State of Cal. v. Continental Insurance

Filed 8/9/12

IN THE SUPREME COURT OF CALIFORNIA

THE STATE OF CALIFORNIA, )

)

Plaintiff, Cross-Defendant )

and Appellant, )

) S170560

v. )

)

CONTINENTAL INSURANCE ) Ct. App. 4/2

COMPANY et al., ) E041425

) Riverside County

Defendants, Cross- )

Complainants and Appellants; )

)

EMPLOYERS INSURANCE OF )

WAUSAU, ) Super. Ct. No. 239784

)

Defendant, Cross- )

Complainant and Respondent. )

____________________________________)

This case considers complex questions of insurance policy coverage

interpretation in connection with a federal court-ordered cleanup of the state‟s

Stringfellow Acid Pits waste site. We initially address the “ „continuous injury‟

trigger of coverage,” as that principle was explained in Montrose Chemical Corp.

v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655 (Montrose) and the “all sums” rule

adopted in Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th

38, 55-57 (Aerojet), and conclude that the principles announced in those cases

apply to the insurers‟ indemnity obligations in this case, so long as the insurers

insured the subject property at some point in time during the loss itself.

Because we conclude that the continuous injury trigger and all sums rule

apply to the duty to indemnify here, we must also determine how best to allocate

the indemnity duty among the insurers responsible for covering the property loss.

As we explain, we conclude that the Court of Appeal below correctly applied the

“all-sums-with-stacking” allocation rule. We therefore affirm the judgment of the

Court of Appeal.

FACTUAL AND PROCEDURAL BACKGROUND

The State of California (State) seeks indemnity from several of its insurers

in connection with a federal court-ordered cleanup of the State‟s Stringfellow Acid

Pits waste site.1 The site was an industrial waste disposal facility that the State

designed and operated from 1956 to 1972. Each insurer that is party to this appeal

issued one or more excess commercial (also known as comprehensive) general

liability (CGL) insurance policies to the State between 1964 and 1976.2 The site

was uninsured before 1963, and after 1978.

1 Insurers are Continental Insurance Company (Continental), successor in

interest to Harbor Insurance Company (Harbor); Continental Casualty Company

(Casualty), successor by merger to CNA Casualty Company of California (CNA);

Yosemite Insurance Company (Yosemite); Stonebridge Life Insurance Company

(Stonebridge), successor of Beneficial Fire & Casualty Company (Beneficial) (see

post, fn. 3); Horace Mann Insurance Company (Horace Mann); and Employers

Insurance of Wausau (Wausau).

2 Excess liability insurance is coverage “whereby, under the terms of the

policy, liability attaches only after a predetermined amount of primary insurance

has been exhausted.” (2 Cal. Insurance Law & Practice (Matthew Bender 1986)

The Insurance Contract, § 14.02[1], p. 14-4.) Frequently there are several layers

of secondary coverage, sometimes referred to as “excess insurance.” (Ibid.; see

Ins. Code, § 676.6, subd. (b).)

2

In 1955, a state geologist determined that a Riverside County quarry was a

suitable location for the disposal of industrial waste. According to the geologist‟s

report, the site was a canyon lined on its bottom with impermeable rock. The

geologist advised the State to build a concrete barrier dam to close a 250-foot gap

in the canyon‟s natural walls. He claimed that, once the dam was in place, “the

operation of the site for industrial wastes [would] not constitute a threat of

pollution.” The State subsequently developed the facility, which went into

operation in 1956, and eventually received more than 30 million gallons of

industrial waste.

In reality, the site suffered from three major flaws that made it ill-suited to

serve as an industrial waste facility. First, the state geologist had failed to identify

an underground aquifer located 70 feet below the canyon floor that facilitated the

movement of groundwater into and out of the site. Second, the rock underlying

the canyon floor was fractured, so it allowed waste to leak into the groundwater

system and escape the facility. Third, the barrier dam proved ineffective. It

permitted contaminants to escape the facility during heavy rains in 1969 and again

in 1978. The severity of the latter event forced the State to conduct a “controlled

discharge” of contaminants into Pyrite Channel. The ensuing plume of waste

extended for miles. The State closed the facility in 1972 after discovering the

groundwater contamination.

