Horizontal Exhaustion: A Shallow Victory for the Excess Insurer Where the Underlying Limits Cannot Be Stacked

Posted on June 7, 2011 by Shaun McParland Baldwin

By 2004, more than 24,000 claimants had filed asbestos bodily injury suits against Kaiser Cement and Gypsum Corporation (“Kaiser”),  as a result of their exposure to Kaiser’s asbestos products. Kaiser exercised its right to select a single primary insurer to respond to the entire loss –the Truck CGL policy issued in 1974 with limits of $500,000 per occurrence. The claim of each asbestos bodily injury claimant was deemed to have been caused by a separate and distinct “occurrence”within the meaning of the Truck policies.  By October 2004, Truck’s indemnity payments for asbestos bodily injury claims exceeded $50 million and included at least 39 claims that resulted in payments in excess of $500,000. 

Kaiser looked to ISCOP, its excess insurer above the 1974 Truck policy, to respond to the indemnity payments in excess of $500,000.   ISCOP balked, claiming that under the principles of horizonal exhaustion, it should not have to respond until all underlying primary policies had been exhausted. Those policies included not only the 1974 Truck policy, but also the other primary policies issued by Truck between 1964-1983, the primary policies issued by Fireman’s Fund (for policy periods from at least 1947 to December 1964), Home Indemnity (for 1983-1985), and National Union (for 1985-1987).  The  California Court of Appeal in Kaiser Cement v. Insurance Co. of the State of Pa, B222310 (filed June 3, 2011) [PDF] [DOC]  agreed that horizontal exhaustion should apply with respect to ISCOP’s coverage obligations as under ISCOPS’s policy language, ICSOP is excess to allvalid and collectible primary insurance, not just the primary insurance in the selected 1974 policy year.    But that was only a fleeting victory for the excess insurer, as the Court also ruled that the underlying Truck CGL policies could not be stacked such that Kaiser could recover multiple policy limits for a single occurrence.    

Rather, the court found that under the language of the 1974 primary policy, Truck is responsible to pay policy limits only once per occurrence, not once per occurrence per year or once per occurrence per policy. In that regard, the “limit of liability” portion of the policy limits Truck’s liability for personal injury or property damage to $500,000 “Per Occurrence.” It further provides (part IV, “Policy Period, Territory, Limits”):

“The limit of liability stated in this policy as applicable ‘per occurrence’ is the limit of the company’s liability for each occurrence. …
There is no limit to the number of occurrences for which claims may be made hereunder, however, the limit of the Company’s liability as respects any occurrence involving one or any combination of the hazards or perils insured against shall not exceed the per occurrence limit designated in the Declarations.” (Italics added.)

The court indicated its ruling was consistent with the 9th Circuit’s ruling in Employers Ins. of Wausau v. Granite State Ins. Co. (9th Cir. 2003) 330 F.3d 1214, 1221, albeit that it was also distinguishable because of the different policy language at issue. “Here, the 1974 primary policy contains a “per occurrence” limit that is “the limit of the company’s liability for each occurrence,” while in Wausau the liability limits of the primary policies were expressly “per occurrence per year.” (Italics added.) The Court concluded: “ having chosen the 1974 primary policy to respond to any claims triggered by that policy, Kaiser may recover from ICSOP to the extent that a claim exceeds that $500,000 per occurrence limit specified in the 1974 primary policy.”

Notably, while the Court found that the Truck policies were exhausted, it was unable to determine whether ICSOP’s obligation to indemnify Kaiser had attached or whether ICSOP has breached its insurance contracts with Kaiser. This was because the record did not contain any information as to whether the other primary policies issued to Kaiser by Fireman’s Fund, Home Indemnity and National Union were exhausted. The court observed that these policies were potentially triggered by the asbestos bodily injury claims at issue in this case. In addition, it could not make any determination of the issue of the stacking of those policy limits. The Court noted that its decision that Truck’s primary policy limits cannot be “stacked” was based on the language of the Truck’s 1974 primary policy, not on a generalized “anti-stacking” rule.  
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Fifth Circuit Limits Excess Insurers Exposure Following Policyholder's Partial Allocation of Primary Limits

Posted on February 11, 2008 by Chris Martin

Several days ago, the Fifth Circuit Court of Appeals evaluated a primary liability carrier’s tender of its policy limits to its insured for covered claims and whether such a tender triggered an excess insurer's liability coverage when the insured allocated the primary limits across several years of losses.  In Service Corp. Int’l v. Great Am. Ins. Co. of New York, 2008 WL 280900 (5th Cir. February 1, 2008), a funeral services company (SCI), with cemeteries throughout the United States, was sued by individual and class action plaintiffs for grave desecrations and improper burials at two specific cemeteries.  Some, but not all, of the events giving rise to the lawsuits occurred between the policy period in question.  SCI was covered by a $25 million primary liability insurance policy and a $50 million excess liability policy.

As the lawsuits were pending against SCI, the primary carrier determined that its covered claims would likely exceed its policy limit for the policy period. The carrier then tendered $25 million to SCI in exchange for an indemnity and hold harmless agreement.  The lawsuits settled for $100 million, but only $13.75 million was allocated by the insured to claims arising during the policy period of the excess carrier in this suit.  The rest were allocated to other years of losses.  

SCI requested coverage from an excess liability carrier, but coverage was denied.  The excess carrier argued because only $13.75 million was allocated to the policy period (and not the complete $25 million limit which had been tendered), the excess layer of coverage had not been triggered.  In response, SCI filed suit against the excess carrier.  The federal district court granted summary judgment in favor of the excess carrier.

On appeal, the Fifth Circuit noted the excess policy incorporated the primary policy’s definition of “loss,” which was “those sums actually paid in the settlement or satisfaction of a claim which the insured is legally obligated to pay as damages of injuries or offense.”  The Fifth Circuit then concluded the parties intended any loss to be measured by the sums used for payment of covered claims during the policy period, not simply by the aggregate sums paid by the insureds.  As such, the insured’s own allocation was used by the Court to determine the excess liability policy had never been triggered.

This is a potentially significant decision particularly for claims in those jurisdictions governed by the Fifth Circuit including Texas, Louisiana and Mississippi.  Because policyholder allocations are common in coverage cases arising out of toxic tort cases and other mass torts, this holding gives excess liability carriers more protections than other courts have extended in recent years.  It remains to be seen how the judicial pronouncements in this case will apply to other efforts to artificially allocate prior primary settlements by policyholders, but it is certainly a step in the right direction.

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