Supreme Court Provides Guidance on Insurance Question Hotly Debated for Decades

On Monday, the California Supreme Court issued its long-awaited decision in Montrose Chemical Corp. of California Superior Court, 2020 DJDAR 3112. In this decision, the court addressed a question that has been hotly debated around the country in litigation that has been pending in the California courts for 30 years—the question of what excess policies an insured can ask to pay claims arising under multiple years of insurance.

The case involves more than 115 excess insurance policies issued by 40 insurers during the 1961-1985 period. Each of the policies states that the insured must exhaust the limits of its “underlying insurance” before it must pay. They have varying provisions that describe the applicable underlying insurance. They also have varying provisions stating that “other insurance” must be exhausted before the excess policy pays.

Montrose and the insurers disagreed as to how to determine what policies would apply and in what order they could be tapped. The insurers argued for a “horizontal” or “bathtub” exhaustion approach. Under this approach, an excess policy in one year would not need to pay before all excess insurance policies at lower levels (i.e., whose liability would attach at a lower dollar amount) in all potentially applicable years paid. For example, assume that an insured had been sued for environmental damage occurring over a 10-year period. Assume also that in each of those 10 years, the insured had a primary policy providing $5,000,000 in coverage, a first layer of excess insurance providing $20,000,000 in coverage, and then a second layer of excess insurance providing another $25,000,000 in coverage. Under the insurers’ horizontal exhaustion approach, none of the second-layer insurers would have to pay before the $200,000,000 in first-layer insurance for all years paid

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