Continuous-damage insurance claims

Continuous-damage insurance claims

The Supreme Court of California has spoken out on insurers’ liability in cases where “damage” occurs continuously.

On August 9, the California Supreme Court handed down the judgment (or “Opinion” as American courts prefer) in State of California v Continental Insurance Company et al, which may be of considerable importance in South Africa.

The case involved what is essentially a pollution clean-up case. The State of California operated an industrial waste disposal facility called the Springfellow Acid Pits waste site. The facility was in operation from 1956 to 1972. The State purchased comprehensive general liability cover from a host of insurers for the years 1964 to 1976. Before 1963 and after 1978, the site was uninsured. In 1955, before the site was used for industrial disposal, a state geologist determined that the quarry on which the facility was to be built was a suitable location for the disposal of industrial waste. The site started operation in the next year. Eventually, 30 million gallons (around 136 million litres) of industrial waste would be deposited on the site.

As it turned out, the site was not suited for the operation and was closed in 1972. A full 26 years later, a federal court found the State liable for negligence with respect to the selection, design and operation of the site. The site would have to be cleaned up, at an estimated cost of US$700 million. The State claimed these costs from its insurers in September 1993, seeking indemnification in the federal action. This resulted in multi-phased litigation. The policy wording was “net loss [of] each occurrence”.

It can be pointed out that, in other parts of the world, more recent policies have been issued on a “claims first made” basis. This became fairly standard after the liability crisis of the 1980s. Clearly, the policies in issue in this case were issued before this date.

Nowadays, most policies have a limit of liability of, say, US$50 million. It is usually thought that the limit of liability covers the total liability under the policy. In 1999, the trial court ruled that in these policies the limit was for each occurrence and not an annual limit.

The next question was when did the occurrence that caused the “damage to property” occur? It’s not obvious in this case – unlike, for example, the case of a car accident or fire, where the time of the occurrence is obvious. The trial court concluded that the damage took place continuously throughout the multiple consecutive policy periods that the policies were in operation. In practical terms, the State would be entitled to claim up to the policy limit for any one year of the multiple consecutive years. The “continuous occurrence” was equated to a single continuous event. The insurers’ liability under this decision was computed to be US$48 million, but the insurers had already paid US$120 million, so effectively the judgment had a US$0 additional value to the State.

The State appealed and virtually all insurers cross-appealed. The Appeal Court reversed the trial court’s decision, holding that the awards could be stacked for all the years the insurers had provided cover. So if the policy had a limit of liability of, say US$50 million, the trial court had ruled the limit of liability of the insurer was US$50 million. The Appeal Court ruled that it was up to the limit for each year. So now, if an insurer had covered the site for 10 years, the liability of that insurer would be US$500 million – which now leads to a different question, that of joint and several liability: can the limits of all insurers be stacked? The Appeal Court outcome was vastly different to that of the trial court. The matter was then taken to the Supreme Court of California, which confirmed the Appeal Court’s decision overturning the precedents on which the High Court had made its decision. The liability of an insurer can be stacked. In short, the coverage is the sum of the years’ limits of indemnity where continuous “damage” occurs.

Relevance to South Africa

In a previous article, we referred to the Mankayi decision of the Constitutional Court, where, for the first time in our history, a court ruled that an employee was not precluded from suing his employer for an occupational disease. The decision doesn’t mean that employers are in fact liable. That will have to be determined on a case-by-case basis unless some class settlement is reached, as happened in the Gencor asbestosis matter. An occupational disease could be an example of a continuous injury event. Since no such action has been decided by our courts, there is little guidance in our case law. It is at this point that the Californian case becomes of interest in South Africa. The California Supreme Court purported to come to its conclusion through the application of the general principles pertaining to the interpretation of contracts. Courts worldwide, including South African courts, would approach the problem in the same way. Of course, differences exist in the wording of policies, so the conclusion from interpretation could well be different – but the approach would be the same.

South African policies largely exclude claims arising from occupational diseases and, as indicated above, occupational-disease type policies in this country have used the “claims first made” wording and not the occurrence wording since the 1980s at least, and possibly before then. Insurers are thus not likely to be liable for events that occurred 30 years ago. It is also unlikely that stacking can take place where ”claims first made” wording is used.

Economics of continuous damage – injury claims

No thought is ever given to the economics of continuous damage as it relates to injury claims. Judges work on the assumption that insurers have limitless funds to pay for any claim. This is, of course, incorrect. If the courts imposed, say R10 billion unprecedented liability on insurers, technically the insurers could become liable. The economics of why this could happen should, however, be left for another occasion – but since insurers learnt from the 1980s liability crisis, this issue is unlikely to occur in South Africa.


Legally Speaking is a regular column by Professor Robert W Vivian, a leading authority on insurance and risk management. He has written a number of books on South Africa’s business history.

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