California Supreme Court Issues Another Pro-Policyholder Decision in Progressive Environmental Cleanup Case Applying “Vertical Exhaustion” Trigger
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California Supreme Court Issues Another Pro-Policyholder Decision in Progressive Environmental Cleanup Case Applying “Vertical Exhaustion” Trigger

Key Takeaways

  • On April 6, 2020 the California Supreme Court handed down a decision in favor of Montrose Chemical Corporation, following 30 years of insurance coverage litigation, applying the “vertical exhaustion” rule.

  • The pesticide manufacturing insured is not obligated to deplete all its lower-level insurance policies before it can access excess policies to cover over $100 million in damages incurred in a Superfund action in connection with Montrose’s production of the pesticide DDT in Torrance, California from 1947 to 1982.

  • The key question decided in the case was whether Montrose or its insurance companies must shoulder the “administrative burden” of spreading multi-year losses among applicable policies.

 

On April 6, 2020, after over thirty years of insurance coverage litigation, the California Supreme Court handed down its long-awaited decision in favor of the insured, pesticide manufacturer Montrose Chemical Corporation, that it is not obligated to deplete all its lower-level insurance policies before it can access excess policies to cover environmental damage claims (Montrose Chemical Corp. of California v. Superior Court of Los Angeles County, Case No. S244737). The decades-old dispute centers on Montrose’s claims for over $100 million of coverage for damages it has incurred in connection with an environmental Superfund action attributed to Montrose’s production of the pesticide DDT in Torrance, California from 1947 to 1982.

The California Supreme Court’s unanimous decision reversed the court of appeals’ August 31, 2017 decision in favor of dozens of excess insurers, which applied the principle of “horizontal exhaustion” requiring a policyholder to exhaust all of its lower-level policies before it can trigger its excess coverage. Continuing the California Supreme Court’s run of policyholder-friendly decisions in progressive environmental damage and “long-tail” bodily injury cases, the ruling in Montrose’s favor applied a “vertical exhaustion” method, which will allow the company to select any triggered excess policy to cover its losses, provided the underlying policies in that same year have been depleted. This approach gives policyholders greater control over their own insurance program and an easier path to accessing large insurance limits for losses spanning multiple years.

The key question decided in the case was whether Montrose or its insurance companies must shoulder the “administrative burden” of spreading multi-year losses among applicable policies. To the California Supreme Court, a vertical exhaustion rule properly places the burden on the insurers. With its holding, the court recognized that insurers being forced to pay may bring contribution actions against other insurers to seek reimbursement.

In its decision, the California Supreme Court acknowledged that the insurers’ interpretation of their other insurance provisions is “not an unreasonable one.” But the court concluded the “other insurance” clauses could also be reasonably construed to apply only to underlying insurance in the same policy period. Additionally, the court found that other aspects of the policies “strongly suggest” that the other insurance provisions’ exhaustion requirements are not meant to apply to coverage purchased in other policy periods. For instance, the excess policies in question mention an “attachment point,” or specific amount of lower-level insurance that must be exhausted before coverage applies. The court opined that, if the policyholder was forced to exhaust lower-level policies across all triggered periods, the attachment point for a given excess policy would increase exponentially.

Ultimately, the court reasoned that horizontal exhaustion may not be as straightforward as the insurers argued, especially since Montrose’s policies “come in all shapes and sizes, each covering different periods of time, providing different levels of coverage, and setting forth distinct exclusions, terms, and conditions,” which the court found makes vertical exhaustion the appropriate trigger approach.

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