Why this Case is Important
On April 6, 2020, after decades of appeals, the Supreme Court of California finally answered the question of which exhaustion method is required under the "all sums with stacking" approach when continuous injury occurs over the course of multiple policy periods for which an insured purchased multiple layers of excess insurance.
Previously the courts have held that "excess" insurance can only be reached by the insured when all other primary insurance policies across all relevant time periods have been exhausted; commonly referred to as "horizontal exhaustion." For insurers, a shift to the "vertical exhaustion" method means that "excess" insurance may now be reached once the directly underlying insurance for "the same time period" has been exhausted.
Plaintiff Montrose Chemical Company was sued for the continuous environmental damage it caused in the Los Angeles area between 1947 and 1982. Montrose entered consent decrees agreeing to pay for the environmental cleanup and alleged that so far it has paid out over $100 million to meet these obligations. Once all the primary policies had been exhausted for the time period, Montrose attempted to access its excess insurance policies. The excess insurance companies refused to allow Montrose to access the excess insurance until Montrose had "horizontally exhausted" the underlying policies for all time periods. Montrose argued that the Court should apply the rule of "vertical exhaustion" and that under this rule Montrose was entitled to access all excess insurance policies once the primary policies underlying the same time period had been exhausted.
The Supreme Court of California reversed the Appellate court’s finding and held that an insured is not required to exhaust excess insurance at lower levels for all periods triggered by continuous injury before it can obtain coverage from higher level excess insurance in any period. The Montrose III Court stated: "Having adopted an all-sums-with-stacking approach to the coverage of long-tail injuries, we are now 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?"
Reading the language of the insurance policy in light of the "background principles of insurance law" and taking into consideration the expectations of both parties, the Court found for Montrose. Further stating, that ambiguities in the terms of the contract are to be resolved in the favor of the policy holder. The Court held that an insured "is entitled to access otherwise available coverage under any excess policy once it has exhausted directly underlying excess policies for the same policy period. An insurer called on to provide indemnification may, however, seek reimbursement from other insurers that would have been liable to provide coverage under excess policies issued for any period in which the injury occurred." Montrose Chemical Corporation of California v. Superior Court, Case No. S244737, 2020 WL 1671560 (Cal. Apr. 6, 2020). at 1.
In Montrose I the court outlined the principle of "the continuous injury trigger of coverage," holding that "bodily injury and property damage which is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods." Id. at 689. The insurers contended that the proper reading of "other insurance" means "other underlying insurance—that is, only excess insurance with lower attachment points from all relevant policy periods." Id. at 17. The court challenged the insurers’ reading of "other insurance," questioning why insurers did not explain why the reference could not be read as a requirement that "the insured exhaust only excess insurance with lower attachment points from same policy period." Id. at 18. The decision in Montrose III comes after decades of appeals, where previous case law has applied horizontal exhaustion requiring the insured to exhaust all underlying insurance policies for the entire time period. The court made clear, however, that its holding applies only to excess policies.
In Dart, the court said an insurer could not avoid its coverage obligations by relying on an "other insurance" clause. The court reasoned that "apportionment among multiple insurers must be distinguished from apportionment between an insurer and its insured. When multiple policies are triggered on a single claim, the insurers' liability is apportioned pursuant to the "other insurance" clauses of the policies or under the equitable doctrine of contribution. That apportionment, however, has no bearing upon the insurers' obligations to the policyholder. ... The insurers' contractual obligation to the policyholder is to cover the full extent of the policyholder's liability (up to the policy limits)." (Id. at p. 1080, 124 Cal.Rptr.2d 142, 52 P.3d 79, quoting Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 105–106, 52 Cal.Rptr.2d 690.)
From a practical standpoint it is important to look to what the court did not do. The Montrose Court specifically declined to address "when or whether an insured may access excess policies before all primary insurance covering all relevant policy periods has been exhausted." Id. at fn. 4. Depending upon the specific contractual language, a shift towards to the "vertical exhaustion" method could allow policy holders to determine which higher layer excess policy they access, prioritizing by most favorable terms.