California’s complex saga of long-tail injury coverage under general liability policies took an interesting turn in the California Supreme Court’s recent decision in Truck Ins. Exch. v. Kaiser Cement.1 In Truck, the court made it clear that Insureds can access excess policy limits without first exhausting all triggered underlying primary coverage, provided the underlying limits for the same policy period have been exhausted.
A Brief Summary of the History of Coverage for Long-Tail Claims in California2
Understanding the contextual significance of Truck requires a brief survey of California’s gradually developed case law with respect to long-tail progressive injury and damage claims. A “long-tail claim” typically involves progressively manifesting damage, injury, or disease that develops over a period of multiple years. Because general liability insurance is traditionally triggered based on the timing of when bodily injury or property damage occurs, the progressive nature of these claims has led many courts to analyze when injury or damage occurs in these claims. In doing so, California courts have generally found that these injuries occur across numerous years, thereby triggering numerous policies.3
A traditional example, which is responsible for a huge body of litigation nationwide, is a victim’s exposure to asbestos products, leading to mesothelioma or asbestosis, although there are countless ways these claims can manifest. In these claims, because of the progressive nature of the disease, it is nearly impossible to determine in which year(s) the bodily injury occurred or, in the inverse, to prove that it didn’t occur in others. Beginning with the seminal Montrose Chem. Corp. v. Admiral Ins. Co. decision, California courts have long held, with respect to long-tail injury claims, every policy with effective dates during the period of progressive bodily injury is triggered, effectively implicating every policy from the date of first exposure until at least diagnosis.4 There, the court explained that “[w]here … successive CGL policy periods are implicated, bodily injury and property damage which is continuous or progressively deteriorating through several policy periods is potentially covered by all policies in effect during those periods.” Two years later, in Aerojet-General Corp. v. Transport Indem. Co., the California Supreme Court elaborated further, explaining that “if specified harm is caused by an included occurrence and results, at least in part, within the policy period, it perdures to all points of time at which some such harm results thereafter.”5 These decisions were focused on duty to defend disputes.
About 15 years after the initial rulings by the California Supreme Court in Montrose Chem. Corp. and Aerojet-General Corp., the court was asked to move beyond the duty to defend issues and address how to allocate indemnity obligations between all of the various triggered policies. In State of Calif. v. Continental Ins. Co., the court confirmed that the concepts in those earlier cases applied equally to indemnity considerations and proceeded to work through the problem of deciding which triggered policy was responsible for what amount of the total liability at issue.6 The court explained that a policy is triggered if any of the damage occurred in the policy period, reasoning that this made any triggered insurer liable up to its policy limits for all resulting damage or injury, without limitation to that specifically occurring in the policy period. To understand the co urt’s reasoning, it is critical to bear in mind that there is extensive case law nationwide discussing the practical impossibility of proving the specific injury or damage that occurred in one year of a long-tail claim and adopting similar frameworks to protect frequently very sympathetic injured parties in these types of claims from having to face an insurmountable burden of proof to show such specificity.7 With that in mind, the Continental court explained that “the successive insurers are not jointly and severally liable. Rather, … each insurer is severally liable on its own policy up to its policy limits.”
Having determined that each triggered policy utilizing “all sums” language is severally responsible for the insured’s entire liability, the Continental court turned next to the impact of that on available limits. The court rejected the insurers’ attempts to impose a pro-rata structure whereby the insured would be able to recover a proportional amount from each triggered policy period, up to a single set of policy limits. Instead, the court held that an “all sums with stacking” approach resolved the issue “as equitably as possible,” permitting the insured to “effectively stack[] the insurance coverage from different policy periods to form on giant uber-policy with a coverage limit equal to the sum of all purchased insurance policies.”
Unfortunately, Continental still did not put the insurance industry’s attempts to shift liability to rest. Although Continental established the insured’s rights to combine all triggered policy limits, it did not explicitly address how the insured had to navigate through (1) accessing the policy periods within the giant “uber-policy” Continental created or (2) how horizontal and vertical exhaustion concepts impacted the insured’s ability to access its excess policies without exhausting all triggered policies with lower attachment points first. Thus, Montrose Chem. Corp. reared its head once more, reaching the Supreme Court again in 2020.8 This time, Montrose’s excess insurers contended that the insured must abide by horizontal exhaustion principles, exhausting all triggered policies with lower attachment points prior to reaching excess policies with higher attachment points. The California Supreme Court unanimously rejected the excess insurers’ argument, resolving an underlying appellate court split on the issue and reasoning that where “other insurance clauses do not clearly specify whether a rule of horizontal or vertical exhaustion applies … the policies are most naturally read to mean that Montrose may access its excess insurance whenever it has exhausted the other directly underlying excess insurance policies that were purchased for the same policy period.”9 In other words, an insured could access an excess policy in its tower provided that the excess policy immediately below it was first exhausted.
Unfortunately, although the 2020 Montrose Chem. Corp. decision implicitly suggested that its reasoning should apply to the insured’s attempt to move from its primary layer into its first excess layer, it was written in such a way that it was susceptible to yet another challenge from the insurance industry, this time seeking to force the insured to exhaust all triggered primary policies prior to accessing any one excess policy. This brings us to the decision forming the original inspiration for this article.
