California Supreme Court building 350 McAllister St, San Francisco, CA 94102 (Photo: Jason Doiy/ALM)

This story is reprinted with permission from the Insurance Coverage Law Center, the industry's only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe. 

Clarification: The story has been updated to reflect that the court's holding is limited to how lower layers of excess policies are exhausted to get to higher layers. 

In a decision described as a major victory for policyholders, the California Supreme Court has unanimously ruled that policyholders do not always have to first exhaust all of their primary coverage over different policy periods in order to access excess coverage for certain years. The case is Montrose Chem. Corp. of Cal. v. Superior Court, No. S244737, 2020 Cal. LEXIS 2095 (Apr. 6, 2020).

Montrose manufactured an insecticide, dichlorodiphenyltrichloroethane, or DDT, at a Torrance, California facility from 1947 to 1982. In 1992, the US and the State of California together sued Montrose for environmental contamination allegedly caused by the operation of the Torrance facility. Montrose agreed to pay for environmental cleanup, and has paid over $100 million and asserts that its future liability could approach or exceed this amount.

Between 1961 and 1985, Montrose had primary and excess comprehensive general liability insurance through the defendant insurers to cover its Torrance facility operations. Primary insurance is the first layer of coverage, where liability attaches immediately after an occurrence that triggers liability, while excess insurance is indemnity coverage that attaches after the underlying insurance coverage for a claim is exhausted. The obligation of an excess insurer to provide coverage begins when a certain level of loss or liability has been reached, which is referred to as the "attachment point" of the excess policy.   In this case, 40 insurers issued more than 115 excess policies between 1961 and 1985, which altogether provide coverage sufficient to indemnify the total anticipated liability that Montrose faces.

So Montrose had to decide whether to first file with all of its primary insurers, then collect from its secondary insurers, in doing so dealing with challenging coverage provisions in some policies, or select a few primary insurers that were most likely to easily provide coverage, and then tender to selected excess insurers for that same policy period, who would then assumedly attempt to recoup those losses from the primary insurers. This is "vertical stacking."

The trial court and the Court of Appeal both denied Montrose's motion for summary judgment and granted, wholly and in part, respectively, the insurers' parallel motion, concluding that the plain language of many of the excess policies that Montrose purchased provide that they "attach not upon exhaustion of lower layer policies within the same policy period, but rather upon exhaustion of all available insurance (Montrose Chemical Corp. v. Superior Court (2017) 14 Cal. App. 5^th 1327 [Cal. Rptr. 3d 748]). Soon after this decision came out in 2017, another Court of Appeal came down on the other side, ruling that vertical exhaustion was appropriate giving the relevant policy language and California case law (State of California v. Continental Ins. Co. (2017) 15 Cal. App. 5^th 1017 [223 Cal. Rptr. 3d 716].)

The California Supreme Court took on this case to determine whether "vertical exhaustion" or "horizontal exhaustion" is required when continuous injury occurs over the course of several policy periods for which there are multiple layers of excess insurance.

Montrose argued that a policyholder is entitled to coverage under any excess policy once it has exhausted other policies with lower attachment points in the same policy period. This is called "vertical exhaustion" or "vertical stacking." The excess insurers argued for a ruling of "horizontal exhaustion," which allows for access to the excess policies only after Montrose had exhausted other policies with lower attachment points from every policy period during which the damage occurred that resulted in liability.

Each excess policy stated that Montrose must exhaust the limits of underlying insurance coverage before coverage will apply. The excess policies also included clauses that required that "other insurance" must be exhausted before the excess policy can be accessed.

The excess insurers that Montrose filed claims with argued that this practice was unfair and that Montrose should have to tender to all primary carriers prior to tendering to any excess insurers. But, the policies at issue did not include terms that Montrose had to tender to all primary insurers first, prior to seeking excess limits, so the case asked what outcome is appropriate if such terms are not present?

The Court read the relevant policy language in light of background principles of insurance law, and also considered the reasonable expectations of the parties, and concluded that vertical exhaustion is appropriate. So, the insured has access to any excess policy after exhausting other directly underlying excess policies that have lower attachment points, but an insurer that is called upon to indemnify the insured's loss can seek reimbursement from other insurers that provided policies during relevant time periods.

The Court also noted that "[a]lthough the insurers' interpretation is not an unreasonable one, it is not the only possible interpretation of the policy language." And [t]he "other insurance" clause at issue clearly requires the exhaustion of underlying insurance, but none clearly or explicitly stated that Montrose must exhaust insurance with lower attachment points purchased for different policy periods." The "other insurance" clauses didn't clearly specify whether horizontal or vertical stacking applied, and, if read in isolation, those clauses might be read the way the insurers wanted them to be read. But, the court noted, if "read in conjunction with the actual language of other provisions in the policies, and in light of their historical role of governing allocation between overlapping concurrent policies, the insurers' reading becomes less likely." So, the Court agreed with Montrose and stated that "[Montrose] 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."

Editors Note: According to Insurance Recovery Partners David Goodwin and René Siemens from Covington & Burling LLP who worked as counsel on this case, when dealing with this many insurers and attempting to determine who appropriately responds, "[u]nder the California Supreme Court's decision, the policyholder would pick a year or multiple years – depending on how much insurance it needs to be made whole – and the policyholder would go first to the primary policy and then after the primary policy pays, to the excess policies in the year or years selected.  Each insurer would pay its full limit of liability until the insured is made whole." They also commented that "with appointments to the California Supreme Court over the past decade, the opinions coming from that Court have been outstanding – well reasoned, well written, and, generally, unanimous in civil cases. The California Supreme Court plainly is the best state supreme court in the country once again, as it was back in the 1950′s and 1960′s."