California’s Supreme Court Addresses Trigger of Coverage and Stacking of Limits

By decision dated August 9, 2012, the Supreme Court of California handed down its long-anticipated holding in State of California v. Continental Insurance Company, 2012 Cal. LEXIS 7324, a ruling that now further defines California law concerning trigger of coverage, allocation of loss, and stacking of policy limits in matters involving continuous or progressive loss.

The State of California decision relates to insurance coverage for environmental contamination emanating from the Stringfellow Acid Pits waste site, which had been operated by the State from 1956 through 1972.  The insurance coverage dispute involved the State’s right to coverage under excess general liability policies issued during the period 1964 to 1976.  The State estimated site remediation costs could reach $700 million.  Each of the State’s insurers had policies requiring them “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, including loss of use thereof.”  Relevant to the State of California decision was a trial court ruling that each of the insurers on the risk during the period 1964 to 1976 was liable for the total amount of the State’s loss, subject to its particular policy limits.  The court based its ruling on the “all sums” language in the policies.  The trial court further held, however, that the State could not recover insurance proceeds in each policy period, nor could it stack policy limits across multiple periods.  In other words, the trial court held that the State was confined to a single policy period in which to recover the entire loss.  On appeal, the California Court of Appeal reversed the lower court’s ruling with respect to stacking of policy limits, allowing the State to recover insurance proceeds in multiple policy years.

On appeal, the Supreme Court first addressed the issue of trigger of coverage, looking to its decisions in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4^th 645 (1995) and Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4^th 38 (1997).  These decisions, noted the court, addressed issues of continuous or progressive damage happening during several policy periods.  Montrose, explained the court, articulated the general rule that as long as there is any damage during the policy period, i.e., an occurrence, then each insurer’s indemnity obligation persists until the loss is complete or terminates.  Aerojet, in turn, set forth the “all sums” rule that any insurer on the risk at the time of a continuous or progressive loss is obligated to pay the entire loss, not just the loss limited to the insurer’s specific policy period.  The State of California court held that while these decisions arose in the context, they also apply in the context of the insurers’ respective duties to indemnify.  In doing so, the court rejected the insurer’s argument that they should only be responsible for the loss that happened during their respective policy periods.  The court found no justification for a pro rata allocation methodology favored by the insurers, concluding that the phrase “all sums” in the policies’ respective insuring agreements required the insurers to pay all amounts for which the insured became legally liable, not just for property damage happening during their respective policy periods.  As the court stated:

We therefore conclude that the policies at issue obligate the insurers to 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 as “on the loss.”  The coverage extends to the entirety of the ensuing damage or injury and best reflects the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.  (Internal citations omitted)

Turning to the issue of stacking of policy limits, the court noted the potential for a shortfall in insurance proceeds if the insured is limited to a recovering proceeds of only a single policy period.  Stacking limits across multiple policy periods, the court observed, avoids this problem:

The all-sums-with-stacking indemnity principle properly incorporates the Montrose continuous injury trigger of coverage rule and the Aerojetall sums rule, and “effectively stacks the insurance coverage from different policy periods to form on giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies.  Instead of treating a long-tail injury as though it occurred in one policy period, this approach treats all the triggered insurance as though it were purchased in one policy period.

The court further explained that:

The all-sums-with-stacking rule means that the insured has immediate access to the insurance it purchased.  It does not put the insured in the position of receiving less coverage than it brought.  It also acknowledges the uniquely progressive nature of long-tail injuries that cause progressive damage throughout multiple policy periods.  (Emphasis in original.)

In reaching its holding, the court rejected disapproved the decision in FMC Corp. v. Plaisted & Companies, 61 Cal.App.4^th 1132 (Cal. App. 1998) which held that stacking of policy limits was not permitted.  Thus, as a result of the California Supreme Court’s decision, stacking of policy limits across multiple policy periods is permissible and will be allowed absent specific anti-stacking language within a policy, or a statute to the contrary.  The court explained that such an approach is both equitable and fulfills the insured’s reasonable expectations.  The court further observed that an all-sums-with-stacking approach “ascertains each insurer’s liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.”  The court did acknowledge, however, that insurers can avoid this allocation methodology by incorporating specific anti-stacking provisions into their policies.

