A Review of California Case Law on "Stacking" of Limits in Continuing Loss Cases

A Review of California Case Law on "Stacking" of Limits in Continuing Loss Cases


On March 18, 2009, the California Supreme Court granted review of the appellate court decision in State of California v. Continental Insurance Company, 169 Cal.App.4th 1114 (2009), which we reported on in our February 2009 issue. The appellate court decision had held that standard commercial general liability language permits “stacking” of limits of all policies triggered by a continuing loss, which the appellate court determined to be the result of a single “occurrence.” The appellate court in Continental rejected the holding by another appellate court in FMC Corp. v. Plaisted & Cos., 61 Cal.App.4th 1132 (1998), that the insured could not recover limits across multiple policy periods, and instead, could recover up to the limits in effect for one policy period only. Both Continental and FMC involved environmental contamination losses.

The Supreme Court has not to date directly addressed the stacking issue. Other appellate court cases on the issue include Safeco Ins. Co. of America v. Fireman’s Fund Ins. Co., 148 Cal.App.4th 620 (2007), in which the court held that a landslide that occurred in the first of five years of policies issued by an insurer triggered only one policy limit, even though further damage to downhill properties resulted in later years from the original slide. The court noted that language in CGL policies that the insurer will pay “all sums” that the insured becomes legally obligated to pay may support an argument that the insured is entitled to the cumulative policy limits under successive policies, even though there is only one occurrence, resulting in stacking of policy limits. However, the court stated that the argument “has no application to the homeowner's policy here, under which the insurer agreed to ‘[p]ay up to our limit of insurance [$500,000 per occurrence] for the damages for which the ‘insured’ is legally liable.”

In contrast, in Stonewall Ins. Co. v. City of Palos Verdes Estates, 46 Cal.App.4th 1810 (1996), the court held that an insurer who was on the risk for three successive policy years out of ten years of continuous property damage was liable for a policy limit for each of the three years. In that case, a home was damaged by a defective storm drain, which caused erosion, and ultimately, destruction of the home. The court rejected an insurer’s argument against stacking, stating that the insurer’s policy language was ambiguous. The court took note that the insurer had also stipulated that its policies “provided coverage of $300,000 per occurrence per year as respects property damage.” The court further held that three deductibles (which totaled $15,000) also applied. See also, Employers ins. of Wausau v. Granite State Ins Co., 330 F.3d 1214 (9th Cir. 2003) [applying California law, Ninth Circuit held that rupture of insured's underground waterlines was a single occurrence causing continuous property damage over 5-year period, so insurer was liable up to its policy limit for each of the 5 years it was on the risk (i.e., policy limits were “stacked”); the dissent asserted FMC anti-stacking should apply since there was only one “occurrence”].

In discussions regarding stacking of limits, appellate courts have cited the California Supreme Court’s decisions in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal.4th 645 (1995) [continuing loss triggers all policies in effect during the loss] and Aerojet-General Corp. v. Transport Indem. Co., 17 Cal.4th 38 (1997) [under “all sums” language in insuring agreement, each policy is responsible for the entire amount of continuous loss spanning multiple policy periods, even loss occurring after policy expires, up to policy limit; insurer can seek contribution from other insurers].

The following hypothetical from the Continental appellate decision illustrates the results from stacking versus no stacking of limits. Polluter Corp. is held liable for $30 million in property damage, resulting from six years of continuous pollution. In year one, it was insured by Insurer A, subject to policy limits of $1 million per occurrence. In each of years two and three, it was insured by Insurer B, subject to policy limits of $10 million per occurrence. And in each of years four, five, and six, it was insured by Insurer C, subject to policy limits of $5 million per occurrence.

If the Supreme Court allows the stacking of limits, under Aerojet mentioned above, each insurer is potentially liable for the full $30 million, but only up to its policy limit. Thus, Insurer A's liability is limited to $1 million; Insurer B's liability is limited to $20 million; and Insurer C's liability is limited to $15 million. Thus, Polluter Corp. can recover the full $30 million. This total would be allocated among the insurers in accordance with their contribution rights. While the precise allocation may depend on the wording of any “other insurance” clauses in the policies, it is most likely to be pro rata (such as by policy limits or “time on the risk”). If by policy limits, Insurer A will contribute 1/36 of the $30 million, or $833,333; Insurer B will contribute 20/36 of the $30 million, or $16,666,667; and Insurer C will contribute 15/36 of the $30 million, or $12,500,000.

If the Court prohibits stacking, however, Polluter Corp.'s recovery is limited to $10 million, the highest limit for one policy period. Moreover, this amount is subject to being allocated among the insurers in accordance with their contribution rights. Hence, no insurer will end up paying its own full policy limits.

In granting review of the Continental decision, the Supreme Court is expected to resolve the apparent conflict between appellate courts on stacking. The decision will have a significant impact on insurer liability in continuous loss cases.