California Court Addresses Horizontal Exhaustion Requirement

In the recent decision Kaiser Cement & Gypsum Corp. v. Insurance Company of the State of Pennsylvania 2013 Cal. App. LEXIS 269 (2^ndDist. April 8, 2013), the California Court of Appeal considered whether horizontal or vertical exhaustion of insurance coverage was required in a continuing damage case.  The case was a follow up to the earlier decision by the court in London Market Insurers v. Superior Court (2007) 146 Cal.App.648, in which it held that “occurrence” in that case meant injurious exposure to asbestos, so there was not a single annual occurrence as was urged by the insurers.  In Kaiser Cement, the court considered how to allocate the coverage for the asbestos bodily injury claims.

In the period 1947 to 1987, four different primary insurers, including Truck Insurance Exchange, insured Kaiser.  Truck covered Kaiser from 1964 to 1983.  Kaiser selected the Truck policy for the year 1974 to be the primary policy which to provide Kaiser with a defense in connection with underlying asbestos bodily injury claims because that policy had no deductible or aggregate limit.  ICSOP was the first level excess insurer over the Truck policy's $500,000 per occurrence policy limit.  The appellate court addressed the issue of which insurer(s) should pay for claims over the $500,000 policy limit.

Significantly, Truck’s other primary policies had deductibles so, as the court noted, Kaiser’s share of any loss potentially increased if there was allocation to other primary policies rather than to the ICSOP excess insurance.  ICSOP nevertheless urged requirement of horizontal exhaustion of all primary policies before its own policy attached, both as a matter of California law and the specific language of the ICSOP policy , pursuant to which the policy limits of all primary policies triggered by an occurrence had to exhaust before coverage was triggered.

The Kaiser Cement court agreed that ICSOP’s policy was excess of all collectible primary insurance based on the policy’s definition of “retained limit” being both the scheduled primary policy and “the applicable limits of any other underlying insurance collectible by the Insured.”  The court nevertheless concluded that Truck's primary policies, other than the 1974 policy, were not collectible because the limits of liability clause in Truck's 1974 policy stated that $500,000 was the limit of the company’s liability for each occurrence and also that “the limit of the Company’s liability as respects any occurrence … shall not exceed the per occurrence limit” set forth in the policy declarations, i.e., $500,000.  The court read this language as an anti-stacking provision, meaning that Truck's 1974 policy was the sole policy that could be triggered by the underlying suits.

The appellate court stated that its holding was consistent with the California Supreme Court’s recent “all-sums-with-stacking” decision in  State of California v. Continental Ins. Co. (2012) 55 Cal.4^th 186, because that decision specified that insurers could avoid stacking of limits by including “’antistacking’” provisions in their policies.  The court held that Truck’s limit of liability language was just such an antistacking provision.  The court remanded the matter to the trial court to determine if there were remaining limits in the other primary carriers’ policies for the injury claims which exceeded Truck’s $500,000 policy limit.

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.