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California Supreme Court:
Vertical Exhaustion Rule Applies to Excess Insurer
Groban Declares Insured May Access Policy Upon Exhaustion of Underlying Primary Coverage for Same Period in Case Involving Continuing Injury; Contrary C.A. Opinions Disapproved
By Kimber Cooley, Staff Writer
An insured, in a continuous injury context, may seek coverage from first-level excess insurance policies upon the exhaustion of any underlying primary coverage obtained for the same period—referred to as “vertical exhaustion”—if the language in the agreement so provides, the California Supreme Court held yesterday.
The decision comes in a case in which a primary insurer sought equitable contribution from excess providers for claims arising from asbestos-related injuries allegedly caused by the insured, a manufacturer of the dangerous product.
Justice Joshua P. Groban wrote the opinion for the unanimous court which reverses the judgment of Div. Four of the Second District Court of Appeal.
The decision expressly disapproved of Courts of Appeal cases applying a “horizonal rule” in which an insured is required to exhaust all primary policies issued during the continuous period of damage, rather than only those covering the same time frame, before accessing the excess policies. Groban wrote:
“[W]e disapprove [Community Redevelopment Agency v. Aetna Casualty & Surety Company’s (1996) conclusion that standardized ‘other insurance’ provisions appearing in first-level excess policies compel a rule of horizontal exhaustion. We likewise disapprove language in Padilla Construction Co., Inc. v. Transportation Ins. Co. (2007)…and Stonewall Ins. Co. v. City of Palos Verdes Estates (1996), suggesting that California law generally requires horizontal exhaustion of all primary insurance in cases of continuous loss.”
Insurance Dispute
Appealing the decision was Truck Insurance Exchange, a primary insurer for Kaiser Cement and Gypsum Corporation, a manufacturer of asbestos-related products from 1944 until the 1970s. Truck filed an equitable contribution claim against several insurers that had issued first-level excess policies to Kaiser for years where the directly underlying primary policy had been exhausted.
By 2004, more than 24,000 claimants had filed product liability suits against Kaiser alleging that they had suffered injuries such as asbestosis or cancer following exposure to the company’s products. Truck initiated the instant litigation in 2001 to determine its coverage obligations to Kaiser.
Earlier decisions in the over-20 years of litigation determined that Truck’s 1974 policy was the only remaining primary insurance for any asbestos-related bodily injury claim alleging initial exposure during the 1974-1975 policy period. Truck filed the equitable contribution claim against excess insurers London Market Insurers, Insurance Company of the State of Pennsylvania, and Granite State Insurance Company.
Continuous Injury Cases
Groban noted that “it has long been the rule” that there is no contribution between a primary and excess carrier without a specific agreement to the contrary. However, the jurist explained:
“That analysis becomes more complicated in the context of continuous injuries, which extend over multiple policy periods. In that circumstance, the question arises whether the excess insurers’ indemnity obligations to the insured attach: (1) only after the exhaustion of all primary layers of insurance issued during the continuous period of injury (horizontal exhaustion); or (2) whether attachment occurs upon exhaustion of the directly underlying primary insurance that was issued during the same policy year (vertical exhaustion).”
He reasoned:
“If the excess insurers have no coverage obligation until all primary policies have exhausted (horizontal exhaustion), it follows that the excess insurer cannot be said to be on the same level of liability as any of the primary insurers, thus precluding any basis for contribution between the two types of insurers. In effect, horizontal exhaustion results in the same situation between excess and primary insurers that occurs where a claim implicates only one policy period: the excess insurer and primary insurer remain on distinct levels of liability, with the excess insurer’s obligations being triggered only after the primary coverage is exhausted, thus precluding contribution.”
Groban continued:
“Under vertical exhaustion, however, the excess insurer owes an indemnity obligation to the insured as soon as the directly underlying primary policy has exhausted. That is true even if primary insurance issued for a precedent or subsequent policy period remains unexhausted (and thus available to the insured). Thus, unlike the situation with horizontal exhaustion, under a rule of vertical exhaustion, a first-level excess insurer from one policy period and a primary insurer from a different policy period might simultaneously owe coverage to the same insured for the same injury.”
Montrose Case
The justice pointed to the 2020 decision by the high court in Montrose Chemical Corporation of California v. Superior Court (referred to in the opinion as “Montrose III”) in which the court found that “other insurance” provisions in an underlying policy called for vertical exhaustion as to between higher and lower-level excess insurance carriers.
The court in Montrose considered the language in the policy as well as background principles of insurance law and the reasonable expectations of the parties.
Applying the reasoning to the case at hand, Groban wrote:
“[W]e agree with Truck that the policy language at issue here cannot be meaningfully distinguished from the policies that we addressed in Montrose III. We also agree that the qualitative distinctions between primary and excess insurance do not justify assigning an entirely different meaning to standardized ‘other insurance’ clauses merely because the excess policy sits over primary insurance rather than another level of excess insurance.”
He continued:
“[T]he provisions are substantially identical, and in several formulations exactly identical, each providing in various ways that the excess policy shall be excess to the underlying primary policy identified in the schedule of underlying insurance along with any ‘other insurance’ or ‘other underlying insurance’ available to the insured. As in Montrose III, none of the provisions explicitly reference ‘other insurance’ purchased for different policy periods.”
Given the similarities between the language in the policies, he declared: “[W]e believe that the language of the first-level excess policies, when considered in conjunction with the insured’s reasonable expectations and the historical role of ‘other insurance’ provisions, is most naturally read to mean that the insured may access the policies upon exhaustion of the directly underlying policies that were purchased for the same period. Excess insurers do, however, remain free to write their future excess policies in a manner that expressly requires horizontal exhaustion.”
Equitable Contribution
Groban pointed out that the excess insurers argue that the Montrose case is not dispositive of the actual question in the case—whether Truck is entitled to contribution from the excess carriers.
The justice determined that the issue should be resolved on remand, saying:
“Although we have concluded that the qualitative distinctions between primary and excess insurance do not present a sufficient basis to depart from the interpretation of the ‘other insurance’ provisions that we adopted in Montrose III (i.e., that such provisions impose only a rule of vertical exhaustion on the insured), whether those distinctions might have more salience in the context of equitable contribution between insurers remains an open question.”
He continued:
“Because the Court of Appeal denied contribution based solely on its erroneous interpretation of the first-level excess policies, it did not consider these or any other alternative arguments related to the question of contribution.”
Groban concluded that “[h]aving now clarified that the first-level excess insurers’ indemnity obligations to Kaiser attach upon exhaustion of the directly underlying primary policies, we find it appropriate to remand the matter for the court to reevaluate whether contribution would” best accomplish justice.
The case is Truck Insurance Exchange v. Kaiser Cement and Gypsum Corporation, 2024 S.O.S. 1907.
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