California Supreme Court Adopts All-Sums-With-Stacking Rule for Long-Tail Claims

August 14, 2012

On Aug. 9, 2012, in a momentous and long-awaited decision, the California Supreme Court unanimously affirmed that the “all sums” approach to insurance indemnity obligations applies to long-tail claims. In addition, the court concluded that policyholders may stack policy limits across multiple policy periods. State of California v. Continental Insurance Company, No. S170560 (Cal. Aug. 9, 2012).

The state of California sought indemnity from multiple insurance companies in connection with the Stringfellow Acid Pits waste site. The state owned and designed the industrial waste disposal facility, which it operated from 1956 to 1971. The site contained 30 million gallons of industrial waste, which leaked into the groundwater and escaped during heavy rains. After discovering the groundwater contamination in 1972, the state closed down the site. Twenty-six years later, in 1998, a federal court found the state liable for all past and future cleanup costs, which the state claims could reach $700 million.

The various insurance companies that were parties to the case provided excess commercial liability policies from 1964 to 1976. The parties stipulated that the property damage was continuous throughout those policy years. The insurance companies advocated that the court adopt pro rata allocation for indemnity, which requires the allocation of the loss to a particular policy be proportionate to the damage suffered during the policy term. The court rejected pro rata allocation based on the policies’ “all sums” language, which states that insurance companies are liable for “all sums which the insured shall become legally obligated to pay.” The court reaffirmed that the “all sums” policy language obligated the insurers to pay the entire loss, up to their policy limits, so long as some of the continuous property damage occurred during the insurers’ policy periods.

The court then turned to the stacking issue, which refers to the stacking of policy limits across multiple policy periods that were on a particular risk. “Stacking policy limits means that when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy.” The court approved of stacking, stating that stacking insurance coverage from different policy periods forms “one giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies.”

The court reasoned that stacking comports with the parties’ reasonable expectations, in that the insurance company reasonably expects to pay for property damage, up to its policy limits, occurring during a long-tail claim, and the insured reasonably expects indemnification for the time periods in which it purchased coverage. “If an occurrence is continuous across two or more policy periods, the insured has paid two or more premiums and can recover up to the combined total of the policy limits,” the court stated. “There is nothing unfair or unexpected in allowing stacking in a continuous long-tail loss.” “The all sums with stacking rule means that the insured has immediate access to the insurance it purchased. It does not put the insured in the position of receiving less coverage than it bought.”

The court emphasized that its decision was based on policies that did not include “antistacking” policy provisions. In adopting stacking, the court expressly disapproved of FMC Corp. v. Plaisted & Companies, 61 Cal. App. 4th 1131 (1998), which prevented a policyholder from stacking multiple consecutive policies.

The opinion can be found here.