Analysis of the Supreme Court of California Decision
Per the Supreme Court of California’s recent decision in Truck Ins. Exch. v. Kaiser Cement, where standard “other insurance” language exists in the applicable policies, “vertical exhaustion” principles apply, meaning an insured’s excess insurers, including the first layer of excess insurance, must provide coverage immediately upon exhaustion of the directly underlying primary coverage for the same policy period. The new rule expounds upon the unanswered question from Montrose III, where the court had similarly held that a vertical exhaustion rule applies between differing layers of excess coverage where all primary coverage had been exhausted.10
The Truck decision arises in the context of an asbestos exposure claim. The insured, Kaiser Cement and Gypsum Corporation (“Kaiser”), manufactured asbestos products from the mid-1940s until the 1970s and became a defendant in thousands of asbestosis and/or cancer lawsuits because of claimant exposure to Kaiser’s products. Several primary policies were triggered for this lengthy period, which all exhausted, except for a primary policy issued by Plaintiff Truck Insurance Company (“Truck”) from 1974-1975 that had no applicable limits due to anti-stacking provisions in the policy, which had been separately upheld by courts in other decisions.11
The 1974-75 Truck policy had a per-occurrence limit of $500,000, with amounts exceeding that level going to excess insurance. Given its exposure, Truck sought contribution on the loss from all the excess carriers, particularly those in other policy years, that continued to assert that they had no obligation to “drop down” until the Truck policy was exhausted.12 Citing prior California law, the court of Appeals held that Truck could not seek contribution from the excess carriers under “horizontal exhaustion” principles, notwithstanding the Montrose III decision. The Supreme Court of California reversed and remanded.
The court held that standard “other insurance” provisions in excess policies were intended to refer only to policies with lower attachment points during the same policy period as overlaying excess.13 The presumption, particularly with scheduled underlying insurance in these policies, is that the excess policy was not underwritten to account for other policy years.14 The court rejected the “qualitative” primary versus excess argument, downplaying the argument that higher primary premiums warrant horizontal exhaustion, explaining that excess attachment would still be subject to exhaustion of primary from that same policy period. The court rejected this argument, finding that factoring in a horizontal exhaustion rule into risk assessment only renders premium computation speculative.15 In addition, the court identified practical concerns with the administration of a horizontal exhaustion rule, including, most significantly, that this can directly disadvantage an insured by raising the odds of it having to litigate or dispute coverage for differing policy terms, exclusions, and conditions for differing policies over years issued by one or more different carriers to obtain coverage for their claims.16
Takeaways for Policyholders
Ultimately, this decision is yet another win for policyholders in the 30+ year fight over the rules for insuring long-tail claims. Although the case largely addressed the rights and obligations of insurers in a contribution scenario, the holding that insureds can access excess limits under a rule of vertical exhaustion is a positive result for policyholders. Insureds will now, as the court observed, no longer be required to litigate or engage in coverage disputes with carriers issuing policies in subsequent years on the basis that that excess coverage has not attached under a rule of horizontal exhaustion.
Critically, insuring possible long-tail claims that arise today is still a very complicated endeavor. Although policyholders continue to secure favorable case law from California’s highest courts, the reality is that these decisions primarily concern policy language from more than 30 years ago. The industry has adapted its policy language to work around these rules in the decades since the original Montrose Chem. Corp. decision. Thus, although there is very favorable case law on record on these issues, no insured should assume that current policies will be unmodified such that they are easily interpreted through the rules outlined in the cases in this article. Most of the decisions cited above make clear that insurers are free to modify their policies to work around their interpretations of traditional standard policy language to accomplish different results. In other words, all of these decisions are still premised on the fundamental tenet of insurance law that the court will try, before considering anything else, to simply read the plain language of the policy and apply it.
Special thanks to our former colleague Michael A. Stockalper for his significant contributions to the authorship of this article.
116 Cal.5th 67 (2024)
2If you are only interested in reviewing our update regarding the Truck decision from 2024, skip to the second section of this article.
3We do not survey here the extensive body of case law debating the appropriate trigger of coverage for various types of long-tail claims.
4Montrose Chemical Corp. v. Admiral Ins. Co.,10 Cal.4th 645, 675 (1995); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 93 Cal.App.4th 847, 896-897 (2000).
5Aerojet-General Corp. v. Transport Indem. Co., 17 Cal.4th 38, 57 (1997).
6State of California v. Continental Ins. Co., 55 Cal.4th 186, 191 (2012) (“Continental”).
7See Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal.App.4th 1, 44 (1996).
8Montrose Chemical Corp. of California v. Superior Ct., 9 Cal.5th 215, 260 (2020) (“Montrose III”).
9For more information on the appellate court split, see Montrose Chemical Corporation v. Superior Court, 14 Cal.App.5th 1306, 1327 (2017) (“Montrose II”) and State of California v. Continental Ins. Co., 15 Cal.App.5th 1017 (2017).
10See Montrose Chemical Corp. of California v. Superior Ct., 9 Cal.5th 215, 260 (2020).
11Exhaustion of the other primary policies took place due to underlying rulings holding that the 1974 Truck policy had anti-stacking language that prohibited Kaiser from obtaining coverage from any of Truck’s other primary policies issued from 1964 to 1983, and capped recovery under the 1974 policy to $500,000 per claim.
12These included London Market Insurers, First State, and Westchester Fire.
13Truck Ins. Exch., supra, 16 Cal.5th at 794-95, 798.
14Id. at 798-99.
15Id. at 800.
16Id. at 799-800.