California Supreme Court Rejects Insurers’ Bid for Horizontal Exhaustion Rule in New Montrose Decision

In Montrose Chemical Corp. v. Superior Court, 2020 WL 1671560 (April 6, 2020), the California Supreme Court held that, when one primary policy exhausts in a continuing injury claim, the excess insurer sitting above that policy must drop down and provide coverage for the entire claim (up to its policy limits), even if primary policies in other years remain unexhausted.

Montrose was sued for environmental contamination between 1947 and 1982. In many years, Montrose had primary insurance as well as multiple layers of excess coverage. Montrose’s excess insurers argued for a “horizontal exhaustion” rule, which would have required that all implicated primary policies exhaust before any excess insurers provide coverage. The California Supreme Court rejected the insurers’ arguments and found that Montrose was entitled to coverage from an excess insurer once the specific primary policy sitting below that insurer was exhausted. The Supreme Court also confirmed that, under California’s “all sums” rule, each excess insurer must provide coverage for the entire amount of the loss (up to its policy limits). 

The Court based these rulings not only on the policy language, but on the fact that it would be unreasonable to force the policyholder to litigate the availability of coverage—including the applicability of exclusions—under every primary policy spanning many years in order to obtain coverage under a single excess policy.  The Court also rejected an argument by the insurers that the “other insurance” clauses in their policies required horizontal exhaustion. The Court explained that the insurers’ other-insurance argument was inconsistent with policy language addressing exhaustion and recent California appellate decisions that limit “other insurance” clauses to contribution disputes between insurers. 

Montrose provides strong ammunition for policyholders to ensure that excess insurers participate in funding settlements and judgments as soon as the underlying primary policy is exhausted, even if other primary policies covering preceding or succeeding years are not.