California Appellate Court holds that liability policy limits may be stacked across policy years
January, 2009
By
Andrew B. Downs
In the latest installment of the decades-long legal saga flowing from the Stringfellow Acid Pits, the California Court of Appeal has held that a policyholder may stack liability policy limits across policy years to maximize its recovery. In other words: Where an insured is liable for a progressive loss happening over many years, it can tap all of its liability insurance in all of the years for protection.
The Stringfellow Acid Pits in Riverside County, California opened in 1956. From then until 1972, more than 30 million gallons of industrial waste was deposited there. The pits leaked, resulting in extensive pollution damage. Clean up efforts began in the 1970's and the site has been the subject of considerable environmental and insurance coverage litigation since the early 1980's.
One of the environmental defendants was the State of California. In 1998 the State was held liable for past and future remediation costs which it has estimated could reach $700 million. This case, State of California v. Continental Insurance Company, No. E041425 (January 5, 2009), involves coverage under excess liability policies issued to the State that were in effect from 1964 through 1975. The issues before the appellate court were (1) whether the State could recover indemnity from any one insurer for the total amount of its loss subject to policy limits, or whether each insurer could be liable only for that portion of the loss attributable to its policy period (the "all sums" issue); and (2) whether the State's recovery on account of this single – albeit continuous – occurrence was limited to the policy benefits available in a single policy year, or whether it could aggregate benefits under all of the years when the damage was happening (the stacking issue). The appellate court ruled in favor of the State on both issues.
In finding in the State's favor on the "all sums" issue, the court concluded (following various California Supreme Court decisions on the duty to defend) that for continuous losses where the property damage spans several policy periods, each insurer that provided coverage during any policy period is liable for the entire loss, up to the limits of its policy. The court explained that the paying insurer could seek contribution from the other insurers that were also on the risk during the period of damage.
The more important part of the decision is the discussion of stacking, where the court also found in favor of the State. The court disagreed with another District Court of Appeal decision, FMC Corp. v. Plaisted & Companies, 61 Cal.App.4th 1132 (1998), which rejected the stacking of liability policy limits across policy periods. This court instead held that where California's "continuous trigger" rule triggers multiple policies, the policyholder is not required to allocate the damage to the particular policy year, or to select a single policy period for recovery purposes. Rather, it can recover up to the policy limits of each triggered policy.
The Court of Appeal also addressed a number of other issues. First, it agreed with the insurers that there was but one occurrence, not several. In doing so, it distinguished between separate conditions that operate concurrently (such as the deposit of waste, an undiscovered underground streambed, and a fractured dam) and separate causes of loss. It held that there was only one cause of physical damage, even if that cause was the result of multiple conditions that operated together. Second, it held that even if a policy was in effect for multiple years, if the limit was "per occurrence" it was enforceable and could not be "annualized" by the State. Third, the court held that the State's recovery could not be reduced on the basis that it not mitigated the loss by delaying commencing remediation activities at the Stringfellow site.
Finally, of interest primarily to lawyers and parties to cases with "lost policy" issues, the court provided the first ever judicial construction of California Evidence Code §1331, the "ancient documents" exception to the Hearsay Rule. That section permits the use in evidence of hearsay statements in written documents that are more than 30 years old "and the statement has been since generally acted upon as true by persons having an interest in the matter." The court concluded that in order to be admissible, the documents must have been treated as true by persons who had an interest in whether or not they were true.
The stacking decision in State of California v. Continental is important not only in the environmental arena, but in connection with any liability coverage dispute involving continuous and progressive harm, such as construction defect cases. Ultimately, the California Supreme Court will have to decide whether this decision is correct, or whether the decision in FMC Corp. v. Plaisted & Companies will be followed, and whether a policy holder's recovery is limited to its maximum coverage in a single year, or whether it can aggregate multiple years of insurance protection for a single occurrence.