California Court of Appeal Issues Important Decision Impacting When Policyholders Can Tap Into Excess Insurance

SUMMARY

In Montrose Chemical Corporation of California v. Superior Court , ___ Cal. App. 4th ___, No. B272387, 2017 WL 3772568 (Cal. Ct. App. Aug. 31, 2017), the California Court of Appeal issued a decision that has the potential to upend years of settled law and create confusion about when policyholders can tap into excess insurance for insurance claims that span multiple policy years.

FACTS

Montrose purchased several layers of excess insurance for each year between 1960 and 1986 that covered a pollution claim.  Different layers of excess insurance had exhausted in different years, such that the insurance had not exhausted in a uniform manner.  Montrose and the insurers filed cross-motions for summary judgment regarding the issue of which excess policies should pay first.  Montrose argued that, under California’s “vertical exhaustion” rule, it was entitled to “electively stack” its excess insurance, such that Montrose could tap into excess insurance at any layer for any policy year if the insurance in that year below that layer was exhausted, regardless of whether the lower layers in other years had been exhausted.  The insurers argued that California’s “horizontal exhaustion” rule applied, requiring exhaustion of all lower layers of insurance in all years. 

COURT’S DECISION

The Court of Appeal rejected both arguments.  The Court of Appeal held that exhaustion must be determined on a policy-by-policy basis using the specific language contained in each of excess policy. 

In reaching this conclusion, the Court rejected Montrose’s argument that State v. Continental, 55 Cal. 4th 186 (2012) allows “elective stacking.”  The Montrose court explained that while Continental permitted stacking of policy limits across multiple policy periods to effectively create “one giant uber policy,” Continental did not speak to the question of which policy should pay first, and Continental did not announce a general rule of “elective stacking” that is not grounded in the specific language of each affected policy.  The Court of Appeal also rejected Montrose’s argument that “elective stacking” is permissible because every excess policy only requires “vertical exhaustion.” 

The Court of Appeal also explained that Montrose’s “vertical exhaustion” argument did not take into account the varying “other insurance” clauses, distinguishing the seminal California Supreme Court case Dart Indus., Inc. v. Commercial Union Ins. Co., 28 Cal. 4th 1059 (2002), in which the Court stated that an “other insurance” clause “has no bearing upon the insurers’ obligations to the policyholder.”  Id. at 280.   The Court explained that Dart is distinguishable because it addressed “other insurance” clauses in policies issued by multiple primary insurers, whereas the present dispute involved multiple excess insurers.  The court explained that “Dart’s statement that apportionment among insurers has no bearing on the insurers’ obligations to the policyholder simply does not apply in the present context.”

KEY TAKEAWAYS

Montrose’s discussion of other insurance clauses creates confusion and is arguably poorly reasoned.  Case law prior to Montrose stated clearly that other insurance clauses do not impact a policyholder’s rights against its insurers, and affect only claims among co-insurers for equitable contribution.  Even in equitable-contribution cases, California courts have rejected “other insurance” clauses and ordered contribution on a pro-rata basis irrespective of “other insurance” language.  See Certain Underwriters at Lloyds, London v. Arch Specialty Ins. Co., 246 Cal. App. 4th 418 (2016).  It is difficult to reconcile Montrose with those lines of authority.

Insurers will attempt to rely on Montrose to transform “vertical exhaustion” policies into “horizontal exhaustion” policies based on “other insurance” provisions.  Policyholders will need to point to the policy language and to the other appellate decisions addressing the role of “other insurance” clauses to demonstrate that the insuring agreement, not the “other insurance” clauses, govern the scope of policies that must be exhausted before a given excess policy drops down.