State v. Cont'l Ins. Co., S170560

CourtUnited States State Supreme Court (California)
Writing for the CourtCHIN
PartiesTHE 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.
Decision Date09 August 2012
Docket NumberSuper. Ct. No. 239784,S170560

THE STATE OF CALIFORNIA, Plaintiff, Cross-Defendant and Appellant,
CONTINENTAL INSURANCE COMPANY et al., Defendants, Cross-Complainants and Appellants;
EMPLOYERS INSURANCE OF WAUSAU, Defendant, Cross-Complainant and Respondent.

Super. Ct. No. 239784


Filed: August 9, 2012

Ct. App. 4/2 E041425 Riverside County

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 (Montrose) and the "all sums" rule adopted in Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 55-57 (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 subject property at some point in time during the loss itself.

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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 property loss. 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.


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 site was uninsured before 1963, and after 1978.

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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

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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 mitigate the 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.

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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, at p. 4.) 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 loss coverage, and it could recover only up to the specific single policy limit in effect at the time the loss occurred. The court based its ruling on the decision in FMC Corp. v. Plaisted & Companies (1998) 61 Cal.App.4th 1132 (FMC), which prevented an insured from stacking multiple consecutive policies in a case in which the insured had caused toxic contamination "over a period of many years" (id. at p. 1142).

In May 2005, a jury in phase three of the trial rendered special verdicts finding the insurers had breached their policies. By that time, the State had already entered into settlement agreements totaling approximately $120 million with several other insurers. The trial court required that these settlements reduce the insurers' liability as setoffs. Therefore, "[u]nder the trial court's one-occurrence, no-annualization and no-stacking rulings, the most the State could recover [from all insurers] was $48 million." Because the State had already recovered $120 million, the court entered judgment nominally in the State's favor, but in the amount of "$0."

The State filed an appeal and, with the exception of Wausau, all of the insurers filed cross-appeals. The Court of Appeal affirmed in part and reversed in part the trial court's ruling. The Court of Appeal, like the trial court, rejected the insurers' contention that they could not be liable for property damage occurring outside their respective policy periods. It held that once coverage was triggered, all of the insurers had to indemnify the insured for the loss. However, the Court of

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Appeal reversed the trial court's ruling that prohibited the State from stacking the total policy limits in effect for any one policy period. In doing so, the Court of Appeal rejected the holding of FMC, supra, 61 Cal.App.4th 1132, characterizing that antistacking decision as "flawed and unconvincing."

Our grant of review followed the insurers' petitions for review.


A. Background

1. Standard of Review and Insurance Law Principles

In general, interpretation of an insurance policy is a question of law that is decided under settled rules of contract interpretation. (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470; Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.) " 'While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply' (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; see AIU [Ins. Co. v. Superior Court (1990)] 51 Cal.3d [807,] at pp. 821-822.)" (Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 868.) "The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties." (Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1264; Civ. Code, §...

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