Insurance Law Hawaii

Hawaii Court of Appeals Confirms Bad Faith Exists Even if No Contractual Duty to Pay Benefits

    The Hawaii Intermediate Court of Appeals reversed the trial court's granting of summary judgment to the insurer on the insured's bad faith claim. Carvalho v. AIG Hawaii Insurance Company, Inc., 2020 Haw. App. LEXIS 382 (Haw. Ct. App. Nov. 16, 2020).

    Plaintiff Carvalho's son was killed in a two-car accident. The other car and driver were uninsured. The deceased son was covered by a policy issued by AIG to his maternal grandparents. Plaintiff made a clam for uninsured motorist (UM) and underinsured motorist (UIM) benefits under the AIG policy. AIG claimed that only non-stacked UM and UIM coverages totaling $70,000 were available. 

    Carvalho filed suit against AIG seeking a declaratory judgment for increased and stacked UM and UIM coverage totaling $1.2 million under the AIG policy. AIG later agreed that the stacked maximum UM and UIMj coverage limits were $1.2 million. AIG maintained, however, that the value of the wrongful death claim had not yet been resolved. 

   The court proceeding was stayed so that an arbitration could take place pursuant to the policy. An arbitration award of $1.75 million was made to the son's estate and Carvalho. AIG paid $1.2 million to Carvalho, reflecting policy limits. Once the stay was lifted, AIG moved for summary judgment on all remaining claims. The trial court granted AIG's motion. 

    On appeal, AIG argued Carvalho could not establish that she had incurred any damages as of February 18, 2008, the date that AIG by letter recognized the increased UM/UIM policy limits, where it was not until April 2, 2009 that the arbitrator determined the amount of damages to be awarded.

    The appellate court noted, however, that under Hawaii law an insured could maintain a claim against an insurer for bad faith mishandling of the insured's claim even where the insurer had not contractual duty to pay any benefits. Further, Carvalho was not required to prove that she suffered economic loss caused by AIG's alleged bad faith in order to recover emotional distress damages caused by AIG's alleged bad faith, which she sought in her complaint. Accordingly, contrary to AIG's argument, summary judgment was not appropriate on the basis that the February 18, 2008 letter acknowledged the increased UM/UIM policy limits, before the arbitration award was made in excess of AIG's payment. AIG's obligation to act in good faith was independent from its contractual obligation to tender benefits to the insured.

    Therefore, summary judgment on the bad faith claim was not appropriate. Thanks to my blogging colleague, Mark Murakami (www.hawaiioceanlaw.com) for flagging this case.

Hawaii Court Tackles Amount Due Under Stacking Provision for UIM Coverage

    The Hawaii Intermediate Court of Appeals (ICA) ruled in favor of the insurer in deciphering the policy's UIM coverage. Kohatsu v. State Farm Mut. Auto. Ins. Co., 2017 Haw. App. LEXIS 388 (Sept. 29, 2017).

    The insureds were in an automobile accident, which resulted in a $300,000 settlement with the other driver's insurance company. The insureds requested UIM coverage from their insurer, State Farm, for the remaining damages from the accident. The parties entered arbitration and an Arbitration Award of $2,304,652.12 was granted in the insureds' favor.

    The parties disputed the amount of coverage available under the policy and the insureds sued State Farm. In cross motions for summary judgment, the insureds argued that each policy for their four vehicles provided stacked UIM coverage of $400,000. Thus, the four policies together provided stacked UIM coverage totaling $1.6 million. State Farm argued that each policy for the four vehicles provided $100,000 in UIM coverage and the four policies together provided stacked UIM coverage totaling $400,000. The circuit court granted partial summary judgment in favor of State Farm. Judgment was entered on the UIM coverage issue and an appeal was filed.

    The Declarations Page for the Mercury Tracer, the car involved in the accident, provided a stacking option for UIM coverage with limits of $100,000 per person and $300,000 per accident. Renewal documents for the other three vehicles owned by the insureds also provided stacked UIM coverage for each vehicle in the amount of $100,000 per person and $300,000 per accident.

