(Vertical Exhaustion Applies to Excess Policies in Continuous Damage Claims, Notwithstanding That Unexhausted Primary Coverage is Afforded to Insured During a Period Other Than the Exhausted Primary Policies Directly Underlying the Excess Policies)
(October 2024) - In Truck Ins. Exch. v. Kaiser Cement and Gypsum Corp. et al., 16 Cal.5th 520 ( June 17, 2024), the California Supreme Court reversed a California Second District Court of Appeal decision addressing vertical and horizontal exhaustion and found that first-layer excess insurance policies are triggered upon vertical exhaustion of primary policies directly below the excess policies. Hence, excess carriers can no longer take the position that defense and indemnity coverage is not triggered under their policies for continuous loss, so long as there is primary coverage afforded to the insured, even if such coverage is for a different policy period. The Supreme Court adopted the reasoning in SantaFe Braun, Inc. v. Ins. Co. of North America (2020) 52 Cal.App.5th 19 (the SantaFe decision).
The Court of Appeal decision found that Truck Insurance Exchange ("Truck") was not entitled to contribution from first-layer excess insurers for continuous loss asbestos claims, notwithstanding that the primary policy limits directly below the excess policies had been exhausted. The Court of Appeal reasoned that since the Truck policy afforded primary coverage to the insured, Kaiser Cement and Gysum Corp. ("Kaiser"), due to the other insurance clauses in the excess policies requiring exhaustion of all underlying insurance, absent Kaiser's exhaustion of all primary policies on the risk for the continuous damage, including the Truck primary policy limits, coverage was not triggered under the excess policies, and Truck was not entitled to contribution for the continuous damage claims pending against Kaiser.
In reversing the Court of Appeal decision, the Supreme Court outlined the principles governing continuous damage or injury claims involving damage or injury taking place over multiple policy periods. The Supreme Court noted that California has adopted an "all-sums-stacking" approach for policies affording occurrence based coverage.
- First, the continuous injury trigger of coverage principle under which bodily injury and property damage that is continuous or progressively deteriorating throughout several policy periods applies to trigger potential coverage by all policies in effect during those periods.
Hence, an insured may select any policy during this period to cover a loss.
- Second, under the "all sums" rule, each triggered
policy is potentially liable up to limits for the total amount of
the loss, notwithstanding that a portion of the loss was covered
under an earlier or later period.
- Third, policies affording coverage during the period of continuous damage may be "stacked" so as to allow an insured to add together the maximum limits of all consecutive policies that were in place during the period of injury or damage.1 Hence, if the insured had 10 annual primary policies affording $1 million per year of coverage, the insured could stack such policies to cover a $10 million loss.
The Supreme Court noted that each of the first level excess policies included language stating that coverage will not attach until Kaiser has exhausted underlying primary policies that are listed in a schedule of underlying insurance. Each excess policy also included another insurance clause requiring the insured to exhaust any other insurance or other underlying insurance before coverage under an excess policy can be accessed.
Kaiser assigned all asbestos-related bodily injury claims that triggered Truck's 1974 primary policy (any claims alleging asbestos injury in or before the Truck policy period) to such policy. This policy did not include aggregate limits, such that coverage could be afforded for multiple claims on a per-occurrence basis without exhaustion of an aggregate limit. The Truck policy was the only primary policy affording primary coverage for claims involving continuous injury taking place in part during the Truck policy period. Truck filed a cross-complaint for contribution against the first-layer excess insurers alleging that they were required to share in the cost of defense and indemnity of the claims pending against Kaiser. The Court of Appeal found to the contrary, reasoning that coverage under the first-layer excess policies could not be triggered by vertical exhaustion.
In reversing the Court of Appeal's decision, the Supreme Court noted the difference between obligations owed to insureds by insurers under the terms of their policies and equitable contribution claims between insurers that are not based on contract, although consideration of whether coverage is afforded by an insurance policy also applies in connection with equitable contribution claims.
In the context of contribution between primary and excess insurers, the Supreme Court noted the differences between claims implicating only a single policy period and claims involving damage during multiple policy periods with respect to horizontal and vertical exhaustion as follows:
In the context of traditional "noncontinuous injury" insurance claims - meaning a claim that implicates only a single policy period - it has long been the rule that there is "no contribution between a primary and excess carrier without a specific agreement to the contrary." (Reliance Nat. Indemnity Co. v. General Star Indemnity Co. (1999) 72 Cal.App.4th 1063, 1080; see Fireman's Fund, supra, 65 Cal.App.4th at p. 1294, fn. 4.) The basis for that rule is rooted in the purpose of contribution, which is to "equalize the common burden" (Fireman's Fund, at p. 1293) shared by coinsurers that "share the same level of liability on the same risk as to the same insured." (Maryland Casualty Co. v. Nationwide Mutual Ins. Co. (2000) 81 Cal.App.4th 1082, 1089 (Maryland); see Morgan Creek Residential v. Kemp (2007) 153 Cal.App.4th 675, 684 [contribution applies only when there is a " `common burden of liability'"].) When a claim implicates only a single policy period, and an excess policy provides that the insurer's coverage obligations attach upon exhaustion of the primary insurance listed in the schedule of underlying insurance, the excess and primary insurer cannot be said to "share the same level of liability." (Maryland, at p. 1089.)
