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.