Following the California Supreme Court’s decision applying vertical exhaustion in Montrose Chemical Corp. of California v. Superior Court (2020) 9 Cal.5th 215 (“Montrose III”), on July 13, 2020, the California Court of Appeal issued its decision in SantaFe Braun, Inc. v. Insurance Company of North America, 2020 WL 3957290, Case No. A151428 (Ct. App. 1st Dist., Div. 4, July 13, 2020) (“Braun v. INA”), holding that all primary policies covering all time periods do not have to be exhausted before coverage can be triggered under any excess policies.
In Montrose III, the Supreme Court held that an insured “is entitled to access otherwise available coverage under any higher level excess policy once it has exhausted directly underlying excess policies for the same policy period. An insurer called on to provide indemnification may, however, seek reimbursement from other insurers that would have been liable to provide coverage under excess policies issued for any period in which the injury occurred.” Montrose III, supra, 9 Cal.5th at 237. However, Montrose III expressly left unanswered the question of: when the insured has incurred continuous losses extending over the coverage periods in multiple primary policies, whether all primary insurance covering all time periods must be exhausted (“horizontally”) before the first level excess policies are triggered, or, as Braun contended, whether coverage under the excess policies is triggered once the directly underlying primary policies specified in each excess policy is exhausted (“vertically”). Braun v. INA, at *4. Braun v. INA resolved the issue.
In Braun v. INA, the appellate court considered policyholder Braun’s appeal of the trial court’s judgment in favor of Braun’s excess insurers, based on the interpretation of the language of various primary and excess insurance policies as they pertained to coverage for asbestos bodily injury claims. After 10 years of phased trial proceedings, the trial court determined that, to trigger coverage under the excess policies, Braun must establish horizontal exhaustion if the policy either “expressly so provides or . . . contains an ‘other insurance clause’ and does not provide for vertical exhaustion of specific policies.” Id. at *2. On appeal, Braun argued that the language of its excess policies did not require exhaustion of all underlying layers of insurance, including all primary policies, but only exhaustion of those policies specified as underlying in each excess policy.
After briefing was submitted in Braun v. INA, the Supreme Court issued its decision in Montrose III, which addressed the sequence in which the insured could access its higher level excess policies once all primary coverage has been exhausted in the specific context of claims for continuous environmental damage caused over decades. After supplemental briefing regarding the impact of Montrose III, the Court in Braun v. INA held that, for indemnity purposes, the insured “is entitled to access otherwise available coverage under any excess policy once it has exhausted directly underlying excess policies for the same policy period.” Id. at *3, citing Montrose III, supra, 9 Cal.5th at 222. Horizontal exhaustion of all underlying primary and underlying excess policies was not required. Therefore, the Court of Appeal reversed and remanded for further proceedings.
The Court of Appeal in Braun v. INA observed that, although Montrose III did not decide whether all primary coverage must be exhausted before any excess coverage is triggered, its reasoning was “instructive,” as was the Supreme Court’s rejection of the argument that horizontal exhaustion was required by the “other insurance” clauses included in the excess policies considered. Id. at *3, citing Montrose III, supra, at 224-225. The Court of Appeal relied heavily on the Supreme Court’s observation in Montrose III that the “other insurance” clauses in the various excess policies did not unambiguously require horizontal exhaustion, and that such policy provisions specifying the dollar amount at which the coverage attaches and defining “underlying insurance” strongly suggest that only vertical exhaustion is required. Id. Interpreting the language of the excess policies in line with the Supreme Court’s interpretation in Montrose III, the Braun v. INA court ruled: “We hold simply that (absent an explicit policy provision to the contrary) the insured becomes entitled to the coverage it purchased from the excess carriers once the primary policies specified in the excess policy have been exhausted.” Id. at *5. As the question was not before it, the court would not express an opinion on the rights of the excess carriers to contribution from primary insurers not directly underlying their coverage. Ibid.
This decision will materially impact excess insurers in long-tail cases, such as asbestos, pollution, and construction defect cases. Insureds will now be permitted to select a policy year and seek to “spike” coverage all the way up a single tower/year of coverage. This means that higher level excess insurers will no longer be able to assert that they have no duty to indemnify until all underlying excess insurance in all policy periods is exhausted. Consequently, excess insurers should be prepared for policyholders to leverage settlement pressure in any given year where the directly underlying insurer exhausts its coverage or tenders its limits towards settlement. Excess insurers must also preserve and assert their reimbursement rights from other insurers as early as possible. Given the caveat in the Court of Appeal’s holding regarding explicit policy language to the contrary, excess insurers may also wish to consider whether policy language revisions are in order to include explicit language requiring exhaustion of all other primary and underlying excess coverage before the excess policy is required to respond to indemnify a claim.