In Montrose Chemical Corp. of Cal. v. Superior Court (No. S244737, filed 4/6/20) (Montrose III), the California Supreme Court held that, as between excess insurers at differing levels of coverage, a rule of “vertical exhaustion” or “elective stacking” applies, whereby the insured may access any excess policy once it has exhausted other excess policies with lower attachment points in the same policy period. The Court limited the rule to excess insurance, stating that “[b]ecause the question is not presented here, we do not decide when or whether an insured may access excess policies before all primary insurance covering all relevant policy periods has been exhausted.”
Montrose manufactured the insecticide DDT in Torrance from 1947 to 1982. In 1990, the state and federal governments sued Montrose for environmental contamination and Montrose entered into partial consent decrees agreeing to pay for cleanup. Montrose claimed to have expended in excess of $100 million doing so, and asserted that its future liability could exceed that amount.
Recounting that in Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, the Court adopted the “all sums” rule, that insurers must pay all sums for property damage attributable to the polluted site, up to their policy limits, as long as some of the continuous property damage occurred while each policy was on the loss. And further, in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, the Court adopted the “all-sums-with-stacking indemnity” rule that effectively stacks the insurance coverage from different policy periods to form “one giant uber-policy” with a coverage limit equal to the sum of all purchased insurance policies. 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?”
The Montrose III Court rejected the insurers’ argument for horizontal exhaustion, under which the insured would have to exhaust all of its lower layer excess coverage across all relevant policy periods before accessing any of its higher layer coverage. Instead, the Court agreed with Montrose that vertical exhaustion applies, permitting an insured to access any higher layer excess policy once it has exhausted the directly underlying excess policy covering the same period.
The answer lay in the excess policies’ “other insurance” clauses. While identifying several different wordings, the Montrose III Court found one common characteristic: “The ‘other insurance’ clauses at issue clearly require exhaustion of underlying insurance, but none clearly or explicitly states that Montrose must exhaust insurance with lower attachment points purchased for different policy periods. Policies that disclaim coverage for amounts covered by ‘other underlying insurance,’ or require exhaustion of ‘all underlying insurance,’ for example, could fairly be read to refer only to other directly underlying insurance in the same policy period that was not specifically identified in the schedule of underlying insurance, anticipating that the scheduled underlying insurance may later be replaced or supplemented with different policies.”
The Montrose III Court said that “[t]he insurers do not explain why the reference [to ‘other insurance’ or ‘other underlying insurance’] is not properly understood to mean ‘other directly underlying insurance’—that is, a requirement that the insured exhaust only excess insurance with lower attachment points from the same policy period. This is one clue that the plain language of these clauses is not adequate to resolve the dispute in the insurers’ favor.”
The Montrose III Court then cited numerous authorities for the proposition that “other insurance” clauses are meant to avoid double recovery under concurrent insurance policies and do not govern allocation of successive policies for continuous losses, making it “difficult to read the clauses here as a clear and explicit direction to adopt a requirement of horizontal exhaustion in cases of long-tail injury.”
The Court also noted that requiring horizontal exhaustion would potentially change the effect of the specifically scheduled underlying limits of the respective policies for a continuous loss because requiring exhaustion of all insurance in every policy period in the layer below would effectively raise the attachment point of the individual higher-level policy.
Making reference to “reasonable expectations,” the Montrose III Court also noted the burden of making the insured have to possibly prove coverage under multiple underlying policies, all with varying terms and exclusions, in order to access the higher level of excess insurance. By contrast, the Court said that nothing in its “vertical exhaustion” rule precludes a triggered excess insurer from seeking contribution from other insurers.
Having limited its decision to excess insurance only, the Montrose III Court distinguished Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, as only addressing horizontal exhaustion as between primary and first-layer excess insurance.
The Montrose III Court summed up, stating: “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.”