Edited by: Charles Redfield
Montrose Chemical Corporation of California v. Superior Court
Court of Appeal, Second Appellate District (September 8, 2017)
The California Second District Court of Appeals’ recent decision in Montrose Chemical Corporation of California v. Superior Court concerns the manner and sequence when an insured may access its excess comprehensive general liability (CGL) policies to cover its liability for ongoing environmental injuries across many policy years.
Montrose Chemical Corporation of California (Montrose), who for many years manufactured the pesticide DDT, has been involved in a decades-long coverage dispute with its numerous primary and excess insurance carriers in relation to Montrose’s liability for injuries caused by DDT. In the course of this litigation, a controversy arose between Montrose and its excess insurers about the manner and sequence in which it could obtain indemnification under the excess policies.
Montrose purchased “layers” of CGL policies from various insurance carriers to cover its operations at a facility in Torrance, California where it manufactured DDT from 1960 to 1986. In each of the relevant years, Montrose purchased a layer of “primary” CGL insurance policies that required the insurers to defend and indemnify Montrose for covered losses up to the policy limits. Above the “primary” insurance policies were multiple layers of “excess” CGL coverage, which provided additional coverage once underlying insurance was exhausted. In total, the relevant excess coverage purchased by Montrose spanned more than 115 separate policies.
Before coverage can attach under an excess policy, the policy limits of the underlying primary policy or policies must typically be exhausted. Normally, primary coverage is exhausted when a primary insurer pays its policy limits to settle a claim or to satisfy a judgment against the insurer. As the Court explained, there are two levels of insurance coverage – primary and excess. “Primary coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability.” In contrast, excess coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted. It is not uncommon for an insured to purchase several layers of secondary insurance.
An excess insurance policy may be written as excess to specifically identified coverage – i.e., to a particular policy or policies or coverage provided by a particular insurer. Alternatively, an excess policy may be written to provide coverage in excess of a primary policy and the applicable limits of any other underlying insurance providing coverage to the insured. Under such a policy, the excess insurer has no duty to defend or indemnify until all underlying policies available to the insured, whether or not listed in the excess policy, are exhausted.
Under California law, “vertical exhaustion” applies where an excess policy expressly provides coverage in excess of a specific primary policy for that same policy period. In such a scenario, excess coverage will attach after the specifically identified primary insurance has been exhausted, notwithstanding the existence of other underlying policies. “Horizontal exhaustion,” on the other hand, applies in those situations where an excess policy provides coverage in excess to all underlying insurance, whether specifically scheduled or not.
In 2012, the California Supreme Court issued a decision in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186 (Continental), which held, in part, that where an ongoing environmental injury triggers multiple policies across many policy years, the insured may “stack” the policies “‘to form one giant “uber-policy” with a coverage limit equal to the sum of all purchased insurance policies.’”
Following that decision, Montrose filed a motion for summary adjudication seeking a declaratory judgment that it may “electively stack” excess policies – i.e., that it may access any excess policy issued in any policy year so long as the lower-lying policies for the same policy year have been exhausted. Montrose argued that it should be entitled to vertically stack all excess coverage triggered in each individual policy period. This approach, which is referred to as a “vertical exhaustion,” would effectively allow Montrose to select any available excess policy to indemnify its liabilities, assuming that the policies immediately underlying that policy are exhausted for this specific policy in question.
The excess insurers opposed Montrose’s motion for summary adjudication, and also sought through a cross-motion for summary adjudication a ruling that no insurer had a duty to pay a covered claim until Montrose had “horizontally exhausted” its lower-lying excess policies in all triggered policy years. In other words, the insurers contended that Montrose could not access coverage under any of the excess policies until Montrose exhausted all the underlying excess coverage in each policy period. This approach is generally referred to as a “horizontal exhaustion.”
The trial court denied Montrose’s motion for summary adjudication and granted the excess insurers’ cross-motion for summary adjudication, ordering that higher-level excess policies could not be accessed until lower-level policies had been exhausted for all policy years. Montrose then filed a petition for writ of mandate challenging the trial court’s summary adjudication order.
The Court of Appeal rejected Montrose’s “elective stacking” approach, concluding that Montrose was not entitled to a declaration that 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, because given the differences in the language of the policies, Montrose is not entitled to such a declaration as a matter of law.
In upholding the trial court’s denial of Montrose’s motion for summary adjudication, the Court of Appeal agreed that “elective stacking” is inconsistent with the policy language of at least some of the more than 115 excess policies at issue and is not compelled by the California Supreme Court’s decision in Continental.
Specifically, the Court rejected Montrose’s argument that Continental confirmed the policyholder’s right to choose the policies and seek to allocate the losses vertically or horizontally as the policyholder sees fit. As it explained, both the relevant policy language and the issues confronting the Continental court were materially distinguishable from Montrose. Most significantly, the Court of Appeal clarified that Continental did not announce any general principles applicable to all insureds and all policies. Instead, it reaffirmed the principle that insurance policies must be interpreted according to their terms, even if alternative allocation schemes might be more desirable.
Consequently, the Court of Appeal also reversed in part the trial court’s grant of the insurers’ motion for summary adjudication, insofar as the trial court ruled that all of the policies must be horizontally exhausted at each coverage level and for each year before higher-level policies may be accessed. To the contrary, 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 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.
For a copy of the complete decision, see: Montrose v. Sup. Ct