That analysis becomes more complicated in the context of continuous injuries, which extend over multiple policy periods. In that circumstance, the question arises whether the excess insurers' indemnity obligations to the insured attach: (1) only after the exhaustion of all primary layers of insurance issued during the continuous period of injury (horizontal exhaustion); or (2) whether attachment occurs upon exhaustion of the directly underlying primary insurance that was issued during the same policy year (vertical exhaustion). If the excess insurers have no coverage obligation until all primary policies have exhausted (horizontal exhaustion), it follows that the excess insurer cannot be said to be on the same level of liability as any of the primary insurers, thus precluding any basis for contribution between the two types of insurers. In effect, horizontal exhaustion results in the same situation between excess and primary insurers that occurs where a claim implicates only one policy period: the excess insurer and primary insurer remain on distinct levels of liability, with the excess insurer's obligations being triggered only after the primary coverage is exhausted, thus precluding contribution.
Under vertical exhaustion, however, the excess insurer owes an indemnity obligation to the insured as soon as the directly underlying primary policy has exhausted. That is true even if primary insurance issued for a precedent or subsequent policy period remains unexhausted (and thus available to the insured). Thus, unlike the situation with horizontal exhaustion, under a rule of vertical exhaustion, a first-level excess insurer from one policy period and a primary insurer from a different policy period might simultaneously owe coverage to the same insured for the same injury. In that situation, it becomes less clear that the excess insurer remains on a different "level of liability" (Maryland, supra, 81 Cal.App.4th at p. 1089) than primary insurers that issued unexhausted policies during different periods of the continuous injury.
The Supreme Court also found that "other insurance" clauses did not mandate horizontal exhaustion. Rather, such clauses only applied to a specific policy period involving overlapping concurrent policies. Hence, the clauses did not apply to insurance purchased for other policy periods.
In adopting a vertical exhaustion requirement for triggering coverage for continuous injury or damage claims with respect to coverage owed under a policy to an insured as a matter of contract, the Supreme Court concluded as follows:
In sum, we believe that the language of the first-level excess policies, when considered in conjunction with the insured's reasonable expectations and the historical role of "other insurance" provisions, is most naturally read to mean that the insured may access the policies upon exhaustion of the directly underlying policies that were purchased for the same period. Excess insurers do, however, remain free to write their future excess policies in a manner that expressly requires horizontal exhaustion.
As respects Truck's contribution claim, the Supreme Court remanded consideration of such claim back to the Court of Appeal. The Supreme Court stated as follows:
Montrose III was a coverage action that required us to determine whether the insured was permitted to access its higher-level excess policies. The answer to that question depended entirely on our interpretation of the policies at issue in that case. Here, however, we are faced with an equitable contribution claim between insurers. As noted above, the terms of the insurers' policies comprise only one of the factors courts may consider when evaluating whether contribution would "'accomplish ultimate justice" (Signal, supra, 27 Ca1.3d at p. 369) in a particular case (see ibid.; ante, at pp. 17-18). Thus, the fact that we have rejected the Court of Appeal's conclusion that the excess policies do not create any indemnity obligation until all primary insurance has been exhausted, and instead have interpreted those policies in a manner that would permit the insured (Kaiser) to access the policies upon exhaustion of the directly underlying primary policies, does not resolve whether Truck is entitled to contribution from the excess insurers.
. . .
Having now clarified that the first-level excess insurers' indemnity obligations to Kaiser attach upon exhaustion of the directly underlying primary policies, we find it appropriate to remand the matter for the court to reevaluate whether contribution would " 'accomplish ultimate justice'"
. . .
On remand, the parties are free to raise any arguments they believe may aid the court in deciding whether contribution is ever appropriate between primary and excess insurers and, if so, whether contribution would be appropriate under the circumstances of this case. The Court of Appeal, in turn, retains discretion to make a further remand to the trial court if it concludes that the trial court is better positioned to address any questions of contribution that may arise in the further proceedings.
COMMENTS
The Truck decision addressed the obligation of a first-layer excess insurer to afford coverage to an insured as required by an insurance contract upon vertical exhaustion of direct underlying primary policy limits. An excess insurer may no longer rely on the rule of horizontal exhaustion of all underlying insurance to avoid providing coverage to an insured. However, the decision left open the issue of whether a primary insurer affording coverage for a continuous loss can ever seek contribution from a first-layer excess insurer affording coverage for such loss during a different policy period upon vertical exhaustion of that excess insurer's scheduled primary policy limits.
Footnote
1. Such stacking can be prevented via the use of anti-stacking endorsements. See, State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 202
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.
