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Insured Must Exhaust Lower Layers of Coverage Before Accessing Higher Layers of Coverage, If Language of Excess Policies So Requires

Where a loss triggers policies across multiple policy periods, an insured must exhaust all triggered underlying policies before accessing higher levels of coverage, if the language of the excess policies so requires. (Montrose Chemical Corporation of California v. Superior Court (2017) WL 3772568)


From 1947 to 1982, Montrose Chemical Corporation of California manufactured dichloro-diphenyl-trichlorethane (DDT) at a facility in Torrance, California. During the 1960's, conservationists began raising concerns about the effects of DDT on the environment, and in 1972 the federal government prohibited the use of DDT within the United States. Montrose continued manufacturing DDT for export until 1982.

In 1990, the United States of America and the State of California sued Montrose in federal court under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). In the CERCLA action, the U.S. and California alleged that Montrose's operation of its Torrance facility caused environmental contamination that damaged land, water, and wildlife in the Los Angeles Harbor and neighboring waters. Montrose eventually entered into partial consent decrees in the CERCLA action and incurred damages of more than $100 million.

Between 1960 and 1986, Montrose purchased "layers" of commercial general liability (CGL) policies from various insurance carriers. In each of the relevant years, Montrose purchased a layer of "primary" CGL insurance policies that required the insurers to defend Montrose against suits seeking covered damages, and to indemnify Montrose for covered damages up to the policy limits. Above the "primary" insurance policies were multiple layers of "excess" CGL policies, which provided additional coverage once underlying insurance was exhausted. In the early years, Montrose purchased just a few layers of excess coverage; in some later years, Montrose purchased more than 40 layers of excess coverage, with aggregate limits of liability in excess of $120 million. In total, Montrose had more than 115 excess policies.

Montrose sued all of its primary and excess insurers to resolve various coverage disputes arising from the underlying CERCLA action. While the coverage case was pending, the California Supreme Court decided State of California v. Continental Ins. Co. (2012) 5 Cal.4th 186. In Continental, the Supreme Court held that where a loss triggers policies across multiple policy terms, the insured may stack primary and excess policies across multiple policy years. However, the Supreme Court did not address the order in which those policies might have to pay.

After the Supreme Court's decision in Continental, Montrose filed a motion for summary adjudication seeking a ruling that it could "electively stack" excess policies – i.e., that it could access any excess policy issued in any policy year so long as the lower-lying policies for the same policy year have been exhausted. All of the excess insurers opposed Montrose's motion for summary adjudication; many of the excess insurers also filed cross-motions for summary adjudication seeking a ruling that no insurer had a duty to pay a covered claim until Montrose had "horizontally exhausted" its lower-lying excess policies in all triggered policy years.

The trial court rejected "elective stacking" in favor of "horizontal exhaustion" and concluded that higher-level excess policies could not be accessed until lower-level policies had been exhausted for all policy years. The trial court thus denied Montrose's motion for summary adjudication and granted the excess insurers' cross-motion for summary adjudication. Montrose then filed a petition for writ of mandate challenging the trial court's summary adjudication order.


The Court of Appeal upheld the trial court's decision, in part. According to the appellate court, the issue is "not whether an insured can access policies written for different policy years (it can), but the order or sequence in which it may or must do so."

The appellate court rejected Montrose's argument that Continental gives insureds the absolute right to "electively stack" excess policies.  While Continental gives insureds the right to access multiple triggered policies, Continental does not address the order or sequence in which those policies may be called upon to pay. Moreover "elective stacking" would be inconsistent with the policy language of at least some of the more than 115 excess policies at issue because "many of the policies attach not upon exhaustion of lower layer policies within the same policy period, but rather upon exhaustion of all available insurance." Specifically, many of the excess policies contained "other insurance" clauses stating that the policies are excess of "other collectible insurance," as well as provisions limiting the excess insurers' liability to loss in excess of "any underlying insurance." Thus, the trial court had properly denied Montrose's motion for summary adjudication on the issue of "elective stacking."

However, the appellate court declined to adopt a universal rule mandating "horizontal exhaustion" in all cases, and instead held that exhaustion will be governed by the language in each excess policy. In that regard, the appellate court noted that "there is tremendous variation among the terms of the excess policies at issue in this matter." Thus, the sequence in which policies may be accessed must be decided on a "policy-by-policy basis," taking into account the relevant provisions of each policy. Accordingly, the appellate court reversed the trial court's grant of the insurers' motion for summary adjudication and remanded the case for further proceedings.


The appellate court summed up its holding as follows: "All we hold today is that insureds must exhaust lower layers of coverage before accessing higher layers of coverage if the language of the excess policies so requires."  The appellate court declined to adopt a blanket "horizontal exhaustion" rule, instead holding that the language of each particular policy must be considered.

The Court of Appeal's decision in this case may not be the final word on the subject. Montrose will likely file a petition for review in the California Supreme Court, and the Supreme Court may decide to hear the matter. During the longstanding (27-year) Montrose coverage litigation, the Supreme Court has already issued two landmark decisions affecting the parties' rights. (See Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287 [establishing standard for duty to defend] and Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 [adopting continuous injury trigger of coverage for progressive property damage cases].)


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