• State of California v. Continental Ins. Co. (4th Dist. Ct. App. 2017) ___Cal. App. 5th___, 2017 DJDAR 9578, Case No. E064518
  • November 29, 2017
  • UNDERLYING CLAIM

    Continental, and/or its predecessors, issued liability policies to the State of California covering the period from 1970 to 1976. In 1983, the United States and the State filed an action in federal court against various defendants for environmental contamination to the Stringfellow site. Certain defendants filed counterclaims against the State, which claims were tendered to the State's insurers. On September 11, 1998, the court issued a "Judgment Pursuant to Rule 54(b)" declaring that the defendants, the State and the United States were all liable persons under CERCLA ("Superfund") and allocated liability amongst the parties. For purposes of California law, it ruled that each counterclaimant was entitled to be paid by the State 100% of any damage each incurred and that the counterclaimants' liability under state law was 0%. Finally, the judgment found the United States had incurred response costs in excess of $80 million. In December 1998 the State entered into a settlement agreement with the counterclaimants pursuant to which the counterclaimants released the State from claims for past costs incurred at the site and the State agreed to assume all liability to reimburse the United Sates for past and future costs incurred. In April 2001 the State entered into a settlement agreement with the United States and agreed to pay $99.4 million for response costs the United States had incurred at the site. In the meantime, the State performed its own remediation at the site.

    In 1993 the State filed suit against certain of its insurers seeking to recover costs associated with the cleanup of the site. In 2002 it filed a separate action against other insurers, including Continental. The two actions were consolidated and the insurers in the second action agreed to be bound by rulings already made in the first action, which included a ruling that policy limits under a policy for a multi-year period applied once per policy period as opposed to once per year (the no annualization ruling.) The court subsequently ruled (1) each insurer was potentially liable for the total loss, subject to policy limits (the all sums ruling), (2) the State could not recover the policy limits under each policy but had to choose one policy period and could recover only up to the policy limits of the policies in effect for that period (the no stacking ruling), (3) for purposes of policy limits, there was only a single covered occurrence (the one occurrence ruling) and (4) the amounts of settlements with certain insurers, which at that point totaled approximately $120 million, had to be used as an offset against the other defendants' liability (the offset ruling). Based on these rulings, the court determined that the most the State could recover was $48 million and the $120 million already paid was more than enough to offset this amount. The court entered judgment finding the defendants liable but awarding zero damages.

    The State appealed and the appellate court affirmed the no-annualization, all sums and one occurrence rulings. However, the appellate court reversed the no-stacking ruling. The California Supreme Court affirmed the decision in State of California v. Continental Ins. Co. (2012) 55 Cal. 4th 186. On remand, the parties filed cross motions for summary adjudication with respect to the issue of whether the principles of vertical or horizontal exhaustion should apply to the Continental policies. The trial court ruled that vertical exhaustion should apply (the vertical exhaustion ruling) and granted the State's motion. The parties then stipulated that Continental would pay its $12 million policy limit and that the court would determine all factual and legal issues regarding prejudgment interest. The State argued that Continental owed prejudgment interest from the time of the Rule 54(b) judgment on September 11, 1998 as that judgment made Continental liable for its full policy limits. Continental argued that (1) the Rule 54(b) judgment did not make Continental liable at all because no damages were awarded, (2) the State's damages were not certain until numerous issues were decided such as whether horizontal or vertical exhaustion applied, how many occurrences there were, whether the policy limits applied per occurrence or per policy year or per occurrence per year, and whether the policies could be stacked, and (3) prejudgment interest could not be calculated before Continental's liability was offset by amounts that the State had recovered from settlements with other insurers. The trial court agreed with the State and ruled that the State was entitled to mandatory prejudgment interest under Civil Code Section 3287(a) from September 11, 1998, totaling in excess of $13 million. The trial court further ruled that, in the alternative, and in the event the award was reversed on appeal, the State was entitled to discretionary prejudgment interest under Civil Code section 3287(b) beginning September 11, 2002, the date when the present action was filed, in an amount exceeding $10 million. Continental appealed.

