California Court Holds That Historical Insurance Coverage Forms 'One Giant Uber-Policy'

Corporate policyholders seeking insurance coverage for "long-tail" claims in California and elsewhere have reason to cheer.

On August 9, 2012, the California Supreme Court granted corporate policyholders the right to fully access and to recover from insurance policies spanning multiple policy periods for claims involving damage that progressed over those periods. In California v. Continental Insurance Co., No S170560 (Cal. Aug. 9, 2012), the state's highest court approved an "all-sums-allocation-with-stacking" rule permitting a policyholder to obtain coverage from the sum total of insurance that the policyholder purchased throughout the years or decades that damage continued. Furthermore, the court recognized that each insurer that participated in the policyholder's insurance program during those years is separately liable to cover the policyholder for damages up to its respective policy limits, even if some of the damage occurred before or after the insurer's policy period. In so doing, the court rejected the insurers' argument that the damages should be spread "pro rata" across all of the years that the loss continued, including years in which the policyholder lacked insurance.

Background

California v. Continental addressed the State of California's ("State") pursuit of insurance coverage for environmental clean-up costs at an industrial waste disposal facility that the State designed and operated from 1956 to 1972. The State purchased insurance policies that covered the site from 1964 to 1977 but did not have insurance for the site before 1963 or after 1978. In 1972, the State discovered groundwater contamination at the site and ceased operations. After closure, heavy flooding caused contamination from the site to flow into a nearby waterway. The federal government held the State responsible for past and future site remediation costs, estimated at $700 million. The State filed suit against its historical insurers seeking coverage for the clean-up costs. A multi-phased trial followed, in which a jury ultimately concluded that the insurers were obligated to pay the clean-up costs. The trial court, however, refused to award the State any damages on the theory that the State had already recovered through settlements with its insurers an amount greater than the potential jury award. This appeal followed.

All Sums Allocation With Stacking

The key issue before the California Supreme Court was whether the State could "stack," or combine...