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Montrose and Horizontal or Vertical Exhaustion: Is the Long-Tail (Claim) Wagging the Dog?

By JoLynn Pollard and Peter Ryan
(as published in the Insurance Journal, April 2, 2018)

The California Supreme Court will again intervene in the protracted saga of insurance litigation stemming from the bodily injury, property damage, and Comprehensive Environmental Response, Compensation, and Liability Act actions against Montrose Chemical Corporation of California, this time to consider the sequence and extent to which excess insurers’ coverage obligations are triggered with respect to claims involving continuous property damage, or long-tail claims.

On Nov. 29, 2017, the Supreme Court accepted Montrose’s petition for review of the Second District’s ruling, requiring horizontal exhaustion of all of the 26 years of underlying policies triggered by damages arising from Montrose’ s 35 years manufacturing the chemical DDT in California.

More than two decades ago in Montrose Chemical Corp. v. Admiral Ins. Co. (1995), the Supreme Court was first called upon to resolve coverage issues arising from these continuous property damage claims against Montrose. Admiral Insurance Co., the insurer for the final four years of the implicated general liability policies, had taken the position that there was no coverage under its policies because the continuous injury had commenced long before the policies were issued.

The Supreme Court rejected this argument, finding that the standard CGL policy language required an insurer to defend and indemnify an insured with respect to actions for continuous or progressively deteriorating bodily injury and property damage that occurred during successive policy periods under a continuous-injury-trigger of coverage.

The Supreme Court’s endorsement of the continuous-injury-trigger of coverage left open the question of how indemnity should be allocated among several years of insurance. Two years later, the Supreme Court addressed this issue in Aerojet-General Corp. v. Transport Indemnity Co. (1997). Aerojet considered contamination claims against an aerospace company for the discharge of hazardous substances over a 30-year time span.

The trial and appellate courts had allocated defense costs on a pro-rata basis between the various insurers and the aerospace company itself for a period in which it was self-insured. The Supreme Court instead adopted an “all-sums” approach finding that — with regard to policies under which an insurer promises to pay all sums that the insured becomes legally obligated to pay as damages — the insurer is obligated to cover all specified harm caused by a triggering event within the policy period, even if some such harm occurs beyond that period.

The all-sums approach made clear that policy limits were available for the entirety of damages resulting from an occurrence under a continuous injury trigger of coverage; but courts over the ensuing years struggled with whether this approach permitted an insured to recover the limits of multiple policies across an array of policy periods.

The Supreme Court took up this question in State of California v. Continental Ins. Co. (2012), as modified (Sept. 19, 2012), announcing the all-sums-with-stacking indemnity principle. According to this rule, the policy limits of policies — subject to a continuous injury trigger of coverage and all sums rule — can be stacked to form one “uber policy.” Analysis of the policies at issue in Continental was somewhat simpler than in most long-tail claims, as the insured was the State of California and as a result, all of the policies were provided on identical forms required by the state.

The matter now before the Supreme Court stems from a question that the all-sums-with-stacking indemnity principle left unanswered: in what order or sequence must an insured access policies written for different policy years in the context of a long-tail claims? Montrose advocates for a vertical exhaustion formula in which excess policies for any policy period are triggered when all underlying insurance for that particular policy period is exhausted. But the Second District Court of Appeal disagreed, finding in Montrose Chemical Corporation of California v. Superior Court (2017), as modified (Sept. 8, 2017), that — for at least some of the excess policies containing an other-insurance provision — underlying insurance for all 26 years of implicated policies must be exhausted before excess coverage can be triggered — a horizontal exhaustion formula.

The Second District’s reliance on other-insurance provisions to require horizontal exhaustion of all underlying policies arguably runs up against the 2002 decision Dart Industries, Inc. v. Commercial Union Ins. Co. (2002). In Dart, the Supreme Court considered an insured’s action for declaratory relief regarding the existence and terms of a primary policy that had been lost. The insurer argued that coverage under the lost policy was limited or precluded by an other-insurance clause.

The Supreme Court refused to consider the effect of the other-insurance clause on the scope of the insured’s coverage, finding that other-insurance clauses affect the apportionment of liability among insurers when multiple triggered policies exist but that the clauses have “no bearing upon the insurers’ obligations to the policyholder.”

The Second District distinguished Dart on the grounds that it applied to a primary policy and not an excess policy as was at issue here. But just a month later, in State of California v. Continental Insurance Company (2017), the Fourth District accepted the very interpretation of Dart rejected by the Second District. In a sequel to the 2012 Continental decision, the Fourth District affirmed the trial court’s ruling in favor of vertical exhaustion. In response to the insurer’s argument that its other-insurance clause mandated horizontal exhaustion the court cited Dart for the proposition that other-insurance clauses apply to contribution actions between insurers and not coverage litigation with an insured.

The Continental 2017 court expressly rejected the argument that Dart is inapplicable because it did not involve any issue as to excess policies or exhaustion.

It is difficult to predict what the Supreme Court will do with the Second District’s Montrose ruling. The Second Circuit kept its holding quite narrow because Montrose had requested a declaration in favor of vertical exhaustion with regard to all 26 years of policies and thus the only necessary finding was that at least some of the applicable policies are subject to horizontal exhaustion based on the policy language therein.

But we can certainly expect guidance on the interpretation of Dart and the effect of other-insurance provisions on long tail claims going forward.

Pollard is a shareholder and Ryan is an associate at Hunt Ortmann Palffy Nieves Darling & Mah Inc. Pollard: jpollard@huntortmann.com, (626) 440-5200. Ryan: ryan@huntortmann.com, (626) 440-5200.

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