Typically, determining the scope of coverage with respect to claims for continuous or progressive property damage requires the resolution of unique issues that are raised when a loss spans multiple policy periods. Thus, issues such as the number of occurrences, trigger, and allocation of damages are recognized components of any analysis of claims for losses that are perceived to be continuous. The application of retained limits was recently added to the list of issues raised by claims involving multiple policy periods.
Continuous Damage Over Several Policy Years
In California Pacific Homes, Inc. v. Scottsdale Ins. Co., 83 Cal. Rptr.2d 328 (Ct. App. 1999), a construction company, California Pacific Homes ("CPH"), was named as a defendant in a lawsuit brought by homeowners seeking damages for construction defects in their condominiums. Ultimately, CPH agreed to pay a total of $1,975,000 to the homeowners in settlement. Following settlement, CPH sought indemnification from its CGL insurers.
Because the loss was continuous and spanned several policy periods, the settlement amount was allocated to CPH's insurers according to the number of years that each insurer was on the risk. Two of the carriers, Scottsdale Insurance Company and National Casualty Company, which issued policies for five successive periods from June 1, 1990 through June 1, 1995, took the position that they were not obligated to indemnify CPH until the insured had contributed an amount equal to its retained limit for each of the triggered policy periods.
Retained Limits for Each Policy Cannot be Stacked
The policies issued by Scottsdale and National provided that "the 'insured's retained limit' is $250,000 [of] ultimate net loss as the result of any one occurrence because of personal injury, property damage, or both combined," and that "the insurer will be liable for '$1,750,000 [of] ultimate net loss as the result of any one occurrence because of personal injury, property damage, or both combined.'" Therefore, according to the policy interpretation proposed by the insurers, which would result in the application of a retained limit for each of the five policy periods at issue, CPH would have had to pay $1,250,000 towards the settlement before seeking to recover proceeds from Scottsdale and National.
Upon learning of the position taken by Scottsdale and National, CPH brought an action against the two insurers seeking a declaration that CPH was responsible for only one self-insured retention for a single, continuous occurrence. The trial court, and later, the Court of Appeal, First District, found that the policies clearly limited the self insured retention to $250,000 per occurrence. In addition, both courts found that the application of a single retention to CPH's claim was supported not only by the parties' stipulation that the settled claims arose from a single occurrence, but also by the plain definition of the term "occurrence." Id. at 329.
The decision in California Pacific Homes clearly takes into account the effect that stacking the retained limits has on the availability of coverage. The Court of Appeal observed, "[j]ust as stacking of policies may have the result of providing far more coverage than an insured has purchased, so stacking of retained limits would have the effect of affording an insured far less coverage for occurrence-based claims than the insured has purchased." Id. at 332 (citing FMC Corp. v. Plaisted & Companies, 72 Cal. Rptr.2d 467 (Ct. App. 1998)).
Anti-Stacking Applies to Policy Limits
The unfair effects of stacking had been recognized previously by the Court of Appeal, Sixth District, in FMC Corp. v. Plaisted & Companies. 72 Cal. Rptr.2d 467 (Ct. App. 1998). In FMC, an insured manufacturer sued its primary and excess/umbrella liability insurers, seeking a declaration of coverage for pollution claims stemming from the manufacturer's commercial activities that caused toxic contamination to soil and groundwater at a number of sites throughout the country. The FMC court found in favor of the insured, but the insured claimed that the court erred when it applied an anti-stacking rule in addition to finding that the insured was entitled to recover "all sums" under the policies at issue in that case.
The FMC court noted that "'[s]tacking 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." Id. at 501. Applying a stacking principle to the facts in FMC, that court observed, would have entitled the insured to recover up to $7 million in liability coverage for a single occurrence under policies that specified a $1 million per occurrence limit.
In short, "'stacking' of the limits of an insurer's policies for consecutive policy periods has been criticized as affording the insured substantially more coverage, for liability attributable to any particular single occurrence, than the insured bargained or paid for." Id . at 502 (citations omitted).
The conclusion of the court in FMC was that an anti-stacking rule should apply so that only the policy limits of policies in effect during one of the policy periods in which coverage was triggered for a single occurrence can apply to property damage attributable to that occurrence, but that the insured could select under which of several triggered policies it was to be indemnified.
Insured Entitled to Select Policy to Respond
Similarly, the California Pacific Homes court endorsed the principle that once coverage is triggered the policy obligates the insurer to indemnify the insured for its entire loss, and successive insurers on the risk when continuous property damage firsts manifests itself are separately and independently obligated to indemnify the insured. California Pacific Homes, Inc. v. Scottsdale Ins. Co., 83 Cal. Rptr.2d at 332 (citing Aerojet-General Corp. v. Transport Indem. Co., 948 P.2d 909 (Cal. 1997)). For support, the trial court relied on the principles set forth in Montrose Chem. Corp. v. Admiral Ins. Co., 913 P. 2d 878 (Cal. 1995) as applied in Armstrong World Indus., Inc. v. Aetna Casualty & Sur. Co., 52 Cal. Rptr.2d 690 (Ct. App. 1996).
In Armstrong, asbestos manufacturers sought to recover under liability policies for asbestos property damage. The Armstrong court concluded that the covenant contained in the policies at issue in that case to pay "all sums" that the insured was liable to pay as damages entitled the insured to select one policy, if several provided coverage, from which to seek indemnification for the entire claim. Although in California Pacific Homes the Court of Appeal subsequently noted that the Scottsdale and National policies did not contain the "all sums" language that appeared in the Armstrong policies, the Court of Appeal did not find the language in the Scottsdale and National policies to be inconsistent with the judgment of the trial court.
Principal of Horizontal Exhaustion Does not Apply
In response to the findings of the trial court, on appeal Scottsdale and National argued that because the insured retained a portion of the risk, their policies should be treated as excess coverage that would not be triggered until the "primary" coverage, the equivalent of five retained limits, was exhausted. Affirming the decision below, the Court of Appeal declined to apply the principle of horizontal exhaustion used in cases involving coverage under primary and excess policies, noting a distinction between apportioning losses between carriers and apportioning losses between an insured and its insurers. California Pacific Homes v. Scottsdale Ins. Co., 83 Cal. Rptr.2d at 333.
In the final analysis, the effect of the decision in California Pacific Homes is to maximize coverage for continuous or progressive property damage where multiple policy periods are triggered. On the other hand, the opinion's narrow scope reaches only those cases where a single occurrence is established by the facts. Multiple occurrences would more than likely lead to a different result.