In a landmark decision with significant implications for policyholders and insurers dealing with high exposure, continuous injury claims, the California Supreme Court held in Montrose Chemical Corp. of California v. Superior Court, Case No. S244737, that policyholders may access otherwise available coverage under any excess policy once it has exhausted the directly underlying coverages for the same policy period, notwithstanding the potential availability of other insurance in other policy periods. In reversing the 2nd District Court of Appeal, the court rejected the horizontal exhaustion approach advocated by the insurers, which would have required that the policyholder first pursue coverage from its lower-level insurers in other years – possibly via expensive coverage litigation – before it could look to the higher-level excess insurers within a given year’s tower. The decision is the latest in a longstanding dispute involving Montrose’s occurrence-based general liability coverage and the extent to which it insures against continuous environmental damage spanning over two decades.
Montrose had advocated for a rule of vertical exhaustion, or elective stacking, which would allow Montrose to immediately access any excess policy once it has exhausted other policies with lower attachment points within the same policy period. The insurers, in contrast, argued for a rule whereby Montrose may access an excess policy only after it has exhausted all other policies with lower attachment points from every triggered policy period in which the environmental damage occurred. While the 2nd District Court of Appeal agreed with Montrose’s insurers, a different California appellate court determined that vertical exhaustion was appropriate in State of California v. Continental Ins. Co., 15 Cal. App. 5th 1017 (2017), creating a split in authority.
In resolving the split, the California Supreme Court reasoned that vertical exhaustion is most consistent with the policy language and with the reasonable expectations of the policyholder. The court emphasized that a rule of horizontal exhaustion could create significant practical obstacles to securing coverage, given that policies in other years may have more restrictive language where coverage is harder to prove. Horizontal exhaustion would also make an excess policy’s schedule of underlying insurance incomplete and ambiguous, as the policyholder would need to consider whether unscheduled policies in other years may also need to be exhausted. For Montrose, imposing a horizontal exhaustion requirement would have increased its excess policy’s attachment point to about $750 million, instead of the $30 million reflected in the schedule of underlying insurance.
The decision eases access to coverage for policyholders facing long-tail continuous injury claims, as it resolves a critical split in authority and reduces the need to resort to protracted coverage litigation prior to securing excess coverage.