California Supreme Court Applies "All-Sums-With-Stacking" of Limits

August 9, 2012

On August 9, 2012, a unanimous California Supreme Court issued a decision in State of California v. Continental Ins. Co. ("State of California"), --- P.3d ----, 2012 WL 3206561, holding:

  • Each insurer that is on the risk when any of the continuous or progressive "property damage" occurs is separately and independently obligated to indemnify up to its full policy limit for all damages the insured becomes legally obligated to pay because of this "property damage."
  • Each Insurer is liable for all "property damage" even if it occurred outside the insurer's policy period or even during an uninsured period.
  • The policy limits of all of the successive triggered policies are "stacked," and the insured has the benefit of the combined total of the policies' limits of all of the policies.
  • Stacking policy limits means that, when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy. Every policy on the policy chart can be called upon if the damage amount equals or exceeds the amount of the coverage.

The Supreme Court had to choose between the All Sums approach and a more pro-insurer allocation approach where a portion of the damage is allocated to each year of coverage, not the entire amount.

The Supreme Court rejected application of "pro rata" allocation and concluded that "all-sums-with-stacking" allocation applied based on the language of the policies in issue. However, in doing so, the court stressed (emphasis added):

  • "Under the CGL policies here, the plain 'all sums' language of the agreement compels the insurers to pay 'all sums which the insured shall become obligated to pay . . . for damages because of injury to or destruction of property. . . .' . . . . As the State observes, '[t]his grant of coverage does not limit the policies' promise to pay "all sums" of the policyholder's liability solely to sums or damage 'during the policy period.'"
  • "[A]s the State correctly points out, the 'during the policy period' language that the insurers rely on to limit coverage, does not appear in the 'Insuring Agreement' section of the policy and therefore is neither 'logically [n]or grammatically related to the "all sums" language in the insuring agreement.'"
  • "Of course, in the future, contracting parties can write into their policies whatever language they agree on, including limitations on indemnity, equitable pro rata allocation rules, and prohibitions on stacking."

Based on these statements in the State of California decision, you can assert that:

  1. Whether "pro rata" allocation or "all-sums-with-stacking" allocation should apply would depend on the insuring language used in the particular policy; and
  2. The "all-sums-with-stacking" allocation approach adopted in State of California should arguably not apply where the policy's insuring language is the language used in a current standard CGL policy. This insuring languagedoes expressly limit the insurer's promise to pay to only those sums that the insured becomes legally obligated to pay because of "property damage" that occurs during the policy period.

The insuring agreement of the 1973 standard CGL policy, like the insuring agreements of the liability policies involved in State of California, (1) states that the insurer "will pay . . . all sums which the insured shall become legally obligated to pay as damages because of . . . 'property damage,'" and (2) does not itself include any express limitation to "property damage" "occurring during the policy period."

However, starting with the CG 00 01 11 85 ISO coverage form, the insuring agreement does itself expressly state both:

  • The insurer will pay "those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies;" and
  • The insurance applies only to "property damage" that "occurs during the policy period."

The current standard CGL policy language changes all policy language upon which the Supreme Court in State of California relied to support its application of the "all-sums-with stacking" allocation approach.

Post-State of California, the issue of what allocation approach would apply where policies using the current standard CGL insuring language are involved remains an open issue.

Undoubtedly, this will be an area that will be litigated in the future.