Court Confirms Vertical Exhaustion Rule
Insurance carriers have cited the Montrose decision since the 1995 California Supreme Court ruling in Montrose Chemical Corp. v. Admiral Insurance Company. That case involved environmental damage that spanned many years. The court held that Montrose could seek indemnification under any excess policy only after all underlying policies that are applicable in the same policy period were exhausted. This became known as horizontal exhaustion.
Since this decision, courts have examined the applicability of this ruling. The most recent decision until now, was contemplated and decided in 2020, known as Montrose III. There, the court held that it is fair to require exhaustion of direct underlying insurance, in lieu of all policies. However, it also held that the excess carriers could seek contributions from all other carriers. This is contrary to horizontal exhaustion and is known as vertical exhaustion.
Montrose III did not opine on two issues of fact. First, was exhaustion of policy limits sufficient, or was carrier payments of underlying limits required? Second, the court did not address the question of jurisdiction and where the policy was issued.
Recently, on June 7, 2024, the California Supreme Court issued an opinion regarding the rule of vertical exhaustion in continuous exposure cases. In Truck Ins. Exch v Kaiser Cement & Gypsum Corp, Cal. 5th No. S273179 (June 17, 2024), the court upheld Montrose III by holding confirming that vertical exhaustion was logical. Confirmation was given that excess insurance can be accessed whenever the policy holder has exhausted the direct underlying insurance policy for the same policy period.
Still to be contemplated is how contribution claims will be handled as well as policy jurisdiction.
This is a win for policy holders.
Understanding other insurance clauses and the interplay between policies while keeping abreast of current case law are key considerations when partnering with a broker.
Decisions on contribution claims while also triggering the immediate excess tower takes strategic planning. It is important to have strong legal guidance and claims advocacy.
If you have any questions about your insurance coverage or wording within your policies, reach out to TSIB today and speak with one of our Risk Consultants.
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