Muddying the Waters on Policy Stacking Law

For decades, policyholders and insurers have argued over how insurance should pay for these types of “long-tail” claims. Policyholders have argued that in response to a long-tail claim, each policy in force while damage took place should pay up to its limits. Primary insurers have argued that they should only have to pay on one policy year despite taking premiums over a course of years. Excess insurers have argued that not only should underlying primary policies fully pay before excess coverage is triggered, but also primary insurers from other years (not underlying the excess coverage) should also pay first in order for the excess carrier to avoid making payments.

In 2012, the California Supreme Court appeared to settle these issues by unanimously holding that (1) a general liability insurer must pay the entirety of the insured’s liability for a covered loss, up to its policy limit, if any part of a long-tail injury occurs during the policy period, even if most of the damage falls outside the policy period (this is known as the “all sums rule”); (2) the insured is entitled to collect the combined limits of all successive years of insurance it purchased while the covered damage continued (known as the “stacking” rule); and (3) the insured does not have to pay for the part of a loss that took place for years when it did not have insurance coverage in place, so long as it had coverage in place for part of the time that the loss was occurring (known as the “no allocation to the insured rule.”) State of California v. Continental Insurance Company, [55 Cal. 4th 186 (2012)].

In adopting the stacking rule, the Supreme Court concluded that standard policy language limiting an insurer’s payment to its limit for an occurrence simply meant that the insurer’s limit for an isolated incident in an individual policy year would not be exceeded, but that in a progressive loss case, that insurer’s other policies in other years could also be called upon to pay. The Supreme Court very briefly noted that it was not ruling out the possibility that in the future insurers could include special language in their policies to preclude stacking.

The Court of Appeal Effectively Disagrees on Stacking

Before Continental Casualty, some California Court of Appeal decisions rejected stacking, but those decisions were vacated or disapproved by the Supreme Court in light of Continental Insurance. Following remand of one of those vacated appellate decisions, the Court of Appeal issued a new decision in Kaiser Cement and Gypsum Corp. v. Insurance Company of Pennsylvania, (April 8, 2013). In this 2013 decision, the Court of Appeal acknowledged the Supreme Court’s 2012 decision in Continental Insurance, and addressed an issue concerning excess insurance coverage, but then effectively disregarded the Supreme Court’s “stacking” rule.

How did the appellate court reach its conclusion? The Court of Appeal analyzed Continental Insurance but then chose to focus on the portion of the decision stating that in the future, insurers could draft language to prohibit stacking. The Court of Appeal ruled that Kaiser Cement’s policies issued by Truck Insurance could not be “stacked” because they contained standard language stating that the Company’s liability “as respects any occurrence . . . shall not exceed the per occurrence limit” in the policy. The Court of Appeal read this standard policy language as fitting Supreme Court’s statement that insurers could include anti-stacking language in their policies. What the Court of Appeal overlooked, however, is that the Supreme Court’s decision referenced language to be specifically drafted in the future, as well as the fact that the policy language concerning the “per occurrence limit” is substantially the same as the language the Supreme Court relied upon to establish stacking as the rule in California.

To be fair, the Supreme Court’s opinion did not quote what it referred to as the “standard language” that allows stacking. But the Supreme Court’s opinion in Continental Insurance affirmed an appellate court’s decision. And the Continental Insurance appellate decision did quote that standard policy language which provided that “the limit of [the insurer’s] liability shall be [specified dollar amount] . . . each occurrence. . .” The differences in policy wording between Kaiser Cement and Continental Insurance do not seem on their face to produce a different result. Both simply state that the insurer’s liability under a particular insurance contract shall not exceed its limit for an occurrence, and neither make any reference to other policies being called upon for other years of injury. While the Kaiser Cement appellate court undoubtedly had access to the Continental Insurance policy language, it elected not to address that language at all.

If allowed to stand, the Kaiser Cement appellate decision would significantly undermine the Supreme Court’s recent ruling adopting stacking. Insurers seeking to avoid stacking will rely on Kaiser Cement, while policyholders will look to Continental Insurance. Whether the Kaiser Cement decision stands is uncertain at this time. If there is any certainty in this area, however, it is that there will be more litigation over how long tail claims will be paid in the future.

The Diagram below illustrates a simplified scenario of three policy years, with loss taking place in at least part of each year. In this scenario, under the California Supreme Court’s “all sums with stacking” formula, the policyholder with a $300,000 loss can collect up to $300,000, the combined policy limits for the three years if it has policies containing “standard language” regarding how the policy limits apply. Under the Court of Appeal’s ruling in Kaiser Cement, paradoxically, the same policyholder would have only $100,000 of coverage under similar policy language.

Download: Perspectives on Insurance Recovery Newsletter – Summer 2013