    The policy offered Non-Stacking Coverage or Stacking Coverage. Non-Stacking Coverage was defined as the limits carried on one vehicle. The Stacking Coverage, which was a more expensive option, consisted of the total of the limits on all the vehicles insured. The parties agreed that the insureds had four vehicles under four separate policies, and that they elected the UIM stacking option for each offer of UIM coverage. 

    An example of stacking was given in the policy. When two vehicles were insured under two separate policies, a UIM limit of $50,000/$100,000 would result in double limits, i.e., $100,000/$200,000 of stacked UIM benefits. Therefore, the per person UIM coverage limit of $100,000 multiplies by four vehicles resulted in a total of $400,000 of stacked UIM coverage for the claim at issue. The circuit court's judgment was affirmed. 

    Thanks to my Damon Key colleague, Mark Murakami [www.hawaiioceanlaw.com], for flagging this case. 

Stacking of Service Interruption and Contingent Business Interruption Coverages Permitted

   The court found that stacking of interruption coverages was allowed based up the language of the policy. Lion Oil Co. v. Nat'l Union Fire Ins. Co., 2015 U.S. Dist. LEXIS 148261 (W.D. Ark. Nov. 2, 2015).

    The insured's oil line was ruptured, causing an interruption of crude oil delivery service. The insured held policies issued by National Union.

   The policies included multiple time element extensions. One extension related to Service Interruption which promised to insure against loss for:

Service Interruption: electrical, steam, gas, water, sewer, incoming or outgoing voice, data, or video, or an other utility or service transmission lines and related plants, substations and equipment situated on or outside of the premises.

Both parties agreed that the service interruption provision was unambiguous and that the court should give effect to the plain language of the policy.

    None of the terms found in the service interruption provision, however, were defined by the policies. The insured argued that the ordinary meaning of the term "transmission line" included a crude oil pipeline and that the ordinary meaning of the term "service" included the delivery of oil. Therefore, the rupture triggered the service interruption provision because its losses resulted from the interruption of crude oil delivery service via the transmission line.

   The court agreed with the proposed meaning of "transmission line." A crude oil pipeline transmitted oil from one place to another. Thus, the plain and ordinary meaning of "transmission line" included a crude oil pipeline. The plain and ordinary meaning of "service," however, was more complex. "Service" could mean "useful labor that does not provide a tangible commodity," which would support the insured's interpretation of the service interruption provision. "Service" could also mean "a facility supplying some public demand," which would support National Union's interpretation. Because the term "service" was susceptible to more than one reasonable interpretation, the Court found that the service interruption provision's language was ambiguous.

    Accordingly, the terms "transmission lines" and "service" included a crude oil pipeline and the delivery of oil. Thus, the service interruption provision covered losses resulting from the interruption of crude oil delivery service to the insured's refinery.

   Turning to the stacking issue, in addition to the time element extension that covered service interruption, the policies also provided an extension that covered contingent business interruption. The issue was whether the policies, which provide service interruption coverage of $25 million and contingent business interruption coverage of $25 million, provided an aggregate coverage of $50 million or a coverage limited solely to $25 million.

   The policies did not contain an anti-stacking provision. There was no language that restricted the number of coverage grants or sub-limits that applied to a given occurrence. National Union argued that stacking the two coverages would allow a double recovery for the same damages. But the insured suffered a net margin loss that was more than $50 million. Thus, stacking the two coverages would not allow a double recovery because the insured was not seeking to recover an amount that was greater than its actual loss.

   The court was unaware of any case from Arkansas or any other jurisdiction that addressed the propriety of stacking coverages in an all-risk policy. National Union could have prevented the stacking of coverages by including an anti-stacking provision in the policies, but did not do so. 

   Therefore, the service interruption coverage and contingent business interruption coverage in the policies could be "stacked" to provide an aggregate coverage of $50 million.

