United States: Montrose Chemical Corporation. V. Superior Court

In Montrose Chemical Corporation v. Superior Court, _______ Cal.App.5th ____ (August 31, 2017), the California Second District Court of Appeal affirmed the trial court's denial of Montrose's motion for summary adjudication arguing that it was entitled to "electively stack" excess policies in any triggered year so long as the lower-lying policies for the same policy year have been exhausted. The trial court rejected Montrose's "elective stacking" arguments in favor of a "horizontal exhaustion" approach and ordered that high level excess policies could not be accessed until lower level policies had been exhausted for all implicated policy years.

The Court of Appeal agreed with the trial court in connection with its rejection of Montrose's elective stacking theory. However, the Court of Appeal also held that a general rule requiring horizontal exhaustion does not apply. Rather, an individual analysis of the policy language in each of the 115 excess policies at issue in the litigation is required in order to determine if such policies afford vertical or horizontal coverage.

The parties' dispute arises out of underlying pollution claims related to Montrose's manufacture of DDT at a facility in Torrance, California for the period of 1947 to 1982. Montrose contends that the defendant excess insurers afford coverage to it for the pollution claims related to its Torrance facility from 1960 to 1986. Montrose also contends that all of the policies underlying the subject excess insurance policies have been exhausted.

Montrose rejected the excess insurers' argument that all underlying insurance must be exhausted on a horizontal basis before potential coverage is triggered under the excess policies for the subject pollution claims. Rather, the Court of Appeal characterized Montrose's position as follows:

Montrose rejected the insurers' horizontal exhaustion approach, asserting that it instead was entitled under the language of the excess policies and the Supreme Court's holding in Continental to "electively stack" its coverage — i.e., to "select any policy to indemnify its liabilities, provided the policies immediately underlying that policy are exhausted" in the same policy period. 

The Court of Appeal characterized the issues presented by Montrose's summary adjudication of issues as follows:

Montrose urges the court to adopt what it terms an "elective stacking" approach. Under this approach, where a policyholder is liable for a continuing injury that potentially is covered by primary and excess policies in multiple policy years, the policyholder "may elect to proceed 'vertically' to exhaust policies for a single coverage year, once the underlying policy exhaustion provisions are satisfied." Montrose urges that "elective stacking" is consistent with Supreme Court precedent "recognizing that policyholders are entitled to look to any independent contract to cover the full extent of their liability (up to policy limits) in accordance with the terms of each individual policy," as well as with the language of the relevant excess policies.

The Continental insurers urge a "horizontal exhaustion" approach. They contend that the excess policies at issue 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 Travelers insurers separately urge declaratory relief is premature because Montrose has not demonstrated that it has exhausted its underlying primary policies, and there is no basis for issuing a writ of mandate because Montrose has failed to demonstrate that it lacks an adequate remedy at law or is at risk of irreparable harm.

In affirming and narrowing the trial court's decision, the Court of Appeal discussed the California Supreme Court's decision in State of California v. Continental Insurance Company, 55 Cal.4th 186 (2012) and stated as follows:

Moreover, as we have said, the court's analysis in Continental was based on the language of the particular policies before it in that case, and specifically the insurers' promises "'[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law ... for damages ... because of injury to or destruction of property,'" up to specified policy limits. (Continental, supra, 55 Cal.4th at p. 193, italics added.) In contrast, many of the excess policies relevant to our analysis do not include "all sums" language, and thus the high court's analysis of the "all sums" language has limited application here.

Further, Continental did not, as Montrose asserts, announce a general principle that insureds covered by multiple policies are entitled to "select which policy(ies) to access for indemnification in the manner they deem most efficient and advantageous." Indeed, 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. (See Continental, supra, 55 Cal.4th at p. 199 ["Although some states have concluded, as the insurers urge in this case, that pro rata coverage would be more fair and equitable when compared to all sums allocation, we are constrained by the language of the applicable policies here."].)

Finally, while Continental held that each "triggered" policy may be called upon to respond to a claim (Continental, supra, 55 Cal.4th at p. 200), it did not consider when a higher-layer excess policy is "triggered" in the context of a long-tail environmental injury. That is, Continental discussed the "'trigger of coverage'" issue temporally, explaining that "'[t]he issue is largely one of timing — what must take place within the policy's effective dates for the potential of coverage to be "triggered"? '" (Id. at p. 196.) Because it was not called upon to do so, the court in Continental did not consider the aspect of "trigger of coverage" before us in this case—what lower-layer excess policies must be exhausted before a higher-layer excess policy is triggered.

In short, while Continental provides a general framework for our analysis, it provides limited guidance on the specific question before us: Whether Montrose may access higher-level excess insurance before exhausting lower-level excess insurance written for different policy periods. As Continental directs, we turn to the language of the relevant policies to decide that question.

In addition, the Court of Appeal noted that the excess insurers "other insurance clauses" may support the argument requiring horizontal exhaustion of underlying scheduled and unscheduled insurance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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