State v. Cont'l Ins. Co.

55 Cal.4th 186

281 P.3d 1000

145 Cal.Rptr.3d 1

12 Cal. Daily Op. Serv. 9101

2012 Daily Journal D.A.R. 11,033

The STATE of California, Plaintiff, Cross–Defendant and Appellant,

v. CONTINENTAL INSURANCE COMPANY, et al., Defendants, Cross–Complainants and Appellants;Employers Insurance of Wausau, Defendant, Cross–Complainant and Respondent.

No. S170560.

Supreme Court of California

Aug. 9, 2012.

As Modified Sept. 19, 2012.

Edmund G. Brown, Jr., Attorney General, Darryl L. Doke and Jill Scally, Deputy Attorneys General; Cotkin & Collins, Joan Cotkin, Los Angeles; Law Offices of Roger W. Simpson, Roger W. Simpson; Law Offices of Daniel J. Schultz, Daniel J. Schultz; Anderson Kill & Olick, Robert M. Horkovich, Edward J. Stein, Robert Chung and Cort Malone for Plaintiff, Cross-defendant and Appellant.

Gauntlett & Associates, Irvine, David A. Gauntlet, James A. Lowe; Orrick, Herrington & Sutcliffe, San Francisco, Barry S. Levin and Darren S. Teshima for United Policyholders and Center for Community Action and Environmental Justice as Amici Curiae on behalf of Plaintiff, Cross-defendant and Appellant.

Winston & Strawn, San Francisco, Scott P. DeVries, Yelitza V. Dunham and Gene C. Schaerr for the League of California Cities as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant.

Latham & Watkins, San Diego, David L. Mulliken, Kristine L. Wilkes, Johanna S. Schiavoni and Drew T. Gardiner for Montrose Chemical Corporation of California as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant.

Heller Ehrman, Proskauer Rose, Los Angeles, Pillsbury WinthropShaw Pittman, Costa Mesa, Reynold L. Siemens and David A. Thomas for Aeorojet–General Corporation and Whittaker Corporation as Amici Curiae on behalf of Plaintiff, Cross-defendant and Appellant.

Epstein, Turner & Song and David B. Epstein, Los Angeles, for Consumer Federation of America as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant.

Berkes Crane Robinson & Seal, Los Angeles, Steven M. Crane, Barbara S. Hodius; Berman & Aiwasian, Los Angeles, Aiwasian & Associates, Deborah A. Aiwasian, Steven M. Haskell; Woolls & Peer, Los Angeles, John E. Peer and H. Douglas Galt for Defendants, Cross-complainants and Appellants Continental Insurance Company, Continental Casualty Company, Horace Mann Insurance Company and Yosemite Insurance Company.

Wilson, Elser, Moskowitz, Edelman & Dicker, Los Angeles, Patrick M. Kelly, Carey B. Moorehead, Craig C. Hunter, Robert Cooper; Sonnenschein Nath & Rosenthal, SNR Denton US, Paul E.B. Glad and Katherine J. Evans for Defendant, Cross-complainant and Appellant Stonebridge Life Insurance Company.

Duane Morris, San Francisco, Philip R. Matthews, Andrew K. Gordon and William J. Baron for Certain London Market Insurers as Amicus Curiae on behalf of Defendants, Cross-complainants and Appellants.

Gibson, Dunn & Crutcher, Irvine, and Scott R. Hoyt for Truck Insurance Exchange as Amicus Curiae on behalf of Defendants, Cross-complainants and Appellants.

Barber Law Group, San Francisco, Bryan M. Barber and Steven D. Meier Defendant, Cross-complainant and Respondent.

Wiley Rein, Laura A. Foggan, Gregory J. Langlois; Sinnott Dito Moura & Puebla, Los Angeles, and Randolph P. Sinnott for Complex Insurance Claims Litigation Association and American Insurance Association as Amici Curiae on behalf of Defendants, Cross-complainants and Appellants and Defendant, Cross-complainant and Respondent.

CHIN, J.

This case considers complex questions of insurance policy coverage interpretation in connection with a federal court-ordered cleanup of the state's Stringfellow Acid Pits waste site. We initially address the “ ‘continuous injury’ trigger of coverage,” as that principle was explained in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655, 42 Cal.Rptr.2d 324, 913 P.2d 878( Montrose ) and the “ all sums” rule adopted in Aerojet–General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 55–57, 70 Cal.Rptr.2d 118, 948 P.2d 909( Aerojet ), and conclude that the principles announced in those cases apply to the insurers' indemnity obligations in this case, so long as the insurers insured the State of California during the property damage itself.

