As insurance is depleted for ongoing claims like asbestos bodily injury and long-term environmental pollution, how an insured is to use its layers of insurance is an issue.  The California Supreme Court has been asked to weigh in on the question of whether “horizontal exhaustion” or “vertical exhaustion” principles should apply to excess and umbrella layers of insurance in Montrose Chemical Corporation of California v. Superior Court of the State of California (Case No. S236148). California courts endorse the requirement of horizontal exhaustion of insurance at the primary level before any excess and umbrella policies attach, unless the excess/umbrella policies expressly require otherwise.  Community Redevelopment Agency v. Aetna Casualty & Surety Co., 50 Cal. App. 4th 329 (1996). However, California’s appellate courts have not directly addressed whether to extend this presumption to other levels of insurance.

In Montrose, a case potentially implicating over $100 million in insurance for decades of environmental contamination, Montrose’s upper-level excess insurers argue that horizontal exhaustion principles should apply to all lower-level excess policies because the higher level excess policies are excess to all “other insurance.”  Montrose, in response, argues that such a finding would be inconsistent with an “all sums” requirement, i.e., that once triggered, a policy has to pay all sums for which the insured is liable. The trial court agreed with the excess insurers, finding that horizontal exhaustion principles applied to levels of excess policies. Montrose lodged a Petition for Writ of Mandate in the Second Court of Appeal, which the Court of Appeal summarily denied.

Montrose appealed the denial of its Writ through a Petition for Review in the California Supreme Court. Under the stringent criteria of C.R.C. 8.500(b), the California Supreme Court accepts review in less than 5% of cases, including where it finds review necessary to secure uniformity or to address an important question of law. Montrose claims this case “demands immediate review” because the trial court order created a “momentus” “mandatory horizontal exhaustion” scheme in conflict with prior precedent. Numerous amici also urge the Court to take the opportunity to provide guidance on this issue. Because this trial court ruling only disposed of one of a many legal issues in the case, California’s highest court could well deem the issue premature.

This activity in California follows in the wake of other recent cases confronting the sequencing of coverage issue.  See e.g., John Crane, Inc. v. Admiral Ins. Co., No. 04-CH-8266 (Ill. Cir. Ct. July 21, 2016) (finding insureds facing long-tail exposure must horizontally exhaust all primary policies before triggering umbrella coverage, but application of horizontal exhaustion requirement to umbrella and excess policies depends on the excess policies’ language); In re Viking Pump, Inc., 27 N.Y.3d 244, 265 (2016) (applying “vertical exhaustion” approach in that case in light of primary policies having “anti-stacking” provisions).