California Supreme Court Says Vertical Exhaustion Applies to Excess Policies in Continuing Loss Cases but Insurers Still Have Contribution Rights

The California Supreme Court decided another big environmental coverage case on April 6, 2020. In Montrose Chemical Corporation of California v. The Superior Court of Los Angeles County, the court's ruling addressed the attachment point of excess insurance for continuous losses.

The parties stipulated that all primary insurance over the entire exposure years had been exhausted. The main issue was whether vertical exhaustion or horizontal exhaustion is required when continuous injury occurs throughout multiple policy periods for which an insured purchased multiple layers of excess insurance: 

“[W]e conclude that a rule of vertical exhaustion is appropriate. Under that rule, the insured has access to any excess policy once it has exhausted other directly underlying excess policies with lower attachment points…” 

The insurers had argued for a rule of horizontal exhaustion, whereby the insured, here Montrose, could access an excess policy only after it had exhausted other policies with lower attachment points from every policy period in which the environmental damage resulting in liability occurred. 

The decision turned in part on the meaning of various iterations of “other insurance” clauses and/or definitions (such as “ultimate net loss” definitions) in the excess policies that referred to other insurance, which the insurers argued should be interpreted as including even insurance from other years, as long as other such lower-level excess policies were on the hook for the same loss. The Court rejected that approach. 

The Court held that, “[e]ven though a rule of vertical exhaustion permits Montrose to access excess insurance from any given policy period, provided the directly underlying insurance has been exhausted, insurers may seek contribution from other excess insurers also liable to the insured.  The exhaustion rule does not alter the usual rules of equitable contribution between insurers.”