In 1998, a federal court found the State liable for, inter alia, negligence in

investigating, choosing, and designing the site, overseeing its construction, failing

to correct conditions at it, and delaying its remediation. The State was held liable

for all past and future cleanup costs. The State claims costs associated with the

Stringfellow site remediation could reach $700 million. The insurers stipulate that

the State is liable for at least $50 million. The State filed an action against several

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of its insurers in September 1993, seeking indemnification for its liability in the

federal action.

The pertinent language of all the policies at issue is essentially identical.

Under the heading “Insuring Agreement,” insurers agreed “[t]o pay on behalf of

the Insured all sums which the Insured shall become obligated to pay by reason of

liability imposed by law . . . for damages . . . because of injury to or destruction of

property, including loss of use thereof.” Limits on liability in the agreements were

stated as a specified dollar amount of the “ultimate net loss [of] each occurrence.”

“Occurrence” was defined as meaning “an accident or a continuous or repeated

exposure to conditions which result in . . . damage to property during the policy

period . . . .” In addition, “ „ultimate net loss‟ [was] understood to mean the

amount payable in settlement of the liability of the Insured arising only from the

hazards covered by this policy after making deductions for all recoveries and for

other valid and collectible insurances . . . .”

The trial was conducted in multiple phases. At the conclusion of a June

1999 bench trial, the court ruled that the policy limits under policies with multiple-

year periods applied “per occurrence” and not annually. Following this, in April

2002, the trial court held that the State‟s failure to remediate and its delay in

remediating the site was not a breach of any duty to mitigate the insurers‟

damages. In September 2002, the State brought a second suit, asserting related

claims against additional insurers, including those which are parties to this appeal.

This case was consolidated with the first action, and defendant insurers in the

second suit agreed to be bound by all prior rulings in the original action. All

parties stipulated that the property damage that the Stringfellow site‟s selection,

design, and construction caused took place continuously throughout the defendant

insurers‟ multiple consecutive policy periods from 1964 to 1976.

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The trial court held that each insurer was liable for damages, subject to its

particular policy limits for the total amount of the loss. The court based this ruling

on the “all sums” language in the insuring agreements. (Ante, at p. 4.) It also held

that the State could not recover the policy limits in effect for every policy period,

and could not “stack,” or combine, policy periods to recover more than one

policy‟s limits for covered occurrences. The court then concluded that the State

had to choose a single policy period for the entire loss coverage, and it could

recover only up to the specific single policy limit in effect at the time the loss

occurred. The court based its ruling on the decision in FMC Corp. v. Plaisted &

Companies (1998) 61 Cal.App.4th 1132 (FMC), which prevented an insured from

stacking multiple consecutive policies in a case in which the insured had caused

toxic contamination “over a period of many years” (id. at p. 1142).

In May 2005, a jury in phase three of the trial rendered special verdicts

finding the insurers had breached their policies. By that time, the State had

already entered into settlement agreements totaling approximately $120 million

with several other insurers. The trial court required that these settlements reduce

the insurers‟ liability as setoffs. Therefore, “[u]nder the trial court‟s one-

occurrence, no-annualization and no-stacking rulings, the most the State could

recover [from all insurers] was $48 million.” Because the State had already

recovered $120 million, the court entered judgment nominally in the State‟s favor,

but in the amount of “$0.”

The State filed an appeal and, with the exception of Wausau, all of the

insurers filed cross-appeals. The Court of Appeal affirmed in part and reversed in

part the trial court‟s ruling. The Court of Appeal, like the trial court, rejected the

insurers‟ contention that they could not be liable for property damage occurring

outside their respective policy periods. It held that once coverage was triggered,

all of the insurers had to indemnify the insured for the loss. However, the Court of

5

Appeal reversed the trial court‟s ruling that prohibited the State from stacking the

total policy limits in effect for any one policy period. In doing so, the Court of

Appeal rejected the holding of FMC, supra, 61 Cal.App.4th 1132, characterizing

that antistacking decision as “flawed and unconvincing.”

Our grant of review followed the insurers‟ petitions for review.

DISCUSSION

A. Background

1. Standard of Review and Insurance Law Principles

In general, interpretation of an insurance policy is a question of law that is

decided under settled rules of contract interpretation. (E.M.M.I. Inc. v. Zurich

American Ins. Co. (2004) 32 Cal.4th 465, 470; Waller v. Truck Ins. Exchange, Inc.

