United States: California Court Holds That Historical Insurance Coverage Forms "One Giant Uber-Policy"

Corporate policyholders seeking insurance coverage for "long-tail" claims in California and elsewhere have reason to cheer.

On August 9, 2012, the California Supreme Court granted corporate policyholders the right to fully access and to recover from insurance policies spanning multiple policy periods for claims involving damage that progressed over those periods.  In California v. Continental Insurance Co., No S170560 (Cal. Aug. 9, 2012), the state's highest court approved an "all-sums-allocation-with-stacking" rule permitting a policyholder to obtain coverage from the sum total of insurance that the policyholder purchased throughout the years or decades that damage continued.  Furthermore, the court recognized that each insurer that participated in the policyholder's insurance program during those years is separately liable to cover the policyholder for damages up to its respective policy limits, even if some of the damage occurred before or after the insurer's policy period.  In so doing, the court rejected the insurers' argument that the damages should be spread "pro rata" across all of the years that the loss continued, including years in which the policyholder lacked insurance. 

Background

California v. Continental addressed the State of California's ("State") pursuit of insurance coverage for environmental clean-up costs at an industrial waste disposal facility that the State designed and operated from 1956 to 1972.  The State purchased insurance policies that covered the site from 1964 to 1977 but did not have insurance for the site before 1963 or after 1978.  In 1972, the State discovered groundwater contamination at the site and ceased operations.  After closure, heavy flooding caused contamination from the site to flow into a nearby waterway.  The federal government held the State responsible for past and future site remediation costs, estimated at $700 million.  The State filed suit against its historical insurers seeking coverage for the clean-up costs.  A multi-phased trial followed, in which a jury ultimately concluded that the insurers were obligated to pay the clean-up costs.  The trial court, however, refused to award the State any damages on the theory that the State had already recovered through settlements with its insurers an amount greater than the potential jury award.  This appeal followed.

All Sums Allocation With Stacking

The key issue before the California Supreme Court was whether the State could "stack," or combine coverage from multiple policy periods, to increase the amount of insurance coverage that it could call upon to pay the clean-up costs.  As the premise for its decision that the State could stack its coverage, the court affirmed its prior decisions in two landmark insurance cases:  Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995) (holding that "property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods"), and Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38 (1997) (holding that any policy covering a risk at some point during a property loss bears liability for all resulting damages, up to its policy limits, including damages that took place before or after the policy period).  The court also confirmed that the insurers bore responsibility for unclear or imprecise language in the policies that they sold to the State.  Relying on these points, the court concluded that "each successive insurer is potentially liable for the entire loss up to its policy limits," and that in order for a policyholder to reap the benefit of this rule in the context of long-tail claims, the policyholder must be allowed to pursue coverage from "consecutive policies and recover up to the policy limits of the multiple plans."  Quoting a law review article, the court described this result as creating "one giant 'uber policy' with a coverage limit equal to the sum of all purchased insurance policies." 

In affirmatively adopting stacking as the law of California, the court disapproved a 14-year-old decision by a California intermediate appellate court that reached a contrary result.  In FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), the California Court of Appeals had ruled that California law did not allow a policyholder to stack its coverage, so that the maximum amount that a policyholder could recover for a loss spanning multiple years was the highest limits the policyholder had purchased in any single policy year.  The California Supreme Court concluded that FMC disregarded the actual policy language at issue and expressly rejected it.

The court also rejected the insurers' arguments in favor of pro rata allocation, under which damages are spread across all of the years in which the long-tail loss took place, with the policyholder liable for damages assigned to periods in which it chose not to purchase insurance.  Pro rata allocation may involve a simple calculation of the number of years the insurer sold policies in comparison to the overall loss period, or may be more complex, taking into account the perceived amount of risk related to specific time periods.  After thorough discussion, the court concluded that neither pro rata option comported with the language of the policies at issue, as discussed in Montrose and Aerojet.

Practical Application

In practical terms, California v. Continental grants a policyholder the opportunity to call upon the sum total of insurance that it purchased over years or even decades to respond to claims that involve damage that develops or progresses over time.  This all-sums-allocation-with-stacking approach will vastly expand the pool of insurance coverage available for claims of environmental contamination, such as were at issue here, and also for other claims involving progressive damage that takes place slowly over years or even decades, such as asbestos exposure claims, breast implant or DES pharmaceutical suits, construction defect actions, and other toxic exposure claims.

Of equal importance, the case makes clear that allocation of losses among multiple policies is an inter-insurer issue rather than a matter for litigation between or among a policyholder and its insurers.  The insurers are obligated to make the policyholder whole for its losses and may not assign to the policyholder damages for periods in which the policyholder failed or was unable to purchase insurance for any reason.  Once the insurers have paid all damages due to the policyholder or on the policyholder's behalf, the insurers may seek indemnification or contribution from one another to reapportion the damages among themselves as they see fit.  This secondary apportionment does not involve the policyholder, however.

Finally, this decision is apt to have ramifications beyond California's boundaries.  Courts across the country are split on how best to allocate damages among the insurers potentially liable for long-term claims, with a number of state and federal courts yet to rule on the subject.  California cases historically have provided influential and persuasive precedent to courts nationwide as they have grappled with complex insurance issues.  As the allocation debate continues, California v. Continental appears certain to take its place alongside Montrose and Aerojet as oft-cited and relied-upon authority.

Corporate policyholders with long-tail liability and years of successive coverage should contact counsel to pursue the benefits of this ruling.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.