United States: New California Decision Rejects Stacking Of Occurrence Limits, Requires Horizontal Exhaustion Of Primary Insurance

On June 3, 2011, the California Court of Appeal for the Second District (Los Angeles) published its opinion in Kaiser Cement & Gypsum Corp. v. Insurance Co. of the State of Pa.¸__ Cal.4th __, __ Cal.Rptr.3d __, 2011 WL 2163737 (2011). The opinion rejects stacking of occurrence limits across multiple policy periods for the same insurer, but confirms that horizontal exhaustion of primary insurance applies to primary insurance issued by other insurers. In a previous appeal in the same case, the Court of Appeal held that all asbestos bodily injury claims did not constitute one occurrence, although the Court of Appeal declined to determine whether the exposure of each plaintiff was a separate occurrence. London Market Insurers v. Superior Court, 146 Cal.App.4th 648, 53 Cal.Rptr.3d 154 (2007).

With respect to stacking of limits, the new Kaiser Cement decision follows FMC Corp. v. Plaisted & Cos., 61 Cal.App.4th 1132, 72 Cal.Rptr.2d 467 (1998) in holding that occurrence limits cannot be stacked for multiple policy periods. That issue is currently before the California Supreme Court in State of California v. Continental Ins. Co., 88 Cal.Rptr.3d 288 (2009), rev. granted. In that case, the Court of Appeal rejected FMC and held that occurrence limits could be stacked.

With respect to horizontal exhaustion, Kaiser Cement follows several previous published decisions finding that all primary coverage triggered by a claim must be exhausted before any excess policy is triggered. See, e.g., Community Redevelopment Agency v. Aetna Casualty & Surety Co., 50 Cal. App.4th 329, 57 Cal.Rptr.2d 755 (1996).

Kaiser Cement addresses horizontal exhaustion and stacking of occurrence limits for asbestos bodily injury claims under somewhat unique circumstances. Kaiser Cement had primary insurance issued by Truck Insurance Exchange between 1964 and 1983 which had occurrence limits, but no annual aggregate limits for products claims until 1980. The occurrence limits and deductibles apparently varied for different annual periods. Kaiser Cement also had primary insurance with Fireman's Fund from 1947 through 1964, and with Home from 1983 to 1985 and National Union from 1985 to 1987. All of the other primaries were allegedly exhausted by 2004.

The dispute at issue on the appeal was between Insurance Company of the State of Pennsylvania (ICSOP), the first-layer excess insurer for the 1974 policy period, and Truck and Kaiser Cement. Based on the FMC decision, Kaiser Cement designated the 1974 policy period to respond to all asbestos bodily injury claims. For this policy period, Truck had a $500,000 per occurrence limit, no aggregate limit, and a $5,000 per occurrence deductible.

Pursuant to the previous decision in London Market Insurers, the trial court found that the exposure of each claimant was a separate occurrence, although that was not an issue in this appeal.

ICSOP took the position that its policy required horizontal exhaustion of all underlying primary insurance, including Truck policy periods other than 1974, and that the occurrence limits of each Truck policy period should be stacked. If this were done, then it would be unlikely that any one asbestos plaintiff could exhaust the stacked limits of all unaggregated Truck policy periods. The Court of Appeal agreed with ICSOP's interpretation of its policy as requiring horizontal exhaustion of all underlying primary "collectible" coverage, not just the 1974 Truck primary coverage. However, the Court of Appeal then held that all of the Truck policies were subject to a single occurrence limit, and there was no basis for stacking the policy limits. Accordingly, only one $500,000 occurrence limit was "collectible" from Truck, and the Truck occurrence limits could not be stacked for multiple policy periods.

The Court of Appeal held that the following policy language did not allow stacking of per occurrence limits by policy period:

The Court of Appeal then held that the absence of any reference to the occurrence limit being an annual limit meant that the occurrence limit applied to all of the liability of Truck in all policy periods for one occurrence, effectively interpreting this language (and similar language elsewhere in the policy) as a non-cumulation provision.

The Court of Appeal did not, however, hold that the Truck wording applied to the other allegedly exhausted primary policies issued by other insurers, and found that ICSOP was entitled to horizontal exhaustion of those policies as well. The Court of Appeal remanded the case to the trial court because there was no evidence that the other primary coverage had actually been exhausted.

Kaiser Cement follows FMC in rejecting stacking of limits, although it tries to rely on very specific policy language (as did the Court of Appeal in the previous London Market Insurers decision) to support that holding. Perhaps this is an attempt to prevent a Supreme Court ruling in the pending State of California case in favor of stacking from overturning this opinion. ICSOP could ask the California Supreme Court to grant review on the stacking issue and then hold that appeal until State of California is decided. The Supreme Court often follows this approach in appeals of an issue already pending before the court.

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