California Allows Stacking of CGL: a Case of First Impression and Importance

Factual and Procedural Background

The State of California (State) sought indemnity from several of its insurers. The Stringfellow site was an industrial waste disposal facility that the State designed and operated from 1956 to 1972. Each insurer that was party to the appeal issued one or more excess commercial (also known as comprehensive) general liability (CGL) insurance policies to the State between 1964 and 1976. The site was uninsured before 1963 and after 1978.

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 claimed that costs associated with the Stringfellow site remediation could reach $700 million. The State filed an action against several of its insurers in September 1993, seeking indemnification for its liability in the federal action. That case was finally resolved by the August 9, 2012, decision of the supreme court.

The State Sues Its Insurers

The state's suit was tried 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 that were 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.

In May 2005, a jury in phase three of the trial rendered special verdicts finding that 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 State filed an appeal and, with the exception of Wausau, all of the insurers filed cross-appeals. The California 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. The California Court of Appeal allowed the State to stack the total policy limits in effect for any one policy period.

"Long Tail" Claims

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 place slowly over years or even decades. 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. 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?

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 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?

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. 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. Neither the State nor the insurers disputed that progressive damage to property at the Stringfellow site "occurred" during numerous policy periods. In addition, the insurers conceded that, in cases such as this, it is impossible to prove precisely what property damage occurred during any specific policy period. The supreme court concluded that the fact that all policies were covering the risk at some point during the property loss was enough to trigger the insurers' indemnity obligation.

Rather than a pro-rata share of the damage, the Supreme Court decided that the policies 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 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.

The all sums indemnity coverage 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 California Court of Appeal allowed the insured to stack the 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." The California Supreme Court found that 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."

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 "anti-stacking" 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

The decision means, simply, that each insurer on the risk must pay its limits for each policy year it had a policy in effect. It puts to rest the most important part of the Stringfellow story. It teaches insurers that the wording of the CGL policy needs rewording to protect against "stacking" and to protect against long tail losses or they will find, when an insured pollutes, that they will be probably be paying their policy limits for every year the policy is in effect.

The case also teaches something the California Supreme Court did not discuss: effective underwriting. If each insurer required a complete application from the state before agreeing to insure it, it should have learned of the existence of problems at the Stringfellow Acid Pits. An intelligent underwriter with that knowledge would have refused to insure the risk or would have specifically excluded losses resulting from the Stringfellow Acid Pits.

The State of California knew or should have known, sometime between 1959 and 1972, that the Stringfellow pits were leaking and polluting the land and water of Riverside County. If it did not disclose that knowledge to its insurers, it concealed a material fact that might have been sufficient grounds to rescind the policies. Any policy issued to the state after it knew of the pollution should have been void from inception.