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California Supreme Court Addresses Insurance Coverage for Long-Tail Legacy Environmental Liabilities

In a long-awaited landmark ruling, the California Supreme Court in State of California v. Continental Insurance Company, 55 Cal. 4th 186, 281 P.3d 1000 (Cal. 2012), has held that insurers issuing CGL “occurrence” policies are obligated to pay all sums to indemnify policyholders for property damage attributable to the Stringfellow Superfund site. The damages range between $50 million and $700 million. “All sums” include payment up to policy limits, as long as some of the continuous property damage occurred while each policy was “on the loss,” even if the claims arose after the policy period expired. The pro-policyholder coverage decision will likely have a significant impact on all long-tail policy coverage claims, as it applies with equal force to all primary and excess policies “on the loss.”

In a long line of California appellate cases over the last 15 years leading up to this decision, California has now clarified precisely what the “all sums” language means in the insuring agreement. Additionally, the decision addresses “stacking” of policy limits when more than one policy is triggered by an occurrence, permitting each policy triggered to be called upon to the extent of its full limits, thereby allowing potential recovery up to the combined limits of all policies. However, an insurer may avoid this result by including an anti-stacking provision in its policy.

The “all sums” approach has been adopted by courts in Oregon, Pennsylvania, Washington, Delaware, Indiana, Arkansas, and Texas. Courts in Colorado, Connecticut, Minnesota, Nebraska, New Jersey, New York, Utah and Vermont have rejected this approach under a variety of rationales, typically employing a pro rata allocation scheme and time on the risk approach, as well as a horizontal exhaustion of primary policies.