From 1944 through the 1970s, Kaiser Cement and Gypsum Corporation manufactured asbestos-containing products at numerous different facilities. By 2004, more than 24,000 claimants had filed product liability suits against Kaiser alleging that they had suffered bodily injury (primarily asbestosis or cancer) as a result of exposure to Kaiser’s asbestos products. Truck Insurance Exchange, is a primary insurer for Kaiser.

Kaiser tendered these claims to Truck, one of several primary insurers that had issued commercial general liability (CGL) policies to Kaiser during this time period. The subsequent litigation has generated multiple appellate decisions that have addressed a wide range of complex questions regarding insurance coverage and policy interpretation.

In 2001, Truck initiated this insurance coverage action to determine its indemnity and defense obligations to Kaiser. Several years later, Truck amended its complaint to add a cause of action for contribution against several of Kaiser’s excess insurers that had issued first-level excess policies to Kaiser for policy years where the directly underlying primary policy had been exhausted.

Relying on the California Supreme Court’s reasoning in Montrose Chemical Corp. of California v. Superior Court (2020) 9 Cal.5th 215 (Montrose III), Truck argued that the excess insurers’ indemnity obligations were triggered immediately upon exhaustion of the directly underlying primary policies. Truck further reasoned 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 to Truck’s coverage costs.

According to the excess insurers, Montrose III’s analysis is limited to excess policies that sit over other excess policies, not first-level excess policies that sit over primary insurance.

The Court of Appeal agreed with the excess insurers that Montrose III did not extend to excess policies that sit over primary insurance, which has characteristics that are distinct from excess insurance including immediate coverage and defense obligations. In so ruling, the court rejected SantaFe Braun, Inc. v. Insurance Co. of North America (2020) 52 Cal.App.5th 19 (SantaFe), which held that Montrose III’s reasoning does apply in the context of first-level excess policies. The court further concluded that because the excess insurers had no coverage obligation under their policies until all primary insurance had been exhausted (including Truck’s primary policy), Truck was not entitled to contribution.

The appeal of this decision to the California Supreme Court required it to resolve the question that it left open in Montrose III: whether standard language in commercial general liability policies that are excess to primary insurance policies should be interpreted to require vertical or horizontal exhaustion. In other words, can an insured access a first-level excess insurance policy upon exhaustion of underlying primary insurance obtained for the same policy period (vertical exhaustion), or is the insured required to exhaust all primary policies issued during the continuous period of damage (horizontal exhaustion)?

Contrary to the Court of Appeal reasoning, the California Supreme Court in Truck Ins. Exchange v. Kaiser Cement & Gypsum Corp.-S273179 (June 2024) concluded that its analysis in Montrose III applies equally here and reversed the Court of Appeal.

In the context of standard “occurrence based” CGL insurance policies, California has adopted what is known as the “all-sums-with-stacking” approach to continuous injuries. This approach has three primary components. First, in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 656 (Montrose I), the Supreme Court adopted the “continuous injury trigger of coverage” principle (id. at p. 685), under which “bodily injury and property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods.” (Id. at p. 655.) In other words, the insured may call upon any policy that was in effect during the continuous period of injury.

Second, in Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, the Supreme Court adopted “the ‘all sums’ rule” (State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 191 (Continental)), pursuant to which each policy triggered during a long-tail injury is potentially liable for the total amount of the loss, regardless of whether a portion of the loss occurred outside the policy’s coverage period. The rule “envisions that each successive insurer is potentially liable for the entire loss up to its policy limits. When the entire loss is within the limits of one policy, the insured can recover from that insurer, which may then seek contribution from the other insurers on the risk during the same loss.” (Id. at p. 200.)

Third, in Continental, supra, 55 Cal.4th 186, the Supreme Court construed language in standard CGL policies to permit “stacking,” which allows an insured “to add together the maximum limits of all consecutive policies that [were] in place during the [period of continuous injury].” (12 Couch on Insurance (3d ed. 2010) § 169:5; see Continental, at p. 200 [“stacking’ generally refers to the stacking of policy limits across multiple policy periods that were on a particular risk”].) In other words, ” ‘[w]hen the policy limits of a given insurer are exhausted, [the insured] is entitled to seek indemnification from any of the remaining insurers [that were] on the risk [during the continuous period of injury].’ ” (Continental, at p. 200.) If, for example, an insured purchased 10 annual policies that each had a coverage limit of $1 million, and all the policies were triggered by a continuous injury, the insured would be permitted to stack all of the policies to collect up to $10 million in total coverage.

In this current case involving Kaiser, the language of the first-level excess policies is essentially identical – and in some cases actually identical – to the policy language in the higher-level excess policies that the Supreme Court considered in Montrose III. The policies also share many of the same characteristics that it found “strongly suggest[ive]” of vertical, rather than horizontal, exhaustion.

“Thus, as in Montrose III, we believe the first-level excess policies are most reasonably construed as requiring only vertical exhaustion.”