(Vertical Exhaustion Applies to Excess Policies in Continuous Damage Claims, Notwithstanding That Unexhausted Primary Coverage is Afforded to Insured During a Period Other Than the Exhausted Primary Policies Directly Underlying the Excess Policies)
(October 2024) - In Truck Ins. Exch. v. Kaiser Cement and Gypsum Corp. et al., 16 Cal.5th 520 ( June 17, 2024), the California Supreme Court reversed a California Second District Court of Appeal decision addressing vertical and horizontal exhaustion and found that first-layer excess insurance policies are triggered upon vertical exhaustion of primary policies directly below the excess policies. Hence, excess carriers can no longer take the position that defense and indemnity coverage is not triggered under their policies for continuous loss, so long as there is primary coverage afforded to the insured, even if such coverage is for a different policy period. The Supreme Court adopted the reasoning in SantaFe Braun, Inc. v. Ins. Co. of North America (2020) 52 Cal.App.5th 19 (the SantaFe decision).
The Court of Appeal decision found that Truck Insurance Exchange ("Truck") was not entitled to contribution from first-layer excess insurers for continuous loss asbestos claims, notwithstanding that the primary policy limits directly below the excess policies had been exhausted. The Court of Appeal reasoned that since the Truck policy afforded primary coverage to the insured, Kaiser Cement and Gysum Corp. ("Kaiser"), due to the other insurance clauses in the excess policies requiring exhaustion of all underlying insurance, absent Kaiser's exhaustion of all primary policies on the risk for the continuous damage, including the Truck primary policy limits, coverage was not triggered under the excess policies, and Truck was not entitled to contribution for the continuous damage claims pending against Kaiser.
In reversing the Court of Appeal decision, the Supreme Court outlined the principles governing continuous damage or injury claims involving damage or injury taking place over multiple policy periods. The Supreme Court noted that California has adopted an "all-sums-stacking" approach for policies affording occurrence based coverage.
- First, the continuous injury trigger of coverage principle under which bodily injury and property damage that is continuous or progressively deteriorating throughout several policy periods applies to trigger potential coverage by all policies in effect during those periods.
Hence, an insured may select any policy during this period to cover a loss.
- Second, under the "all sums" rule, each triggered
policy is potentially liable up to limits for the total amount of
the loss, notwithstanding that a portion of the loss was covered
under an earlier or later period.
- Third, policies affording coverage during the period of continuous damage may be "stacked" so as to allow an insured to add together the maximum limits of all consecutive policies that were in place during the period of injury or damage.1 Hence, if the insured had 10 annual primary policies affording $1 million per year of coverage, the insured could stack such policies to cover a $10 million loss.
The Supreme Court noted that each of the first level excess policies...
