State of California v. Continental Insurance Company

Unfortunately, the site was severely flawed. First, approximately 70 feet below the site was an underground channel that carried groundwater into and out of the site. Second, the underlying rock of the quarry was fractured and allowed the contaminants to leak. Finally, the concrete barrier dam was inadequate and permitted the escape of contaminants. In 1969, heavy rain caused the waste to overflow the ponds. In 1972, groundwater contamination was discovered and the site was closed. However, the site continued to leak. In addition, in 1978, rain once again caused an overflow. Thereafter, California allowed a controlled discharge of contaminants, which resulted in a “plume” of contamination that spread for miles.

Litigation over the site soon followed with both California and the United States suing numerous defendants. Certain defendants counterclaimed against California. In 1998, a federal court found the State of California liable for, inter alia, negligent investigation, choice, and design of the site, negligent supervision of construction, failing to remedy site conditions and delaying clean-up of the site. Ultimately, California was held liable for all past and future remediation costs relating to the site ' which California claimed could be between $50 and $700 million.

In connection with the federal litigation, in 1993, California sued five insurers, seeking indemnification for its liability in the federal actions. The state filed an additional action asserting claims against new insurers in 2002. The two actions were consolidated in October 2003. In due course, the state settled with certain insurers for a total of $120 million and proceeded against five non-settling insurers, Continental Insurance Company, Horace Mann Insurance Company, Yosemite Insurance Company, Employers Insurance of Wausau, and Stonebridge Life Insurance Company.

The trial was conducted in phases. In Phase III, the parties stipulated that the trial court could resolve certain legal issues by motion. As a result, California filed a motion requesting a ruling that, because the contamination was continuous across multiple policy periods, California was “entitled to indemnity up to the combined limits of all policies in effect during those policy periods” ' in essence permission to horizontally stack policies. In opposition, the insurers filed briefs asking that the court rule that each of their policies covered only the property damages attributable to the stated policy period ' a rejection of the “all sums” approach in favor of pro rata allocation.

The Trial Court's All Sums and No Stacking Rulings

In March 2004, before the case was allowed to proceed before the jury, Judge Erik Kaiser issued rulings on the cross-requests for stacking and pro rata liability allocation.

The All Sums Ruling

Judge Kaiser first addressed the insurers' request for a rejection of the all sums approach regarding allocation of liability. “All sums” refers to a method of allocating liability among insurers which permits the insured to select one policy among multiple triggered policies from which to seek indemnification. See Ostrager & Newman, Handbook on Insurance Coverage Disputes ' 9.04[a] (14th ed. 2008). Under this approach, once a policy is triggered, the insurer is required to pay “all sums” for which the insured is legally obligated, up to the policy limits. Moreover, a policyholder may select the policy under which it chooses to be indemnified See Id. The insurer may then seek contribution among other policies to properly apportion liability for all insurers on the risk. See Id.

Judge Kaiser began his allocation analysis by noting that the California Supreme Court's decision in Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal. 4th 645 (1995), provided for a continuous trigger doctrine: “multiple policies may apply if progressively deteriorating or continuous damage spanned multiple policy periods; each policy triggered by damage occurring during its policy period.” Amended Ruling on Plaintiff's Motion to Obtain Indemnity up to the Combined Limits of the Applicable Policies at 2, California v. Underwriters, No. Civ239784 (Cal. Super. Mar. 5, 2004) (“Amended Ruling”). After noting that numerous California decisions have adopted an all sums approach to allocation of liability predicated on the continuous trigger doctrine, Judge Kaiser held that the all sums approach was appropriate and that an insurer would be liable for damage outside its policy period. Id. As a result, “once coverage for a continuous or progressively deteriorating damage or injury is triggered under a liability policy, the insurer is required to pay for all sums (up to policy limits) of the insured's liability ' not just liability specifically allocable to damage during the policy period.” Id.

