Insurance Coverage & Bad Faith Newsletter - Spring 2020

Montrose Chemical Corporation Of California v. Superior Court

(Supreme Court Finds That Insureds Can Trigger Excess Insurance Policies on a Vertical Basis Without First Exhausting Lower Level Excess Policies on a Horizontal Basis)

(May 2020) - In Montrose Chemical Corp. of Calif. v. Superior Court, ---Cal.5th--- (April 6, 2020), the California Supreme Court reversed the underlying Court of Appeal decision finding that lower level excess policies must be exhausted on a horizontal basis before coverage is triggered under higher layer excess policies in connection with pollution claims involving continuing loss over a 34-year period. The parties had agreed that all primary coverage for this period had been exhausted. The Supreme Court held that excess policies can be exhausted on a vertical basis, assuming scheduled underlying primary and lower level excess policies have been exhausted. The Supreme Court rejected the upper level excess insurers’ argument that the other insurance clauses in their policies required exhaustion of all underlying insurance, whether specifically scheduled during the same policy period, or during other unscheduled policy periods. 

The Supreme Court held as follows:

Reading the relevant policy language in light of background principles of insurance law and considering the parties’ reasonable expectations, we conclude that a rule of vertical exhaustion is appropriate. Under that rule, the insured has access to any excess policy once it has exhausted other directly underlying excess policies with lower attachment points, but an insurer called upon to indemnify the insured’s loss may seek reimbursement from other insurers that issued policies covering relevant policy periods.

The Supreme Court reasoned as follows with respect to excess insurers’ other insurance clauses:

In sum, the “other insurance” clauses do not clearly specify whether a rule of horizontal or vertical exhaustion applies here. Read in isolation, the “other insurance” clauses might plausibly be read to perform the function the insurers ascribe to them. But 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. Rather, in the absence of any more persuasive indication that the parties intended otherwise, the policies are most naturally read to mean that Montrose may access its excess insurance whenever it has exhausted the other directly underlying excess insurance policies that were purchased for the same policy period.

The Supreme Court also found that excess insurance policies triggered on a vertical basis were still free to seek contribution from other excess insurance policies that covered the loss. The Supreme Court also specifically stated that its decision did not address the rule that all primary coverage must be exhausted before coverage under an excess policy is triggered for a loss. See Community Redevelopment Agency v. Aetna Cas. & Sur. Co., 50 Cal.App.4th 329 (1996). The Supreme Court stated that “regardless of whether Community Redevelopment was correct to apply a rule of horizontal exhaustion in that distinct context - a question not presently before us - we are unpersuaded that reasoning of Montrose I requires us to apply a rule of horizontal exhaustion that would limit Montrose’s ability to access insurance coverage that it has paid for.”

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