California Supreme Court Finds Vertical Exhaustion Applies to First-Level Excess Policies
Addressing issues left open in its seminal decision in Montrose, the California Supreme Court found that the language in the first-level excess policies meant that the insured could access the policies upon exhaustion of the directly underlying policies purchased for the same policy period. Truck Ins. Exchange v. Kaiser Cement & Gypsum Corp., 2024 Cal. LEXIS 3271 (Cal. June 17, 2024).
From 1944 through the 1970's, Kaiser manufactured asbestos-containing products at numerous different facilities. By 2004, more than 24,000 claimants had filed product liability claims against Kaiser alleging that they had suffered bodily injury as a result of exposure to Kaiser's asbestos products. Kaiser tendered these claims to Truck, one of several primary insurers that had issued CGL policies to Kaiser.
In 2001, Truck initiated this coverage action to determine its indemnity and defense obligations to Kaiser. Truck later amended its complaint to add a cause of action for contribution against several of Kaiser's excess insurers. The issue presently before the court was whether Truck was entitled to contribution from various coinsurers that issued first-level excess policies to Kaiser during the period in question.
Truck issued a primary policy for the 1974-1975 period that provided a "per occurrence" limit of $500,000, but did not include any aggregate limit of coverage. By contrast, all the primary policies issued by non-Truck insurers did contain an aggregate limit on coverage. Each of the first-level policies included language stating that coverage would not attach until Kaiser had exhausted underlying primary policies that were listed in a schedule of underlying insurance.
Kaiser assigned all asbestos-related bodily injury claims that triggered Truck's 1974 primary policy to the 1974 policy. The excess carriers noted that Kaiser selected Truck's 1974 policy because it had no aggregate limit, did not require Kaiser to pay an allocated share of defense (like Truck's other primary policies), and had the lowest deductible per occurrence ($5,000).
Before the trial court, Truck argued that the first-level excess insurers' indemnity obligations to Kaiser attach upon exhaustion of the directly underlying primary policies. Because the excess insurers' coverage obligations were triggered, Truck argued they should be ordered to contribute to Truck's indemnity and defense obligations under the 1974 policy. The excess carriers argued there was no basis for contribution because all of the applicable excess policies contained "other insurance" provisions that conditioned coverage on the exhaustion of all available underlying primary insurance that had been issued during the continuous period of damage, which necessarily included Truck's 1974 primary policy.
After a bench trial in 2016, the trial court denied Truck's contribution request. While Truck's appeal was pending, the Supreme Court issued its decision in Montrose Chemical Corp. of California v. Superior Court, 9 Cal. 5th 215 (2020). Montrose held that an insured's excess policies required only vertical exhaustion, meaning that the insurers' indemnity obligations attached as soon as the insured had exhausted any excess policies with lower attachment points that had been issued for the same policy year. Nevertheless, the Court of Appeal concluded that the first-level excess insurers did not owe Kaiser any indemnity obligation until Kaiser had exhausted every primary policy issued during the period of continuous damage. Further, there was no possible basis to award Truck contribution.
The Supreme Court granted review. As in Montrose, the court was faced with questions regarding whether language in standard CGL excess policies imposed a rule of vertical or horizontal exhaustion in the context of continuous injury insurance claims. The excess carriers argued that primary insurers generally received higher premiums and offered lower liability limits in exchange for coverage that attached immediately upon the happening of an insurance occurrence and provide defense costs. Therefore, horizontal exhaustion should apply.
The Supreme Court held 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, was most naturally read to mean that the insured could access the policies upon exhaustion of the directly underlying policies that were purchased for the same period. Excess insurers could, however, write their future excess policies in a manner that expressly required horizontal exhaustion.
Regarding equitable contribution sought by Truck, the excess insurers and Kaiser argued that even if it might be appropriate to order contribution between primary and excess insurers, such an order would be unjust here. Because Truck agreed to indemnify Kaiser up to $500,000 for each asbestos-related bodily injury claim but placed no aggregate limit on coverage, ordering the excess insurers to contribute to that initial $500,000 in coverage would effectively allow Truck to pay less coverage than it promised under its 1974 policy.
The Court of Appeal did not consider these issues regarding contribution. Having now clarified that the first-level excess insurers' indemnity obligations to Kaiser attached upon exhaustion of the directly underlying primary policies, the Supreme Court remanded the matter for the Court of Appeal to reevaluate whether contribution would accomplish ultimate justice among the insurers and their policy holder. On remand, the parties could raise arguments regarding whether contribution was ever appropriate between primary and excess insurers and, if so, whether contribution would be appropriate under the circumstances of this case.
