California policyholders with long-tail environmental liabilities can collect more from their insurers as a result of a state Supreme Court ruling in a long-running toxic waste dump case.

In its ruling earlier this month, the California Supreme Court ruled unanimously in State of California v. Continental Insurance Co. et al. in favor of the “all sums with stacking” default allocation rule regarding commercial general liability policies purchased by the state of California from several insurers over several years. The ruling upheld an appellate court decision.

“It's a home run for policyholders,” said Jim Dorion, complex liability consulting leader in Marsh Inc.'s risk consulting group in Chicago.

Under the ruling, policyholders involved in long-tail environmental claims can “stack” coverage limits over multiple policy years and are not limited to a single year. Also, insurers are obligated to pay under the “all sums” language in the policy up to their policy limits as long as the continuous property damage occurred while each policy was on the loss.

At issue is California's Stringfellow Acid Pits, a toxic waste dump and Superfund site near Glen Avon, that the state built and operated from 1955 to 1972. However, structural and design defects allowed contaminants to escape into the ground and through a barrier dam, leading to litigation against the state. The state filed two actions, which later were consolidated, seeking coverage from various insurers to remediate the site.

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“Policyholders may now have many multiples of the policy limits their insurers told them was available to respond to these types of losses,” Mr. Dorion said.

“This is a big deal,” said Robert M. Horkovich, New York-based managing shareholder for Anderson Kill & Olick P.C. and lead trial counsel for the state on California v. Continental.

“Now it's very clear in California that no matter what long-tail risk you have, whether it's environmental or asbestos, you're going to be able to get full benefits of your policy—all sums—and you're going to be able to collect the benefits of multiple policies, for which you paid premiums,” Mr. Horkovich said.

As a result of the ruling, 17 law firms have notified their clients about the potential to recover additional payment from insurers for any environmental cleanups in the state, Mr. Horkovich said.

“If any policyholders out there have not fully recovered under all their policies and only were limited to a single year, they now may have, if they haven't released that coverage, significant additional sources to obtain benefits to pay for environmental cleanups,” he said.

Affected insurers could not be reached for comment.

Courts in some states have adopted a pro rata rule to allocate the amount of damage to each year over which the long-tail injury occurred, a method preferred by insurers as payments are limited to the fraction of property damage during their policy period, experts say.

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Laura Foggan, partner at Wiley Rein L.L.P. and leader of the law firm's insurance appellate group in Washington, said the California Supreme Court's decision is a “distortion” of how insurance works.

“Contrast a policyholder that only buys one insurance policy in a 10-year period to another policyholder that pays premiums and carefully insures itself each year for 10 years, and under an all-sums result, both policyholders get exactly the same coverage,” she said.

“That result is one that was sought by policyholders and is an undesirable outcome from insurers' perspective,” said Ms. Foggan, whose firm filed an amicus brief in the California case on behalf of two insurer organizations. “It's really a fallacy to suggest that an insurance policy is written to cover all sums that may take place in any number of years.

“This case has come fairly late in the game in a time when allocation questions have been litigated by policyholders and insurers around the country,” Ms. Foggan said.

However, Mr. Dorion said the ruling could be influential in states that do not have well-developed insurance coverage law.

The environmental insurance market will not change significantly as a result of the ruling, since many insurers already use clear anti-stacking provisions in their environmental liability policies, said David Orleans, senior vice president in Willis Group Holdings P.L.C.'s environmental practice in San Francisco.

“I think going forward...there's going to be big, bold anti-stacking endorsements or provisions in the policy form,” Mr. Orleans said.

Gregory Schilz, managing director of Aon Risk Solutions' environmental services group in San Francisco, said that while insurers may be concerned about the sufficiency of their reserves on claims, the ruling will not affect coverage and pricing going forward.

“I don't think that this case would create a situation where there's going to be new opportunities for insureds to now find coverage where they didn't have it already,” he said.