INSURANCE LAW: California Supreme Court to Review Key Issue of Insurance Policy Exhaustion & Elective Stacking


Since its initial filing in August of 1990, the longstanding Montrose Chemical Corporation environmental coverage litigation has yielded several decisions that have shaped insurance coverage law in California. In September of 2017, the California Court of Appeal held that Montrose could not “electively stack” its excess policies (i.e. Montrose’s preferred method of accessing any excess policy issued in any policy year so long as the lower-lying policies for the same policy year have been exhausted) but may only access its various excess policies on a “policy-by-policy” basis taking into account the relevant provisions of each policy. Montrose Chemical Corporation of California v. Superior Court (2017) 14 Cal.App.5th 1306. Most recently, on November 29, 2017, the California Supreme Court granted Montrose’s petition for review setting up a final showdown between proponents of “vertical exhaustion” (i.e. policyholders) and proponents of “horizontal exhaustion” (i.e. insurance carriers).

From 1947 to 1982, Montrose manufactured DDT at a facility in Torrance, California. During the 1960’s, conservationists began to raise concerns about the effects of DDT on the environment, and, in 1972, the federal government prohibited its use within the United States. Nonetheless, Montrose continued to manufacture DDT for export through 1982. In 1990, the United States and the State of California launched a Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) action against Montrose alleging that Montrose’s operation of its Torrance facility caused environmental contamination that damaged land, water, and wildlife in the Los Angeles Harbor and neighboring waters (i.e. continuing injury). While the CERCLA action is ongoing, Montrose purportedly entered into a partial consent decree wherein it has incurred damages in excess of $100 million.

Montrose purchased various layers of CGL (Commercial General Liability) insurance from numerous insurance carriers covering its operations at the Torrance facility from 1960 to 1986. The “primary” layers of coverage purchased by Montrose required the insurers to defend and indemnify Montrose for its covered environmental losses up to the policy limits or policy “exhaustion.” Above the primary layers of coverage were multiple layers of “excess” CGL coverage which provided additional coverage once underlying insurance was exhausted. While Montrose purchased only a few layers of excess coverage in the early years of the Torrance plant’s operation, in some later years, Montrose purchased more than 40 layers of excess coverage, with aggregate limits of liability in excess of $120 million. Different years of coverage afforded varying amounts of excess coverage issued by numerous and differing insurers. As such, Montrose advocated for the ability to aggregate or “stack” all of the primary and excess limits of liability in a single policy period without having to establish that all policies insuring Montrose in every policy period (including policies issued to cover different time periods both before and after the policy period insured by the targeted policy period) have been exhausted. Montrose also sought the ability to unilaterally select the policy period to cover such losses and the manner in which to allocate its liabilities across such policies.

Following the California Supreme Court’s decision in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, Montrose filed a Fifth Amended Complaint in the action seeking declaratory relief upholding Montrose’s proposed “elective stacking” approach wherein it may access any of the more than 115 excess policies at issue so long as its liabilities are sufficient to exhaust the underlying policies for the same policy year. Several of Montrose’s excess insurers, on the other hand, argued for a “horizontal exhaustion” approach and the required exhaustion of all underlying primary policies in each triggered policy period; noting that some excess policies contain provisions “that make them excess to vertically underlying policies in the same policy period plus ‘other valid and collectible’ insurance, that is, other insurance that is not vertically underlying and also triggered by the same occurrence.”

The trial court denied Montrose’s motion for summary adjudication and granted the insurers’ cross-motion for summary adjudication on this issue. The Court of Appeal upheld the denial of Montrose’s motion for summary adjudication but reversed, in part, the trial court’s granting of the insurers’ motion for summary adjudication noting that it would not adopt the trial court’s conclusion that all excess policies must be horizontally exhausted. Instead, the Court of Appeal agreed with the trial court that “elective stacking” is inconsistent with the policy language of at least some of the more than 115 excess policies at issue but concluded that the sequence in which policies may be accessed must be decided on a policy-by-policy basis, taking into account the relevant provisions of each policy. The Court of Appeal emphasized that its ruling should not be applied to all of the subject excess policies pointing out that “[...] there is tremendous variation among the relevant policies, and each must be interpreted according to its own language.”

Montrose appealed to the California Supreme Court and review was granted to decide the following issue:

When continuous property damage occurs during several periods for which an insured purchased multiple layers of excess insurance, does the rule of “horizontal exhaustion” require the insured to exhaust excess insurance at lower levels for all periods before obtaining coverage from higher level excess insurance in any period?

With the California Supreme Court now slated to resolve the dispute between “horizontal exhaustion” and “vertical exhaustion,” the insurance, legal and business communities await an outcome that will undoubtedly impact thousands of losses and billions of dollars in coverage.

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