The No Stacking Ruling

Judge Kaiser next considered California's request to horizontally stack the policy limits. “Stacking” policy limits means that when more than one policy is triggered by an occurrence, each policy can be called upon to satisfy the claim up to the full limits of each policy. Ostrager & Newman, Handbook on Insurance Coverage Disputes ' 9.04[c] (14th ed. 2008). Under the concept of stacking, the limits of every triggered policy are combined to determine the total amount of coverage available for a particular claim. Id. Where stacking is permitted, an insured may “obtain benefits from a second policy on the same claim when recovery from the first policy would alone be inadequate to compensate for the actual damages suffered,” Wagner v. State Farm Mut. Auto. Ins. Co., 40 Cal. 3d 460, 463 n.2 (1985), because stacked policies that apply to a single loss are treated as cumulative as opposed to mutually exclusive. Stacking across policy periods is generally referred to as “horizontal stacking.”

In addressing the request for horizontal stacking, Judge Kaiser acknowledged that California had made a strong argument that horizontal stacking was widely accepted by California courts, at least in the primary insurance context. Amended Ruling at 3. However, he further explained that he felt bound by the Sixth Appellate District's decision in FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132, 1189 (1998), which “held that horizontal stacking made the aggregate limits and the separately negotiated premiums for each policy period illusory by expanding coverage to the sums of every policy in every policy period triggered by continuous damage over multiple policy periods.” Amended Ruling at 4. Accordingly, Judge Kaiser held that California was only “entitled to select a single policy period triggered by continuing damage from the occurrence at the Stringfellow site” and could only “recover the full amount of limits of the policies in that period for damages within and outside the period.” Amended Ruling at 4. As a result, California was precluded from horizontally stacking policies across policy periods.

The Fourth Appellate District's Ruling and Reasoning

After a jury trial, California appealed the trial court's “no stacking ruling.” The insurers filed a protective cross appeal.

All Sums

The Fourth Appellate District affirmed Judge Kaiser's all sums allocation of liability. In addressing this issue, the court reasoned that the previous California Supreme Court decisions of Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38 (1997) and Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal 4th 645 (1995) had adopted a continuous trigger and all sums approach and that the court was bound to “follow the lead” of the California Supreme Court. Cal. v. Continental Ins. Co., — Cal. Rptr. 3d –, No. E041425, 2009 WL 18696, at *9 (Cal. Ct. App. Jan 15, 2009).While the court acknowledged that a majority of jurisdictions have rejected an all sums allocation in the indemnity context, California had “firmly aligned itself with the minority.” Id. Therefore, “in California, when there is a continuous loss spanning multiple policy periods, any insurer that covered any policy period is liable for the entire loss, up to the limits of its policy. The insurer's remedy is to seek contribution from any other insurers that are also on the risk.” Id. at *8.

Stacking

Turning to the stacking of policy limits, the court began by analyzing the standard CGL policy in the context of previous California Supreme Court cases and determined that stacking of limits was appropriate and that standard policy language provided for stacking. Relying in part on Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38 (1997) and Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal 4th 645 (1995), the court reasoned that, because California follows a continuous trigger theory and an all sums allocation of liability, it necessarily followed that the insured was entitled to horizontally stack policies to recover up to the full amount of the policy limits for each triggered policy. Continental Ins. Co., — Cal. Rptr. 3d –, No. E041425, 2009 WL 18696, at *10-12 (Cal. Ct. App. Jan 15, 2009). In addition, the court noted that Stonewall Insurance Co. v. City of Palos Verdes Estates, 46 Cal. App. 4th 1810 (1996), the first California case to address horizontal stacking of limits across policy periods, squarely held that stacking was permitted. Id. at *14.

In reaching this conclusion, the Fourth Appellate District also expressly rejected the no stacking rule adopted by the Sixth Appellate District in a factually similar environmental pollution case, FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998). In FMC, the Sixth Appellate District reasoned that permitting an insured to recover under multiple, consecutive insurance policies for liability arising out of a continuous injury would create an unacceptable windfall for the insured by providing the insured with “substantially more coverage for liability attributable to any particular single occurrence than the insured bargained or paid for.” 61 Cal. App. 4th at 1189-91. This conclusion was squarely rejected by the Fourth Appellate District.

