New California Court of Appeal Case Supports Policyholder Argument Regarding “Stacking” of Consecutive Policy Limits

1/21/2009 Articles

On January 5, 2009, the California Court of Appeal, Fourth District, issued an important new decision regarding the "stacking" of policy limits: State of California v. Continental Insurance Company, No. E041425 (Super. Ct. No. 239784).  Overall, Continental is a very positive decision for insureds.  However, some of the court's secondary rulings are less helpful for insureds, particularly those seeking coverage for major environmental- or asbestos-related exposures.  This client alert highlights the key elements of the Continental decision.


Continental involves insurance coverage disputes arising out of environmental contamination at the Stringfellow industrial waste disposal site in Riverside County operated by the State of California.  Due to flaws in its design, hazardous waste escaped, causing extensive contamination of third-party soil and groundwater over many years.  The State was found liable for negligence in designing the site, supervising its construction, failing to remedy conditions at the site, and delaying the environmental clean up.  The State sought coverage for this exposure under numerous excess general liability policies covering periods from 1964 to 1976.

The "Stacking" Ruling

The most significant part of the Continental decision deals with "stacking," a term used to describe the process of "treating multiple policies that apply to a single loss as cumulative - as a ‘stack' of coverage - rather than as mutually exclusive."  Such treatment allows an insured to recover under multiple liability insurance policies over multiple years for the same occurrence.

The Continental court was asked to determine whether the standard insuring agreement in all the excess policies at issue were applicable to the State's liability; that language required the insurers "to pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law ... for damages ... because of injury to or destruction of property, including loss of use thereof ..."

Viewing this standard insuring agreement in the context of two California Supreme Court cases (Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 669 (1995) (third party property damage caused by the insured's negligent conduct will trigger every insurance policy in effect when any of the property damage took place) and Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38 (1997) (each policy that is triggered by an "occurrence" is obligated to pay the full amount of the insured's loss (i.e., "all sums"), up to the policy limit), the Continental court concluded that the standard policy language expressly authorizes "horizontal stacking" of consecutive policy limits.  The court reasoned that if a series of policies are triggered by a continuous injury, and each such policy is separately liable for "all sums" that the insured must pay as damages, it follows that the insured is entitled to recover up to the full policy limits for every single policy triggered by the occurrence.

In reaching this conclusion, the Fourth Appellate District expressly rejected the "anti-stacking rule" adopted by the Sixth Appellate District in a factually similar case, FMC Corp v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998).  While the FMC court acknowledged the continuous trigger theory, it held that an insured was not entitled to recover under every consecutive policy triggered by the occurrence, but must choose any one policy period for which it could then recover up to the limits in effect for that period; otherwise, concluded the FMC court, the insureds would receive a "windfall."  Continental squarely rejects this premise, noting that since the insured had paid separate premiums for the separate policy periods, it should be able to recover the separate policy limits.

While this horizontal "stacking" decision is a positive development for insureds, one aspect of the court's ruling in this area may be cause for concern.  While the policies at issue in Continental evidently did not impose a self-insured retention ("SIRs") or deductible, the court nevertheless extrapolated its stacking decision to conclude that horizontal stacking of SIRs is required under California law.  In other words, the insured must separately satisfy a separate self-insured retention for each consecutively-issued policy whose limits the insured seeks to "stack."

In support of this conclusion, Continental cited California Pacific Homes, Inc. v. Scottsdale Ins. Co., 70 Cal. App. 4th 1187 (1999).  However, the insured in California Pacific only sought coverage under one of its five consecutively-issued insurance policies, so court did not reach the issue of stacking SIRs.  Indeed, other California appellate courts have held that horizontal stacking of deductibles is not allowed.  See, e.g., Montgomery Ward & Co., Inc. v. Imperial Cas. & Indem. Co., 81 Cal. App. 4th 356, 364 (2000) ("We conclude SIRs are not primary insurance and the principle of horizontal exhaustion does not apply."); see also Vons Cos., Inc. v. United States Fire Ins. Co., 78 Cal. App. 4th 52 (2000) (payments by one insurer may satisfy a SIR under another applicable policy).

Given the clear split of authority among the California Courts of Appeal concerning issues relating to stacking of policy limits created, or furthered, by the Continental decision, it seems quite likely that the California Supreme Court will grant review of this decision if a petition is filed, so we will continue to monitor all aspects of the case.

The "Single vs. Multiple Occurrences" Ruling

The Continental court also addressed the issue of whether there had been multiple "occurrences" of contamination at the Stringfellow site, as the State argued, or a single "occurrence," as the insurers argued.  The State pointed to various design defects that caused the escape of contaminants from the site, and argued that each one was a separate occurrence.  In addition, the State argued that the fourth occurrence arose when the pit overflowed during one particularly heavy rainy season.