Contractor Covered for Voluntary Remediation Efforts in Completed Homes

   The Texas Supreme Court held that a home builder was covered for the voluntary removal and replacement of a defective insulation product it had installed in hundreds of homes. Lennar Corp. v. Market Am. Ins. Co., 2013 Tex. LEXIS 597 (Tex. Sup. Ct. Aug. 23, 2013). 

   Lennar built homes using an exterior insulation and finish system (EIFS). It was subsequently determined that EIFS trapped water inside homes with wood-frame walls, causing rot and structural damage, mildew and mold, and termite infestation. Lennar decided to contact all its homeowners and offer to remove the EIFS and replace it with conventional stucco. 

   Lennar notified its insurers that it would seek indemnification for the costs. The insurers refused to participate in Lennar's proactive efforts, preferring to wait and respond to homeowners' claims one by one. All insurers denied coverage and Lennar sued. The trial court entered summary judgment for all insurers, The court of appeals affirmed, except for Markel, which had provided a $25 million commercial umbrella policy, in effect from June 1, 1999 through October 19, 2000.

    On remand, Lennar and Markel tried the coverage case. After a jury trial, the court determined there was coverage and awarded $2.4 million to Lennar. The court of appeals reversed and rendered judgment for Markel. The court determined Lennar had not established its legal liability to the homeowners in order to trigger Markel's coverage. Further, Lennar had not offered evidence of damages covered by the policy. The policy covered only the cost of repairing home damage, not the cost of locating it. Because Lennar did not segregate the two, it was entitled to recover nothing. 

   The Texas Supreme Court reversed. The court rejected Markel's argument that Lennar's settlements were prejudicial because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone. In other words, had Lennar stonewalled the homeowners, fewer repairs would have been made. This was a question of fact, not of law, which the jury resolved in Lennar's favor. Further, Markel failed to prove that it was prejudiced in any way by Lennar's settlements. Therefore, Lennar's loss as shown by the settlements was the amount Markel was obligated to pay under the policy.

      The only cost evidence Lennar presented at trial was to remove all of the EIFS from damaged houses, repairing the damage, and recovering the houses with conventional stucco. For some homes, removal of the EIFS revealed no damage. But for the homes that had some damage, Lennar did not segregate its cost to repair only the damage found; it included the cost of removing EIFS from the entire house to find all the damaged areas. Markel argued the court of appeals correctly found that the cost of determining the areas of water damage was not covered by the policy. 

   The Texas Supreme Court, however, found that the cost of finding EIFS property damage in order to repair it was "because of" the damage. Lennar could not have located all the damage, which was hidden from sight, without removing all the EIFS.

   Finally, Markel argued it was only responsible for the portion of the damage that occurred during its policy period. Coverage under Markel's policy was limited to property damage that occurred during the policy period, but expressly included damage from a continuous exposure to the same harmful conditions. For damage that occurred during the policy period, coverage extended to the "total amount" of loss suffered as a result, not just the loss incurred during the policy period. Thus, Lennar's total remediation costs was covered. Although Market argued, in the alternative, that it should be responsible with Lennar's other insurers only for its pro rata share of the remediation expenses, the Court had previously rejected this approach. 

California Court of Appeal Adopts Horizontal Exhaustion Rule

   In a long running suit regarding thousands of asbestos bodily injury claims brought against Kaiser Cement and Gypsum Corporation, the California appellate court held that the excess carrier's indemnity obligation did not attach until all collectible primary policies were exhausted. Kaiser Cement and Gypsum Corp. v. Ins. Co. of the State of Pennsylvania, 215 Cal. App.4th 210 (Cal. Ct. App. April 8, 2013).

   Kaiser manufactured a variety of asbestos-containing products from 1944 through the 1970's. Truck Insurance Company provided primary insurance to Kaiser from 1964 to 1983, through four CGL policies covering 19 annual policy periods. The policy in effect from 1974 to 1981 contained a $500,000 "per occurrence" liability limit. Kaiser was insured by three other primary carriers between 1947 and 1987. ICSOP issued a first layer excess policy to Kaiser from 1974 through 1976.  

