(Article from Insurance Law Alert, June 2024)
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Holding
Reversing an intermediate appellate court, the California Supreme Court ruled that a primary insurer is permitted to access excess insurance policies after primary policies covering the same policy period and directly underlying the excess policies are exhausted. Truck Ins. Exch. v. Kaiser Cement and Gypsum Corp., 2024 Cal. LEXIS 3271 (Cal. June 17, 2024).
Background
Kaiser Cement, a manufacturer of asbestos-containing products, was named as a defendant in thousands of product liability suits. During the relevant time period, Kaiser Cement was insured under a primary general liability policy issued by Truck Insurance. In 2001, Truck Insurance filed suit to determine its defense and indemnity obligations to Kaiser Cement.
While litigation in this matter has generated numerous decisions relating to the scope and availability of insurance coverage, including the United States Supreme Court decision discussed above, Truck Insurance’s present appeal focused on a single issue: whether it was entitled to contribution from various insurers that issued first-level excess policies to Kaiser Cement during the relevant time frame. Each of the excess policies in question sat atop a primary policy (issued by a non-Truck Insurance company) that had been exhausted.
Truck Insurance argued that each first-level excess insurer’s indemnity obligation attached upon exhaustion of the directly underlying primary policy (an approach known as “vertical exhaustion”). Truck Insurance further claimed that because the excess coverage obligations had been triggered, it was entitled to equitable contribution from the excess insurers. A trial court denied Truck Insurance’s contribution claim, ruling that “other insurance” provisions in the excess policies required horizontal exhaustion (i.e., exhaustion of all primary policies in effect during the period of continuous injury). An intermediate appellate court affirmed and the California Supreme Court reversed.
Decision
The California Supreme Court relied on its ruling in Montrose Chemical Corp. of California v. Superior Court, 9 Cal.5th 215 (2020), which endorsed a vertical exhaustion approach for excess policies that sat atop other excess policies in the context of ongoing environmental property damage claims. In Montrose, the court rejected the argument that “other insurance” provisions in excess policies required horizontal exhaustion. The court reasoned that language in those provisions (which varied by policy but generally speaking, required exhaustion of other or underlying insurance prior to accessing excess coverage) did not require exhaustion of insurance policies purchased in different policy periods. Rather, as the court noted, “other insurance” provisions have been typically construed to govern allocation questions with respect to overlapping concurrent policies. Additionally, the decision in Montrose emphasized that when construing the excess policies “as a whole,” including language referring to specific underlying policies or attachment points, it is clear that the exhaustion requirements were intended to apply to directly underlying insurance, not to coverage purchased in other policy periods.
The court rejected the excess insurers’ assertion that Montrose was limited to cases involving successive layers of excess insurance and did not govern the exhaustion analysis for excess policies that sit atop primary policies. The court stated: “the qualitative distinctions between primary and excess insurance do not justify assigning an entirely different meaning to standardized ‘other insurance’ clauses merely because the excess policy sits over primary insurance rather than another level of excess insurance.
Comments
While the decision resolved the appropriate method for exhaustion of first-level excess policies, it did not rule that Truck Insurance was entitled to contribution from the excess insurers. The court emphasized that contribution claims among insurers implicate “equitable principles designed to accomplish ultimate justice in the bearing of a specific burden.” The court remanded the matter to the appellate court, noting that:
[a]lthough we have concluded that the qualitative distinctions between primary and excess insurance do not present a sufficient basis to depart from the interpretation of “other insurance” provisions that we adopted in Montrose III (i.e., that such provisions impose only a rule of vertical exhaustion on the insured), whether those distinctions might have more salience in the context of equitable contribution between insurers remains an open question.