In addressing the FMC decision, the Fourth Appellate District noted that, “[i]n our view, standard policy language does provide for stacking, and therefore that is exactly what the insured has bargained and paid for. If an occurrence happens entirely within one policy period, the insured has paid a 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.” Continental Ins. Co., — Cal. Rptr. 3d –, No. E041425, 2009 WL 18696, at *16 (Cal. Ct. App. Jan 15, 2009). The court further noted that, when a continuous loss spans multiple policy periods, it is “appropriate to place a greater contractual obligation on the insurers.” Id. Moreover, the Fourth Appellate District determined that a no stacking rule would give an impermissible windfall to insurers. Id. Finally, in pointing out what it perceived as the major flaw of the no stacking rule, the court noted that, under FMC, an insured is permitted to choose the policy period and policy under which it wants to recover necessarily means that each of the policies affords coverage, up to the policy limits, and thus stacking is justified. Id. at *17.

Implications for Insurers

First, it now seems clear that, given the clash between the FMC and Continental courts, the California Supreme Court will be called upon to answer the question of whether horizontal stacking is permissible. Until then, for policies governed by California law, great uncertainty faces insurers and insureds alike.

In addition, choice of law determinations will become increasingly important for insurers. Consequently, careful consideration will need to be given about arguing for the application of California law.

Conclusion

While the focus of the Continental decision was on horizontal stacking, it was predicated on the goal of maximizing coverage, consistent with its adoption of an “all sums” allocation theory. A court's allocation decision should not, however, provide a windfall to either the insured or the insurer. The horizontal stacking approach adopted in Continental compounds that error by benefiting the insured, to the detriment of the insurer. As the FMC court noted, horizontal stacking of policy limits allows an insured to obtain a coverage amount which is greater than the coverage amount which it purchased for any single occurrence. Once the insured gets the benefit of an “all sums” allocation and selects the policy period that applies, it cannot then stack multiple policies in direct violation of the definition of an “occurrence” which specifically contemplates a single occurrence based on “a continuous and repeated exposure to conditions.” For this reason, among others, the FMC holding is in line with the policy language and is likewise more just and appropriate.

Kim V. Marrkand, a member of the litigation section in the Boston office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., chairs the firm's insurance/reinsurance group and the firm's bankruptcy/insurance group and is on the Board of Editors of this newsletter. Wynter N. Lavier, an associate in the litigation section in Mintz Levin's Boston office, is a member of the firm's insurance/reinsurance group. Both Ms. Marrkand and Ms. Lavier regularly represent and advise insurers and reinsurers in coverage disputes. The views expressed in the article are those of the authors and not necessarily those of Mintz, Levin or its clients.

In a blow for insurers and contrary to the weight of authority in multiple other juridictions, the California Court of Appeals for the Fourth District recently reversed the trial court on its so-called “no stacking rule” and affirmed the trial court in its “all sums” liability allocation. In California v. Continental Insurance Co., — Cal. Rptr. 3d –, No. E041425, 2009 WL 18696 (Cal. Ct. App. Jan 15, 2009), the Fourth Appellate District held that, under California law: 1) an insured can horizontally stack policy limits when there is a continuous loss extending over multiple policy periods; and 2) each insurer that covers any part of the claim is obligated to pay the entire claim, up to the limits of its policy. Because environmental contamination generally occurs across policy periods, these rulings are likely to be cited by insureds seeking to maximize coverage and therefore merit careful scrutiny and explanation as to why they should not apply.

