In a continuous injury case, an insured is entitled to indemnification under any excess policy once the insured exhausts the directly underlying excess policies in the same policy period. (Montrose Chemical Corp. of California v. Superior Court (2020) 9 Cal.5th 215)
Facts
From 1947 to 1982, Montrose Chemical Corporation of California manufactured dichloro-diphenyl-trichloroethane (DDT) at a facility in Torrance, California. In 1990, the United States of America and the State of California sued Montrose in federal court under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). In the CERCLA action, the U.S. and California alleged that Montrose’s manufacture of DDT at the Torrance facility caused environmental contamination that damaged land, water, and wildlife in the Los Angeles Harbor and neighboring waters. Montrose eventually entered into partial consent decrees in the CERCLA action and incurred damages of more than $100 million.
Between 1961 and 1985, Montrose purchased “layers” of commercial general liability (CGL) policies from various insurance carriers. In each of the relevant years, Montrose purchased a layer of “primary” CGL insurance policies that required the insurers to defend Montrose against suits seeking covered damages, and to indemnify Montrose for covered damages up to the policy limits. Above the “primary” insurance policies were multiple layers of “excess” CGL policies, which provided additional coverage once all scheduled underlying insurance and any other insurance was exhausted. In the early years, Montrose purchased just a few layers of excess coverage; in some later years, Montrose purchased more than 40 layers of excess coverage, with aggregate limits of liability in excess of $120 million. In total, Montrose had more than 115 excess policies.
Montrose sued all of its primary and excess insurers to resolve various coverage disputes arising from the underlying CERCLA action. Eventually, Montrose exhausted its primary coverage. Montrose then sought a ruling allowing for “vertical exhaustion,” whereby Montrose could access any higher-level excess policy following exhaustion of lower-level excess policies in the same policy period. The excess insurers, on the other hand, sought a ruling requiring “horizontal exhaustion,” whereby Montrose could access a higher-level excess policy only after exhaustion of lower-level excess policies from every policy period in which continuous injury occurred.
Both the trial court and the Court of Appeal rejected “vertical exhaustion” in favor of “horizontal exhaustion,” thus concluding that Montrose could not access higher-level excess policies until it had exhausted lower-level excess policies for all policy years in which continuous injury occurred. Following those adverse rulings in the trial court and the Court of Appeal, Montrose sought and obtained review by the California Supreme Court.
Holding
The California Supreme Court reversed, and held that “vertical exhaustion,” not “horizontal exhaustion,” applied in this circumstance.
The Supreme Court began by noting that in cases involving continuous injury, California follows an “all-sums-with-stacking” rule, which allows the insured to obtain indemnification from every policy that covers a portion of the loss, up to the full limits of each policy. The Supreme Court then held that while the subject excess policies all contained “other insurance” provisions requiring exhaustion of all underlying insurance, those provisions could fairly be read as referring only to other underlying insurance in the same policy period, and not to underlying insurance in other policy periods. The Supreme Court then held that to the extent any of the excess policies were ambiguous, the “reasonable expectations” doctrine favored a rule of vertical exhaustion rather than a rule of horizontal exhaustion.
The Supreme Court rejected the excess insurers’ argument that vertical exhaustion might unfairly require a few “disfavored insurers” to shoulder the burden of indemnification. The Supreme Court reasoned that while vertical exhaustion permits the insured to obtain indemnification under any higher-level excess policy after any directly underlying lower-level excess policies have been exhausted, an insurer that is called on to provide indemnification may then seek contribution from other insurers that provide coverage for any period in which injury occurred.
Comment
The Supreme Court’s ruling in this case may be summarized as follows: In a continuous injury case, the insured has access to any excess policy once the insured has exhausted other directly underlying excess policies for the same policy period. However, an insurer that is required to indemnify the insured for such loss may seek contribution from other insurers that issued policies covering relevant policy periods.
Note that the Montrose coverage litigation has been pending for some 30 years. In the course of the litigation, the Supreme Court issued two other landmark decisions, namely, Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287 (Montrose I), which established important rules regarding the duty to defend, and Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 (Montrose II), which adopted the continuous injury trigger of coverage for progressive property damage cases. This most recent decision – Montrose III – represents a victory for insureds, who will be able to elect coverage in specified years with more favorable policy language, thereby forcing the “targeted” insurers to seek contribution from other insurers.