By Kevin Clonts
The ongoing litigation involving the cleanup of long-term environmental contamination by the Montrose Chemical Corporation of California has once again resulted in new insurance law. In 1995, the litigation resulted in California’s “continuous injury trigger of coverage” rule, under which “damage which is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods.” In an opinion released in April 2020, the California Supreme Court established the rule of “vertical exhaustion” or “elective stacking,” whereby an insured confronted with a long-tail loss may access any excess policy once it has exhausted other policies with lower attachment points in the same policy period.
Montrose Chemical Corp. of California v. Superior Court (Apr. 6, 2020) ___Cal.5th___, 2020 Cal. LEXIS 2095, involved a “long-tail” injury, in which pollution released over a period of years resulted in ongoing and progressive damages. Montrose had multiple layers of coverage during each of multiple policy periods, including the underlying primary policy and many stacked excess policies.
The parties disputed the meaning of the “other insurance” clauses in the excess insurance policies. “These clauses provide, in a variety of ways, that each policy shall be excess to other insurance available to the insured, whether or not the other insurance is specifically listed in the policy’s schedule of underlying insurance.” The insurers argued that these clauses call for a rule of “horizonal exhaustion,” under which an 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. Though the court acknowledged that this is one reasonable interpretation of the “other insurance” clauses, it pointed out that no clause stated that the insured “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.” Ultimately, the court concluded that the policies are “most naturally read” to mean that the insured may access its excess insurance whenever it has exhausted the other directly underlying insurance policies that were purchased for the same policy period.
In addition, the court reasoned that vertical exhaustion more readily protects the objectively reasonable expectations of the insured. Though in theory horizontal exhaustion could be implemented with relative ease, insurance policies “come in all shapes and sizes, each covering different periods of time, providing different levels of coverage, and setting forth distinct exclusions, terms, and conditions. Given all of these variations across the relevant dimensions, how would a rule of horizonal exhaustion apply?” These differences in policies “would create as many layers of additional litigation as there are layers of policies,” thereby requiring the insured to engage in ongoing litigation in order to obtain the benefits of the policies it purchased.
Even though the vertical exhaustion rule allows the insured to access any policy period so long as the directly underlying insurance has been exhausted, insurers may seek contribution from other excess insurers also liable to the insured. This rule, the court reasoned, allows the carriers to seek fair allocation amongst themselves, and shifts from the insured to the insurers the “administrative task of spreading the loss among insurers.”
The court explained that its new rule was a continuation of the rulings that built upon Montrose I’s “continuous injury trigger of coverage” rule and eventually resulted in the “all-sums-with-stacking” rule, which “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.”
In sum, under the “vertical exhaustion” rule, an insured confronted with a long-tail loss may seek indemnification under any excess policy once it has exhausted the underlying excess policies in the same policy period, and the carriers then can seek contribution from other carriers on the risk.