History of the Underlying Litigation

The series of cases commonly referred to as “The Stringfellow Litigation” arose out of pollution caused by an industrial waste site originally owned by J.B. Stringfellow, Jr. (“the site”). The site was originally a quarry in a canyon near Glen Avon in Riverside County, CA. In 1955, a California state geologist determined that the quarry was underlain by impermeable rock and, once a dam was built to close off the only gap in the canyon walls, would be eminently suitable as an industrial waste storage site. Ultimately, California constructed the recommended dam and utilized the site for dumping and storage of hazardous industrial waste between 1956 and 1972. In total, the site held approximately 30 million gallons of industrial waste in unlined ponds.

Unfortunately, the site was severely flawed. First, approximately 70 feet below the site was an underground channel that carried groundwater into and out of the site. Second, the underlying rock of the quarry was fractured and allowed the contaminants to leak. Finally, the concrete barrier dam was inadequate and permitted the escape of contaminants. In 1969, heavy rain caused the waste to overflow the ponds. In 1972, groundwater contamination was discovered and the site was closed. However, the site continued to leak. In addition, in 1978, rain once again caused an overflow. Thereafter, California allowed a controlled discharge of contaminants, which resulted in a “plume” of contamination that spread for miles.

Litigation over the site soon followed with both California and the United States suing numerous defendants. Certain defendants counterclaimed against California. In 1998, a federal court found the State of California liable for, inter alia, negligent investigation, choice, and design of the site, negligent supervision of construction, failing to remedy site conditions and delaying clean-up of the site. Ultimately, California was held liable for all past and future remediation costs relating to the site ' which California claimed could be between $50 and $700 million.

In connection with the federal litigation, in 1993, California sued five insurers, seeking indemnification for its liability in the federal actions. The state filed an additional action asserting claims against new insurers in 2002. The two actions were consolidated in October 2003. In due course, the state settled with certain insurers for a total of $120 million and proceeded against five non-settling insurers, Continental Insurance Company, Horace Mann Insurance Company, Yosemite Insurance Company, Employers Insurance of Wausau, and Stonebridge Life Insurance Company.

The trial was conducted in phases. In Phase III, the parties stipulated that the trial court could resolve certain legal issues by motion. As a result, California filed a motion requesting a ruling that, because the contamination was continuous across multiple policy periods, California was “entitled to indemnity up to the combined limits of all policies in effect during those policy periods” ' in essence permission to horizontally stack policies. In opposition, the insurers filed briefs asking that the court rule that each of their policies covered only the property damages attributable to the stated policy period ' a rejection of the “all sums” approach in favor of pro rata allocation.

The Trial Court's All Sums and No Stacking Rulings

In March 2004, before the case was allowed to proceed before the jury, Judge Erik Kaiser issued rulings on the cross-requests for stacking and pro rata liability allocation.

The All Sums Ruling

Judge Kaiser first addressed the insurers' request for a rejection of the all sums approach regarding allocation of liability. “All sums” refers to a method of allocating liability among insurers which permits the insured to select one policy among multiple triggered policies from which to seek indemnification. See Ostrager & Newman, Handbook on Insurance Coverage Disputes ' 9.04[a] (14th ed. 2008). Under this approach, once a policy is triggered, the insurer is required to pay “all sums” for which the insured is legally obligated, up to the policy limits. Moreover, a policyholder may select the policy under which it chooses to be indemnified See Id. The insurer may then seek contribution among other policies to properly apportion liability for all insurers on the risk. See Id.

Judge Kaiser began his allocation analysis by noting that the California Supreme Court's decision in Montrose Chemical Corp. v. Admiral Insurance Co. , 10 Cal. 4th 645 (1995), provided for a continuous trigger doctrine: “multiple policies may apply if progressively deteriorating or continuous damage spanned multiple policy periods; each policy triggered by damage occurring during its policy period.” Amended Ruling on Plaintiff's Motion to Obtain Indemnity up to the Combined Limits of the Applicable Policies at 2, California v. Underwriters, No. Civ239784 (Cal. Super. Mar. 5, 2004) (“Amended Ruling”). After noting that numerous California decisions have adopted an all sums approach to allocation of liability predicated on the continuous trigger doctrine, Judge Kaiser held that the all sums approach was appropriate and that an insurer would be liable for damage outside its policy period. Id. As a result, “once coverage for a continuous or progressively deteriorating damage or injury is triggered under a liability policy, the insurer is required to pay for all sums (up to policy limits) of the insured's liability ' not just liability specifically allocable to damage during the policy period.” Id.

