Clean Up Your Dirty Property By Stacking Old Insurance Policies, California Supreme Court says

The California Supreme Court made it a lot easier for property owners that hold contaminated property to rely on insurance to help foot the bill for clean up. 

In a recent court decision, State of California v. Continental Insurance Company, 12 C.D.O.S. 9101 (filed Aug. 9, 2012), the court unanimously held that the State of California could rely on coverage in old commercial general liability policies to pay for hazardous waste clean up at the Stringfellow Acid Pits.  The case is significant because its reasoning could be applied not only to environmental clean up cases, but also to construction defect claims or other “long tail” liability cases.

Environmental damage disputes are often focused on “long-tail” injury, which is characterized as a series of indivisible injuries attributable to continuing events without a single unambiguous cause.  Long tail injuries occur slowly over years or even decades.  Traditional CGL policies are typically silent as to this type of injury and coverage disputes over environmental damage are common. 

In the Continental case, the State of California sought indemnity from several of its insurers in connection with a federal court-ordered cleanup of the State’s Stringfellow Acid Pits waste site.  Each insurer issued one or more excess commercial general liability (CGL) insurance policies to the State between 1964 and 1976. 

The language in the policies at issue was essentially identical.  Under the insuring agreement, the insurers agreed “[t]o 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.”  Limits of liability in the agreements were stated as a specified dollar amount of the “ultimate net loss [of] each occurrence.”  “Occurrence” was defined as “an accident or a continuous or repeated exposure to conditions which result in . . . damage to property during the policy period . . .” 

The trial court held that each insurer was liable for damages, subject to its particular policy limits for the total amount of the loss.  However, the trial court also 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.  The court required the state to choose a single policy period for the entire loss coverage and recover only up to the specific policy limit in effect at the time the loss occurred.

Naturally, the State appealed because the trial court’s interpretation severely limited the amount it could recover under the policies the State had purchased.  The Court of Appeal rejected the insurers’ argument that they could not be liable for property damage occurring outside their respective policy periods.  The appellate court held that once coverage was triggered, all of the insurers had to indemnify the insured for the loss.  

Another appeal followed, landing the case in the California Supreme Court.  This time, the victory for the State was total.  The Court held that the insurers’ indemnity obligations extended beyond the expiration of the policy period where there has been a continuous loss.  “In other words . . . as long as the property is insured at some point during the continuing damage period, the insurers’ indemnity obligations persist until the loss is complete, or terminates,” the Court said.  The successive insurers are severally liable on their own policies up to their respective policy limits.  As a result, the policies at issue obligated 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 was “on the loss.”  Thus, the coverage extends to the entirety of the ensuring damage or injury. 

The next logical step was to allow the State to stack the insurance policies, and the Court took it.  “Stacking” generally refers to the stacking of policy limits across multiple policy periods that were on the same risk. By adopting an “all sums with stacking indemnity principle,” the California Supreme Court has directed other courts to view long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.  If an occurrence is continuous across two or more policy periods, the Court reasoned that the insured has paid two or more premiums and can recover up to the combined total of the policy limits. 

For the State of California, the California Supreme Court’s decision was a huge victory.  The trial court had limited the insurers’ liability to $48 million, resulting in no recovery because those amounts had already been paid over to the state.  While the opinion was not entirely clear on this point, the potential recovery by the State from the insurers with stacking could be in the nine figures.  In light of the Continental case, property owners with long tail injury and older CGL policies would be best advised to reach out to counsel to determine whether coverage is available for their losses. 



Chick-Fil-A, Land Use Permitting and the Constitution

This week, elected officials in San Francisco, Boston, Chicago and New York made statements that Chick-Fil-A restaurants would not be welcome in their jurisdictions because of the personal opinions expressed by the company’s CEO Dan Cathy.  What was surprising in all of this was not the conflict of political opinions over same-sex marriage.  The bigger issue — from the perspective of land use law — was the willingness of those same public officials to suggest a course of action that would violate state and federal Constitutional law if taken to its logical conclusion.

For example, according to press reports, a Chicago alderman said that he would personally “deny a land use permit [to Chick-Fil-A] to open a restaurant in my ward.” His refusal to grant a land use permit on the basis of the personal views of the property owner would almost certainly be a violation of the federal Constitution — specifically the Fourteenth Amendment’s equal protection clause.   (By the way, the California Constitution also guarantees equal protection of the laws.  Cal. Const. art. I, section 7(a).) 

For an equal protection violation to occur, a property owner does not need to be a member of an identifiable class.  The equal protection guarantee protects not only groups, but individuals who would constitute a “class of one.”  “A plaintiff can establish a ‘class of one’ equal protection claim by demonstrating that it has been intentionally treated differently from others similarly situated and that there is no basis for the difference in treatment.”  Squaw Valley Dev. Co. v. Goldberg (9th Cir. 2004) 375 F.3d 936. 

“Class of one” equal protection cases often involve claims that a government action was “arbitrary and irrational,” usually on the basis of vindictive action, illegitimate animus or ill will.  The textbook case is the U.S. Supreme Court’s decision in Village of Willowbrook v. Olech (2000) 528 U.S. 562.  In that case, the court held that a village unfairly required one property owner to grant a larger water connection easement than that required by neighboring property owners.  Why? Because the local government held animosity toward the property owner from a previous, successful lawsuit the property owner had filed against the village. 

In the Ninth Circuit, federal courts have also found a cause of action when government action in the land use context is based on “arbitrary or malicious conduct.”  See Lockary v. Kayfetz (9th Cir. 1990) 917 F.2d 1150; Valley Outdoor, Inc. v. City of Riverside (9th Cir. 2006) 446 F.3d 948.  Ninth Circuit courts have also established a test whereby an equal protection plaintiff may show pretext by creating a triable issue of fact that either: “(1) the proffered rational basis was objectively false; or (2) the defendant actually acted based on an improper motive.”  Squaw Valley Dev. Co. v. Goldberg (9th Cir. 2004) 375 F.3d 936. So, in the present case, even if the proposed Chick-Fil-A restaurant might cause increased traffic, noise, or air pollution from cooking all that chicken, a project applicant could argue that the real reason that the city rejected the permit was the CEO’s personal views. 

Regardless of your beliefs on the political question (and this blog is not taking a position one way or the other, as this blog only deals with real estate and land use law), you can see why the legal issues have caused several public officials to backtrack on their comments against the land use permitting of Chick-Fil-A in their jurisdictions. 

Again, even those backtracking statements may not be enough if Chick-Fil-A wants to take legal advantage.  On his Land Use Prof Blog, Ken Stahl, an associate professor of law at Chapman University, astutely observed “because of what the various officials in Chicago, San Francisco, Boston, etc. have said, it will only be harder to exclude Chick-Fil-A even if the city has a legitimate concerns about traffic, noise, etc. because the inference of discriminatory animus will be so hard to shake.” 

Only time will tell if the owners/franchisees of Chick-Fil-A in the aforementioned cities pursue their expansion plans and, if they do, whether land use litigation will ensue.