California Supreme Court Rules In Favor Of Vertical Exhaustion
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The California Supreme Court ruled that vertical exhaustion applied to determine how a policyholder could access its excess insurance policies. Montrose Chem. Corp. v. Superior Court, No. S244737 (Cal. Apr. 6, 2020). The case involved coverage for Montrose Chemical Corporation’s environmental liabilities at its Torrance facility under insurance policies issued from 1961 to 1985. Montrose and its insurers agreed that Montrose’s primary policies were exhausted but disputed the sequence in which Montrose could access the excess insurance policies.

Montrose argued for vertical exhaustion. Under that method, each excess policy would be triggered after the exhaustion of any underlying excess policies in the same policy period. The insurers argued for horizontal exhaustion. Under that method, an excess policy would be triggered after the exhaustion of all underlying policies in all relevant policy periods.

The California Supreme Court sided with Montrose. Relying on settled principles of insurance law, the court first examined the other insurance provisions and concluded that those clauses “do not clearly specify whether a rule of horizontal or vertical exhaustion applies here.” Notably, the court cited the recent Restatement of Liability Insurance on other insurance clauses in support of its conclusion.

The court went on to consider the parties’ reasonable expectations. It found those expectations favored vertical exhaustion and not horizontal exhaustion. According to the court, applying horizontal exhaustion would not be straightforward because the 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.” The court stated that horizontal exhaustion “would create significant practical obstacles to securing indemnification” and “undermin[e] the policyholder’s reasonable expectation that coverage would be triggered upon the exhaustion of the amount listed as the policy’s stated attachment point.”

The insurers were not left without any recourse. Instead, the court acknowledged that the insurers could seek reimbursement from one another through equitable contribution or subrogation.

The Supreme Court of California’s opinion in Montrose makes clear that vertical exhaustion applies to long-tail claims when determining excess insurers’ obligations. This will make it easier for policyholders in California to obtain payment from excess insurers for settlements and damages when a claim implicates multiple policy periods.

 

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    Patrick counsels clients on all aspects of insurance and reinsurance coverage. He assists clients in obtaining appropriate coverage and represents clients in resolving disputes over coverage, including in litigation and ...

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