Addressing apportionment issues left unresolved by the California Supreme Court’s decision in Montrose Chemical Corporation v. Admiral Insurance Company, 10 Cal.4th 645 (1995), California’s intermediate appeals court has ruled that an insured that manufactured asbestos-containing products must first exhaust the limits of all of its primary insurance before it may claim benefits under its excess coverage.  Kaiser Cement & Gypsum Corp. v. Ins. Co. of the State of Pennsylvania, No. B222310 (Cal. Ct. App. Jun. 3, 2011).  The court’s decision is available here.

In this case, the insured had manufactured asbestos-containing products in at least ten different facilities from 1944 until the 1970’s.  One insurer had issued primary general liability policies over the period from 1964 through 1983; three other carriers had also issued primary general liability policies before and after that period.  The insured had separately purchased excess liability coverage for several of the underlying policy periods.

By 2004, the insured had been named as a defendant in more than 24,000 lawsuits, each alleging bodily injury from exposure to the insured’s products.  The insured had tendered every claim involving potential exposure to asbestos in 1974 to its general liability carrier for that year, whose policy featured a $500,000 per-occurrence limit and no annual aggregate.  By October 2004, the primary carrier had spent more than $50 million to indemnify the insured.

The primary carrier sued the insured for a declaration that its policy’s limits had been exhausted, and that it had no further obligation to defend or indemnify its insured against the claims.  The insured, in turn, cross-claimed against its excess carriers, seeking a declaration that they were obligated to defend and indemnify the insured following exhaustion of the primary coverage.  The insured took the position that, by selectively tendering to one policy year, the excess carriers in that year were obligated to respond to any claims that exceeded the limit of primary coverage.  The trial court granted summary judgment in favor of the insured.

After reviewing the language of the excess policy, the Court of Appeal reversed, holding that the principle of horizontal exhaustion required all of the insured’s primary policies to exhaust before coverage under the excess policies could be triggered.  The court went on to state that, in light of the primary policies’ terms, the limits of policies issued by the same company could not be stacked.  Rather, each company was obligated to pay only one per-occurrence limit.  Harmonizing its conclusions, the appeals court held that horizontal exhaustion simply required each primary insurer on the risk to pay its entire per-occurrence limit before excess coverage would be triggered.  It then remanded the case for further proceedings.

The court’s decision resolves a recurring issue under California law, with respect to horizontal versus vertical exhaustion.  It represents a significant victory for excess insurers – though, as always, this case turned on the terms and conditions of the insurance policies themselves.