In Short
The Decision: In a recent decision, the California Supreme Court reaffirmed a policyholder's right to reach excess liability coverage by providing key guidance as to the proper exhaustion method for continuous injury claims spanning multiple policy periods.
The Holding: The court held that under standard form language used in commercial general liability policies, a policyholder only needs to exhaust the directly underlying primary policy to obtain the benefits of first-level excess liability coverage (i.e., "vertical exhaustion"). In doing so, the court rejected the insurer's attempt to narrow prior precedent and require exhaustion of all primary policies on the risk during alleged continuous injuries (i.e., "horizontal exhaustion").
Looking Ahead: The decision reaffirms the insurance coverage rights of policyholders when addressing long-tail claims that trigger numerous policy periods. The decision further helps policyholders resist attempts by excess insurers to avoid their coverage obligations.
On June 17, 2024, in Truck Insurance Exchange v. Kaiser Cement and Gypsum Corporation, the California Supreme Court rejected an insurer's attempt to narrow the application of vertical exhaustion in continuous injury claims that span numerous policy years. Specifically, the Court answered a question that was potentially left open in Montrose Chemical Corp. of California v. Superior Court, 9 Cal. 5th 215 (2020) ("Montrose III")—whether a policyholder can access a first-level excess policy upon exhaustion of the underlying primary insurance obtained for the same policy period (i.e., vertical exhaustion); or alternatively, whether a policyholder must exhaust all primary policies issued during the continuous period of damage (i.e., horizontal exhaustion). The court unequivocally held that the policy language required only vertical exhaustion, marking a win for policyholders.
The appellant, Truck Insurance Exchange ("Truck"), was a primary insurer for Kaiser Cement and Gypsum Corporation ("Kaiser"), a company that manufactured and sold products containing asbestos. Truck filed an equitable contribution claim against several of Kaiser's first-level excess insurers. The trial court denied Truck's request for equitable contribution on the ground that the "other insurance" provision in Kaiser's excess policies required horizontal exhaustion of all primary insurance. The "other insurance" provisions stated that the policyholder must exhaust any "other insurance" or "other underlying insurance" before the excess policy can be accessed.
In 2020, pending Truck's appeal of the order denying contribution, the California Supreme Court issued its decision in Montrose III, which considered similar "other insurance" clauses. The Montrose III decision concluded that, where all primary policies were exhausted, the availability of excess policies was governed by vertical exhaustion. In other words, when all primary policies on the risk are exhausted, an excess policy could be accessed as soon as all the directly underlying insurance from that policy period (i.e., any primary and any excess policies with a lower attachment point) were exhausted.
Truck argued on appeal that the Montrose III decision applied to allow vertical exhaustion of the first-level excess policies even where all of Truck's primary insurance at issue was not yet exhausted. The appellate court disagreed and found that Montrose III did not extend to excess policies that sit over primary insurance, which has characteristics that are distinct from primary insurance (including immediate coverage and defense obligations). As a result, the appellate court concluded that horizontal exhaustion applied and that excess insurers had no coverage obligation until all primary insurance had been exhausted.
The California Supreme Court reversed the appellate court, relying on and expanding the precedent set in Montrose III. It held that "Montrose III applies equally here": "the first-level excess policies do not require the insured to horizontally exhaust primary insurance issued during different policy periods." The court explained that the policy language of the first-level excess policies could not be meaningfully distinguished from the policy language of the excess policies it addressed in Montrose III. It also reasoned that the qualitative distinctions between primary and excess insurance do not justify assigning an entirely different meaning to the standardized "other insurance" clauses merely because the excess policies sat over primary insurance rather than another level of excess insurance. The court noted that a rule of horizontal exhaustion would effectively raise the excess policy's attachment point with each subsequent primary policy issued during the period of continuous injury, and would thus operate to penalize the policyholder simply because it obtained more insurance.
In remanding the case, the court noted, however, that "its conclusion that the first-level excess policies only require vertical exhaustion" did not fully resolve whether Truck was entitled to equitable contribution from the excess insurers. Because an insurance coverage dispute between an insured and its insurer is based on different principles than a contribution claim between coinsurers, the ultimate question of whether Truck was entitled to contribution would require an examination of "equitable principles designed to accomplish ultimate justice in the bearing of a specific burden." Thus, irrespective of the outcome of insurers battling each other over contribution obligations, the principles outlined by the court provide valuable reassurance to policyholders pursuing multiple insurers over extended coverage periods.
The Kaiser decision further affirms that policyholders retain discretion concerning how to utilize their available insurance assets—i.e., once a particular primary policy has been exhausted, a policyholder can choose to seek payment from the excess policies immediately above that exhausted primary policy in addition to seeking coverage from other primary policies in other policy periods. Policyholders facing continuous injury claims that span multiple policy years should continue to carefully analyze the policy language and strategic options to maximize their coverage rights.
Three Key Takeaways
1. The California Supreme Court has reaffirmed a policyholder's ability to reach excess liability coverage for continuous-injury claims occurring during multiple policy periods.
2. Subject to the policy language at issue, once a primary general liability policy is exhausted, a policyholder can pursue coverage under the excess policies directly above that exhausted policy, in addition to seeking coverage under other primary policies on the risk.
3. Policyholders should carefully review the relevant language and composition of their overall coverage potentially available to address claims spanning multiple policy periods.
