Montrose Ruling: Just when you thought it was easy to understand…
Just when you thought it was easy to understand elective stacking and vertical exhaustion, the California Court of Appeal (Montrose Chemical Corporation of California v. Superior Court, 14 C.A.5th, 1306 (8/31/17, modified 9/8/17) demands that one actually read the policies involved. Montrose Chemical Corporation manufactured and distributed DDT between 1947 and 1982 in Torrance, California. Ultimately, they were sued for causing continuous environmental damages in the Port of Los Angeles. In this case, Montrose made a valiant effort to short circuit their massive coverage litigation involving years of primary and excess coverage and asserted that they could make an elective stacking of policies and vertically exhaust the primary and excess policies in a single year (or selected years). Not without reason, the excess carriers involved disputed the Montrose position and basically asserted that horizontal exhaustion of primary policies across all years was required.
The Court of Appeal, under orders from the California Supreme to evaluate the issue, rejected the Montrose Argument for Elective Stacking and Vertical Exhaustion based on the specific language of the Excess insurance policies involved. In effect, the court required the trial court in this case, and other cases like it, to make a detailed comparative analysis of the various coverage provisions contained in each policy to determine the relative positions of each carrier.
Coverage counsel and insurance experts will love this case. It is the full employment act of 2017. It may also provide some incentive to insurance brokers to more carefully advise their clients as they add multi layers of overage to each additional year. In this case, where the policy holder is liable for continuing injury that is potentially covered by primary and excess policies in multiple years, Montrose advocated an “elective stacking” approach. In this context, Montrose argued it was entitled to elect to proceed vertically to exhaust policies for a single coverage year, once the underlying policy exhaustion provisions were satisfied.
Horizontal Exhaustion – Selective Vertical Exhaustion
The “Continental” excess insurers advocated a horizontal exhaustion. They contended that the excess policies at issue contain provisions “that make them excess to vertically underlying policies in the same policy period, “plus other valid and collectible insurance,” that is, other insurance that is not vertically underlying (including primary policies in other implicated policy periods) and is also triggered by the same occurrence.”
Travelers, in this case, also argues that the matter is premature because Montrose has not demonstrated that it has exhausted its underlying primary policies; it only “contends that the liability in the case exceeds the policy limits of the primary policies it has elected to exhaust. (The court never reached this issue)
The court held that Montrose was not entitled to the relief it sought as a matter of law (selective vertical exhaustion), but also held that the lower court’s decision was not one it could adopt either. The lower court had required that all horizontal policies had to be exhausted before the excess policies were implicated. The Appellate court in this Montrose case refused to adopt a single exhaustion scheme that applies to Montrose’s entire coverage portfolio, and instead directed that each policy be interpreted according to its terms. Thus, the relative terms of policies initially thought to be primary may actually render one excess to the other. (“However, other insurance clauses may be relevant to determining whether two policies provide the same level of coverage—and thus, the order in which excess policies attach”). (Montrose, 14 C.A. 5th 1306, Parag. B8)
The court discussed the definition of Primary and Excess insurance and pointed out that Excess Insurance (1) can be written as excess to specifically identified coverage or coverage provided by a particular insurer; or, it can be written as coverage in excess of an identified primary policy and the “applicable limits of any other underlying insurance providing coverage to the insured”, or words to that effect.
Earlier Decision by California Supreme Court
In an earlier decision, State of California v. Continental Ins. Co. (2012) 55 Cal 4th 186 the California Supreme Court had permitted the stacking of policies and vertical exhaustion of the excess carriers above the primary. But in this Montrose case the court pointed out that in Continental the primary carriers had “all sums” coverage which permitted stacking absent anti stacking language in the policy. In Montrose, not all primary carriers had “all sums” coverage language, which suggested complete horizontal primary exhaustion may not be appropriate.
Thus, the court rejected Montrose’ argument that Continental case held that insureds covered by multiple policies are entitled to “select which policy(s) to access for indemnification in the manner they deem most efficient and advantageous. The court said Continental reaffirmed the principle that insurance policies must be interpreted according to their terms, even if alternative allocation schemes might be more desirable. It also pointed out that Continental did not decide when a higher level excess policy is triggered in the context of a long tail environmental claim.
Montrose Chemical Corporation of California location (shown on map) and area affected by dumping of DDT toxic waste.
Montrose Ruling – Image info and source
Montrose Ruling – Excess Policies
After making that analysis and reviewing the policies, the court noted several provisions in the excess policies that required them to reject the Montrose argument that the excess policies attach upon the exhaustion of lower layer policies within the same policy period. For example:
- The insuring agreements in some excess policies had language that provided that the excess policies were not triggered until exhaustion “of all available insurance”
- The Retained Limit Clause may have language stating the company’s liability is limited to ultimate net loss in excess of the insured’s retained limit, which is defined as the greater of the total of the applicable limits of the underlying policies listed in the declarations, “and any other underlying insurance collectible by the insured”.
- The “other insurance clause” may, in effect, provide that the policy at issue is excess to both scheduled and unscheduled policies using language such as: “if other collectible insurance is available to the insured covering a loss also covered hereunder, this policy shall be in excess of and not contributory with such other insurance”.
- The definition of “loss” in terms of other insurance may affect the priority; the policy may use the following language: “the sums paid as damages in settlement of a claim or in satisfaction of a judgment …after making deductions for all recoveries, salvages and other insurance (whether recoverable or not) other than the underlying insurance and excess insurance purchased specifically to be in excess of this policy;
- “Other Insurance clauses which negate coverage”; Some policies have language in the Other Insurance clauses that say there is no coverage if the insured has other insurance.
The court specifically stated that each policy had different language and that each policy had to be analyzed separately.
Conclusion – The Montrose Ruling Future Outlook
The courts requirement that each policy of insurance be analyzed separately and carefully with respect and relative to each other is not surprising given the analysis put forth by the California Supreme Court in cases such as State of California v. Continental (supra). One can expect that every coverage case involving multiple layers of insurance will require this level of analysis. Of course, a hearing before the California Supreme Court will, likely be requested to allow the court to clarify any inconsistencies between Montrose and the Continental case.
“Montrose Ruling Breaking News: As expected, the Montrose case went to the California Supreme Court in the form of a Petition for Review. Review was granted by the Court on November 29, 2017. The case will be briefed and argued in due course. Expect at least 9 months to a year before oral arguments are set in this matter.” Latest update May 2018.