In a series of cases over the past 30 years, the California Supreme Court has adopted a full-amount approach to compensation for continuing injuries, where a continuing loss continues over multiple policy periods:
- The insured may make a claim under any primary policy during this period.
- The insurance will pay the full amount up to the policy limits.
- The insured can access the limit across all policy periods or “stack” the limit.
The only decision left was whether the first level of excess insurance could be accessed before all other underlying recoverable insurance was exhausted.
On June 17, 2024, the California Supreme Court will answer this question: Truck Insurance Exchange v. Kaiser Cement and Gypsum Co.or “Kaiser,” argued that it doesn’t have to exhaust its underlying insurance. The ruling reverses an earlier California intermediate appeals court ruling.
Vertical and horizontal fatigue
Kaiser Issues regarding the interpretation of primary and excess insurance in the context of long-term asbestos injury claims. Kaiser Cement and Gypsum Corporation manufactured asbestos-containing products from 1944 through the 1970s. By 2004, Kaiser faced over 24,000 product liability lawsuits alleging that its products caused injuries. Between 1947 and 1987, several insurers provided primary insurance to Kaiser, including Truck Insurance Exchange, which covered insureds from 1964 to 1983.
The main insurance policies contained aggregate limits, but the 1974-1975 policies issued by Truck Insurance Exchange had limits of $500,000 per policy.
Kaiser also purchased first level excess insurance from multiple insurers over various policy years.
The truck filed suit to determine its indemnification obligation to Kaiser in 2001. At the time the court ruled, the truck’s 1974-1975 insurance was the only one in existence. Major A policy that can cover asbestos-related claims.
The central legal issue was whether Kaiser could access the excess insurance after exhausting the primary insurance limits of its trucking policies for a particular policy period (vertical exhaustion) or whether the company must exhaust all of its primary insurance over all periods before it can access the excess insurance (horizontal exhaustion). The trucking companies argued for vertical exhaustion so that they could obtain contributions from the excess insurance on top of other exhausted primary insurance.
Court reasoning
The California Supreme Court unanimously reversed the lower appellate court and adopted a vertical exhaustion approach. The Court based its decision on the language and structure of standard insurance policy clauses.
In 2020, the California Supreme Court Montrose Chemical Co. v. Superior CourtThis case addressed the issue in a situation where a lower level of excess insurance had to be exhausted before a higher level of excess insurance could be accessed.
of Montrose The Court considered the “other insurance” clauses in the policies at issue and concluded that while those clauses “do not expressly provide as to whether the horizontal or vertical exhaustion rule applies,” they do support allowing policyholders to access higher levels of excess insurance when a lower level of excess insurance for the same policy term has been exhausted.
Four years later, the California Supreme Court KaiserThe difference is Kaiser The problem is that the primary insurance is exhausted before the excess insurance kicks in. The court determined that this distinction was immaterial due to the similarities between the two policies. Kaiser and Montrose:
“[W]We agree with Trucks that the policy language at issue here is not meaningfully distinct from the policy addressed in Montrose. We also agree that the qualitative distinction between primary and excess insurance does not justify assigning a radically different meaning to a standardized ‘other insurance’ clause simply because the excess insurance sits above the primary insurance rather than at some other level of excess insurance.”
Not only were the insurance policies substantially similar to one another, the court found, “none of the policies expressly referred to ‘other insurance’ being purchased.” Different insurance periods“
Courts have also determined that requiring horizontal exhaustion could impose an undue burden on policyholders in continuing injury claims. Specifically, requiring policyholders to exhaust all primary insurance issued over multiple policy periods before being able to access excess insurance for any policy period could lead to significant delays and increased litigation costs, which courts have found to be unreasonable.
The court ultimately held that vertical exhaustion applies to continuing losses and means that excess insurance for a policy period can be accessed as soon as the underlying primary insurance for that same period is exhausted – there is no need to wait until the primary insurance for other years is exhausted.
This holding is supported by the excess insurance language, the insured’s reasonable expectations, and the history of the “other insurance” clause. In caution, the court noted:[e]However, excess insurers retain the freedom to enter into future excess insurance contracts in a manner that expressly requires horizontal exhaustion.”
Practical points
Scott P. DeVries
Previous decisions requiring horizontal exhaustion have been difficult for policyholders. Not only have they created problems with decades-old policies becoming insolvent, but the need to exhaust every primary policy for each policy period, each with its own coverage issues, has the potential to prolong litigation and delay benefits to policyholders. The courts’ adoption of vertical exhaustion has alleviated these concerns.
Joseph Y. Itkin
The Court expressly noted that excess insurers are free to write their policies in a manner that requires horizontal exhaustion. Policyholders should pay close attention to the wording of their future policies so that they can adjust their expectations accordingly.
Syed S. Ahmad
When negotiating new insurance policies, policyholders should consider enlisting the assistance of their insurance coverage advisors to include clauses that address vertical exhaustion.
Scott P. DeVries ([email protected]) is special counsel in the firm’s San Francisco office and exclusively represents policyholder clients in a wide range of insurance matters arising under first party property insurance, umbrella general liability insurance, directors and officers insurance, EPLI insurance, crime insurance, crypto and digital asset insurance, and cyber insurance.
Joseph Y. Itkin ([email protected]), an associate in the firm’s Los Angeles office, focuses his practice on complex insurance litigation and advising policyholders on insurance coverage matters.
Syed S. Ahmad ([email protected]), head of the insurance practice at Hunton Andrews Kurth LLP and a partner in the Washington, DC office, where he represents clients in insurance and reinsurance matters and other business litigation.