(1995) 11 Cal.4th 1, 18.) “ „While insurance contracts have special features, they

are still contracts to which the ordinary rules of contractual interpretation apply.‟

(Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; see AIU [Ins. Co.

v. Superior Court (1990)] 51 Cal.3d [807,] at pp. 821-822.)” (Foster-Gardner,

Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 868.) “The

fundamental goal of contractual interpretation is to give effect to the mutual

intention of the parties.” (Bank of the West v. Superior Court, supra, 2 Cal.4th at

p. 1264; Civ. Code, § 1636.) “Such intent is to be inferred, if possible, solely from

the written provisions of the contract.” (AIU, supra, 51 Cal.3d at p. 822; Civ.

Code, § 1639.) “If contractual language is clear and explicit, it governs.” (Bank

of the West v. Superior Court, supra, 2 Cal.4th at p. 1264.) “ „The “clear and

explicit” meaning of these provisions, interpreted in their “ordinary and popular

sense,” unless “used by the parties in a technical sense or a special meaning is

given to them by usage” ([Civ. Code,] § 1644), controls judicial interpretation.

(Id., § 1638.)‟ [Citations.]” (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th

at p. 18.)

6

“A policy provision will be considered ambiguous when it is capable of two

or more constructions, both of which are reasonable.” (Waller v. Truck Ins.

Exchange, Inc, supra, 11 Cal.4th at p. 18, citing Bay Cities Paving & Grading,

Inc. v. Lawyers’ Mutual Ins. Co. (1993) 5 Cal.4th 854, 867.) A term is not

ambiguous merely because the policies do not define it. (Bay Cities Paving,

supra, 5 Cal.4th at p. 866; Bank of the West v. Superior Court, supra, 2 Cal.4th at

pp. 1264-1265; Castro v. Fireman’s Fund American Life Ins. Co. (1988) 206

Cal.App.3d 1114, 1120.) Nor is it ambiguous because of “[d]isagreement

concerning the meaning of a phrase,” or “ „the fact that a word or phrase isolated

from its context is susceptible of more than one meaning.‟ ” (Castro v. Fireman’s

Fund American Life Ins. Co., supra, 206 Cal.App.3d at p. 1120.) “ „[L]anguage in

a contract must be construed in the context of that instrument as a whole, and in

the circumstances of that case, and cannot be found to be ambiguous in the

abstract.‟ ” (Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265, italics

omitted, quoting Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d

903, 916, fn. 7.) “If an asserted ambiguity is not eliminated by the language and

context of the policy, courts then invoke the principle that ambiguities are

generally construed against the party who caused the uncertainty to exist (i.e., the

insurer) in order to protect the insured‟s reasonable expectation of coverage.” (La

Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27,

37.) We now apply these principles to the present case.

2. “Long-tail” Claims

Disputes like the one here frequently occur in the context of environmental

damage and toxic exposure litigation. The kind of property damage associated

with the Stringfellow site, often termed a “long-tail” injury, is characterized as a

series of indivisible injuries attributable to continuing events without a single

unambiguous “cause.” Long-tail injuries produce progressive damage that takes

7

place slowly over years or even decades. Traditional CGL insurance policies,

including those drafted before such environmental suits were common, are

typically silent as to this type of injury. (Hickman & DeYoung, Allocation of

Environmental Cleanup Liability Between Successive Insurers (1990) 17 N. Ky.

L.Rev. 291, 292 (Hickman & DeYoung).) Because of this circumstance, many

insurers are unwilling to indemnify insureds for long-tail claims. Their refusal to

indemnify often causes insureds to sue for coverage. As the present case

highlights, these suits tend to be complex. Typically they involve dozens of

litigants and even larger numbers of insurance policies covering multiple time

periods that stretch back over many years.

