In a continuous injury case, absent an explicit policy provision to the contrary, an insured is entitled to excess coverage once the primary policies specified in the excess policy have been exhausted. (Santa Fe Braun, Inc. v. Insurance Co. of North America (2020) 52 Cal.App.5th 19)
Facts
Santa Fe Braun, Inc. (Braun) constructs and maintains oil refineries. At all relevant times, Braun had primary general liability coverage through three different insurers, and multiple layers of excess liability coverage through numerous other insurers.
Beginning in 1992, various individuals filed asbestos-related bodily injury claims against Braun, and Braun sought defense and indemnity from its three primary insurers. In 1998, Braun and its primary insurers entered into an agreement to defend and settle the underlying claims against Braun while the primary insurers resolved allocation issues among themselves.
In 2004, Braun sued its excess insurers, seeking a declaration that the excess insurers were obligated to assist with the costs of the underlying asbestos-related lawsuits. Braun sought a ruling allowing for “vertical exhaustion,” while the excess insurers sought a ruling requiring “horizontal exhaustion.” The trial court ruled that Braun’s excess policies required “horizontal exhaustion” of all primary insurance before the excess policies could be triggered. Because Braun failed to establish that all of its primary insurance was exhausted, the trial court entered judgment in favor of the excess insurers. Braun appealed.
While Braun’s appeal was pending, the California Supreme Court issued its decision in Montrose Chemical Corp. of California v. Superior Court (2020) 9 Cal.5th 215 (“Montrose III”). In Montrose III, the Supreme Court held that in a continuous loss situation, where an insured has exhausted all primary insurance, the insured may “access any excess policy for indemnification during a triggered policy period once the directly underlying excess insurance has been exhausted.” However, in Montrose III, the Supreme Court declined to decide whether an insured could gain access to excess policies before exhausting all primary insurance covering all relevant policy periods. That issue was presented in the Santa Fe Braun case, because Braun had not established that all of its primary insurance was exhausted.
Holding
The Santa Fe Braun Court of Appeal reversed the trial court. The appellate court concluded that, based on the reasoning in Montrose III, the trial court had erred in requiring Braun to prove exhaustion of all primary policies in all years before Braun could gain access to an excess policy in any one year. Rather, according to the appellate court, absent an explicit policy provision to the contrary, “the insured becomes entitled to the coverage it purchased from the excess carriers once the primary policies specified in the excess policy have been exhausted.” In short, once Braun proves exhaustion of the primary coverage in any one year, Braun can trigger coverage of the excess coverage immediately above that exhausted primary coverage.
Comment
The Supreme Court’s decision in Montrose III and the Court of Appeal’s decision in Santa Fe Braun both allow for a rule of “vertical exhaustion” instead of automatically requiring a rule of “horizontal exhaustion.” Importantly, however, in both cases, the courts focused on the specific language contained in the excess policies at issue. The Supreme Court in Montrose III emphasized that “[p]arties to insurance contracts are … free to write their policies differently to establish alternative exhaustion requirements … if they so wish.” Whether excess insurers will attempt rewrite their policies to require horizontal exhaustion of all primary policies remains to be seen.
Note that the excess insurers in Santa Fe Braun have filed petitions for review in the California Supreme Court. Thus, we will continue to monitor the case for any further developments.