Insurance Law

• Jurisdiction: California,United States
• Author: By Stephen Raucher and Michael Sohigian
• Citation: Vol. 2020
• Publication year: 2020

Insurance Law

By Stephen Raucher and Michael Sohigian

Introduction

In 2020, policyholders scored a significant victory at the California Supreme Court, which ruled in favor of vertical exhaustion in the context of continuous loss claims. The year also saw numerous reversals of summary judgment on coverage and bad faith issues, mostly in favor of policyholders. A notable exception to the policyholder winning streak was the almost unanimous rejection by trial courts of efforts to secure coverage for COVID-19 business interruption losses; however, those cases have not yet percolated to the Courts of Appeal, and are thus not addressed in this year’s update. In addition, several cases wrestled with civil procedure issues in the context of insurance policies, including arbitration, choice of law and forum selection. Finally, the door for insurance broker liability was cracked open in cases where the broker holds itself out as having expertise in a specialized area of insurance.

Insurer v. Insurer

California Supreme Court Endorses “Vertical Exhaustion” in Order to Trigger Upper-Level Excess Insurance

Montrose Chemical Corp. (“Montrose”) manufactured DDT at its Torrance facility from 1947-1982. Montrose purchased primary and excess commercial general liability policies from 1961-1985. In 1990, the United States and the State of California sued Montrose for environmental contamination, leading to a consent decree for environmental cleanup pursuant to which Montrose has expended more than $100 million. Montrose sought coverage from its primary and excess insurers, leading to years of litigation and multiple published decisions, culminating most recently in Montrose Chemical v. Superior Court, in which the Supreme Court considered the sequence in which Montrose may access its excess insurance policies.¹

The question presented in Montrose III was whether the insured had to exhaust all underlying policies spread over the years before accessing an excess policy for a given year, or whether it was sufficient to just exhaust the relevant year’s underlying policies (primary and excess). The former type of exhaustion, advocated for by the excess insurers, is known as “horizontal exhaustion,” whereas the latter, advocated for by the insured, is called “vertical exhaustion” or “elective stacking.”

The parties agreed that all of Montrose’s primary insurance had been exhausted, but only some first level excess policies had been. The question was thus whether all of the first level excess policies needed to be exhausted before second level excess policies could be accessed. The excess policies all provided that the insured must exhaust the limits of its underlying insurance in the same policy period before coverage triggered. All of the excess policies also contained “other insurance” clauses, which required exhaustion “of any other underlying insurance.”

The trial court granted summary adjudication to the insurers, finding that horizontal exhaustion should apply. After Montrose filed a writ petition, the Court of Appeal affirmed. However, the Supreme Court reversed, finding that vertical exhaustion applied: “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 issued policies covering relevant policy periods.”²

The Court found that, while the insurers’ interpretation of their other insurance clauses to refer to all other available insurance was not unreasonable, the clauses could also be read to refer only to other directly underlying insurance in the same policy period. The Court noted that other insurance clauses have generally been used to address allocation questions with respect to overlapping concurrent policies, not among successive insurers. Moreover, excess policies explicitly state their attachment point by referencing a specific dollar amount of underlying insurance and/or specific underlying policies. Accordingly, the objectively reasonable expectation of the insured favored vertical exhaustion.

In addition, because each year’s policy terms and conditions varied, a rule of horizontal exhaustion would create practical obstacles to securing indemnification: “Horizontal exhaustion would create as many layers of additional litigation as there are layers of policies.”³ Montrose was thus not required to exhaust excess insurance at lower levels for all periods triggered by continuous injury before obtaining coverage from higher level excess insurance.

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Following Montrose III, Vertical Exhaustion Held to Apply to First Level Excess Insurance

The Montrose III case left undecided the question of whether horizontal exhaustion applies to all primary insurance before first level excess insurance can be triggered, although several earlier Court of Appeal cases had held that it does.⁴ However, following the logic of Montrose III, the Court of Appeal, First Appellate District, found in SantaFe Braun, Inc. v. Insurance Co. v. North America that vertical exhaustion generally applies.⁵

SantaFe Braun ("Braun") was sued for asbestos-related bodily injury claims spread over multiple policy years. Braun sought a declaration that its excess insurers were obligated to defend and indemnify. The trial court ruled that horizontal exhaustion was required unless the excess policy expressly provided for vertical exhaustion. While the case was on appeal, the Supreme Court issued its decision in Montrose III.

