In the case of Truck Ins. Exch. V. Kaiser Cement, Case No. 5273179, 2004 WL 3016941 (June 17, 2024), the Supreme Court of California examined when a first-level excess insurer's indemnity obligations attach in a situation involving continuous injury that potentially triggered multiple policy periods. It concluded that the language contained in the first-level excess policies was materially identical to that of the language in the higher-level policies. Based on this assessment, it concluded that the first-level excess policies are best interpreted as requiring only vertical exhaustion.
Factual Background
For several decades, starting in the 1940s, Kaiser manufactured products containing asbestos at numerous facilities. By 2004, over 24,000 claimants sued Kaiser for bodily injury that they alleged was caused by exposure to asbestos. Truck Insurance Exchange was one of several primary insurers retained by Kaiser during the applicable policy periods. In this appeal, the court is focused on whether Truck was entitled to contribution from its co-insurers that also issued first-level excess policies to Kaiser during the applicable coverage period.
Procedural Background
Historically California case law mandated that all applicable primary liability insurance policies must be exhausted before any excess insurance policies could be triggered. This is known as horizontal exhaustion. Cases such as Community Redevelopment Agency v. Aetna Casualty & Surety Co., 50 Cal. App.4th 329, 339 (1996), Stonewall Ins. Co., Inc. v. City of Palos Verdes Estates, 46 Cal.App.4th 1810, 1852-1853 (1996), and Padilla Construction Co., Inc. v, Transportation Ins. Co., 150 Cal.App4th 984, 986-87 (2007), consistently upheld this core principle.
However, this changed with the California Supreme Court's decision in Montrose Chemical Corp. of California v. Superior Court (2020). In this landmark case, higher tier excess insurers argued for horizontal exhaustion, but the court adopted a vertical exhaustion rule instead. The court ruled that insured parties could seek indemnification from any excess policy once the underlying excess policies in the same period were exhausted, without needing to exhaust excess insurance at lower levels for all periods triggered by continuous injury. However, Montrose III did not address whether horizontal exhaustion still applied to primary policies before triggering any excess policy. This decision left insurers with a division in rulings on this issue.
Vertical v. Horizontal Exhaustion
Vertical and horizontal exhaustion refers to the different methods of determining when excess insurance coverage is triggered. Vertical exhaustion requires that all underlying primary insurance coverage for a specific policy period be exhausted before excess insurance coverage for that same period is triggered.
Horizontal exhaustion requires that all primary insurance coverage across all policy periods must be exhausted before any excess insurance coverage can be triggered. This means that excess coverage will only apply after the limits of all primary insurance policies for all relevant periods have been exhausted, regardless of the policy period in which the claim occurs.
In summary the key differences may be explained as follows:
| Vehicle Exhaustion | Horizontal Exhaustion | |
| Trigger | Requires exhaustion of primary insurance within the same policy period. | Requires exhaustion of primary insurance across all periods. |
| Policy Layers | Each policy period has its own "tower" or structure of coverage that must be used before moving to the next level. | Looks at all primary polices collectively before excess coverage is triggered. |
| Complexity | Only deals with policies within a single policy period. | Involves multiple policies over multiple policy periods. |
Court's Analysis
The case at hand revolved around a contribution action by Truck Insurance Exchange concerning asbestos claims against Kaiser Cement, which faced over 24,000 claims related to asbestos exposure. The dispute focused on a 1974-75 primary policy after others had exhausted. Truck argued for vertical exhaustion, seeking contribution from excess carriers, while Kaiser and the excess carriers supported horizontal exhaustion.
On June 17, 2024, the California Supreme Court firmly rejected the appellate court's adherence to horizontal exhaustion, instead affirming the view that first-level excess policies only require vertical exhaustion of primary policies. The Court asserted that an insured can seek coverage from excess policies above exhausted primary policies, irrespective of whether primary policies in other years have exhausted. The court was careful to note, however, that first-level excess policies do not require the insured to horizontally exhaust primary insurance issued during different policy periods. Therefore, this decision did not resolve the question of whether Truck is owed contribution from the excess insurers.
Significance of the Decision
This decision signifies a move away from horizontal exhaustion towards vertical exhaustion in California, though the possibility remains that horizontal exhaustion may still apply in certain inter-insurer disputes. Nonetheless, the trend indicates a strong shift towards vertical exhaustion, reversing the long-standing horizontal exhaustion framework established since 1996.