant ramifications in the litigation of such claims when based on insurance policies that contain similar language to the CGL policies at issue here.

The language of all of the CGL policies in Continental Insurance required the insurers to pay “all sums which the insured shall become obligated to pay . . . for damages . . . because of injury to or destruction of property” and limited the insurers’ liability to a specified dollar amount of the “ultimate net loss [of] each occurrence.” The court analyzed its prior decisions in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, and Aerojet-General Corp. v. Transport indemnity Co. (1997) 17 Cal.4th 38, and found them to stand for the principle that where a policy contains such “all sums” language, and there is a continuous loss, any portion of which occurs during the policy period, an insurer’s indemnity obligations extend beyond the expiration of the policy period up until the point where the continuous loss terminates. The court pointed out that the plain language of the CGL policies in the case at hand did not restrict the insurer’s liability to sums expended or damage incurred solely “during the policy period,” and, thus, the Montrose and Aerojet principle applied. Therefore, since all of the CGL policies covered the risk of environmental damage to the Stringfellow site at some point during the continuous groundwater contamination, each insurer’s indemnity obligations were triggered as to the entirety of the damage, up to each policy’s limits.

After finding that the “all sums” language of the policies allowed each of the policies to cover up to the amount of the entire property damage, the court went on to find that the language of the CGL policies at issue did not limit “stacking” of the coverages. “Stacking” means that where several policies are triggered by one occurrence, each policy can satisfy the claim up to the full limits of that policy, and these policy limits can be “stacked” across several policy periods to cover the entire continuous loss. The court found the “all-sums-with-stacking” rule to be in keeping with its previous decisions in Montrose and Aerojet, as well as permitted by the insurance policy language involved – specifically, the insurance policies did not prohibit “stacking.” This, in effect, allowed the State to “stack” insurance coverage from the different policy periods during which the damage occurred creating coverage limits equal to the sum of all of the limits of the purchased insurance policies. The court opined that the “all-sums-with-stacking” rule is particularly appropriate to the “uniquely progressive nature of long-tail injuries that cause progressive damage throughout multiple policy periods.” Cont’l. Ins. at 15.

The Supreme Court’s decision has definitive implications for the litigation of future “long-tail” claims, including environmental cleanup claims, arising under past insurance policies that contain the “all sums” language and that do not prohibit “stacking”: principally, the “all-sums-with-stacking” rule will apply to permit the insured to recover the full extent of each policy that was in force when some part of the continuous property damage occurred and to “stack” those policy limits up to the amount of the entire property damage. The decision likely will affect future California insurance policies by encouraging insurers to incorporate policy language defeating the “all-sums-with-stacking” rule. Future insureds should be watchful for policy language prohibiting stacking, limiting indemnity, and specifying pro rata coverage allocation rules.