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In what is described as a major policyholder victory, the California Supreme Court unanimously ruled Monday that policyholders do not have to first exhaust all their primary coverage over different policy periods in order to access their excess coverage for particular years.
The court’s ruling “unlocks potentially billions worth of coverage that insurers have tried to keep in limbo across the industry,” said policyholder attorney John M. Wilson, a partner with Latham & Watkins LLP in San Diego, who represented Montrose Chemical Corp. of California, on the court’s decision in Montrose Chemical Corp. of California v. The Superior Court of Los Angeles County.
Los Angeles-based Montrose contended a policyholder is entitled to coverage under any excess policy once it has exhausted other policies with lower attachment points in the same policy period, which is called “vertical exhaustion” or “elective stacking.”
Insurers in this case argued the policyholder must first exhaust all the insurance with lower attachment period purchased for different policy periods before they can tap the excess coverage, which is known as “horizontal exhaustion.”
The origin of the lawsuit is a Torrance, California, facility operated by Montrose between 1947 to 1982 that manufactured the insecticide, dichlorodiphenyltrichloroethane, or DDT.
The state of California sued Montrose for environmental contamination allegedly caused by its operation of the facility in 1990. Montrose entered into partial consent decrees in which it agreed to pay for environmental cleanup. The company has said it has since spent more than $100 million as a result, and anticipates future liability could approach or exceed this amount, according to the ruling.
Montrose had purchased primary and excess comprehensive general liability insurance to cover its Torrance operations between 1961 and 1985. Forty excess insurers collectively issued more than 115 excess policies during this period, said the ruling.
The coverage dispute in the case dates to 1990, when Montrose first sued its insurers to resolve various coverage disputes, but the issue covered in Monday’s ruling first arose in 2015, according to the ruling.
A Los Angeles trial court ruled in the insurers’ favor, which was later affirmed by a state appeals court.
But another state appeals court held in 2017 in State of California v. Continental Ins. Co. that vertical exhaustion “was appropriate given the relevant policy language and our case law.”
The state supreme court then accepted the case to resolve whether in these cases vertical exhaustion or horizontal exhaustion is required.
“Reading the relevant policy language in light of background principles of insurance law and considering the parties’ reasonable expectations we conclude that rule of vertical exhaustion is appropriate,” said the state supreme court.
“Under that rule, the insured has access to any excess policy once it has exhausted other directly underlying excess policies with lower attachment points. But an insurer called upon to indemnify the insured’s loss may seek reimbursement from other insurers that is used policies covering relevant policy periods.”
“Although the insurers’ interpretation is not an unreasonable one, it is not the only possible interpretation of the policy language,” said the ruling.
“The ‘other insurance’ clauses at issue clearly require exhaustion of underlying insurance, but none clearly or explicitly states that Montrose must exhaust insurance with lower attachment points purchased for different policy periods,” it said.
“In sum, the ‘other insurance’ clauses do not clearly specify whether a rule of horizontal or vertical exhaustion applies here. Read in isolation, the ‘other insurance’ clauses might plausibly be read to perform the function the insurers ascribe to them.
“But read in conjunction with the actual language of other provisions in the policies, and in light of their historical role of governing allocation between overlapping concurrent policies, the insurers’ reading becomes less likely.”
The policies “are most naturally read to mean that Montrose may access its excess insurance when it has exhausted the other direct underlying excess insurance policies that were purchased for the same policy period,” said the decision, in ruling in Montrose’s favor.
Mr. Wilson said, “This has been a long fight that the carriers have dragged out for years.” The court’s approach in the decision “much more fairly allocates the burden.”
Mr. Wilson said the ruling will be influential in other states. “The California Supreme Court has always been at the forefront of major insurance issues that have ramifications across the industry, and so any time they speak unanimously on an issue like this it’s going to have significant consequences across the country.”
He said, “One of the takeaways is that it’s a crucial reminder to policyholders to accept the industry’s uniform claims about disputed policy provisions.
“This is one that the carriers have forced policyholders to fight from a number of different angles for years and it was important we keep at it because we think the Supreme Court reached the right results.
Policyholder attorney Robert Horkovich, a New York-based managing shareholder with Anderson Kill P.C., who was co-counsel in the State of California case, said the ruling is a “big victory for policyholders” that makes it easier for them to access coverage “and it means more coverage for policyholders,” especially in environmental cases.
Insurer attorneys in the case had no comment or could not be reached.
Brazil's upper house of parliament recently passed legislation which is expected to make environmental insurance mandatory for businesses, Segs.com reported. The number of insurers providing environmental cover is limited in the country which could lead to a rise in insurance rates for the segment.