The California Court of Appeal recently issued an important case involving coverage for continuous property damage over several policy periods. Among its various rulings, the court held policy limits of multiple policies could be stacked. Further, the "all sums" rule, obligating each insurer to pay the entire claim, was applicable. See State of California v. Continental Ins. Co., 2009 Cal App. LEXIS 1 (Cal. Ct. App. Jan. 5, 2009).
The case involved long-standing litigation regarding an industrial waste disposal site built by the state and which began operations in 1956. In 1972, groundwater contamination was discovered and the site was closed. In 1998, a federal court found the state liable. The state then sued its insurers for amounts it was ordered to pay to clean up the site.
The trial court ruled each insurer was potentially liable for the total amount of loss, subject to policy limits, rejecting the insurers' contention they were only liable for the portion of the loss attributable to their own policy periods (all sums ruling). But the trial court further ruled the state could not recover the policy limits in effect for every policy period. Instead, the state had to choose one policy period, and could recover only up to the policy limits of the policies in effect during the period (no-stacking ruling). Because the state had settled with other insurers for $120 million, this amount had to be set off against the insurer's liability. Therefore, the trial court's ruling limited the maximum recovery from all insurers to $48 million. As a result, the state was awarded a nominal judgment in the amount of zero dollars.
All Sums Ruling
The insurers agreed that under Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995), they were liable for property damage that occurred during their respective policy periods. They denied, however, liability for any property damage occurring before or after their policy periods. The insurers urged adoption of a rule allocating the total property damage pro rata, based on each insurer's time on the risk.
The appellate court disagreed because Montrose determined that an insurer on the risk when continuous or progressively deteriorating damage first manifests itself is obligated to indemnify the insured for the entirety of the ensuing damage. Therefore, each insurer covered the total amount of the state's liability for property damage (subject to their respective policy limits), including property damage that occurred before or after their policy periods.
No-Stacking Ruling
Because the loss was greater than the limits of any one applicable policy, the state sought to stack the policy limits across the policy periods. Although FMC Corp. v. Plaisted & Companies, 61 Cal. App. 4th 1132 (1998) held insureds could not stack limits across policy periods, this court found FMC's reasoning flawed. The policy language provided for stacking. Even though there was only one occurrence, the insured could recover against each insurer up to the limits of the insurer's policy. Therefore, the state was entitled to stack the policy limits of all applicable policies across all applicable policy periods.
One-Occurrence Ruling
The state argued there were several occurrences based on various periods of leakage from the waste site. But once the leakage began, it was continuous. The policies defined "occurrence" as "a continuous or repeated exposure to conditions which result in . . . damage to property. . . ." Therefore, there could be multiple contributing conditions, but only a single occurrence.
No-Mitigation Ruling
In the underlying case, the court found the state negligently delayed remediation of the site. This ultimately increased the cost of the clean up. The insurers, therefore, argued the state violated its duty to mitigate. The court disagreed. A duty to mitigate applied to damages resulting from the defendant's wrongful conduct. Here, the amounts caused by the alleged failure to mitigate were not the consequences of the insurers' (defendants') breach. Moreover, the insurers' breach did not cause the remediation costs for which the state was held liable. Consequently, the doctrine of mitigation did not apply.
Hawaii Law
No appellate court in Hawai'i has yet adopted the "all sums" rule. Stacking has been addressed by the Hawai`i Supreme Court in terms of underinsured motorist coverage. See, e.g. Macabio v. TIG Ins. Co., 87 Hawai`i 307, 955 P. 2d 100 (1998). In Sentinel Ins. Co. v. First Ins. Co., 76 Hawai`i 277, 875 P.2d 594 (1994), the Hawai'i Supreme Court addressed equitable allocation among two insurers, but did not address stacking of multiple policies covering various periods of continuous, progressive property damage.
