California Supreme Court Ruling Will Enable Montrose to Tap Excess Policies

By | April 7, 2020

A decision this week by the California Supreme Court gave policyholders with long-tail environmental claims a potentially big win, finding that polices within each policy period can be vertically stacked.

The decision was handed down on April. 6 in Montrose Chemical Corporation of California v. The Superior Court of Los Angeles County.

Montrose Chemical Corp. was sued for causing continuous environmental damage in the Los Angeles area between 1947 and 1982. The company subsequently entered into partial consent decrees to resolve various claims.

Montrose, which went to tap its liability insurance to cover what it owes in connection with the claims, had continuous primary insurance as well as layers of excess insurance from 1961 to 1985.

Montrose argued it is entitled to coverage under any relevant policy once it has exhausted directly underlying excess policies for the same policy period, while the insurers involved argued that Montrose may call on an excess policy only after it has exhausted every lower level excess policy covering the relevant years.

A trial court denied Montrose’s motion and granted the insurers’ motion, holding that the excess policies required horizontal exhaustion in the context of this multiyear injury. Montrose filed a petition for a writ of mandate, which the court summarily denied. The California Supreme Court granted Montrose’s petition for review and transferred the case to the Court of Appeal with instructions to issue an order to show cause why the relief Montrose sought should not be granted.

The Court of Appeal affirmed the trial court’s denial of Montrose’s motion for summary adjudication and affirmed in part the trial court’s grant of the insurers’ parallel motion.

The matter eventually got back to the California Supreme Court.

“Reading the insurance policy language in light of background principles of insurance law, and considering the reasonable expectations of the parties, we agree with Montrose: It is entitled to access otherwise available coverage under any excess policy once it has exhausted directly underlying excess policies for the same policy period,” the ruling states.

The decision relies heavily on the court’s decision in the insurance coverage dispute over the massive environmental cleanup of the Stringfellow Acid Pits in State of California v. Continental.

Robert M. Horkovich, an insurance recovery attorney and managing partner of Anderson Kill, was part of the legal team that represented the state of California in the Continental case.

Horkovich, who is not involved in the Montrose case, said great benefit for policyholders in the recent ruling.

“This is a good thing for policyholders and this will mean a lot toward the payment for environmental cleanup costs,” Horkovich said.

The court ruled that a policyholder doesn’t have to prove every primary insurance policy in every year was already tapped, and instead that a policyholder must only show a primary policy was exhausted in one year before tapping into the excess policy in that particular year – a process called spiking.

Legal representatives for the insurers involved have been reached out to for comment.

An abbreviated example of a longer court explanation is as follows: In three different policy years – 1, 2 and 3 – it needs only be proven that the primary policy was exhausted in year 3 before a policyholder can into the excess policy in year 3, they do not have to prove they’ve exhausted the primary policy in years 1 or 2 to get to the excess policy in year 3.

The reasoning offered by the court that each policy in a given year may have different terms and exclusions, so “a rule of horizontal exhaustion would create significant practical obstacles to securing indemnification.”

The court further reasoned that an excess insurer can sue the other the primary insurers involved if there’s a dispute: “An insurer called on to provide indemnification may, however, seek reimbursement from other insurers that would have been liable to provide coverage under excess policies issued for any period in which the injury occurred.”

Horkovich said the ruling will “permit a policyholder not to get bogged down” in proving terms and conditions of policies that may have been sold 10 or 20 years ago,

There are dozens of insurers named in the ruling as real parties of interest, including Allstate Insurance Co., Continental Casualty Co., Fireman’s Fund Insurance Co., and Munich Reinsurance America Inc.

Topics California Carriers Legislation Excess Surplus Pollution

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