Yesterday the California Supreme Court issued its long-awaited decision in State of California v. Continental Insurance, No. S170560. In its latest ruling, which will affect all long-tail insurance cases, including Environmental, Asbestos and latent injury, and Construction Defect cases, the Court rejected the “pro rata” time on the risk allocation scheme advocated by the insurers and held:
- For indemnity relating to “long tail” claims1, the “all sums” language in the Comprehensive General Liability (CGL) policies obligates a carrier to indemnify up to the policy limits, so long as some portion of the “property damage” that is the subject of the suit occurred during the policy period; and
- The insured is entitled to “stack” the limits of successive policies up to the policy limits for indemnity relative to that loss.
The case arose out of the State of California’s claim for indemnity under its excess Comprehensive General Liability policies in connection with a federal court-ordered cleanup of the State’s Stringfellow Acid Pits waste site. The State designed the Stringfellow site, and operated it as an industrial waste disposal facility from 1956 to 1972, when groundwater contamination was discovered. In 1998, a federal court found the State liable for all past and future cleanup costs for the site. Each of the six insurers that were parties to the appeal issued excess Comprehensive General Liability policies to the State between 1964 and 1976.
The Stringfellow site, and the resulting insurance litigation, has given rise to several insurance rulings already, including Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 — adopting the continuous injury trigger for defense, and State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008 — holding that the relevant event to determine if there is an “occurrence” is the discharge into the environment from a contained area, and that where there is an indivisible injury, the insured is not obligated to prove the amount of any property damage resulting from any discrete cause.
There are several critical aspects of the Court’s decision.
First, there was no dispute that the environmental damage began shortly after the operation of Stringfellow began, and that it continued throughout the defendant insurers’ policy periods and beyond. According to the opinion, the site was uninsured prior to 1963, and after 1978. The issue, therefore, was whether the State of California could be allocated partial responsibility for the cleanup costs for the amount of property damage occurring in years where it was self insured. This fact pattern — where there is insurance for some but not all of the affected years — is common in “long tail” or “progressive loss” type cases. A carrier with only one year of coverage could potentially be responsible for all damages regardless of the length of time over which the property damage occurred.
However, the second critical aspect of the Court’s decision, and one that may temper its precedent value, is the specific policy language. The Excess Policies at issue utilized older Comprehensive General Liability policy language. The Court observes:
Under the heading “Insuring Agreement,” 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 on liability in the agreements were stated as a specified dollar amount of the “ultimate net loss [of] each occurrence.” “Occurrence” was defined as meaning “an accident or a continuous or repeated exposure to conditions which result in … damage to property during the policy period …” (at pg.4) (emphasis added)
In newer Commercial General Liability policies, the Insuring Agreement reads: “We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies … This insurance applies to “bodily injury” and “property damage” only if … the “bodily injury” or “property damage” occurs during the policy period …” (e.g., ISO form CG 00 01 10 01) (emphasis added)
The State of California Court noted that the “pro rata,” or time on the risk allocation approach advanced by the carriers assigns liability for those years of the continuous progression of property damage to all affected years, including those where the insureds chose not to purchase insurance. The Court determined the “all sums” language of the policies was inconsistent with this result, emphasizing that its holding follows directly from the policy language, rather than any general principle, and is therefore arguably inapplicable to policies using the revised language:
Under the CGL policies here, the plain “all sums” language of the agreement compels the insurers to pay “all sums which the insured shall become obligated to pay … for damages … because of injury to or destruction of property …” (Ante, at p. 4.) As the State observes, “[t]his grant of coverage does not limit the policies’ promise to pay ‘all sums’ of the policyholder’s liability solely to sums or damage ‘during the policy period.'”
The insurers contend that it would be “objectively unreasonable” to hold them liable for losses that occurred before or after their respective policy periods. But as the State correctly points out, the “during the policy period” language that the insurers rely on to limit coverage, does not appear in the “Insuring Agreement” section of the policy and therefore is neither “logically [n]or grammatically related to the ‘all sums’ language in the insuring agreement.” (emphasis added)
Under later ISO policy forms, the Insuring Agreement requires that property damage occur during the policy period. Accordingly, there are valid arguments — at least for carriers using later versions of the Commercial General Liability policy forms — to distinguish the “all sums” holding by this decision, and that explicit language requiring that property damage occur during the policy period is unambiguous and should be applied. It is therefore an open question whether the allocation approach advanced by the carriers would have been successful with the newer policy forms.
The third critical aspect of the decision is its rejection of FMC Corp. v, Plaisted & Cos. (1998) 61 Cal.App.4th 1132. The Court noted that in this case, like FMC, the policies had no specific prohibition on stacking of policy limits. The Court concludes:
We agree with the Court of Appeal, and find that the policies at issue here, which do not contain antistacking language, allow for its application. In so holding, we disapprove FMC Corp. v. Plaisted & Companies, 61 Cal.App.4th 1132
In conclusion, this decision from the California Supreme Court is significant, because it firmly extends the “all sums” language to indemnity. For policies with the applicable language, if any part of the property damage that is part of a “long tail” case, the carrier will be obligated to pay up to the policy limit, and then seek equitable contribution between other carriers on the risk.
1The kind of property damage associated with the Stringfellow site, often termed a “long-tail” injury, is characterized as a series of indivisible injuries attributable to continuing events without a single unambiguous “cause.” Long-tail injuries produce progressive damage that takes place slowly over years or even decades. (Pg 7-8)