California Supreme Court Upholds "All-Sums" and Stacking Insurance Approach To Long-Tail Property Loss

 In yet another chapter to the Stringfellow Acid Pits waste site saga, the California Supreme Court, in an August 9, 2012 unanimous decision, ruled that where there are "long-tail" continuous injuries (common in environmental and toxic tort cases where contamination occurs over the course of many years), an insurer providing coverage for any portion of the "long-tail" period may be liable for the entire loss, up to policy limits.  Further, the Court held that where there were multiple policy years involved, the policy limits of each year could be "stacked" to form "one giant “uber-policy,” thereby increasing the total amount of insurance coverage available to pay clean-up costs or other damages.

In The State of California v. Continental Insurance Co., et al. (No. S170560), the Court addressed the extent to which various insurers were required to reimburse the State of California, which was found liable in federal court in 1998 for contamination at Stringfellow. The State had various occurrence-based policies with various insurers during the many years the site was in operation.  Each policy provided that the insurer agreed "to 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 ..." (emphasis added).  It was undisputed that the damage to the Stringfellow site "occurred" during numerous policy periods, and that it would have been impossible to prove what specific property damage occurred during any one policy period.

The Court concluded that all of the policies at issue covered the risk at some point during the property loss, thereby triggering each insurer's indemnity obligations.  Citing to Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995) and Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38 (1997), the Court held that the "all-sums" language in the policies meant that each successive insurer who provided coverage for the risk during the long-tail property damage period was severally liable for the entire loss, up to each respective policy's limits, even if some of the damage occurred before or after the insurer's policy period or during times when the policyholder had no insurance.  In doing so, the Court rejected the insurers' arguments for pro rata allocation, under which damages are spread across all of the years in which the long-tail loss took place, with the policyholder liable for damage assigned to periods in which it chose not to purchase insurance, or can otherwise not establish coverage.

The Court next turned to how to address the situation where the continuous "long-tail" loss exceeds the limits of any single policy.  Under those circumstances, the Court applied an "all-sums-stacking-rule," which effectively stacks the limits of each policy from different policies to create a giant "uber-policy."  Under that approach, instead of treating the long-tail injury as though it occurred in only one defined policy period, as a prior California intermediate appellate court had ruled, now all triggered insurance would be treated as if it were purchased for one long policy period, with a coverage limit equal to the sum of all purchased insurance policies. 

As the Court noted, the "all-sums-stacking rule" is advantageous because:

1. it is equitable in light of the characteristics of a long-tail injury, 
2. the insured's expectations are met because it paid premiums for coverage, along with the respective policy limits, in each of the policy periods in question, 
3. it meets the insurer's expectations because the insurer "reasonably expects to pay for property damage occurring during a long-tail loss it covered, but only up to policy limits," and 
4. it fixes the insurer's liability without the complication of artificially breaking the long-tail injury into "distinct periods of injury" to try to somehow calculate actual injury during the designated policy period.

The "all-sums-stacking-rule" will prove beneficial to policyholders subject to environmental clean-up obligations where the contamination was caused over a long period of time and is not easily divisible, by allowing them to stack the policy limits from each year, thereby exceeding any recovery than would otherwise be available if only one policy were triggered.

 

Insureds should not expect policies going forward to be so generous, however.  The Court specifically indicated that "in the future, contracting parties can write into their policies whatever language they agree upon, including limitations on indemnity, equitable pro rata coverage allocation rules, and prohibitions on stacking."

--Josh Bloom and Jon Enscoe

For more information, contact Josh Bloom at (415) 228-5406, jab@bcltlaw.com or Jon Enscoe at (415) 228-5495, je@bcltlaw.com