Insurance Law Client Alert: Appeals Court Renews Finding of Exception to Horizontal Exhaustion Rule

In Kaiser Cement & Gypsum Corp. v. Insurance Co. of State of Pennsylvania (No. B222310, filed 4/8/13), a California Court of Appeal again carved out an exception to the rule of horizontal exhaustion holding that, given the right policy language, an insurer issuing successive policies that span a continuous loss is only obligated for a single year’s limit per occurrence.

Kaiser had tendered thousands of asbestos claims involving continuing bodily injury to its primary insurer, Truck Insurance Exchange (Truck). Truck insured Kaiser for several years, and Kaiser selected 1974 as the policy year to respond for injuries occurring, in part, during that year. Certain of the claims exceeded Truck’s $500,000 per occurrence limit and Truck had argued that because its successive primary policies all specified that “The limit of liability stated in this policy as applicable per occurrence is the limit of the company’s liability for each occurrence,” Truck’s liability was limited to $500,000 per occurrence, not $500,000 per occurrence-per year.

In a prior opinion the Court of Appeal had agreed, announcing an exception to the rule of horizontal exhaustion, holding that any primary insurer issuing successive policies is only obligated for a single year’s per occurrence limit before excess insurance is triggered. Thus, an insurer that renewed for 10 years would only owe one year’s primary coverage for a continuing loss. (Kaiser Cement v. Ins. Co. of Pa. (2011) 196 Cal.App.4th 140, review granted Aug. 24, 2011, S194724.)

The broader principal of horizontal exhaustion was then confirmed by the California Supreme Court in State of California v. Continental Insurance Co. (2012) 55 Cal.4th 186, which held that continuing losses were not broken down into discrete policy years but instead, all policies in effect during any part of a continuous loss were obligated for “all sums,” and could be “stacked,” resulting in one big pool of “uber insurance” for the policyholder.

The Supreme Court vacated the earlier Kaiser Cement opinion, and ordered the Court of Appeal to reconsider its decision in light of the State of California case. But, having done so, the Court of Appeal again found that, under the language of Truck’s 1974 primary policy, Truck was responsible to pay policy limits only once per occurrence, not once per occurrence per year or once per occurrence per policy.

To get there, the Court of Appeal acknowledged the holding in State of California, but noted that the Supreme Court had specifically left the door open with a caveat that insurers could contract around the “all sums with stacking” rule by use of express policy language. The appeals court noted that the Truck primary policies stated that “[t]he limit of liability stated in this policy as applicable ‘per occurrence’ is the limit of the company’s liability for each occurrence” and “[t]here is no limit to the number of occurrences for which claims may be made hereunder, however, the limit of the Company’s liability as respects any occurrence involving one or any combination of the hazards or perils insured against shall not exceed the per occurrence limit designated in the Declarations.”

Further, the policy specifically provided that, “[t]he limit of liability stated in this policy as applicable ‘per occurrence’ is the limit of the company’s liability for each occurrence” and “the limit of the Company’s liability as respects any occurrence . . . shall not exceed the per occurrence limit designated in the Declarations.”

According to the Kaiser Cement court, this is “antistacking” wording as contemplated by the Supreme Court in the State of California case: “Notably, the policy does not say that the per occurrence limit is the limit of the company’s annual liability for any occurrence, or that the per occurrence limit is the limit of the company’s liability under the policy. Rather, it says that the per occurrence limit is the limit of the company’s liability. We presume, as we must, that the parties intended this language to mean what it plainly says—that for any single occurrence, Truck is liable up to the per occurrence limit, and no more. We thus conclude that the trial court correctly determined that Kaiser may not ‘stack’ the liability limits of Truck’s primary policies, but rather may recover only up to the ‘per occurrence’ limit of one policy.”

Having essentially reached the same decision it was ordered to reconsider by the Supreme Court in the wake of the State of California case, it is not clear that this opinion will remain citable as precedent. The decision once again ignores the fact that each policy renewal constitutes a separate contract for which a separate premium is paid, and would appear to limit the coverage available to policyholders that renew, which could be seen as inconsistent with the “all sums with stacking” rule announced by the Supreme Court.

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April 9, 2013