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Cleanup coverage win may aid many buyers


RIVERSIDE, Calif.-A California appellate court ruling that allows policyholders to "stack" coverage limits over multiple policy years will affect insurance recovery cases beyond the environmental liability issues reviewed by the court, several attorneys said.

The ruling in State of California vs. Continental Insurance Co. et al. regarding commercial general liability policies purchased by California from several insurers over several years also runs counter to a 1998 California appellate court finding that insurers have used since then to limit insurance awards and settlements, several policyholder attorneys said.

Last week's decision by the 4th District Court of Appeal stems from California's supervision over several years, beginning in 1956, of the infamous Stringfellow hazardous waste site near Glen Avon, Calif. The case involved six insurers, or their predecessors, that sold excess corporate general liability polices to the state.

The unanimous three-judge ruling affects insurance recovery for asbestos cases, toxic torts and construction defect claims where multiple policy years often are at stake, said David B. Goodwin, a policyholder attorney at Covington & Burling L.L.P. in San Francisco.

California's 4th District Court of Appeal ruled that when a continuous pollution loss spans multiple policy periods, each liability insurer covering any policy period is liable for the entire loss up to their policy limits.

More importantly, policyholder attorneys agree, the ruling allows policyholders to stack coverage limits purchased over multiple years.

"If an occurrence happens entirely within one policy period, the insured has paid one premium and can recover up to one policy limit; however, if an occurrence is continuous across two policy periods, the insured has paid two premiums, and can recover up to the combined total of two policy limits," the court ruled. "We see nothing unfair or unexpected in this."

That finding overturned a 2004 state trial court's "no-stacking" ruling that said the state, as a policyholder, had to choose one policy period and could recover only the policy limits in effect for that period.

To reach that decision, the trial court relied on a 1998 6th District Court of Appeal decision in FMC Corp vs. Plaisted & Cos., which held that an insured cannot stack across policy periods.

State supreme and appellate courts nationwide have split on the issue, said Roger W. Simpson, an attorney in the Los Angeles office of Cotkin & Collins, who represented California.

The nationwide controversy over stacking-although not always referred to by that term-began in the 1970s and was prevalent initially in asbestos cases before expanding to other insurance coverage areas, Mr. Simpson said.

In California, insurers have relied on the 1998 FMC ruling to limit recovery, especially in settlement negotiations, said Drew Gardiner, an attorney in the San Diego office of Latham & Watkins L.L.P., which filed an amicus on behalf of Montrose Chemical Corp. in the appellate court case decided last week.

In the 1998 FMC case, California's 6th District Court of Appeal said a policyholder's largest potential recovery is restricted to the highest occurrence limit for any one policy period.

That decision "really limited our ability to recover for major losses spanning over multiple years because insurers always insisted that FMC is gospel," Mr. Gardiner said.

Now with the 4th District's decision, "policyholders have an argument that FMC is not good law," said Robert Horkovich, a partner in the New York office of Anderson Kill & Olick P.C., who also represents California.

In its decision, the 4th District extensively analyzed FMC and concluded that the 6th District failed to follow other California cases and based its decision "on reasoning that we find to be flawed and unconvincing," the court ruled.

The 4th District also said that, based on policy language and California authority, stacking "is exactly what the insured bargained and paid for."

The ruling is an important one for policyholders, agreed Paul Killion, an insurer defense attorney in the San Francisco office of Duane Morris L.L.P. But the anti-stacking ruling in FMC mitigated the onerous aspects of holding insurers responsible for "all sums."

In addition to allowing policyholders to stack limits, the 4th District held that insurers are responsible for all sums. That requires insurers to pay under occurrence-based liability policies up to their policy limits of the insured's liability, and not just liability specifically allocable to damage during the policy period.

With a split among California appellate courts over stacking, review by the California Supreme Court is likely, several attorneys said. The amount of dollars at stake-as well as the interest the issue has drawn from policyholders, insurers, public interest groups and local governments- makes a state Supreme Court review especially likely, they added.

Numerous corporate and government entity policyholders in California ensnared in decades of litigation over pollution coverage are affected, said Scott P. DeVries, an insurance recovery attorney in the San Francisco office of Winston & Strawn L.L.P., which filed an amicus brief for the League of California Cities in the case decided last week.

Liabilities yet to emerge under policies purchased decades ago also would be affected, Mr. DeVries said.

In 1998, a federal court found California liable for environmental damage and responsible for past and future remediation costs, which California said could reach $700 million, court records indicate.

In a separate case stemming from contamination at the Stringfellow site, California's Supreme Court heard arguments last week on whether a pollution exclusion under CGL policies begins when waste material is discharged from a site or when waste is deposited into it.

State of California vs. Continental Insurance Co. et al., California Court of Appeal, 4th District; No. E041425; Jan 5, 2009.