   Kaiser tendered numerous claims for bodily injury to Truck. By October 2004, Truck's indemnity payments exceeded $50 million and included at least 39 claims that resulted in payments in excess of $500,000. For claims alleging bodily injury in 1974, Kaiser selected Truck's 1974 policy to respond to each of the claims. 

   Truck filed for a declaratory judgment, arguing its primary policies had been exhausted and it had no further obligation to defend or indemnify Kaiser. Kaiser cross-claimed against its excess insurers, including ICSOP. Kaiser argued once the 1974 primary policy exhausted, the first level excess policy issued by ICSOP became liable for the claim once Truck had exhausted its $500,000 per-occurrence limit for that year. The trial court granted summary judgment to Kaiser on its cross-claim against ISCOP. 

   On appeal, the court held that ICSOP's policy language required horizontal exhaustion. Therefore, ICSOP was not responsible to indemnify Kaiser until all primary policies were exhausted. ICSOP's policy provided that Kaiser's retained limit was equal to the limits of liability indicated in the schedule of underlying policies, "plus the applicable limit(s) of any other underlying insurance collectible by the Insured."

   ICSOP then argued that its 1974 excess policy required the exhaustion of all primary insurance before the excess policy was triggered. ICSOP argued that all primary insurers had to pay policy limits for each year in which coverage existed. The court disagreed. Under Truck's primary policy, it was responsible to pay policy limits only once per occurrence, not once per occurrence per year or once per occurrence per policy. 

   Finally, the court determined that Truck's policy language did not permit "stacking" of various Truck policies over several years. The Truck policy contained a "per occurrence" limit. This language meant Kaiser was not permitted to recover from Truck more than the occurrence limit for a single occurrence. (In a prior appeal, the court held that the relevant occurrence was not Kaiser's design, manufacture, and distribution of asbestos produces, but the injurious exposure of claimants to asbestos products.)  Truck was liable up to the per occurrence limit, and no more. The trial court correctly determined that Kaiser could not "stack" the liability limits of Truck's primary policies, but rather could recover only up to the "per occurrence" limit of one policy. Having chose the 1974 primary policy, Kaiser could recover from ICSOP to the extent that a claim exceeded the $500,000 per occurrence limit specified in the 1974 primary policy. 

   The case was remanded for a determination on whether the other primary insurers' policies would also have to be exhausted before the excess policy attached. 

California Supreme Court Adopts All-Sums-With-Stacking-Rule Approach to Long-Tail Claims

   In a long awaited decision regarding California's liability for damages caused by the Stringfellow Acid Pits case, the California Supreme Court adopted the "all sums" method of allocating coverage among multiple insurers for long-tail claims. Further, the court concluded that stacking of policy limits was consistent with the CGL policy language. See State v. Cont'l Ins. Co., 2012 Cal. LEXIS 7324 (Cal. Aug. 9, 2012).

    We discussed in a prior post the decision by the Court of Appeal. By way of summary, in 1955 a state geologist determined that a Riverside County quarry was a suitable location for disposal of industrial waste. Based on this recommendation, the site was developed and went into operation in 1956. Problems with the site developed, leading to, among other things, contamination of groundwater and the release of contaminants from the site during heavy rains. The site was closed in 1972.

   In 1998, a federal court found the State liable for harm caused by the site and delaying in its remediation. The State was held responsible for all past and future cleanup costs. When its insurers refused to provide coverage under liability policies, the State sued. The trial court held that each insurer was liable for damages, subject to its particular policy limits, for the total amount of the loss. It also held that the State could not recover the policy limits in effect for every policy period, and could not "stack" policy periods to recover more than one policy's limits for covered occurrences. "Stacking" referred to the stacking of policy limits across multiple policy periods that were on a particular risk. 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 of Appeal, like the trial court, held that once coverage was triggered, all of the insurers had to indemnify the insured for the loss. However, the Court of Appeal reversed the trial court's ruling that prohibited the State from stacking the total policy limits in effect for any one policy period.