Following Montrose III, the Court of Appeal found that the "other insurance" clauses in Braun's excess policies were similarly ambiguous as to whether the exhaustion requirement applied only to directly underlying insurance. The SantaFe court rejected insurers' argument that differences between primary and excess policies compelled a different result than Montrose III, noting that the policy language interpreted in Montrose III was the same whether the underlying insurance was primary or excess. Accordingly, the Court held absent an explicit policy provision to the contrary, "the insured becomes entitled to the coverage it purchased from the excess carriers once the primary policies specified in the excess policy have been exhausted."⁶ Notwithstanding the prior Court of Appeal decisions to the contrary, the Supreme Court denied review, thus presumably settling the issue in light of its holding in Montrose III.

Ninth Circuit Rejects Excess Insurer's Theory That Primary Policy Was Improperly Eroded by Paying to Settle Uncovered Losses

In AXIS Reinsurance Co. v. Northrop Grumman Corp., an excess carrier asserted that underlying carriers had paid for uncovered settlements, thereby "improperly eroding" policy limits.⁷ Northrup Grumman carried Employee Benefit Plan Fiduciary Liability Insurance: (1) $15 million primary with National Union; (2) $15 million excess with Continental Casualty; and (3) $15 million second excess with AXIS Reinsurance Company ("AXIS").

National Union contributed to a settlement with the Department of Labor alleging pension plan violations, exhausting its policy. Continental contributed to a subsequent settlement of a lawsuit brought on behalf of two Northrop employee plans, exhausting its policy and triggering the AXIS policy. AXIS paid the remainder of the settlement ($9.7 million), but sued Northrop seeking a declaration that the first settlement was not for a covered loss, thereby improperly eroding the underlying limits. The district court granted summary judgment in favor of AXIS.

The Ninth Circuit reversed, noting that there was no circuit precedent for the "improper erosion" theory. The Court held that, absent specific language in the excess policy, the excess insurer may not contest payments made at prior levels of insurance unless there is an indication of bad faith or fraud. In response to AXIS' argument that the underlying settlement was for a disgorgement claim that was uninsurable under California law, the Court noted that its "holding that excess insurers generally may not second-guess the payment decisions of underlying insurers applies even in cases where, as here, those prior payments arguably were for loss that is uninsurable as a matter of state public policy."⁸

Landlord's Insurer Awarded Equitable Contribution Against Tenant's Insurer After Settling Restaurant Patrons' Action For Injuries When Car Crashed Into Restaurant

Patrons who were injured when a car crashed into a restaurant where they were eating sued the restaurant for their injuries. They subsequently added the landlord on the theory that after a similar prior accident the landlord should have protected the property to prevent a vehicle from entering. In Truck Ins. Exchange v. AMCO Ins. Co., the landlord's insurer ("TIE") sued the restaurant's carrier.⁹ TIE tendered the patrons' suit to AMCO based on indemnity provisions in the restaurant's lease, but AMCO rejected the tender, contending the plaintiffs' claims "did not arise out of its insured's use or occupancy of the premises" because the restaurant had "no responsibility for a vehicle losing control on the street and crashing into the restaurant" or for taking measures to protect the property.¹⁰

Both the restaurant and the landlord moved for summary judgment. The trial court granted the restaurant's motion, but it denied that of the landlord due to evidence of the earlier incident of which the landlord, but not the restaurant, had notice. TIE settled the underlying action, then sued AMCO for equitable subrogation, equitable indemnification, equitable contribution, and declaratory relief.

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TIE alleged that the parties' lease contained a provision requiring the restaurant to indemnify, defend, and hold landlord harmless against claims and damages asserted against landlord "as may be related or incidental to Tenants [sic] operations."¹¹ TIE also alleged the lease required landlord to be listed as an...