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.

4th Circuit Applies Pro Rata Allocation

In its recent decision in Pennsylvania National Mutual Cas. Ins. Co. v. Roberts, 2012 U.S. App. LEXIS 2084 (4^th Cir. Feb. 3, 2012), the United States Court of Appeals for the Fourth Circuit, applying Maryland law, had occasion to consider allocation of loss arising out of a lead paint bodily injury lawsuit.

Plaintiff in the underlying matter was diagnosed with elevated blood lead levels in September 1992, when she was twenty (20) months old.  She continued to exhibit elevated blood levels through August 1995.  Plaintiff’s suit named as a defendant Attsgood, which owned and managed the property where plaintiff lived from the time of her birth through November 1, 1993.  Plaintiff’s complaint also named as a defendant the subsequent property owner, who defaulted.  Attsgood was insured through Penn National under consecutive general liability policies covering the period January 13, 1992 (subsequent to plaintiff’s birth) through January 13, 1994. The underlying suit eventually resulted in an award to plaintiff in the amount of $850,000, and a finding that Attsgood and the subsequent property manager were jointly and severally liable for the amount.

Following the verdict, Penn National sought a declaratory judgment against Attsgood and the plaintiff, arguing that it was responsible only for 22 months of the entire period in which plaintiff was exposed to lead, that period being from January 13, 1992 through November 1993 when Attsgood sold the property. While Attsgood defaulted in the declaratory judgment action, plaintiff contested Penn National’s allocation theory, arguing that in light of the joint and several finding as to both defendants, Penn National should be responsible for paying the entirety of the $850,000 award. The Maryland federal district court rejected plaintiff’s argument.  Instead, applying a continuous trigger theory, the lower court held Penn National was responsible for 24 months (i.e., the full two years of the policies) of the 55 months that plaintiff was exposed to lead conditions (from her January 1991 birth through August 1995 when her blood lead levels normalized). Thus, the court concluded, Penn National was responsible for 24/55 of the underlying award, or $370,600.

On appeal, the Fourth Circuit affirmed the lower court’s ruling that Penn National should not be responsible for paying the entirety of the underlying judgment.  Any other outcome, noted the court, would be contrary to the plain language of Penn National’s policies, which applied to “bodily injury” happening during the respective policy periods.  As the court explained, “the contract does not cover damages Attsgood became legally obligated to pay for injuries that occurred outside of the policy period.”  (Emphasis supplied.)  Moreover, plaintiff’s argument ran contrary to well-established Maryland law applying a pro rata by time on the risk allocation of liability in lead paint liability matters.  Plaintiff argued that these cases should not apply because they did not involve multi-defendant cases. The Fourth Circuit found this distinction “entirely unpersuasive,” concluding that the pro rata methodology stems from the language of the insurance policy, not from the number of defendants involved.  Finally, the court found that as a matter of public policy, it would simply be unfair to saddle Penn National with losses that happened outside the periods of its policies.

While the court agreed that pro rata allocation was proper, it nevertheless concluded that the lower court erred in determining Penn National’s allocated share of the loss.  The court agreed that the trigger period was 55 months, running from plaintiff’s date of birth through the date that her blood lead levels normalized.  The Fourth Circuit held, however, that the proper numerator was not 24 months, but instead 22 months, representing the period of time in which the Attsgood owned the property at which plaintiff resided.  Thus, the court found Penn National responsible for 22/55 of the underlying loss rather than 24/55.

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.