Posted on 05 Sep 2012 by Neilson
On August 9, 2012, the California Supreme Court held that an insurance policyholder liable for a loss that occurred over many years may allocate the loss on an “all sums” basis and “stack” liability policy limits across multiple policy years to maximize recovery.
Ruling in State of California v. Continental Insurance, the Court also declined to reduce insurer payments even though the policyholder lacked insurance during some periods of the loss.
Ruling May Have Broad Impact
For policies subject to interpretation under California law, and possibly in other states, the decision could have broad ramifications. It may also affect property damage and bodily injury claims arising from so-called long-tail claims.
Long-tail claims are relatively common in cases involving construction defects, asbestos, silicosis, viral infections, or other personal injuries resulting from defective products and medical implants, as well as sexual abuse. Such claims can involve a series of indivisible injuries attributable to continuing events without a single, unambiguous cause. Long-tail injuries produce progressive damages that occur slowly over years, often decades.
Potential Boon to Policyholders
Under the “all sums with stacking” ruling, policyholders may be able to recoup tens of millions of dollars, or more, in previously inaccessible policy limits. The ruling illustrates the importance of preserving and understanding historical insurance records that may respond to past, current, and future claims. It supports placing all potentially relevant years and layers of coverage on notice of long-tail claims.
Review Pre-1986 Policies
Many policyholders with coverage affected by California law may need to revisit their insurance recovery results, particularly for pre-1986 policies.
• Policyholders should confirm the date ranges for all long-tail injury claims. Policyholders that received less than full indemnification should evaluate whether they have limits remaining within the loss period that are not subject to prior exhaustion or a full policy release.
• Because policyholders are no longer restricted to a single policy year by “anti-stacking” precedent, they may collect from multiple years of insurance coverage. The potential return on investment on finding missing policy records may have increased dramatically. Postponing research of historic insurance records may mean relegating collectable coverage to oblivion. Specialists can undertake an “archaeology” effort to track down old policies.
• Prior to the California decision, many policyholders chose to allocate long-tail losses to the year of coverage providing the greatest amount of indemnification. In an all-sums-with-stacking allocation scenario, pursuing the earliest years of coverage first after considering aggregates, deductibles, re-insurance, and retrocessions, may be advantageous.
• Insurers have used the potential fallout from Continental to suppress “agreed” claim values. Open submissions to London market schemes of arrangement and any domestic insurer insolvencies should be recalculated using an all-sums-with-stacking allocation to determine if additional relevant coverage will attach to outstanding or future losses. There may now be a window to renegotiate a higher value.
To maximize the potential benefits of this decision, policyholders should review all relevant historical policies for “non-cumulation,” anti-stacking, and occurrence provisions that could potentially limit these benefits. The remaining limit should also be assessed.
Any credible estimation of historical insurance asset size requires a thorough understanding of multiple issues and how they interrelate. Careful analysis may reveal the value of an insurance portfolio now greatly exceeds previous assessments.