California Supreme Allows Vertical Exhaustion of Primary Coverages
The California Supreme Court Concludes it is Best to Relieve an Insured of a Need for Multiple litigation and Impose the Obligation on Insurers
Montrose Chemical Corporation (Montrose), a well known California polluter, has made a great deal of insurance law over the years and has done so again in a case decided April 6, 2020.
In Montrose Chemical Corporation Of California v. The Superior Court Of Los Angeles County, Canadian Universal Insurance Company, Inc., et al., S244737, Supreme Court Of California (April 6, 2020) Montrose asked the California Supreme Court to allow it to tap its excess liability insurance to cover amounts it owes in connection with regard to claims resulting from suits for causing continuous environmental damage in the Los Angeles area between 1947 and 1982 and subsequently entered into partial consent decrees to resolve various claims.hose claims.
Montrose argued it was entitled to coverage under any relevant policy once it has exhausted directly underlying policies for the same policy period. The insurers, by contrast, argued that Montrose may call on an excess policy only after it has exhausted every lower level primary and excess policy covering the relevant years. The Supreme Court agreed with Montrose and concluded that it is entitled to access otherwise available coverage under any excess policy once it has exhausted directly underlying excess policies for the same policy period.
Montrose manufactured the insecticide dichloro-diphenyl-trichloroethane (DDT) at its facility in Torrance, California from 1947 to 1982. In 1990, the United States and the State of California sued Montrose for environmental contamination allegedly caused by Montrose’s operation of this facility. Montrose entered into partial consent decrees in which it agreed to pay for environmental cleanup. To meet its obligations, Montrose has expended millions of dollars. Montrose represented to the court that the total is more than $100 million—and asserts that its anticipated future liability could approach or exceed this amount.
Montrose purchased primary and excess comprehensive general liability insurance to cover its operations at the Torrance facility from defendant insurers between 1961 and 1985. An excess insurer’s coverage obligation begins once a certain level of loss or liability is reached; that level is generally referred to as the “attachment point” of the excess policy. Forty insurers collectively issued more than 115 excess policies during the 1961 to 1985 period, which collectively provide coverage sufficient to indemnify Montrose’s anticipated total liability.
Montrose and the insurers agree that Montrose’s primary coverage has been exhausted. In a variety of ways, the excess policies also provide that “other insurance” must be exhausted before the excess policy can be accessed.
The rule Montrose proposes in its amended complaint is a rule of “vertical exhaustion” or “elective stacking,” whereby it may access any excess policy once it has exhausted other policies with lower attachment points in the same policy period. The insurers disagreed.
TRIAL COURT DECISION
The trial court denied Montrose’s motion and granted the insurers’ motion, holding that the excess policies required horizontal exhaustion in the context of this multiyear injury. The Court of Appeal affirmed. Shortly after the Court of Appeal published its opinion in this case, another Court of Appeal disagreed with its reasoning in State of California v. Continental Ins. Co. (2017) 15 Cal.App.5th 1017. The court in that case determined that vertical exhaustion was appropriate given the relevant policy language and California case law.
In a much earlier iteration of this case, the Supreme Court noted “the settled rule” is that “an insurer on the risk when continuous or progressively deteriorating damage or injury first manifests itself remains obligated to indemnify the insured for the entirety of the ensuing damage or injury,” up to the policy’s limit. (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 686, italics added (Montrose I).)
Recognizing that the limits of any one policy may be insufficient to cover the entire liability resulting from a continuous injury the insured may seek indemnification from every policy that covered a portion of the loss, up to the full limits of each policy. This all-sums-with-stacking indemnity principle forms one giant uber-policy with a coverage limit equal to the sum of all purchased insurance policies. Having adopted an all-sums-with-stacking approach to the coverage of long-tail injuries, the Supreme Court was presented with a follow-on question: In what order may an insured access excess policies from different policy periods to cover liability arising from long-tail injuries?
The Meaning of “Other Insurance” Clauses
The parties’ dispute centers on the meaning of the “other insurance” clauses in the excess insurance policies. The Supreme Court concluded that the “other insurance” clauses at issue clearly require exhaustion of underlying insurance, but none clearly or explicitly state that Montrose must exhaust insurance with lower attachment points “purchased for different policy periods.”
The Supreme Court noted that other aspects of the insurance policies (in essence, RTFP, reading the full policy) strongly suggest that the exhaustion requirements were meant to apply to directly underlying insurance and not to insurance purchased for other policy periods. Under the insurers’ theory of horizontal exhaustion, Montrose would not be permitted to access a policy until it has exhausted underlying insurance limits “for every relevant policy period” — which would add up to substantially more than the limit. The “other insurance” clauses do not clearly specify whether a rule of horizontal or vertical exhaustion applies in this type of dispute.
Consideration Of The Parties’ Reasonable Expectations Favors A Rule Of Vertical Exhaustion Rather Than Horizontal Exhaustion.
The policies Montrose purchased come in all shapes and sizes, each covering different periods of time, providing different levels of coverage, and setting forth distinct exclusions, terms, and conditions.
Because the exclusions, terms, and conditions may vary from one policy to another, a rule of horizontal exhaustion would create significant practical obstacles to securing indemnification. Horizontal exhaustion would create as many layers of additional litigation as there are layers of policies. Requiring a policyholder to litigate the terms and conditions of all policies with lower attachment points in every policy period before accessing policies with higher attachment points would effectively increase the attachment point. Horizontal exhaustion will undermine the policyholder’s reasonable expectation that coverage would be triggered upon the exhaustion of the amount listed as the policy’s stated attachment point.
Nothing about the rule of vertical exhaustion requires a single insurer to shoulder the burden of indemnification alone. Although a rule of vertical exhaustion permits Montrose to access excess insurance from any given policy period, provided the directly underlying insurance has been exhausted, insurers may seek contribution from other excess insurers also liable to the insured. The administrative task of spreading the loss among insurers is, to the California Supreme Court, one that must be borne by the insurer instead of the insured.
“California law permits Montrose to seek indemnification under any excess policy once Montrose has exhausted the underlying excess policies in the same policy period. Montrose is not required to exhaust excess insurance at lower levels for all periods triggered by continuous injury before obtaining coverage from higher level excess insurance in any period.” The insurers may then seek contribution from each other.
Cases like Montrose I and this iteration of litigation between Montrose and its insurers establishes why insurers now favor “claims made” and “claims made and reported” policies since the occurrence policies – whether primary or excess – can never die in peace and policies issued as long ago as 1961 must still pay out its limits to Montrose and, if it paid more than it believes it owed, sue other insurers (some of which are long ago bankrupt) for contribution. The Supreme Court concluded that it is best to have the insured indemnified and the insurers fight over who owed what and when. Montrose avoids multiple lawsuits with its excess insurers in favor of the insurers entering into multiple lawsuits for contribution. The decision applies an age old rule of insurance coverage interpretation: “When in doubt, no matter how small, make the insurer pay.”
© 2020 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.