It is often “virtually impossible” for an insured to prove what specific

damage occurred during each of the multiple consecutive policy periods in a

progressive property damage case. (Hickman & DeYoung, supra, at p. 292.) If

such evidence were required, an insured who had procured insurance coverage for

each year during which a long-tail injury occurred likely would be unable to

recover. “While CGL policies [such as the ones at issue here] limit coverage to

their policy period, the policies . . . require only that some damage occur during

the policy period. . . . Unfortunately, CGL policies leave unanswered the crucial

question for long-tail injuries: when does a continuous condition become an

„occurrence‟ for the purposes of [triggering] insurance coverage?” (Bratspies,

Splitting the Baby: Apportioning Environmental Liability Among Triggered

Insurance Policies (1999) 1999 B.Y.U. L.Rev. 1215, 1228-1229, fn. omitted

(Bratspies).)

B. Montrose and Aerojet

While the term “trigger of coverage” does not appear in the language of the

CGL insurance policies here, it is a term of “convenience used to describe that

which, under the specific terms of an insurance policy, must happen in the policy

8

period in order for the potential of coverage to arise. The issue is largely one of

timing — what must take place within the policy’s effective dates for the potential

of coverage to be „triggered‟?” (Montrose, supra,10 Cal.4th at p. 655, fn. 2.) In

Montrose, we held that in the context of a third party liability policy “property

damage that is continuous or progressively deteriorating throughout several policy

periods is potentially covered by all policies in effect during those periods.” (Id. at

p. 655.) In that case, the dispute centered on a series of successive liability

policies that seven insurers issued covering a 26-year period. (Id. at p. 656.) At

issue was whether an insurer whose policy covered only the last four years of this

period had a duty to defend suits alleging continuous and progressive property

damage and bodily injury that resulted from hazardous chemicals that the insured

manufactured beginning before, but continuing during, the insurer‟s policy period.

This court held that “ „[p]roperty damage‟ ” was “ „physical injury to or

destruction of tangible property which occurs during the policy period . . . .’ ” (Id.

at p. 668.) The policy defined “ „occurrence‟ ” as “ „an accident, including

continuous or repeated exposure to conditions, which results in . . . property

damage . . . .‟ ” (Id. at p. 669; see also id. at pp. 671-673.) Under the insurance

policy language at issue in Montrose, we determined that a continuous condition

becomes an occurrence for the purposes of triggering insurance coverage when

“ „property damage‟ ” results from a causative event consisting of “the accident or

„continuous and repeated exposure to conditions.‟ ” (Id. at p. 669.) The limitation

on potential indemnity was that the damage must “ „occur‟ during the policy

period, and „. . . result[]‟ from the accident or „continuous and repeated exposure

to conditions.‟ ” (Ibid.)

In 1997, this court again was asked to interpret the all sums insurance

policy language in determining an insurer‟s defense duties under a similar CGL

policy. We noted that “the „settled rule‟ of the case law” is that “ „an insurer on the

9

risk when continuous or progressively deteriorating [property] damage or [bodily]

injury first manifests itself remains obligated to indemnify the insured for the

entirety of the ensuing damage or injury.‟ ” (Aerojet, supra, 17 Cal.4th at p. 57, fn.

10, italics added by the Aerojet court.) Although Aerojet, like Montrose,

principally involved the duty to defend, the issue the court addressed included the

question whether the insurers could require the insured to pay any part of the

defense costs. (Id. at pp. 55-56.) Aerojet reasoned that the insurers would be

liable to indemnify the insured against all claims that resulted from some

triggering harm during the respective policy periods, even if the claims arose after

the policy period expired. (Id. at p. 71.) Therefore, the insurers were responsible

for defending the insured for all claims that involved the triggering damage.

(Ibid.) Aerojet understood Montrose as extending insurers‟ indemnity obligations

beyond the expiration of the policy period where there has been a continuous loss.

In other words, under Aerojet, as long as the property is insured at some point

during the continuing damage period, the insurers‟ indemnity obligations persist

until the loss is complete, or terminates. (Ibid.)3 As the present Court of Appeal

observed, Aerojet‟s “all sums” approach to the duty to indemnify was essential to

its holding regarding the duty to defend.

Similar reasoning applies to the indemnity question presented here. Neither

the State nor the insurers dispute that progressive damage to property at the

Stringfellow site “occurred” during numerous policy periods. In addition, the

insurers concede that in cases such as this it is impossible to prove precisely what

3 My concurring and dissenting opinion in Aerojet (Aerojet, supra, 17

Cal.4th at pp. 88-92 (conc. & dis. opn. of Chin, J.)) related to the allocation of

defense costs to one insurer‟s limited cash flow and self-insurance policy at issue

in that case, and is not relevant to the present facts or decision.

