CA App. / Asbestos Allocation

Vertical Exhaustion Applies at Primary Level for Asbestos Claims

The California Court of Appeals for the First District, applying California law, reversed the decision of the trial court and remanded for further proceedings after finding that the policyholder, SantaFe Braun, Inc. (“Braun”), only needed to prove exhaustion of the primary policy in order to access the excess coverage in any given policy year: i.e., the insured needed to prove vertical exhaustion, not horizontal exhaustion.

Braun was sued in numerous asbestos-related cases. Braun filed a declaratory action against its insurers asking the court to find that the underlying asbestos bodily injury lawsuits triggered its excess policies. In Phase Two of a three-phase proceeding, the trial court held horizontal exhaustion of all primary and underlying excess insurance coverage was required before accessing coverage under the excess policies at issue.

The appellate court looked to the recent decision from the California Supreme Court for guidance, Montrose Chem. Corp. of Cal. v. Superior Court, 9 Cal. 5th 215(2020). In Montrose, the California Supreme Court held that in a continuous injury environmental case the insured was “entitled to access otherwise available coverage under any excess policy once it has exhausted directly underlying excess policies for the same policy period.” The Montrose court rejected the argument that the “other insurance” clause in the policies required horizontal exhaustion because the specific provision could “refer only to other directly underlying insurance in the same policy period that was not specifically identified in the schedule of underlying insurance, anticipating that the scheduled underlying insurance may later be replaced or supplemented with different policies.”

In the instant case, after reviewing the language of the excess policies, the appellate court determined that they contained similar language to the policies at issue in Montrose. The appellate court explained that “other insurance” clauses in the policies were ambiguous as to the scheduling of applicable primary policies and the definitions of “ultimate net loss.” Based on its review of the policy language, the appellate court held that the “other insurance” clause suggested “the exhaustion requirements were meant to apply to directly underlying insurance and not to insurance purchased for other policy periods.”

To reinforce its finding, the appellate court evaluated the practicability of requiring horizontal exhaustion of all primary insurance as a prerequisite to trigger excess insurance coverage. There were eight first-level excess insurance policies at issue, six of the policies were excess of $1M and two of the policies were excess of $250,000. If the insured had to exhaust horizontally it would not be able to access the excess coverage until every primary policy was exhausted for every year that bodily injury or property damage occurred. Under this interpretation, and specifically for a continuous injury case, excess coverage would only apply once the insured incurred losses far beyond the underlying limit provided for in each excess policy which, in the court’s opinion, was not the proper interpretation of the policies.

Based on its findings, the appellate court explained that, on remand, Braun would be allowed to introduce evidence regarding the exhaustion of the directly underlying policies to prove that its excess policies were triggered. In sum, the court found vertical exhaustion applied. SantaFe Braun, Inc. v. Ins. Co. of N. Am., No. A151428, 2020 Cal. App. LEXIS 645 (Cal. Ct. App. July 13, 2020).