   The Supreme Court affirmed the Court of Appeal.The court had previously held that as long as the property was insured at some point during the continuing damage period, the insurers' indemnity obligations persisted until the loss was complete or terminated. See Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38 (1997). The policies at issue here supported adoption of the all sums coverage principles. The policies compelled the insurers to pay "all sums which the insured shall become obligated to pay . . . for damages . . . because of injury or destruction of property . . . ." This grant of coverage did not limit the policies" promise to pay  "all sums" of the policyholder's liability solely to sums or damage "during the policy period." Therefore, the policies obligated the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits as long as some of the continuous property damage occurred while each policy was "on the loss."

   Next, the court considered whether the consecutive policies could be stacked to allow recover up to the policy limits of multiple policies. In other words, stacking policy limits meant that when more than one policy was triggered by an occurrence, each policy could be called upon to respond to the claim up to the full limits of the policy.

   Absent anti-stacking provisions in the policy, the standard policy language permitted stacking. The court disapproved FMC Corp. v. Plaisted & Companies, 61 Cal. App. 4th 1132 (1998), 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.

California Court Determines Horizontal Exhaustion Applies, But Underlying Limits Cannot Be Stacked

   The case involved another chapter in the long-standing coverage litigation in which the insured, Kaiser Cement and Gypsum Corporation, sought to enforce indemnity obligations against its insurers for thousands of suits filed because of asbestos exposure. See Kaiser Cement and Gypsum Corp. v. Ins. Co. of the State of Pennsylvania, 2011 Cal. App. LEXIS 686 (Cal. Ct. App. June 3, 2011). A prior ruling determined that because "occurrence" meant injurious exposure to asbestos, the thousands of claims against Kaiser were not a single occurrence.

   Between 1947 and 1987, Kaiser purchased primary policies from four different carriers, including Truck Insurance Exchange. Kaiser selected the Truck CGL policy in effect in 1974, with a $500,000 per occurrence limit, to respond initially to all claims that alleged asbestos exposure in that year. By October 2004, Truck had paid more that $50 million for asbestos bodily injury claims, and at least 39 claims resulted in payments in excess of $500,000. It filed suit for a declaration that its primary policies had been exhausted and it had no further obligation to defend or indemnify Kaiser. Truck also sued Kaiser's excess insurers and sought equitable subrogation and contribution from these defendants.  Kaiser filed cross-claims against the excess insurers seeking excess coverage under these policies.

   The issue in the present matter was determining who was responsible to indemnify Kaiser for asbestos claims that exceeded the 1974 primary policy's limit of $500,000 per occurrence? Kaiser and Truck contended that the excess insurer for 1974, The Insurance Company of the State of Pennsylvania ("ICSOP"), was responsible to pay claims over $500,000. ICSOP, however, contended that all of Kaiser's primary policy limits had to be "stacked." This meant that all Truck Policies issued to Kaiser between 1964 and 1983, as well as the other primary policies issued to Kaiser by the three other carriers between 1947 and 1987, had to be exhausted before any excess insurer had to indemnify Kaiser. 

   The trial court granted Kaiser's motion for summary judgment against ICSOP. The court ruled that the excess coverage dropped down once the $500,000 primary limit was exhausted for the primary policy.

   The court of appeal reversed. First, under both ICSOP's 1974 excess policy and the principle of "horizontal exhaustion," ICSOP was not responsible to indemnify Kaiser for losses until all primary policies were exhausted. The ICSOP policy provided that excess coverage was not applicable until Kaiser had recovered the limits of liability indicated in the schedule of underlying policies, "plus the applicable limits of any other underlying insurance collectible by the Insured." "Any other underlying insurance" meant any primary insurance available to Kaiser.

