National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

On the most recent decision (State of Calif. v. Continental Ins. Co.), we reported in October that the California appellate court had issued a tentative decision prior to oral arguments. The court’s final decision is consistent with the indication of its leanings. The lengthy decision contains the following rulings:

• "All sums" rule applies - In a continuous loss situation, each insurer that covers any part of the claim has an obligation to pay the entire claim, and then seek reimbursement from other insurers.  This was suggested by earlier cases and is the approach taken by many courts around the country.
• The insured can stack policy limits across policy periods (absent policy language on the issues) - There was nothing in the policies or law that precluded stacking of policies across applicable policy periods. This is a rejection of FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4^th 1132.  
• Self-insured retentions (“SIRs”) must be paid under each excess policy (dicta) - If multiple policies each with an SIR are implicated, the court should require each SIR to be paid prior to coverage being available under the excess policy.
• Distinction between deductibles and SIRs (dicta) - Deductibles are typically found in personal liability policies whereas SIRs are found in commercial policies. In policies with SIRs, limits are paid after payment of SIR but deductibles reduce policy limits.
• Only a single occurrence was at issue – There were not four occurrences (i.e., (1) escape of contaminants through fractures in the rocks; (2) escape through the barrier; (3) escape through the underground streambed; and (4) an overflow from the pit).  The single occurrence was the continuing exposure to the conditions (plural) at the site which combined to cause on-going contamination when the waste was put into the site.  The court likened the site to a sieve with multiple holes; each hole is not a separate occurrence.  The overflow from the pit did not constitute a separate occurrence because the State failed to show it resulted in separate damage.
• No annualization of limits - There was no language in the multi-year policies indicating the limits were intended to apply annually.
• The trial court's "set off" ruling is moot in light of the reversal of the trial court's no-stacking ruling and the size of the total loss.
• Mitigation of damages doctrine did not apply - This defense is not available to insurers who claim the insured failed to take steps which would have reduced its damages (and inured to the insurer's benefit).
• The trial court did not abuse its discretion in declining to apply the ancient documents or business records exceptions to the hearsay rule. Documents located in the excess insurers underwriting file could not be properly authenticated and presented in order to meet the requirements of those evidentiary rules.

The dispute between the LA Unified School District (the “District”) and general contractor Hayward Construction Company and Hayward’s bonding company Great American was over the scope of an emergency contract Hayward entered to finish construction of an elementary school. Most of the appellate court’s opinion addresses whether Hayward plead enough to pursue claims against the District for rescission and breach of contract for misrepresentation or nondisclosure of material facts, and the impact of the trial court’s rulings on Great American. The trial court’s rulings dismissing Hayward’s claims were reversed in all respects.

On the issue of interpretation of the “completion contract” between Hayward and the District, the trial court had ruled the contract was not ambiguous.  Hayward submitted extrinsic evidence for the court to consider on a provisional basis, including documents to which the contract referred and the parties’ discussions about the scope of the work contemplated by the contract, to show the contract was ambiguous and could be interpreted as Hayward advocated. The trial court ruled the parole evidence rule precluded such evidence because the evidence was being offered to alter, vary or add to the terms of an integrated contract.

The appellate court disagreed, finding the record did not indicate the court had considered the extrinsic evidence. Plus, “the contract itself is not so clear and explicit that it is unambiguous on its face.” The court reviewed the two step process the trial court should have employed:

• First, the court should have provisionally received the evidence of the parties’ intentions to determine if the contract could be reasonably susceptible to an interpretation urged by that party. 
• Second, if the contract was reasonably susceptible to that interpretation, then the evidence should be admitted.

The case was reversed and remanded for such a determination.

Thorpe Insulation Company was a distributor and installer of asbestos insulation products. Thorpe was sued in thousands of personal injury lawsuits. Thorpe’s insurance policies covered both products/completed operations claims (“products claims”) and non-products claims (“operations claims”). All of its policies’ aggregate limits applied to products claims, but not to operations claims.

In 1978, Thorpe began tendering the asbestos lawsuits to its primary insurers. In 1984, Thorpe and ten of its primary insurers entered into a Claim Handling and Settlement Agreement (the “1984 Agreement”). The stated purpose of the 1984 Agreement was to “clarify among” the parties to the agreement “the apportionment of defense and indemnification of Thorpe[.]” The 1984 Agreement provided, among other things, that it should not be construed “as a policy interpretation, and shall not be used in any Court … to interpret the obligations under general liability or other policies” and was “without prejudice to later assertion by any such parties of claims against each other … pursuant to the several reservations of rights … contained in this Agreement.” 

Thorpe’s primary insurers charged all settlement payments against the policies’ aggregate limits, treating the claims as products claims. As the primary policies exhausted, Thorpe began tendering claims to its first level excess insurers. In 1998, seven of Thorpe’s first level excess insurers entered into an Interim Excess Insurance Claims Handling Agreement (the “1998 Agreement”). The stated purpose and terms of the 1998 Agreement were similar to those of the 1984 Agreement. The 1998 Agreement also considered an excess insurer’s policy to be implicated when the underlying primary policy is “contend[ed to] have been exhausted.” Thorpe was not a party to the 1998 Agreement, but received a copy and advised its first level excess layer insurers that it reserved all rights under their policies.  

Thorpe’s first level (and upper level) excess insurers charged payments under their policies against aggregate limits, again treating all claims as products claims. When Thorpe had nearly exhausted all of its $180 million in aggregate limits, it sued its insurers seeking a declaration that the insurers still owed defense and indemnity in connection with claims that Thorpe now contended were operations claims and not subject to aggregate limits.

The insurers argued that by accepting payment of the policies’ aggregate limits on a layer-by-layer basis over several decades, Thorpe understood that all of the underlying claims were products claims under the terms of the policies. Thorpe filed a motion in limine to exclude evidence of the parties’ post-policy course of performance. The trial court granted the motion on two grounds: (1) course of performance evidence is only relevant if it predates a controversy and the 1984 Agreement indicated the existence of a controversy, and (2) such evidence is relevant only if it sheds light on the intent of the parties at the time of contracting and the individuals who negotiated the subject policies were not the same as those who performed under the policies.

The insurers filed a petition for writ of mandate. The court of appeal issued an order to show cause to consider whether the trial court erred in concluding the policies’ claims handling history was irrelevant to the issue of policy interpretation.  

Preliminarily, the appellate court concluded that course of performance evidence is generally admissible to interpret insurance policies, even standard form insurance policies. The court also concluded the admissibility of course of performance evidence does not require the individual performing under the contract to be the individual who negotiated the contract. 

However, the appellate court held course of performance evidence is only relevant to the issue of contract interpretation when the performance is attributable to the parties’ understanding of the contract. The court determined that in the case before it, the 1984 and 1998 Agreements, not the policies, governed the bulk of the parties’ performance. Among other things, the court found particularly relevant the fact that Thorpe obtained excess coverage proceeds because the insurers to the 1998 Agreement had agreed among themselves to make those payments while reserving rights to subsequently contend the payments were not, in fact, due under their policies. 

The court concluded the trial court did not err in excluding evidence of performance following the 1984 Agreement. But the court left open the possibility that pre-1984 course of performance evidence and course of performance evidence as to excess insurers not parties to the 1998 Agreement could still be admissible.