California Supreme Court Rejects Insurance Industry’s Attempt to Constrict Coverage for Long-Tail Losses

On August 9, 2012, the California Supreme Court issued its decision in State of Calif. v. Continental Ins. Co., et al., a closely-watched insurance coverage dispute in which several major liability insurers, supported by amicus briefs filed on behalf of the insurance industry, sought to severely narrow the scope of coverage for long-tail property damage and bodily injury claims. In a significant victory for policyholders, the Court rejected the insurers’ arguments, reaffirming California’s “ensuing damage” rule and laying to rest lingering questions regarding the ability of policyholders to stack policy limits in multi-policy-year claims. The Court’s opinion has at least three significant ramifications for policyholders.

First, Continental reaffirms the “ensuing damage” rule – i.e., that any insurance policy on the risk while continuing and progressive property damage or bodily injury is occurring is obligated to indemnify the insured for all of the ensuing damage or injury, including damage or injury that occurs after the policy expires. In doing so, the Court rejected the insurance industry’s argument that the phrase “during the policy period” in the standard liability policy’s definition of “occurrence” limits coverage under each policy to damage or injury during the policy period and that the insured must bear a “pro-rata” responsibility for damage that occurs during uninsured periods.

Second, Continental acknowledges that it is “often ‘virtually impossible’ for an insured to prove what specific damage occurred during each . . . policy” in long-tail property damage cases and, for this reason, rejects the notion that the insured bears the burden of proving what damage occurred during specific policy years. Rather, the Court held, “the fact that all policies were covering the risk at some point during the property loss is enough to trigger the insurers’ indemnity obligation.”

Finally, Continental rejects the insurers’ attempt to create an “anti-stacking” rule that would have treated a long-tail loss spanning multiple policies as if it had occurred in a single policy, limiting the insured’s coverage to a single policy limit. The Court held that allowing the insured to stack the policy limits of all policies in force during a long-tail loss gives the insured “immediate access” to its insurance, preserves the coverage that it purchased, and acknowledges the “uniquely progressive nature of long-tail injuries” spanning multiple policy periods. The Court disapproved FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), which had limited coverage for a long-tail contamination loss to a single policy.