This week, the California Court of Appeal issued a new decision regarding the “stacking” of policy limits: State of California v. Continental Insurance Company, No. E041425 (Super. Ct. No. 239784).  As the Continental court explained, “stacking” generally refers to “treating multiple policies that apply to a single loss as cumulative – as a ‘stack’ of coverage – rather than as mutually exclusive.”  Such treatment allows an insured to recover under multiple liability insurance policies for the same occurrence.

Reading the standard CGL insuring agreement in the context of previous California Supreme Court decisions, the Continental court concluded that this standard language permits stacking of policy limits.  The court reasoned that if a series of consecutively-issued insurance policies can all be triggered by a continuous injury (Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995)), and each such policy is separately liable for “all sums” the insured becomes legally obligated to pay because of such an injury (Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38 (1997)), it follows that the insured is entitled to recover up to the full policy limits for every single policy triggered by the occurrence.

In reaching this conclusion, the Fourth Appellate District expressly rejected the “anti-stacking rule” adopted by the Sixth Appellate District in a factually similar case, FMC Corp v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998).  The FMC decision acknowledged the Montrose and Aerojet rules, but held that an insured was not entitled to recover under every consecutive policy triggered by the occurrence.  Rather, FMC held that the insured could choose any one policy period and to recover up to the limits in effect for that one period.

In FMC, the court reasoned that if insureds were permitted to recover under multiple, consecutively-issued insurance policies for liability arising out of a continuous injury, they would receive a “windfall.”  Continental squarely rejects this premise:

If an occurrence happens entirely within one policy period, the insured has paid one premium and can recover up to one policy limit; however, if an occurrence is continuous across two policy periods, the insured has paid two premiums, and can recover up to the combined total of two policy limits. We see nothing unfair or unexpected in this.

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Indeed, an antistacking rule would give a windfall to the insurers.  This should be apparent from the remedy with which FMC came up.  It allowed the insured to choose any one policy period (i.e., the one with the highest limits) and to recover up to the limits in effect for that one period. […]  Once the insured did so, however, it was barred from recovering the excess under any other policy.  Nevertheless, any one insurer who did pay up to its policy limits would still be entitled to contribution from all the other insurers.  Thus, in the end, it would not actually have to pay its full policy limits.  Accordingly, the insurers would benefit from the fact that the insured purchased multiple policies covering multiple periods.  The insured, who made this prudent choice, would not.

Continental is an important case because it clearly establishes FMC as an outlier, inconsistent with other California decisions addressing stacking issues.  The Fourth Appellate District forcefully took on the FMC ruling and has created a clear split of authority among the California Courts of Appeal concerning stacking of policy limits.  Under these circumstances, it seems likely that the California Supreme Court will grant review.  Thus, Continental may not be the last word on stacking of consecutive policy limits.