10

property damage occurred during any specific policy period. The fact that all

policies were covering the risk at some point during the property loss is enough to

trigger the insurers‟ indemnity obligation.

The insurers rely on footnote 19 in Montrose, supra, 10 Cal. 4th at page

681, which generally noted that the court could not endorse a holding that insurers

are “jointly and severally liable for the full amount” of a long-tail loss. (Italics

omitted.) Aerojet explained the Montrose footnote. “In Montrose, we also made

plain that „successive‟ insurers „on the risk when continuous or progressively

deteriorating [property] damage or [bodily] injury first manifests itself‟ are

separately and independently „obligated to indemnify the insured‟: „[W]here

successive . . . policies have been purchased, bodily injury and property damage

that is continuing or progressively deteriorating throughout more than one policy

period is potentially covered by all policies in effect during those periods.‟

[Citation.] The successive insurers are not „jointly and severally liable.‟

[Citation.]” (Aerojet, supra, 17 Cal.4th at p. 57, fn. 10, italics added, quoting

Montrose, supra, 10 Cal.4th at pp. 686-687, 681, fn. 19.) Rather, as the Court of

Appeal observed, each insurer is severally liable on its own policy up to its policy

limits.

The insurers advocate that we adopt an alternative allocation scheme — a

pro rata rule for indemnity allocation. Pro rata (or apportionment) allocation

“assigns a dual purpose to the phrase „during the policy period‟ in the CGL

policy‟s definition of „occurrence.‟ The phrase serves both as a trigger of

coverage and as a limitation on the promised „all sums‟ coverage [language in the

„Insuring Agreement‟].” (Bratspies, supra, 1999 B.Y.U. L.Rev. at p. 1234.)

Courts apportioning coverage on a pro rata basis require the allocation of loss to a

particular policy be “proportionate to the damage suffered during that policy‟s

term.” (Interim 23, Appleman on Insurance 2d (Holmes ed. 2003)

11

§ 145.4[A][2][b], p. 25 & fn. 109 [citing cases].) “This approach emphasizes that

part of a long-tail injury will occur outside any particular policy period. Rather

than requiring any one policy to cover the entire long-tail loss, [pro rata] allocation

instead attempts to produce equity across time.” (Bratspies, supra, 1999 B.Y.U.

L.Rev. at p 1232.) Of states addressing similar questions concerning

indemnification for long-tail injuries involving multiple consecutive CGL policies,

several have adopted some variation of the pro rata allocation approach.4

Under the most basic scheme of pro rata allocation, an equal share of the

amount of damage is assigned to each year over which a long-tail injury occurred.

The amount owed under any one policy is calculated by dividing the number of

years an insurer was “on the risk” by the total number of years that the progressive

damage took place. The resulting fraction is the portion of the liability owed by

that particular insurer. Some states, most notably New Jersey, utilize more

complicated systems of pro rata allocation allowing for the “weighing” of each

insurer‟s liability to compensate for an insured‟s increased perception of risk over

time. (See Owens-Illinois, Inc. v. United Ins. Co., supra, 650 A.2d 974.)

4 See, e.g., Owens-Illinois, Inc. v. United Ins. Co. (N.J. 1994) 650 A.2d 974

(adopting pro rata approach to continuous loss); see also Public Serv. Co. of Colo.

v. Wallis & Cos. (Colo. 1999) 986 P.2d 924, 935; Security Ins. Co. v. Lumbermens

Mut. Cas. Co. (Conn. 2003) 826 A.2d 107; Atchison, Topeka & Santa Fe Ry. v.

Stonewall Ins. Co. (Kan. 2003) 71 P.3d 1097; Aetna Cas. & Sur. Co. v.

Commonwealth (Ky. 2005) 179 S.W.3d 830, 842; Southern Silica of Louisiana,

Inc. v. Louisiana Insurance Guarantee Association (La. 2008) 979 So.2d 460;

Boston Gas Co. v. Century Indem. Co. (Mass. 2009) 910 N.E.2d 290; Domtar, Inc.

v. Niagara Fire Ins. Co. (Minn. 1997) 563 N.W.2d 724, 732; EnergyNorth

Natural Gas, Inc. v. Certain Underwriters at Lloyd's (N.H. 2007) 934 A.2d 517;

Consolidated Edison Co. of N.Y. v. Allstate Ins. Co. (N.Y. 2002) 774 N.E.2d 687;

Sharon Steel Corp. v. Aetna Cas. & Sur. Co. (Utah 1997) 931 P.2d 127, 140-142;

Towns v. Northern Sec. Ins. Co. (Vt. 2008) 964 A.2d 1150, 1167.