The No Stacking Ruling

Judge Kaiser next considered California's request to horizontally stack the policy limits. “Stacking” policy limits means that when more than one policy is triggered by an occurrence, each policy can be called upon to satisfy the claim up to the full limits of each policy. Ostrager & Newman, Handbook on Insurance Coverage Disputes ' 9.04[c] (14th ed. 2008). Under the concept of stacking, the limits of every triggered policy are combined to determine the total amount of coverage available for a particular claim. Id. Where stacking is permitted, an insured may “obtain benefits from a second policy on the same claim when recovery from the first policy would alone be inadequate to compensate for the actual damages suffered,” Wagner v. State Farm Mut. Auto. Ins. Co. , 40 Cal. 3d 460, 463 n.2 (1985), because stacked policies that apply to a single loss are treated as cumulative as opposed to mutually exclusive. Stacking across policy periods is generally referred to as “horizontal stacking.”

In addressing the request for horizontal stacking, Judge Kaiser acknowledged that California had made a strong argument that horizontal stacking was widely accepted by California courts, at least in the primary insurance context. Amended Ruling at 3. However, he further explained that he felt bound by the Sixth Appellate District's decision in FMC Corp. v. Plaisted & Cos. , 61 Cal. App. 4th 1132, 1189 (1998), which “held that horizontal stacking made the aggregate limits and the separately negotiated premiums for each policy period illusory by expanding coverage to the sums of every policy in every policy period triggered by continuous damage over multiple policy periods.” Amended Ruling at 4. Accordingly, Judge Kaiser held that California was only “entitled to select a single policy period triggered by continuing damage from the occurrence at the Stringfellow site” and could only “recover the full amount of limits of the policies in that period for damages within and outside the period.” Amended Ruling at 4. As a result, California was precluded from horizontally stacking policies across policy periods.

The Fourth Appellate District's Ruling and Reasoning

After a jury trial, California appealed the trial court's “no stacking ruling.” The insurers filed a protective cross appeal.

All Sums

The Fourth Appellate District affirmed Judge Kaiser's all sums allocation of liability. In addressing this issue, the court reasoned that the previous California Supreme Court decisions of Aerojet-General Corp. v. Transport Indemnity Co. , 17 Cal. 4th 38 (1997) and Montrose Chemical Corp. v. Admiral Insurance Co. , 10 Cal 4th 645 (1995) had adopted a continuous trigger and all sums approach and that the court was bound to “follow the lead” of the California Supreme Court. Cal. v. Continental Ins. Co., — Cal. Rptr. 3d –, No. E041425, 2009 WL 18696, at *9 (Cal. Ct. App. Jan 15, 2009).While the court acknowledged that a majority of jurisdictions have rejected an all sums allocation in the indemnity context, California had “firmly aligned itself with the minority.” Id. Therefore, “in California, when there is a continuous loss spanning multiple policy periods, any insurer that covered any policy period is liable for the entire loss, up to the limits of its policy. The insurer's remedy is to seek contribution from any other insurers that are also on the risk.” Id. at *8.

