Vertical Exhaustion Applies in Continuous Injury Cases; Contribution Dispute between Insurers Remanded

The California Supreme Court reversed the appellate court and unanimously held that “vertical exhaustion” applies in the continuous injury context under the standard language found in commercial general liability policies. It concluded that an insured may seek coverage from a first level excess policy upon the exhaustion of underlying primary insurance obtained for the same policy period.  In making this determination, the California Supreme Court specifically rejected horizonal exhaustion, which requires an insured to exhaust all primary policies issued during the continuous period of damage before it could access excess policies. The California Supreme Court then remanded the issue of contribution between the primary and excess insurers.  

In Montrose Chemical Corp. of California v. Superior Court, 9 Cal.5^th 215 (2020) (Montrose III), the California Supreme Court determined that upon the exhaustion of all primary policies, vertical exhaustion applied based on the interpretation of the “other insurance” provisions. However, in Montrose III, the parties agreed that all primary policies had been exhausted, thus, it left open the question as to whether the same rule applied if all primary policies are not exhausted.  

Truck Insurance Exchange (“Truck”) is the primary insurer for Kaiser Cement and Gypsum Corporation (“Kaiser”).  It filed an equitable contribution claim against several excess insurers for policy years where the directly underlying primary policy had been exhausted. Truck argued that because the excess insurers owed a coverage duty to Kaiser, they were effectively responsible for indemnifying the same loss as Truck and should therefore be required to contribute. The excess insurers argued they had no duty to indemnify Kaiser until Kaiser had exhausted every primary policy issued during the period of continuous damage, and thus there was no possible basis for contribution.  

In reversing the appellate court and determining that vertical exhaustion applied, the California Supreme Court rejected the excess insurers’ argument that the policy language needed to be interpreted differently because of the “qualitative distinctions” between primary and excess insurance. The California Supreme Court followed its previous reasoning and policy interpretation from Montrose III.  In doing so, it also expressly disapproved of the court of appeal cases applying horizontal exhaustion.  

Concluding that vertical exhaustion applied, however, did not end the dispute because the issue before the California Supreme Court was contribution between insurers, not insurer versus insured like in Montrose III. “While coverage disputes between insureds and their insurers are a form of contract action that turns on the meaning of the policy language, ‘an equitable contribution claim between coinsurers is not based upon contract, but instead involves,’ ‘equitable principles designed to accomplish ultimate justice in the bearing of a specific burden.’”  Because the Court of Appeals rejected Truck’s contribution claim based entirely on its erroneous interpretation of the excess policies, it did not address the alternative arguments about the fairness of ordering the excess insurers to contribute. Therefore, the California Supreme Court remanded the matter to the Court of Appeals to address these equitable principles in the first instance. The Supreme Court expressly stated that on remand, the parties are free to raise any arguments related to whether contribution is ever appropriate between primary and excess insurers and, if so, whether contribution would be appropriate under the circumstances of this case. Truck Ins. Exchange v. Kaiser Cement and Gypsum Corp., No. S273179, 2024 WL 3016941 (Cal. June 17, 2024).