Because we conclude that the continuous injury trigger and all sums rule apply to the duty to indemnify here, we must also determine how best to allocate the indemnity duty among the insurers responsible for covering the State of California's liability. As we explain, we conclude that the Court of Appeal below correctly applied the “all-sums-with-stacking” allocation rule. We therefore affirm the judgment of the Court of Appeal.

Factual and Procedural Background

The State of California (State) seeks indemnity from several of its insurers in connection with a federal court-ordered cleanup of the State's Stringfellow Acid Pits waste site.¹ The site was an industrial waste disposal facility that the State designed and operated from 1956 to 1972. Each insurer that is party to this appeal issued one or more excess commercial (also known as comprehensive) general liability (CGL) insurance policies to the State between 1964 and 1976.² The State was uninsured before 1963, and after 1978.

In 1955, a state geologist determined that a Riverside County quarry was a suitable location for the disposal of industrial waste. According to the geologist's report, the site was a canyon lined on its bottom with impermeable rock. The geologist advised the State to build a concrete barrier dam to close a 250–foot gap in the canyon's natural walls. He claimed that, once the dam was in place, “the operation of the site for industrial wastes [would] not constitute a threat of pollution.” The State subsequently developed the facility, which went into operation in 1956, and eventually received more than 30 million gallons of industrial waste.

In reality, the site suffered from three major flaws that made it ill-suited to serve as an industrial waste facility. First, the state geologist had failed to identify an underground aquifer located 70 feet below the canyon floor that facilitated the movement of groundwater into and out of the site. Second, the rock underlying the canyon floor was fractured, so it allowed waste to leak into the groundwater system and escape the facility. Third, the barrier dam proved ineffective. It permitted contaminants to escape the facility during heavy rains in 1969 and again in 1978. The severity of the latter event forced the State to conduct a “controlled discharge” of contaminants into Pyrite Channel. The ensuing plume of waste extended for miles. The State closed the facility in 1972 after discovering the groundwater contamination.

In 1998, a federal court found the State liable for, inter alia, negligence in investigating, choosing, and designing the site, overseeing its construction, failing to correct conditions at it, and delaying its remediation. The State was held liable for all past and future cleanup costs. The State claims costs associated with the Stringfellow site remediation could reach $700 million. The insurers stipulate that the State is liable for at least $50 million. The State filed an action against several of its insurers in September 1993, seeking indemnification for its liability in the federal action.

The pertinent language of all the policies at issue is essentially identical. Under the heading “Insuring Agreement,” insurers agreed “[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law ... for damages ... because of injury to or destruction of property, including loss of use thereof.” Limits on liability in the agreements were stated as a specified dollar amount of the “ultimate net loss [of] each occurrence.” “Occurrence” was defined as meaning “an accident or a continuous or repeated exposure to conditions which result in ... damage to property during the policy period....” In addition, “ ‘ultimate net loss' [was] understood to mean the amount payable in settlement of the liability of the Insured arising only from the hazards covered by this policy after making deductions for all recoveries and for other valid and collectible insurances....”

The trial was conducted in multiple phases. At the conclusion of a June 1999 bench trial, the court ruled that the policy limits under policies with multiple-year periods applied “per occurrence” and not annually. Following this, in April 2002, the trial court held that the State's failure to remediate and its delay in remediating the site was not a breach of any duty to mitigatethe insurers' damages. In September 2002, the State brought a second suit, asserting related claims against additional insurers, including those which are parties to this appeal. This case was consolidated with the first action, and defendant insurers in the second suit agreed to be bound by all prior rulings in the original action. All parties stipulated that the property damage that the Stringfellow site's selection, design, and construction caused took place continuously throughout the defendant insurers' multiple consecutive policy periods from 1964 to 1976.

The trial court held that each insurer was liable for damages, subject to its particular policy limits for the total amount of the loss. The court based this ruling on the “all sums” language in the insuring agreements. ( Ante, 145 Cal.Rptr.3d at pp. 4–5, 281 P.3d at p. 1003.) It also held that the State could not recover the policy limits in effect for every policy period, and could not “stack,” or combine, policy periods to recover more than one policy's limits for covered occurrences. The court then concluded that the State had to choose a single policy period for the entire liability coverage, and it could recover only up to the total policy limits in effect during that policy period. The court based its ruling on the decision in FMC Corp. v. Plaisted & Companies (1998) ...