California Appellate Court Provides Insurers with Road Map for How to Avoid California Supreme Court’s “Stacking” Ruling

April 19, 2013

Insurance LawAlmost two years ago, the California Court of Appeal grappled with how to allocate coverage under multiple liability policies triggered by a claimant’s exposure to asbestos over many years. In Kaiser Cement and Gypsum Corporation v. Insurance Company of the State of Pennsylvania, 2011 WL 2163737 (2d Dist., June 3, 2011) (Kaiser I), the court endorsed the concept of “horizontal exhaustion” (the principle that an excess liability insurer’s coverage for continuous, progressive bodily injury is triggered only upon exhaustion of all triggered primary policies, regardless of whether those primary policies cover the same policy period as the excess insurer). The court, however, also determined that the “per occurrence” coverage limits available under a single primary insurer’s successive liability policies could not be combined or “stacked” and thus need not all be exhausted in order to trigger coverage under an excess policy.
The California Supreme Court granted review in Kaiser I, and then remanded the case back to the court of appeal for decision in light of State of California v. Continental Insurance Co., 55 Cal.4th 186 (2012) (Continental), a case involving similar issues in the context of an environmental damage claim. In Continental, the supreme court held that when a continuous, progressive loss triggers liability insurance under multiple, successive policies, (1) each triggered policy is obligated to pay “all sums” the insured is obligated to pay up to policy limits, and (2) the insured may “stack” the limits of all triggered policies. But the supreme court’s opinion came with a “significant caveat.” The caveat was that the court’s “all sums-with-stacking” holding must yield to policy language that unambiguously prohibits stacking and all sums allocation.

The California Court of Appeal has now issued its unanimous opinion on remand, Kaiser Cement and Gypsum Corporation v. Insurance Company of the State of Pennsylvania, 2013 WL 1400920 (Apr. 8, 2013) (Kaiser II), which shows insurers how to avoid Continental’s pro-stacking rule. Kaiser II reiterates the result and reasoning of Kaiser I in light of the supreme court’s caveat in Continental. In an opinion that is virtually identical to its opinion in Kaiser I, except for the addition of a brief section to discuss Continental, the court makes two key rulings:

  • An excess insurance policy that conditions coverage on the exhaustion of “any . . . valid and collectible” underlying insurance applies only after all primary policies triggered by continuous and progressive injury are exhausted.
  • “Per Occurrence” primary policy limits in successive primary policies issued by a single insurer may not be stacked when continuous and progressive asbestos-related bodily injury triggers coverage under each policy and each triggered policy limits the liability of “the company”—that is, the primary’s primary insurer—to $500,000 “per occurrence,” not $500,000 “per occurrence per year.”

Simply put, the “per occurrence” language in the primary policy before the court functioned as an anti-stacking provision within the meaning of the Continental caveat. Thus, the exhaustion of a single per occurrence policy limit triggered excess coverage, unless primary coverage issued by other primary insurers was triggered.

I will examine the Kaiser II court’s reasoning and its implications for insurance policy drafting in my next post.