California Adopts “All-Sums-With-Stacking” Rule in Decision that Maximizes Coverage Available to Policyholders

    The California Supreme Court last week handed down a major ruling endorsing the “all-sums-with-stacking” approach for insurance coverage in long-tail environmental claims.

    On August 9, 2012, the Court issued its unanimous opinion in State of California v. Continental Insurance Company, No. S170560 (a copy of the decision is available here).   The case arose out of the clean-up of California’s Stringfellow Acid Pits hazardous waste site.  The site operated as an industrial waste disposal facility from 1956 to 1972.  The site was closed because of groundwater contamination.  In 1998, a federal court found the State of California liable for clean-up costs, which could range as high as $700 million.

    The State began litigation against its insurers as early as 1993, seeking indemnification for the federal action.  The group of insurers in this case, all of which issued excess policies, were brought in as defendants in 2002.  A trial court held that “each insurer was liable for damages, subject to its particular policy limits for the total amount of loss,” based on the “all sums” language in the insuring agreements.  Further, the trial court held that the State “could not recover the policy limits in effect for every policy period, and could not ‘stack,’ or combine, policy periods to recover more than one policy’s limits for covered occurrences.”  Relying on FMC Corp. v. Plaisted & Companies, 61 Cal. App. 4th 1132 (1998), the trial court held that the State had to choose a single policy period for the entire loss coverage, and it could recover only up to the specific single policy limit in effect at the time the loss occurred.   This approach limited the State’s potential recovery to $48 million; because the State had already received $120 million from prior settlements with other insurers, no additional recovery was available.

    The State appealed, and the California Court of Appeals agreed that the “all sums” language in the policies meant that the insurers were liable for property damage occurring outside of their policy periods; but it reversed on the second issue, agreeing with the insureds that stacking the policy limits for any policy period was permissible.

    The California Supreme Court affirmed the decision of the Court of Appeals.  The high court began by noting that there was no dispute that damage occurred during numerous policy periods, and that the insurers had conceded that it was not possible to establish which damage occurred during which policy period. Therefore, the insurers were “severally liable” on their own policies, up to their respective policies’ limits.

    The Court did consider the insurers’ argument for a pro rata allocation approach, but wrote that it was constrained by the policy language at issue, which stated that the insurer would pay “all sums which the insured becomes obligated to pay,” not limited to the policy period.  The Court took the same approach to stacking, concluding that, because the policies did not contain express anti-stacking provisions, stacking must be allowed.  In so doing, it expressly disavowed the holding in FMC Corp.

    This decision will likely have an impact on coverage disputes in many contexts, including construction defect, asbestos, toxic torts, and any other area where damage takes place over long periods of time, particularly because the “all sums” language at issue is found in so many standard general liability policies.  As the Court itself noted, however, there is a glimmer of hope for insurers on a going-forward basis, as “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.”

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