   Next the court considered what primary insurance was "collectible." ICSOP contended its excess obligations did not kick in until Kaiser collected policy limits for each year in which coverage existed. Truck and Kaiser argued that under the language of the 1974 primary policy, Truck was responsible to pay policy limits only once per occurrence, not once per occurrence per year or once per occurrence per policy. The Truck policy provided,

The limit of liabilitystated in this policy as applicable 'per occurrence' is the limit of the company's liability for each occurrence.

There is no limit to the number of occurrences for which claims may be made hereunder, however, the limit of the Company's liability as respects any occurrence involving one or any combination of the hazards or perils insured against shall not exceed the per occurrence limit designated in the Declarations.

   The court agreed with Truck and Kaiser.  The policy language meant Kaiser could not "stack" Truck's primary policy limits before the excess layer was activated. Instead, having chosen the 1974 primary policy to respond to any claims triggered by that policy, Kaiser could recover from ICSOP to the extent that a claim exceeded the $500,000 per occurrence limit specified in the 1974 primary policy.

   Nevertheless, the judgment for Kaiser had to be reversed because the record did not indicate whether the other primary policies Kaiser held had been exhausted. Therefore, the court could not determine whether ICSOP's obligation to indemnify Kaiser had attached or whether ICSOP had breached its policy with Kaiser.

Policy Language Restricts Ongoing Damage to One Occurrence

   Are construction defects that allegedly result in water intrusion and property damage over several policy periods the result of one occurrence or multiple occurrences?  This was the issue under consideration in Bayley Constr. v. Am Guar. and Liab. Ins. Co., 2010 U.S. Dist. LEXIS 110767 (W.D. Wash. Oct. 15, 2010).

   Bayley Construction was the general contractor for construction of a shopping center.  When sued for construction defects, it settled with the help of some of its insurers.  Travelers contributed $1 million, Wausau contributed $1 million, and American Guarantee contributed $4 million.  After the settlement, American Guarantee pursued its cross claims against National Union and Travelers.  National Union and Travelers moved for summary judgment.

   National Union's policies first became effective on December 31, 2004.  The policies defined "occurrence" as "an accident, including continuous or repeated exposure to conditions.  All such exposure to substantially the same general conditions shall be considered as arising out of one Occurrence."   An endorsement addressed continuing damage as follows:

   In the event of continuing or progressive Bodily Injury or Property Damage over any length of time, such Bodily Injury or Property Damage shall be deemed to be one Occurrence and shall be deemed to occur only when such Bodily Injury or Property Damage first commenced.

   National Union argued that because it was undisputed that the water damage commenced during the 2000-01 period - before National Union's policies were in effect - all subsequent damage had to be attributed to the date of the original occurrence.  Accordingly, the damage occurred outside National Union's policy period.  American Guarantee responded that its expert identified certain property damage that did not occur until 2006, 2007 or 2008, which fell within National Union's policy periods. 

   The court noted that merely because the damage was ongoing and continued into the National Union policy period did not change the fact that it started before the National Union policy period.  Because National Union's policies specifically stated that ongoing property damage was considered to be one occurrence on the date of its first inception, and the first inception of the water intrusion was before 2004, the "occurrence" of property damage took place before the earliest National Union policy period.

   Travelers motion was based on "anti-stacking" language in its policies.  Travelers paid the $1 million policy limits on Bayley's 2000-01 policy, but did not pay any additional amounts despite issuing subsequent policies covering additional policy periods.  The anti-stacking language stated,

   We'll pay amounts . . . legally required to pay as damages for covered bodily injury or property damage that happens while this agreement is in effect. . . and is not property damage covered by another insurance policy issued to you by us. . . . 

Travelers argued the property damage at the shopping center first manifested during the 2000-01 policy period and Travelers paid on that policy.  Therefore, the property damage "happened" during the 2000-01 policy period and the "anti-stacking" language precluded aadditional coverage under its subsequent policies.

   The court agreed.  Even American Guarantee's witnesses conceded the property damage constituted one occurrence of continuing damage and Travelers paid the policy limit on the 2000-01 policy.   Under the policies' anti-stacking provision, no subsequent policies covered the loss at the shopping center.

