California Court Declines to Adopt Blanket “Horizontal Exhaustion” Approach

Complexity does not excuse need to assess exhaustion on a policy-by-policy basis

A California appellate court, applying California law, declined to adopt a blanket rule for determining when an insured can trigger its excess policies to cover losses due to claims of environmental injury.  The appellate court refused to uphold the “horizontal exhaustion” approach applied by the trial court and held that the sequence for which policies may be accessed for coverage must be decided on a policy-by-policy basis.

Montrose Chemical Corporation of California (“Montrose”) manufactured the pesticide DDT.  In 1990 Montrose was sued under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”).  Montrose incurred damages in excess of $100 million in the CERCLA action and, according to Montrose, the additional future damages could approach or exceed that amount.  Montrose filed a coverage action against its insurers to resolve various coverage disputes surrounding more than $200 million in liability coverage across more than 100 policies covering nearly 25 years.  Through a motion for summary judgment, Montrose sought a declaration that it may “electively stack” excess policies to cover its liability for environmental injuries caused by DDT.  Montrose argued that it may access any excess policy issued in any policy year so long as the lower-lying policies for the same policy year had been exhausted.  This is commonly referred to as “vertical exhaustion.”  Through a cross-motion for summary judgment, the excess insurers sought a ruling that no insurer had a duty to pay a covered claim until Montrose had “horizontally exhausted” its lower-lying excess policies in all triggered policy years.  The trial court rejected “elective stacking” in favor of “horizontal exhaustion.”  Thus, the trial court denied Montrose’s motion and granted summary judgment in favor of the excess insurers.

The appellate court agreed with the trial court that “elective stacking” was inconsistent with the policy language of at least some of the excess policies at issue and that “elective stacking” was not compelled by California Supreme Court authority; however, the appellate court disagreed that policies must always be horizontally exhausted at each coverage level and for each year before higher-level policies may be accessed.   The appellate court found that the sequence in which policies may be accessed must be decided on a policy-by-policy basis: “[B]ecause there is tremendous variation among the policies at issue, we decline to adopt a single exhaustion scheme that applies to Montrose’s entire coverage portfolio, and instead direct that each policy be interpreted according to its terms.”

Montrose argued, inter alia, that horizontal exhaustion is “unworkable in practice due to the complexity of its coverage portfolio.” The appellate court acknowledged that the allocation would be a complicated process, but it did not find that warranted “elective stacking.” According to the appellate court, “[t]hat complexity, however, is not relevant to our analysis, as we cannot in the service of expediency, impose obligations that are inconsistent with the terms of the contracts Montrose itself negotiated.” Montrose Chem. Corp. of Cal. v. Superior Court of the State of Cal., County of Los Angeles, No. B272387 (Cal. Ct. App. Aug. 31, 2017).