At long last, the Supreme Court of California issued its opinion in State of California v. Continental Insurance Company (we have previously blogged about this important case here and here). The Court’s unanimous opinion is a resounding win for policyholders and re-affirms California’s adherence to the “all sums” allocation method and, importantly, approves of the “stacking” of insurance policies in long-tail claims.
The issue for the Court to decide was how liability for property damage that occurred at the Stringellow site over the course of many years should be allocated amongst the many insurers that had insured the State of California during the loss. The California Court of Appeal ruled that each insurer on the risk during the loss was liable for “all sums” up to its policy limits, and that the State could stack its policies and recover the full policy limits from each one. The Supreme Court affirmed each of these holdings in full.
The Court’s opinion opens with a brief discussion of its seminal opinions in Montrose and Aerojet and those cases’ holdings regarding the issues of trigger and allocation. Relying on Montrose, the Court succinctly found that all of the policies in question were “triggered,” concluding that “[t]he fact that all policies were covering the risk at some point during the property loss is enough to trigger the insurers’ indemnity obligations.” The Court then rejected the insurers’ arguments in favor of a pro rata rule for indemnity allocation, under which each insurer is only liable for a pro rata share of the total loss, finding that “all sums” allocation was mandated by the plain language of the policies. The Court concluded that “the policies at issue obligate the insurers to pay all sums for property damage attributable to the Strgingellow 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.’”
Having re-affirmed all sums allocation, the Court then turned to the issue of “stacking,” i.e. whether “when more than one policy is triggered by an occurrence, [can] each policy . . . be called upon to respond to the claim up to the full limits of the policy.” The Court approved of stacking noting that stacking has “numerous advantages” including that it comports with both an insured’s and an insurers’ reasonable expectations. Importantly, the Court expressly disapproved of the Court of Appeal decision in FMC Corp. v. Plaisted & Cos., which had held that an insured could not stack policy limits, but instead had to select a single policy period and recover up to the limits for that period. The Court did note that “an insurer may avoid stacking by specifically including an ‘antistacking’ provision in its policy.”
State of California is a significant victory for insureds. The Court’s re-affirmance of the “all-sums” rule means that any one policy must pay the damage that occurred before, during or after the insurer’s policy period. The practical significance is that the insurer can’t refuse to pay for damage that occurred before or after its policy. This is extremely important when there are years where the insured didn’t have insurance, or can’t find the policy, or bought a policy from a now-bankrupt insurer. Under the “all-sums” rule, the insurer is liable for the entire liability, and can’t require the insured to pay for any periods where there is no available insurance. The Court’s adoption of stacking gives insureds the full benefit of the insurance they paid for over the years, by recognizing that an insured can use the combined limits of all the insurance they bought to cover their liability for a settlement or judgment. For example, if an insured bought $1 million in insurance for each of ten years, the insured can use all of that insurance –$10 million– to pay the loss.