12

Significantly, all pro rata allocation methods assign liability to the insureds for

those years of the continuous injury that the insureds chose not to purchase

insurance. Although some states have concluded, as the insurers urge in this case,

that pro rata coverage would be more fair and equitable when compared to all

sums allocation, we are constrained by the language of the applicable policies here

(as noted ante, at p. 4), which supports adoption of the all sums coverage

principles, as it does not differ in any meaningful way from the Montrose and

Aerojet policies. (Aerojet, supra, 17 Cal.4th at p. 49.) Under the CGL policies

here, the plain “all sums” language of the agreement compels the insurers to pay

“all sums which the insured shall become obligated to pay . . . for damages . . .

because of injury to or destruction of property . . . .” (Ante, at p. 4.) As the State

observes, “[t]his grant of coverage does not limit the policies‟ promise to pay „all

sums‟ of the policyholder‟s liability solely to sums or damage „during the policy

period.‟ ”

The insurers contend that it would be “objectively unreasonable” to hold

them liable for losses that occurred before or after their respective policy periods.

But as the State correctly points out, the “during the policy period” language that

the insurers rely on to limit coverage, does not appear in the “Insuring Agreement”

section of the policy and therefore is neither “logically [n]or grammatically related

to the „all sums‟ language in the insuring agreement.” The insurers‟ claim that

their indemnity responsibility is limited to damage occurring “during the policy

period” would unduly restrict their agreement to pay “all sums” the insured is

obligated to pay for damages due to “injury to or destruction of property. . . .” The

CGL policy language does not contemplate such a limited result once there is a

property damage occurrence that triggers the insurers‟ indemnity responsibilities

13

for the entirety of the loss, and a growing number of states have similarly adopted

this interpretation of the all sums language.5

We therefore conclude that the policies at issue obligate the insurers to pay

all sums for property damage attributable to the Stringfellow 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.” The coverage extends to the

entirety of the ensuing damage or injury (Montrose, supra, 10 Cal.4th at p. 686),

and best reflects the insurers‟ indemnity obligation under the respective policies,

the insured‟s expectations, and the true character of the damages that flow from a

long-tail injury.

C. Stacking Considerations

As we have explained, the all sums indemnity coverage that the Court of

Appeal below adopted under Montrose and Aerojet envisions that each successive

insurer is potentially liable for the entire loss up to its policy limits. When the

entire loss is within the limits of one policy, the insured can recover from that

insurer, which may then seek contribution from the other insurers on the risk

during the same loss. Recognizing, however, that this method stops short of

satisfying the coverage responsibilities of the policies covering a continuous long-

tail loss, and potentially leaves the insured vastly uncovered for a significant

portion of the loss, the present Court of Appeal allowed the insured to stack the

5 See, e.g., Hercules, Inc. v. AIU Ins. Co. (Del. 2001) 784 A.2d 481, 494;

Allstate Ins. Co. v. Dana Corp. (Ind. 2001) 759 N.E.2d 1049, 1058; Goodyear

Tire & Rubber Co. v. Aetna Cas. & Sur. Co. (Ohio 2002) 769 N.E.2d 835; J.H.

France Refractories Co. v. Allstate Ins. Co. (Pa. 1993) 626 A.2d 502; American

Nat’l Fire Ins. Co. v. B & L Trucking & Constr. Co. (Wn. 1998) 951 P.2d 250;

Plastics Engineering Co. v. Liberty Mut. Ins. Co. (Wis. 2009) 759 N.W.2d 613,

616.

14

consecutive policies and recover up to the policy limits of the multiple plans.

“Stacking” generally refers to the stacking of policy limits across multiple policy

periods that were on a particular risk. In other words, “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.”

