Recent Developments in Excess, Surplus Lines, and Reinsurance Law

• Pages: 341-375
• Date: 01 April 2021
• Published date: 01 April 2021
• Author: Michael Carolan,Thomas Kinney,Nathan Lee,Timothy M. Thornton Jr.,Ira J. Belcove,Karen M. Borg,Abigail Chin,Molly S. Crabtree,Randi Ellias,Andrew J. Foreman,Kevin J. O'Brien,Mark A. Schwartz,Larry P. Schiffer
• Subject Matter: Administrative & Public Law

341

* Michael Carolan is a partner in the Washington, D.C. office of Troutman Pepper Hamil-

ton Sanders LLP. Thomas Kinney is an associate with Troutman Pepper Hamilton Sanders

LLP in the same office. Timothy M. Thornton, Jr. and Nathan Lee are partners in the

Encino, California office of Gray Duffy, LLP. Molly Crabtree is a partner in the Columbus,

Ohio, office of Porter Wright Morris & Arthur LLP. Ira Belcove, Karen Borg, Randi Ellias,

Andrew Foreman, Kevin O’Brien, and Mark Schwartz are partners in the Chicago office

of Porter Wright. Larry Schiffer is President of Schiffer Law & Consulting PLLC in New

York. Abigail Chin is a federal judicial law clerk.

RECENT DEV ELOPMENTS IN EXCESS,

SURPLUSLINES, A ND REINSURA NCE LAW

Michael Carolan, Thomas Kinney, Nathan Lee, Timothy M.

Thornton, Jr., Ira J. Belcove, Karen M. Borg, Abigail Chin,

Molly S. Crabtree, Randi Ellias, Andrew J. Foreman, Kevin J.

O’Brien, Mark A. Schwartz, and Larry P. Schiffer*

I. Developments in Excess and Surplus Lines Insurance Law .......342

A. Exhaustion of Underlying Insurance ....................................342

B. Allocation of Damages for Insurance ...................................345

II. Developments in Reinsurance Law .............................................349

A. Arbitrability ...........................................................................350

B. Consolidation ........................................................................356

C. Discoverability of Reinsurance Information ........................356

D. Enforceability of Foreign Arbitral Awards ...........................358

E. Expenses in Excess of Limits ................................................ 359

F. Follow the Settlements ......................................................... 361

G. Functus Officio ..................................................................... 363

H. Insolvency—Offset and Mutuality ....................................... 364

I. Preemption ............................................................................ 366

J. Right to Associate ................................................................. 368

K. Vacatur................................................................................... 370

Tort Trial & Insurance Practice Law Journal, Spring 2021 (56:2)342

I. DEVELOPMEN TS IN EXCESS AN D

SURPLUS LIN ES INSURA NCE LAW

Case law affecting the excess and surplus lines insurance industry addressed

a number of issues in the last year, including the issue of exhaustion of

underlying insurance and what a policyholder must establish in order to

trigger coverage for excess insurance policies and the proper allocation of

damages for insurance coverage. Key decisions in each area are discussed

below.

A. Exhaustion of Underlying Insurance

This survey period saw significant developments in a number of different

states with respect to the question of the exhaustion of underlying insur-

ance and what a policyholder must establish in order to trigger coverage

for excess insurance policies.

First and perhaps most significantly, in Montrose Chemical Corp. v. Supe-

rior Court,1 the California Supreme Court addressed the issue of exhaustion

among excess insurers on long-tail risks, and determined that the policies

at issue allowed vertical—and did not require horizontal—exhaustion. This

was the third decision by the California Supreme Court in environmental

contamination coverage lawsuits involving Montrose Chemical Corpo-

ration, following Montrose Chemical Corp. v. Superior Court2 and Montrose

Chemical Corp. v. Admiral Insurance Co.3

As background, Montrose was sued for causing continuous environmen-

tal damage between 1947 and 1982 on account of its manufacturing of the

pesticide dichloro-diphenyl-trichlorethane (DDT) at its facility in Cali-

fornia. After Montrose was sued by the state and federal governments, it

entered into partial consent decrees to resolve various claims and sought

reimbursement from its liability insurers. For each policy year from 1961

to 1985, Montrose had purchased primary insurance and multiple layers of

excess insurance.

The issue before the California Supreme Court was what Montrose had

to establish in order to trigger each layer of excess insurance coverage.4

Montrose proposed a rule of “vertical exhaustion” or “elective stacking,”

whereby the insured could “go up” its insurance tower in a given policy

period without exhausting lower levels of insurance coverage available in

other policy periods.5 The insurers proposed a rule of “horizontal exhaus-

tion,” meaning that Montrose could access an excess policy only after it

1. 460 P.3d 1201 (Cal. 2020) (Montrose III).

2. 861 P.2d 1153 (Cal. 1993).

3. 897 P.2d 1 (Cal. 1995).

4. Montrose III, 460 P.3d at 1203.

5. Id. at 1205–06.

Recent Developments in Excess, SurplusLines, and Reinsurance Law 343

had exhausted other policies with lower attachment points for every year in

which the environmental damage occurred.6

Ultimately, the California Supreme Court adopted what it articulated

as a “vertical exhaustion” theory at the excess level.7 Thus, an insurer on

the risk whose policy is chosen to respond to a loss must pay the full loss

up to policy limits and cannot limit its payment to its pro rata share. The

carrier may seek reimbursement from other insurers under a contribution

or subrogation theory.8 This allows an insured to pick a second layer excess

if the first layer excess underneath it in the same policy year (and other

lower layers of coverage in the same policy year) is exhausted, even though

first layer excess coverage in other policy years is not exhausted.9 This also

allows an insured to recover under all layers of coverage in one policy year,

while shifting from the insured to the administrative burden of seeking

reimbursement from other excess insurers.10

The court’s analysis focused on “other insurance” clauses in the poli-

cies.11 The court first noted that the “other insurance” clauses do not men-

tion the effect of coverage in another policy period.12 As such, while the

other insurance language could reasonably be argued to refer to other

insurance in other years of coverage, it could also be read as referring only

to other insurance in the same policy year. In light of this, the court found

that “the plain language of these clauses is not adequate to resolve this dis-

pute in the insurers’ favor.”13

Looking outside the policies, the court found that the traditional use of

other insurance clauses was to prevent multiple recoveries. Citing to both

California precedent and a comment in the Restatement of the Law of

Liability Insurance, the court noted that such clauses are generally used to

address allocation between overlapping concurrent policies, not the alloca-

tion of liability amongst successive insurers.14 Moreover, the court noted

that courts in most other states have reached the same conclusion when

6. Id. at 1206.

7. Id.

8. Id.at 1208 & n.5.

9. Id. at 1206, 1214.

10. Id. at 1214.

11. Id. at 1205. The court construed the concept of “other insurance” clauses broadly to

include definitions of ultimate net loss and retained limit as used in insuring agreements, loss

payable provisions, and limits provisions in addition to clauses more traditionally viewed as

”other insurance” clauses—namely, those that are titled “Other Insurance.” This functional

analysis of the policy language looks to see if it acts like an “other insurance” clause, even if it

calls itself something else.

12. Id. at 1213.

13. Id. at 1210.

14. Id. at 1211.