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Court of Appeal Allows “Stacking” of Insurance Policies for Environmental Cleanup Claims

Jan. 14, 2009

A recent California Court of Appeal ruling may result in increased insurance payouts to insureds in some environmental cleanups. In State of California v. Continental Insurance Co., _ Cal.Rptr.3d _, 2009 WL 18696, 09 Cal. Daily Op. Serv. 161, Cal.App. 4 Dist., January 05, 2009 (No. E041425), the Fourth Appellate District held that an insured may “stack” insurance policies covering a continuous loss spanning multiple policy periods. The court expressly disagreed with a previous Court of Appeal opinion case that had barred such stacking.

“Stacking” means treating multiple insurance policies issued over consecutive periods (i.e. years) as cumulative with respect to a loss that spans the time period — as a “stack” of coverage — rather than as mutually exclusive. If the policies are stacked, the insured can collect the policy limit under each policy (i.e. each year the policy was issued). If they are not stacked, the insured is limited to the policy limit of the largest applicable policy issued during the appropriate time period. Whether stacking is allowed can make a multimillion-dollar difference in the insurance claim and payout, as described below.

In Continental Insurance the issue arose from the State of California’s attempt to recover its cleanup costs at the Stringfellow hazardous waste site under several excess liability policies issued by six insurance companies. The State sought to stack its policies across insurers, collecting the full policy limit from each insurer. It also sought to stack the policies across policy periods, treating each period as a separate policy and collecting the full policy limit for each one.

Whether to allow such stacking has vexed the California courts. The trial court in Continental Insurance had refused stacking based on an earlier case from the Sixth Appellate District, FMC Corp. v. Plaisted & Companies et al., 61 Cal.App.4th 1132, 72 Cal.Rptr.2d 467, 98 Cal. Daily Op. Serv. 1535, 98 Daily Journal D.A.R. 2121, Cal.App. 6 Dist., March 03, 1998 (No. H013360, H016104, H016806, H015090, H016674, H017215, H015511, H016805). FMC held that an insured may not stack insurance policies. Under FMC, where multiple policies cover a period of continuous loss, the insured must choose to recover benefits under only one of the policies. The FMC court itself dismissed a then two-year-old Court of Appeal decision from the Second Appellate District that allowed stacking, Stonewall Insurance Co. v. City of Palos Verdes et al. 46 Cal.App.4th 1810, 54 Cal.Rptr.2d 176, 96 Cal. Daily Op. Serv. 4520, 96 Daily Journal D.A.R. 7284, Cal.App. 2 Dist., June 19, 1996 (NO. B023805, B045183).

The Court of Appeal in Continental Insurance rejected FMC and approved stacking. “Based on the policy language, and also based on a consistent line of authority in California that allows stacking in other multiple coverage situations, we conclude that the State was entitled to stack the policy limits of all applicable policies across all applicable policy periods.” 2009 WL 18696 at 20.

Which rule is followed can enormously affect insurance payouts. Suppose an insured had three policies issued in three consecutive years, each covering a continuous loss that occurred over the course of the three-year period, and each with a limit of $10 million. Under FMC, the insured would only be able to collect benefits under one of the policies, up to the policy limits of $10 million. However, under Continental Insurance, the insured could stack the three policies and collect up to $30 million (provided cleanup costs were at least $30 million).

The significance of Continental Insurance remains to be seen. With the decision, there are now three Court of Appeal decisions, from three separate Appellate Districts, on the issue of stacking: the Second and Fourth Appellate Districts have allowed stacking while the Sixth Appellate District has not. The insurers in the Continental Insurance case may ask the California Supreme Court to resolve the conflict. For now, trial courts will choose which decision to follow, with large amounts riding on the outcome.

For more information, please contact the following attorneys:

Christopher Berka, Partner
chris.berka@bingham.com, 650.849.4866

Geoffrey Holtz, Partner
geoffrey.holtz@bingham.com, 415.393.2390

Rick Rothman, Partner
rick.rothman@bingham.com, 213.680.6590

Marilee Allan, of Counsel
marilee.allan@bingham.com, 415.393.2364

Robert Brundage, of Counsel
robert.brundage@bingham.com, 415.393.2988

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