    APPELLATE COURT'S RULING

    On appeal, Continental argued that the prejudgment interest award was incorrect as it was premised on the trial court's erroneous ruling that vertical exhaustion applied. The appellate court found that because the policies were written in excess of a retention, the application of vertical exhaustion was proper. This was true even with respect to policies which became excess to another policy or policies as a result of the State's decision to purchase other insurance to cover its retention. In addition, the appellate court noted that other insurance clauses, upon which Continental relied, "are intended to apply in contribution actions between insurers, not in coverage litigation between insurer and insured." The appellate court also agreed with the State's point that under Continental's argument, "' a court could not determine the amount any insurer owes without first determining what every insurer owes....' (Fn. Omitted.) For example, if a lower-layer insurer for a different policy period happened to claim that some exclusion in its policy applied, a court could not determine whether Continental's policies were triggered without first determining that exclusion claim. This would deprive the State of the timely indemnity that it bargained for." Based on the foregoing, the appellate court determined that "aside from the other-insurance clauses, which are not specific to other lower-layer insurance, there was simply no policy language requiring exhaustion of any other insurance. Rather, the policies provided that Continental's duty to pay arose as soon as the specified retention was exhausted." Consequently, the trial court correctly ruled that vertical exhaustion applied.

    Continental next contended that the trial court erred in awarding prejudgment interest from the time the Rule 54(b) judgment was entered because the judgment contained no language ordering the State to pay the United States. The appellate court disagreed. It noted that the judgment effectively ordered the State to pay the United States in excess of $80 million in damages. Although the trial court adjudged the State and the counterclaimants jointly and severally liable, it also found the State 100% liable under state law for the counterclaimants' damages. As such, the State was effectively adjudged liable for the entire amount. The appellate court concluded that the Rule 54(b) judgment "not only triggered but fully exhausted Continental's policies, making Continental liable for its $12 million policy limits" and the trial court correctly awarded prejudgment interest from the date of the Rule 54(b) judgment.

    Continental next argued that the trial court erred in awarding prejudgment interest because damages could not be determined, and therefore were not certain under Civil Code section 3287(a) until after certain rulings were made by the trial court. The appellate court again disagreed, finding that with respect to insurance cases, the controlling issue is whether any uncertainty is legal or factual. "What portion of a loss will be allocated to a given insurer has been treated as a matter of the extent of liability, not a matter of damages-at least when it does not turn on disputed factual issues." The appellate court went on to state that "when the allocation of indemnity among insurers turns on factual issues, damages are uncertain and pretrial interest is unavailable; when it turns exclusively on legal issues, damages are certain and pretrial interest is available." Continental argued it could not know how much it would owe, if anything, until the trial court made rulings on the issue of no-annualization, all sums, stacking, number of occurrences, and vertical or horizontal exhaustion. However, the appellate court noted that damages can be certain even when the defendant denies any liability. The appellate court concluded that "what is critical is not whether the defendant actually knows how much it should pay; rather, it is whether the defendant could have calculated how much it should pay, if it had known how a court would ultimately rule on the legal issues. (Citation.)" Since all of the disputed issues were purely legal ones, it was not necessary for them to be resolved before prejudgment interest could be incurred.

    Finally, Continental argued that the trial court erred in refusing to apply an offset for the approximately $160,000 million that the State had received from other insurers. It contended that the State's damages had to be offset by that amount before prejudgment interest could be awarded. The appellate court again rejected Continental's argument, noting that Continental had failed to show that the State had been made whole by virtue of the other payments. Although the trial court had earlier held that the most the State could recover was $48 million, that was before the no-stacking ruling was reversed. Upon the reversal of that ruling "it became apparent that the State could recover more than $48 million - it could recover up (sic) the full extent of its liability (as long as that was within the applicable policy limits). Therefore, Continental was not entitled to an offset absent making a showing that the State had been made whole. The judgment was affirmed.

    EFFECTS OF THE COURT'S RULING

    This case follows California law to the effect that carriers providing coverage above self-insured retentions may not rely on principles of horizontal exhaustion in continuous loss cases. However, the appellate court went a step further, finding also that in what it referred to as a "hybrid" case, where the insured has obtained an insurance policy to cover its retention amount, horizontal exhaustion still may not be applied. The decision is also significant in that the appellate court concluded that prejudgment interest was owed by the insurer for a period even before the coverage action was filed as the appellate court found that the damages were sufficiently certain when the insured was adjudged liable and all issues as to coverage were purely legal. Insurers should be aware of this possible additional item of expense. that could be owed and accruing between adjudication of the underlying case and any judicial determination of coverage that turns on legal issues alone.

    This opinion is not final. It may be withdrawn from publication, modified upon rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

    This publication is intended for informational purposes only and is not intended as legal advice or as a substitute for legal consultation in a particular case or circumstance. Transmission of this information is not intended to create, and receipt does not create, an attorney-client relationship.