Waiving Stacked Coverage Continues When Additional Cars Added to Policy

    Considering Pennsylvania law, the Third Circuit was asked whether the insured waived "stacked" UIM benefits in subsequent policies that listed additional automobiles?  See State Auto Prop. & Cas. Ins. Co. v. Pro Design, P.C., No. 08-3006 (3rd Cir. May 12, 2009) [here].  In a result consistent with Hawai`i law, the Third Circuit held the initial wavier applied when automobiles were later added to the policy.

    The insured was involved in an automobile accident while riding in a vehicle insured under a Business Auto Policy issued by State Auto.  When issued in June 2001, the policy covered only one vehicle and provided $35,000 in underinsured motorist (UIM) coverage.  The insured signed a written waiver of "stacked" UIM coverage.  The policy was renewed in subsequent years, including 2004, when the insured added a second vehicle.  In 2006, a third vehicle was added.  State Auto did not provide the insured with the opportunity to sign additional stacking waivers when adding the second and third vehicles. 

    After renewal of the policy in 2007, the accident occurred.  State Auto determined the stacking of UIM benefits was waived even when new automobiles were added and the liability limit was only $35,000.  The insured, on the other hand, contended it never waived stacking of coverage when adding automobiles to the policy.  Therefore, the liability limit was $105,000, or $35,000 for each of the three vehicles covered by the policy.  The District Court agreed with the insured and ruled the initial stacking waiver was invalid because of the addition of new vehicles to the policy.

    The Third Circuit reversed.  It noted a Pennsylvania statute that presumed stacking applied unless waived by the insured for a smaller premium.  The insured argued stacking applied to its policy because, while it waived stacking when purchasing a single-vehicle policy, the statute required the execution of an additional waiver upon the addition of vehicles to the policy.  State Auto, however, argued the stacking waiver executed upon purchase of the single-vehicle policy remained valid as to the multi-vehicle policy.  To settle this argument, the Third Circuit turned to two potentially conflicting decision of the Pennsylvania Supreme Court.

    In Sackett v. Nationwide Mut. Ins. Co., 919 A.2d 194 (Pa. 2007)(Sackett I), the court held the statute required when adding a new car to an existing policy, the insurer must provide a new stacking waiver in order to permit the insured to waive the increased amount of available stacked UM/UIM coverage.

    In Sackett II, however, the Pennsylvania Supreme Court modified Sackett I after rehearing.  See Sackett v. Nationwide Mut. Ins. Co., 940 A.2d 329 (Pa. 2007)(Sackett II).  The court held that the extension of coverage to a vehicle added to a pre-existing multi-vehicle policy was not a new purchase of coverage under the statute, and therefore did not obligate the insurer to obtain new or supplemental UM/UIM stacking waivers.  Notably, however, the court warned that its decision was limited to the addition of a vehicle to a multi-vehicle policy, leaving unresolved a situation where additions were made to single-vehicle policies.

    In Pro Design, the Third Circuit predicted the Pennsylvania Supreme Court would extend its ruling in Sackett II to a single-vehicle policy.  The statute did not require State Auto to provide the insured with the opportunity to waive stacking upon the addition of the second and third vehicles to the policy.  The waiver signed at the inception of the policy remained valid upon the addition of those vehicles and the subsequent renewals of the policy. 

    Under Hawai`i law, stacking of UM/UIM coverage is controlled by statute.  An insurer must offer UM/UIM coverage with the option to stack coverage.  Haw. Rev. Stat. 431:10C-301(d).  If UM or UIM coverage is rejected, no further offer is required to be included in any renewal or replacement policy issued to the insured.  See Dai-Tokyo Royal State Ins. Co. v. Yokote, 103 Haw. 181, 188 n. 9, 80 P.3d 1002, 1009 n. 9 (relying on Haw. Rev. Stat. 431:10C-301 (e).

California Court Allows Stacking of Multiple Policies, Follows "All Sums" Rule

    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.