Horizontal exhaustion[361] requires each layer of a tower of coverage to indemnify the policyholder to the full extent of its policy limits before requiring contribution by any policies in the layer above. When an occurrence implicates more than one policy period, each triggered primary policy can be called upon to pay the claim up to the full limits of that policy. Excess carriers often argue for application of this "horizontal exhaustion" approach, which triggers their policies only after the limits of all triggered primary policies have been exhausted.
While horizontal exhaustion seems to be the dominant exhaustion theory courts apply, a few courts have adopted a vertical approach.[362]
In American Family Mutual Insurance Co. v. Continental Casualty Co.,[363] the Arizona Court of Appeals adopted horizontal exhaustion by implication. At issue was a dispute between two insurance companies, each of which provided both primary and umbrella coverage that was potentially applicable to the same motor vehicle accident in which a passenger was injured. Pursuant to A.R.S. Sec.20-1123.01(B), the primary policy covering the vehicle was first in line to pay for the injuries to the passenger. The issue on appeal was whether that same statutory provision mandated that the umbrella policy covering the vehicle must also be exhausted before reaching the separate primary policy covering the non-owner driver of the vehicle. In using a horizontal exhaustion analysis, the court observed that there were two instances in which a policy may be deemed excess: (1) "true excess" coverage, which provides coverage for a modest premium against catastrophic losses that exceed the limits of the underlying coverage; and (2) when other insureds have purchased insurance that fortuitously may be applicable to a given loss.[364] The court observed that "[U]mbrella coverages, almost without dispute, are regarded as true excess over and above any type of primary coverage, excess provisions arising in regular policies in any manner, or escape clauses."[365] The court noted that "[t]here is certainty and simplicity in a rule which holds insurers who issue residual protection only are last to pay so long as that is their expressed intent."
The court in American Family Mutua Insurance Co. v. Continental Casualty Co. held that the non-owner driver's primary liability policy must be exhausted ahead of the owner's umbrella policy, i.e., horizontal exhaustion.
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Notes:
[361] The court in Cont'l Cas. Co. v. Armstrong World Indus., Inc., 776 F. Supp. 1296 (N.D. Ill...