(Colon, Pay It Forward: Allocating Defense and Indemnity Costs in

Environmental Liability Cases in Cal. (Feb. 2002) 24 Ins. Litig. Rptr. 43, 53.)

“When the policy limits of a given insurer are exhausted, [the insured] is entitled

to seek indemnification from any of the remaining insurers [that were] on the

risk . . . .” (J.H. France Refractories Co. v. Allstate Ins. Co., supra, 626 A.2d at p.

509 [adopting all sums allocation and serial stacking of policies in Pennsylvania

for continuous bodily injuries caused by asbestos manufacturer]; see also Koppers

Co. v. Aetna Cas. & Sur. Co. (3d Cir 1996) 98 F.3d 1440 [adopting all sums and

stacking for environmental cleanup liability].) The all-sums-with-stacking

indemnity principle properly incorporates the Montrose continuous injury trigger

of coverage rule and the Aerojet all sums rule, and “effectively stacks the

insurance coverage from different policy periods to form one giant „uber-policy‟

with a coverage limit equal to the sum of all purchased insurance policies. Instead

of treating a long-tail injury as though it occurred in one policy period, this

approach treats all the triggered insurance as though it were purchased in one

policy period. The [insured] has access to far more insurance than it would ever

be entitled to within any one period.” (Bratspies, supra, 1999 B.Y.U. L.Rev. at p.

1245.) 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. It also acknowledges the uniquely

progressive nature of long-tail injuries that cause progressive damage throughout

multiple policy periods. (Ibid.)

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In adopting the all-sums-with-stacking rule, the Court of Appeal rejected

the FMC court‟s antistacking ruling because it “disregarded the policy language

entirely.” The Court of Appeal noted that, as in this case, the policies in FMC did

not include antistacking provisions, so the FMC court resorted to “judicial

intervention” in order to avoid stacking. As the Court of Appeal recognized,

absent antistacking provisions, statutes that forbid stacking, or judicial

intervention, “standard policy language permits stacking.” We agree with the

Court of Appeal, and find that the policies at issue here, which do not contain

antistacking language, allow for its application. In so holding, we disapprove

FMC Corp. v. Plaisted & Companies, supra, 61 Cal.App.4th 1132.6

An all-sums-with-stacking rule has numerous advantages. It resolves the

question of insurance coverage as equitably as possible, given the immeasurable

aspects of a long-tail injury. It also comports with the parties‟ reasonable

expectations, in that the insurer reasonably expects to pay for property damage

occurring during a long-tail loss it covered, but only up to its policy limits, while

the insured reasonably expects indemnification for the time periods in which it

purchased insurance coverage. All-sums-with-stacking coverage allocation

ascertains each insurer‟s liability with a comparatively uncomplicated calculation

that looks at the long-tail injury as a whole rather than artificially breaking it into

6 There is precedent in the Court of Appeal for adopting the stacking rule,

although the insurers correctly point out that stacking was allowed in the presence

of a stipulation only. (See Stonewall Ins. Co. v. City of Palos Verdes Estates

(1996) 46 Cal.App.4th 1810, 1853 [adopting “horizontal” approach to excess

liability coverage, meaning that if limits of liability of each primary insurance

policy adequately cover the occurrences, there is no excess coverage expectation].)

This case is the first in our court to consider the stacking of excess policies in the

continuous property loss scenario.

16

distinct periods of injury. As the Court of Appeal recognized, 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. There is

nothing unfair or unexpected in allowing stacking in a continuous long-tail loss.

The most significant caveat to all-sums-with-stacking indemnity allocation is that

it contemplates that an insurer may avoid stacking by specifically including an

“antistacking” provision in its policy. Of course, in the future, contracting parties

can write into their policies whatever language they agree upon, including

limitations on indemnity, equitable pro rata coverage allocation rules, and

prohibitions on stacking.

CONCLUSION

In the present case, consistent with this court‟s precedent, principles of

equity, and sound insurance policy interpretation considerations, we conclude that

the all sums approach to insurance indemnity allocation applies to the State‟s

successive property or long-tail first party property loss. In addition, we conclude

that allocation of the cost of indemnification under these circumstances should be

determined with stacking. Consequently, we affirm the Court of Appeal‟s

judgment.

CHIN, J.

WE CONCUR:

CANTIL-SAKAUYE, C. J.

KENNARD, J.