New York Court Addresses Number of Occurrences for Molestation Claim

In its recent decision Roman Catholic Diocese of Brooklyn v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2011 N.Y. App. Div. LEXIS 6432 (2d Dep’t. Sept. 20, 2011), a New York appellate level court had occasion to consider various coverage issues arising out of a sexual molestation claim; specifically, number of occurrences and allocation of loss.

The claimant in the underlying suit alleged that she had been molested for a period of seven years “at different times during the day and week, and at multiple locations.” While the insured had primary general liability coverage available for each of these years, each of the policies had a sizable self-insured retention.  This prompted the insured to contend to the position that the underlying matter, which settled for $2 million, could be allocated solely to two of the triggered policy periods, based on a “joint and several” allocation theory.  The trial court held against the insured, holding that the loss was properly allocated among all triggered policy years, and that the insured was responsible to pay the fully retention amount in each of those years.

On appeal, the court agreed with the lower court, noting that a “joint and several” theory of allocation had long since been rejected by New York courts (see e.g., Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 746 N.Y.S.2d 622 (N.Y. 2002)) and was “inconsistent with the unambiguous language of the … policies providing coverage for bodily injury that resulted from an occurrence ‘during the policy period.’”  The court explained that it was not possible to isolate what extent of the underlying plaintiff’s injury happened during any single policy period, and as such, the appropriate method of allocation was on a pro rata basis across each of the policy periods.   Central to the court’s decision in this regard was its finding that the molestation could not be considered a single occurrence, but rather multiple occurrences since “it cannot be said that there was a close temporal and spatial relationship between the acts of sexual abuse.”  As such, the court concluded, each of the insured’s policies over the entire seven-year period was triggered and the insured was be responsible for satisfying a full self-insured retention in each of these periods.

Vermont Supreme Court Rejects Joint and Several Liability Theory

In its recent decision Bradford Oil Company, Inc. v. Stonington Ins. Co., 2011 Vt. LEXIS 102 (Vt. Sept. 11, 2011), the Supreme Court of Vermont had occasion to revisit the issue of whether a time-on-the-risk allocation methodology should apply to pollution condition that occurred over a period of several decades.

The site in Bradford Oil was a filing station that was the source of an underground petroleum leak believed to have commenced in the 1960s or 1970s and continued through the 1990s.  The station was placed on the Vermont Hazardous Waste Sites List in 1997 when the petroleum contamination was first discovered.  The insured undertook an investigation and clean up, the majority of which costs were paid through the Vermont Petroleum Cleanup Fund (“VPCF”).   Bradford had four general liability policies through Stonington covering the period 1994 through 1997.  While Stonington agreed that the policies provided coverage for the cleanup, a coverage dispute arose as to extent of coverage afforded under the policies.

In the ensuing coverage litigation, in which the State of Vermont was a party, Stonington argued that based on the decision in Towns v. Northern Security Ins. Co., 964 A.2d 1150 (Vt. 2008), the proper methodology for allocation in Vermont is time-on-the-risk.  As such, Stonington contended that based on a simple time-on-the-risk allocation, it should only be responsible for 4/27, or 15% of total cleanup costs.  The State, however, argued that a joint and several liability methodology should apply, leaving Stonington responsible for the all cleanup costs up to the limits of its policies.  Specifically, the State contended that Towns should not apply to a situation where the insured’s liability, by statute, is joint and several.  The State also claimed that Towns should not apply where the VPCF is a party to the litigation.  The Vermont Supreme Court rejected both of the State’s arguments. 

First, the court refused to expand the policies’ coverage merely because the insured’s statutory liability was joint and several.  The court concluded that because the policies required that the “property damage” occur during the policy periods, it would be an inequitable result if Stonington was held responsible for cleanup costs associated with contamination pre-dating the policies.  Further, the mere fact that the insured’s liability was described by the statute as joint and several was irrelevant, since “the contribution of insurers is different from the tort concept of contribution among joint tortfeasors.”  The court also rejected the State’s position that Towns should not apply when the VPCF is the plaintiff in interest, explaining that coverage is based on the terms of the policy, not any statutory or public policy rationale.  In passing, the court held that the insurer should not have the burden of showing that the insured elected to be self-insured for any gaps in coverage rather than placing the burden on the insured to show that it could not obtain coverage for such periods.  In doing so, the court explained “we do not want to adopt a methodology that rewards inaction, failure to obtain appropriate coverage, or failure to keep track of insurance policies.”