After waiting over three years since granting review in State of California v. Continental Insurance Co. (previously discussed here) the Supreme Court of California heard oral arguments in the case yesterday morning.  This highly anticipated case touches on many important insurance coverage issues; principally how liability is allocated across multiple successive policies, and whether the limits of successive policies may be “stacked.”

The Continental cases deals with the State of California’s insurance coverage for environmental remediation at the Stingfellow site.  Property damage occurred over the course of many years, with many different insurance carriers on the risk.  At issue was how the liability for the property damage should be allocated.  The trial court, relying on FMC Corp v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998) ruled that the State could not stack the policy limits of successive insurance policies, but instead was required to pick a single policy year and recover the full amounts of the limits from that period.  The Court of Appeal reversed this ruling, relying on the plain language of the policy and expressly rejecting the holding of FMC.

The oral argument focused predominately on the issue of how to allocate liability across multiple successive policies.  The insurance carriers argued that each insurer on the risk was only liable for its pro-rata share of the liability based on policy language requiring an occurrence “during the policy period.”  The State argued that each insurer’s promise to pay “all sums” was not limited to liability for damages occurring during the policy period, and therefore each insurer was liable for all damage once their policy was triggered.

The questioning was led predominately by Chief Justice Cantil-Sakauye and Justice Liu.  Both of these Justices focused their questions on the policy language and its construction with a particular focus on the promise to pay “all sums.”  Chief Justice Cantil-Sakauye and Justice Liu seemed to support the State’s construction of the policies, with Justice Liu referring to the definition of occurrence as the “hook” that triggered the separate promise to pay all sums.

While the majority of the argument focused on allocation, stacking was also discussed.  Justice Kennard steered the parties’ arguments towards stacking in several instances.  Justice Kennard at one point voiced her support for the stacking rule and Chief Justice Cantil-Sakauye pressed the insurer’s counsel to point to any specific “anti-stacking” language in the policy.

The court will publish its opinion within 90 days of May 30, 2012