In another round of litigation involving coverage issues between Montrose Chemical Corporation and its insurers, the California Supreme Court ruled in favor of Montrose, adopting vertical exhaustion of excess policies. Montrose Chem. Corp. of Calif. v. The Superior Court of Los Angeles County, 9 Ca. 5th 215 (2020).
In 1990, the United States and the State of California sued Montrose for contamination from 1947 to 1982 caused by Montrose's facility manufacturing insecticides. Montrose had primary and excess liability policies from defendant insurers between 1961 and 1985. Forty insurers collectively issued more than 115 excess policies, which collectively provided coverage sufficient to indemnify Montrose's anticipate total liability.
Primary coverage was exhausted. Each excess policy provided that Montrose had to exhaust the limits of its underlying coverage before there would be excess coverage. Which excess carrier could be called on first was the issued before the California Supreme Court.
Montrose proposed a rule of "vertical exhaustion" or "elective stacking," whereby it could access any excess policy once it exhausted other policies with lower attachment points in the same policy period. The insurers, in contract, argued for "horizontal exhaustion," whereby Montrose could access an excess policy only after it exhausted other policies with lower attachment points from every policy period in which the environmental damage resulting in liability occurred.
On motions for cross-summary judgment, the trial court denied Montrose's motion and granted the insurers' motion. Horizontal exhaustion was required in the context of a multiyear injury. The Court of Appeals affirmed.
The Supreme Court reversed and found vertical exhaustion was appropriate. Under this rule, the insured had access to any excess policy once it exhausted other directly underlying excess policies with lower attachment points. Further, an insurer called upon to indemnify the insured's loss could seek reimbursement from other insurers that issued policies covering relevant policy periods.
The court noted that horizontal exhaustion would create significant practical obstacles to securing indemnification because the exclusions, terms, and conditions could vary from one policy to another. The insured would be put to a considerable expense of having to establish a right to coverage under the definitions, terms, conditions, and exclusions from policies in every policy period triggered by the continuous injury.
Therefore, California law permitted Montrose to seek indemnification under any excess policy once Montrose exhausted the underlying excess policies in the same policy period. Montrose was not required to exhaust excess insurance at lower levels for all periods triggered by continuous injury before obtaining coverage from higher level excess insurance in any period. Parties in insurance policies could, of course, write policies differently to establish alternative exhaustion requirements or coverage allocation rules if they so desired.