Stacking

Turning to the stacking of policy limits, the court began by analyzing the standard CGL policy in the context of previous California Supreme Court cases and determined that stacking of limits was appropriate and that standard policy language provided for stacking. Relying in part on Aerojet-General Corp. v. Transport Indemnity Co. , 17 Cal. 4th 38 (1997) and Montrose Chemical Corp. v. Admiral Insurance Co. , 10 Cal 4th 645 (1995), the court reasoned that, because California follows a continuous trigger theory and an all sums allocation of liability, it necessarily followed that the insured was entitled to horizontally stack policies to recover up to the full amount of the policy limits for each triggered policy. Continental Ins. Co., — Cal. Rptr. 3d –, No. E041425, 2009 WL 18696, at *10-12 (Cal. Ct. App. Jan 15, 2009). In addition, the court noted that Stonewall Insurance Co. v. City of Palos Verdes Estates , 46 Cal. App. 4th 1810 (1996), the first California case to address horizontal stacking of limits across policy periods, squarely held that stacking was permitted. Id. at *14.

In reaching this conclusion, the Fourth Appellate District also expressly rejected the no stacking rule adopted by the Sixth Appellate District in a factually similar environmental pollution case, FMC Corp. v. Plaisted & Cos. , 61 Cal. App. 4th 1132 (1998). In FMC, the Sixth Appellate District reasoned that permitting an insured to recover under multiple, consecutive insurance policies for liability arising out of a continuous injury would create an unacceptable windfall for the insured by providing the insured with “substantially more coverage for liability attributable to any particular single occurrence than the insured bargained or paid for.” 61 Cal. App. 4th at 1189-91. This conclusion was squarely rejected by the Fourth Appellate District.

In addressing the FMC decision, the Fourth Appellate District noted that, “[i]n our view, standard policy language does provide for stacking, and therefore that is exactly what the insured has bargained and paid for. If an occurrence happens entirely within one policy period, the insured has paid a 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.” Continental Ins. Co., — Cal. Rptr. 3d –, No. E041425, 2009 WL 18696, at *16 (Cal. Ct. App. Jan 15, 2009). The court further noted that, when a continuous loss spans multiple policy periods, it is “appropriate to place a greater contractual obligation on the insurers.” Id. Moreover, the Fourth Appellate District determined that a no stacking rule would give an impermissible windfall to insurers. Id. Finally, in pointing out what it perceived as the major flaw of the no stacking rule, the court noted that, under FMC, an insured is permitted to choose the policy period and policy under which it wants to recover necessarily means that each of the policies affords coverage, up to the policy limits, and thus stacking is justified. Id. at *17.

Implications for Insurers

First, it now seems clear that, given the clash between the FMC and Continental courts, the California Supreme Court will be called upon to answer the question of whether horizontal stacking is permissible. Until then, for policies governed by California law, great uncertainty faces insurers and insureds alike.

In addition, choice of law determinations will become increasingly important for insurers. Consequently, careful consideration will need to be given about arguing for the application of California law.

Conclusion

While the focus of the Continental decision was on horizontal stacking, it was predicated on the goal of maximizing coverage, consistent with its adoption of an “all sums” allocation theory. A court's allocation decision should not, however, provide a windfall to either the insured or the insurer. The horizontal stacking approach adopted in Continental compounds that error by benefiting the insured, to the detriment of the insurer. As the FMC court noted, horizontal stacking of policy limits allows an insured to obtain a coverage amount which is greater than the coverage amount which it purchased for any single occurrence. Once the insured gets the benefit of an “all sums” allocation and selects the policy period that applies, it cannot then stack multiple policies in direct violation of the definition of an “occurrence” which specifically contemplates a single occurrence based on “a continuous and repeated exposure to conditions.” For this reason, among others, the FMC holding is in line with the policy language and is likewise more just and appropriate.

Kim V. Marrkand, a member of the litigation section in the Boston office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., chairs the firm's insurance/reinsurance group and the firm's bankruptcy/insurance group and is on the Board of Editors of this newsletter. Wynter N. Lavier, an associate in the litigation section in Mintz Levin's Boston office, is a member of the firm's insurance/reinsurance group. Both Ms. Marrkand and Ms. Lavier regularly represent and advise insurers and reinsurers in coverage disputes. The views expressed in the article are those of the authors and not necessarily those of Mintz, Levin or its clients.