Montrose III: Appeals Court Rejects “Elective Vertical Stacking,” but Declines to Find “Universal Horizontal Exhaustion” Absent Proof of Policy Wordings

In Montrose Chemical Corp. v. Superior Court (No. B272387; filed 8/31/17) (Montrose III), a California appeals court found that excess insurance is not triggered for continuous and progressive losses until there has been horizontal exhaustion of underlying insurance, but there is no “universal horizontal exhaustion” because the order or sequence in which excess policies may be accessed depends on the specific policy wording at issue.

The coverage lawsuit was initiated by Montrose in 1990, when it was named in environmental actions for continuous and progressive property damage emanating from its Torrance chemical plant since the 1960s. Montrose had varying levels of insurance coverage throughout, but the total limits and attachment points of differing levels of excess coverage in any given year had changed from year-to-year. The coverage action was stayed in 2006 due to concern of prejudice to the underlying defense, but the stay was lifted in 2014 with Montrose entering a consent decree in the CERCLA action.

Based on the Supreme Court’s opinion in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, Montrose amended its complaint and sought summary judgment on a theory that it was entitled under the language of the excess policies and the Supreme Court’s holding in Continental, to “electively stack” its coverage—i.e., to “select any policy to indemnify its liabilities, provided the policies immediately underlying that policy are exhausted” in the same policy period. That is, Montrose contended that it could access any excess policy issued in any policy year so long as the lower-lying policies for the same policy year have been exhausted.

The excess insurers opposed Montrose’s motion for summary adjudication, and some of them brought a cross-motion for summary adjudication on a theory that no excess insurer had a duty to pay a covered claim until Montrose had “horizontally exhausted” its lower-lying excess policies in all triggered policy years. The trial court agreed, and granted the excess insurers’ horizontal exhaustion motion, while denying Montrose’s “elective stacking” motion.

The appeals court generally approved horizontal exhaustion, with limitations. Specifically, the court declined to hold that policies must necessarily be horizontally exhausted at each coverage level and for each year before higher-level policies may be accessed. Instead, the court ruled that the sequence in which policies may be accessed must be decided on a policy-by-policy basis, taking into account the relevant provisions of each policy.

Montrose had argued that: (1) it only needed to establish that its liabilities were sufficient to exhaust the underlying policy(ies) in the same policy period, and was not required to establish that all policies insuring Montrose in every policy period (including policies issued to cover different time periods both before and after the policy period insured by the targeted policy) with limits of liability less than the attachment point of the targeted policy, have been exhausted; and (2) Montrose could select the manner in which to allocate its liabilities across the policy(ies) covering the losses. Thus, the policyholder “may elect to proceed ‘vertically’ to exhaust policies for a single coverage year, once the underlying policy exhaustion provisions are satisfied.”

The excess insurers argued that strict horizontal exhaustion applied, and that Montrose could not access coverage under any excess policy until its liabilities exhausted all of the lower-lying excess coverage in every policy period.

As described by the appeals court, under the excess insurers’ approach, with five years’ coverage the underlying insurance in all five years would have to be exhausted before any excess policy was triggered. But Montrose argued it could pick, for example, years two, three and four, and only those years’ underlying insurance would need to be exhausted before the excess in those years was triggered.

The appeals court rejected Montrose’s argument, but said: “However, we do not adopt the trial court’s conclusion that all excess policies must be horizontally exhausted. Instead, because there is tremendous variation among the policies at issue, we decline to adopt a single exhaustion scheme that applies to Montrose’s entire coverage portfolio, and instead direct that each policy be interpreted according to its terms.”

The Montrose III court began by distinguishing Continental, saying that the “all-sums-with-stacking indemnity” principle annunciated in that case which “effectively stacks the insurance coverage from different policy periods to form one giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies,” dealt merely with whether a policyholder could access policies in different years or different policy periods, whereas Montrose III concerned the order or sequence in which the policyholder could do so. Moreover, many of the excess policies at issue did not even contain the “all sums” wording.

The Montrose III court said that the plain language of the subject excess policies would not support “elective stacking” in the first instance: “Our analysis of the policies, moreover, leads us to conclude that many of the policies attach not upon exhaustion of lower-layer policies within the same policy period, but rather upon exhaustion of all available insurance.” For example, some “retained limit” wording provided that: “The company’s liability shall be only for the ultimate net loss in excess of the insured’s retained limit defined as the greater of … the total of the applicable limits of the underlying policies listed in the declarations hereof, and the applicable limits of any other underlying insurance collectible by the insured.” Or “other insurance” wording provided: “If other collectible insurance … is available to the insured covering a loss also covered hereunder (except insurance purchased to apply in excess of the sum of the retained limit and the limit of liability hereunder) the insurance hereunder shall be in excess of and not contribute with, such other insurance.” The Montrose III court said that policies with such wording would be excess to both scheduled and unscheduled policies.

The Montrose III court found support in Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329 , distinguished Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, and rejected an appeal to pure public policy. Thus, the Montrose III court affirmed the denial of summary judgment for Montrose.

Having done so, however, the Montrose III court then stated that “The present record does not support a universal ‘horizontal exhaustion’ approach; thus, the trial court erred in granting the insurers’ motion on the issue of duty.” The court said that although the insurers had stipulated as to some of the language of the relevant policies, they did not provide the courts with all of the policy language or with copies of the policies themselves. Consequently, “[t]he absence of these policies makes it impossible for us to ‘interpret [policy] language in context, with regard to its intended function in the policy.’” (Citing Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277.) Among other things, the Montrose III court pointed out that some policies followed form to underlying insurance, but without the underlying policies it could not render an opinion on coverage for the excess.

The Montrose III court summed up: “For these reasons, we cannot conclude that each of the more than 115 policies at issue requires ‘horizontal exhaustion’ of the underlying policy layers for each policy year. Accordingly, the [excess] insurers were not entitled to summary adjudication on the issue of duty.”

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September 5, 2017