In one of the more troubling aspects of the case from the policyholder perspective, the Continental court rejected the State's argument, holding that, at most, there could have been only two occurrences, leaks from the various defects in the pit's design, and the overflow.  The court reasoned that the initial deposit of the pollutants, combined with the multiple defects in the pits, were an accumulation of factors that constituted only one occurrence.  In the court's view, the pit's overall defective design and construction were a set of similar "conditions."  The deposit of pollutants at the pit then resulted in a single instance of "continuous . . . exposure" to all three conditions.  The court did not subscribe to the view that, had the pit functioned as designed, the filling of the pit would have been immaterial to any occurrence.  Neither was the court influenced by the fact that every defect was separate and independent of the others.

While the court also concluded that the initial deposit of pollutants combined with heavy rains could have given rise to a second occurrence (i.e., the overflow of the pit), it concluded that the State had failed to satisfy the burden of proof at trial on this issue, and upheld the trial court's decision that the State's liability arose from a single occurrence.  This aspect of the trial court's ruling has already been appealed and recently was argued before the California Supreme Court.  See State of Cal. v. Underwriters at Lloyd's, London, 146 Cal. App. 4th 851 (2006), rev. granted by State of Cal. v. Underwriters at Lloyd's, London, 156 P.3d 1014; 57 Cal. Rptr. 3d 542 (2007). Thus, the Supreme Court may yet rule that there is no need to prove separate damage in order to prove a separate occurrence.

The "No Annualization of Limits" Ruling

In another aspect of the Continental decision that is less helpful for insureds, the court declined to accept the State's argument that the stated limits of liability for its multi-year policies applied annually.  The insurers argued that the stated limits simply applied "per occurrence," and since there was, in the court's view, only one occurrence at the Stringfellow site, only one limit applied no matter how long the policy was in force.

Accepting the insurers' view as the correct one, the court noted that the limits were not expressed as "per occurrence per year," but simply as "per occurrence."  Despite some persuasive evidence to the contrary, the court held that the three-year policies were written as one policy with one premium, payable in three annual installments.  

This ruling presents a departure from Stonewall Insurance Co. v. City of Palos Verdes Estates, 46 Cal. App. 4th 1810 (1996), in which the court ruled that the limits of a three-year policy applied annually, rather than "per occurrence."  The Continental court distinguished this relevant legal precedent by noting that the three-year policy at issue in Stonewall had been created by annual endorsements to the original policy, attaching a new declarations page (the section of an insurance policy that, among other things, states the policy's limits of liability).

This holding raises an interesting distinction between policies issued for three consecutive, one-year policy periods, and a single, three-year policy.  Under Continental, the difference could be very significant.  Three-year policies typically are older policies; they generally were issued to save the insurer transactional costs and give the insured a higher degree of stability in its insurance program.  It could be argued that the Continental ruling allows a windfall to insurers who issued multi-year policies. 

As shown by the distinction drawn between the policy at issue in Stonewall and the policy at issue in Continental, determining whether the limits of a multi-year insurance policy will be "annualized" requires a close examination each particular policy - including the declarations page.  The ability to present the facts to show more than one occurrence also becomes crucial.  While multi-year general liability policies are not as common today as they were years ago, if your company buys multi-year policies, you should be looking very carefully at the limits wording and premium details to determine whether they would support an annualization of limits argument.

The "Ancient Documents" Evidentiary Ruling

Finally, the Continental decision is the first published opinion construing California Evidence Code section 1331, the so-called "ancient documents rule."  Under the rule, a document that is over thirty years old can be admitted into evidence under certain circumstances, despite the unavailability of any witness who can "authenticate" it (i.e., testify that he or she created it).  The Continental court ruled that the admissibility of ancient documents turns on whether the party offering the evidence can prove that "persons having an interest in the matter" actually relied upon the information contained in the document.

Ancient documents frequently are relied upon in insurance coverage litigation to prove the existence of lost policies, particularly in cases where the underlying injury spans several decades.   The Continental ruling makes clear that such ancient documents will be admitted into evidence only under very specific circumstances.  Continental underscores the importance of preserving copies of historic insurance policies, so that resort to secondary evidence is unnecessary.

As noted throughout this client alert, the Continental decision is a departure from other appellate court rulings in a number of areas.  We will continue to follow its progress through the court system to be sure we can weigh in as appropriate on issues of concern to insureds.


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