In a decision that likely will have significant ramifications for long-tail coverage claims, the Supreme Court of California held in State of California v. Continental Insurance Co., S170506 that the continuous injury trigger and all sums rule applied to several insurance policies issued to the State of California between 1964 and 1976, and permitted the “stacking” of those policies. The court’s decision is consistent with the plain language of the policies at issue, and permitting stacking of policies covering a long-tail injury spanning several policy periods comports with the parties’ reasonable expectations of coverage.

The case arose from the court-ordered cleanup of the Stringfellow Acid Pitts industrial waste site that the state operated between 1956 and 1972. The site received more than 30 million gallons of industrial waste and was closed in 1972 after the state discovered significant groundwater contamination. The State estimated costs of the cleanup would reach $700 million and sought from its insurers indemnification for its liability for the cleanup costs. Following a multiple-phase trial, the trial court held that the State should not be permitted to “stack” multiple policies. The state had already recovered $120 million in settlement agreements with other insurers, and the trial court’s anti-stacking ruling limited the State’s recovery to $48 million. The Court of Appeal reversed the trial court’s anti-stacking ruling, and the insurers sought review.

The Continental Insurance Company court noted that in a pair of cases from 1995 and 1997, it found that an insurer’s obligations under a general liability policy extended to so-called “continuous injuries” and required insurers under such policies to defend and indemnify their insureds against damage claims where at least some of the continuous injury occurred during the policy period, even if the claims arose after the policy expired. Continental Insurance Co., S170506 at 8-10. First in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal. 4th 645, 655, and again in Aerojet-General Corp. v. Transport Indem. Co. (1997) 17 Cal. 4th 38, 55-57, the court considered whether an insurer was obligated to defend its insured against suits alleging continuous and progressive property damage occurring over the course of several years and, accordingly, a number of policy periods. In Montrose, the policy at issue defined an “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in … property damage.” Continental Insurance Co., S170506 at 9, quoting Montrose, 10 Cal. 4th at 669. Thus, the court concluded that a continuous condition becomes an occurrence that triggers insurance coverage when the property damage results from an event – either an accident or continuous and repeated exposure to conditions, and an insurer’s indemnity is limited only to the extent that the damage must occur during the policy period and result from the accident or exposure. Continental Insurance, S170506 at 9, quoting Montrose, 10 Cal. 4th at 669. In Aerojet, the court concluded that an insurer’s indemnification obligations extended to all claims resulting from the triggering harm during the policy period, even if the claims themselves arose after the policy period. Continental Insurance Co., S170506 at 10, quoting Aerojet, 17 Cal. 4th at 71.

The Continental Insurance Company court reasoned that the rationale of the Montrose and Aerojet decisions applied with equal force to the question of whether the primary and excess liability insurers in were required to indemnify the State for the progressive groundwater contamination at the Stringfellow site. Continental Insurance Co., S170506 at 10-11. The court rejected the pro rata allocation scheme proposed by the insurers, reasoning that the “all sums” language of the policies plainly obligates the insurers to pay “all sums which the insured shall become obligated to pay … for damages … because of injury to or destruction of property” and is not limited to the damage occurring during the policy period. Id. at 13. The court reasoned that to limit insurers’ indemnification obligations to damage occurring “during the policy period” – language that did not appear in any of the policies – “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.’” Id.

Turning to whether policies issued across multiple policy periods could be “stacked” – effectively permitting an insured to access multiple policies issued over the course of a long-tail injury – the court reasoned that the “all-sums-with-stacking principle properly incorporates the Montrose continuous injury trigger of coverage rule and the Aerojet all sums rule,” stacking the coverage from different policy periods to form a policy with limits equal to the sum of all of the limits purchased over the duration of the long-tail injury. Id. at 15. The rule permits an insured to immediately access all of the insurance it purchased, rather than receiving less than the full amount of purchased limits. Id. The court further reasoned that the rule offers several advantage, including resolving the question of coverage for long-tail injuries as equitably as possible and comporting with the parties’ reasonable expectations. Id. at 16. The insurer pays no more than its policy limits for damage occurring during its policy period, and the insured obtains the indemnification it reasonably expects to be available for the periods in which it purchased coverage. Id.