BAXTER, J.

WERDEGAR, J.

CORRIGAN, J.

LIU, J.

17

See last page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion State of California v. Continental Insurance Company

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted XXX 170 Cal.App.4th 160

Rehearing Granted

__________________________________________________________________________________

Opinion No. S170560

Date Filed: August 9, 2012

__________________________________________________________________________________

Court: Superior

County: Riverside

Judge: Sharon J. Waters, Stephen D. Cunnison and Erik Michael Kaiser

__________________________________________________________________________________

Counsel:

Edmund G. Brown, Jr., Attorney General, Darryl L. Doke and Jill Scally, Deputy Attorneys General;

Cotkin & Collins, Joan Cotkin; Law Offices of Roger W. Simpson, Roger W. Simpson; Law Offices of

Daniel J. Schultz, Daniel J. Schultz; Anderson Kill & Olick, Robert M. Horkovich, Edward J. Stein, Robert

Chung and Cort Malone for Plaintiff, Cross-defendant and Appellant.

Gauntlett & Associates, David A. Gauntlet, James A. Lowe; Orrick, Herrington & Sutcliffe, Barry S. Levin

and Darren S. Teshima for United Policyholders and Center for Community Action and Environmental

Justice as Amici Curiae on behalf of Plaintiff, Cross-defendant and Appellant.

Winston & Strawn, Scott P. DeVries, Yelitza V. Dunham and Gene C. Schaerr for the League of California

Cities as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant.

Latham & Watkins, David L. Mulliken, Kristine L. Wilkes, Johanna S. Schiavoni and Drew T. Gardiner for

Montrose Chemical Corporation of California as Amicus Curiae on behalf of Plaintiff, Cross-defendant and

Appellant.

Heller Ehrman, Proskauer Rose, Pillsbury Winthrop Shaw Pittman, Reynold L. Siemens and David A.

Thomas for Aeorojet-General Corporation and Whittaker Corporation as Amici Curiae on behalf of

Plaintiff, Cross-defendant and Appellant.

Epstein, Turner & Song and David B. Epstein for Consumer Federation of America as Amicus Curiae on

behalf of Plaintiff, Cross-defendant and Appellant.

Berkes Crane Robinson & Seal, Steven M. Crane, Barbara S. Hodius; Berman & Aiwasian, Aiwasian &

Associates, Deborah A. Aiwasian, Steven M. Haskell; Woolls & Peer, John E. Peer and H. Douglas Galt

for Defendants, Cross-complainants and Appellants Continental Insurance Company, Continental Casualty

Company, Horace Mann Insurance Company and Yosemite Insurance Company.

Page 2 – counsel continued – S170560

Counsel:

Wilson, Elser, Moskowitz, Edelman & Dicker, Patrick M. Kelly, Carey B. Moorehead, Craig C. Hunter,

Robert Cooper; Sonnenschein Nath & Rosenthal, SNP Denton US, Paul E. B. Glad and Katherine J. Evans

for Defendant, Cross-complainant and Appellant Stonebridge Life Insurance Company.

Duane Morris, Philip R. Matthews, Andrew K. Gordon and William J. Baron for Certain London Market

Insurers as Amicus Curiae on behalf of Defendants, Cross-complainants and Appellants.

Gibson, Dunn & Crutcher and Scott R. Hoyt for Truck Insurance Exchange as Amicus Curiae on behalf of

Defendants, Cross-complainants and Appellants.

Barber Law Group, Bryan M. Barber and Steven D. Meier Defendant, Cross-complainant and Respondent.

Wiley Rein, Laura A. Foggan, Gregory J. Langlois; Sinnott Dito Moura & Puebla and Randolph P. Sinnott

for Complex Insurance Claims Litigation Association and American Insurance Association as Amici

Curiae on behalf of Defendants, Cross-complainants and Appellants and Defendant, Cross-complainant and

Respondent.

Counsel who argued in Supreme Court (not intended for publication with opinion):

Roger W. Simpson

Law Offices of Roger W. Simpson

18441 Santa Eugenia Street

Fountain Valley, CA 92708

(714) 968-8521

Steven M. Crane

Berkes Crane Robinson & Seal

515 South Figueroa Street, Suite 1500

Los Angeles, CA 90071

(213) 955-1150