Although "other insurance" provisions cause a variety of mischief (see footnote), disputes related to these clauses frequently arise, as in Montrose IX, when a policyholder purchased "towers" of liability insurance policies over successive years and then seeks to recover from its insurers for a liability involving "long tail" continuous or progressive injuries that span many insurance policy periods. In those circumstances, the policyholder and the insurers often dispute which policy or policies in the "tower" must be exhausted before a particular excess or higher-level policy may be required to pay. The California Supreme Court used the following hypothetical coverage chart as a simple representation of the issue:

The questions presented in Montrose IX were:

• In order to access Policy 2A, must the policyholder exhaust only the limits of liability of the lower-level excess policies immediately underlying it in the same year, namely Policy 1A?  This is what Montrose argued, and the Supreme Court agreed.   

• Or, alternatively, in order to access Policy 2A, must the policyholder exhaust the limits of liability of every insurance policy in all triggered years at lower levels (i.e., Policies 1A/B/C plus all of the Primary Insurance in each year), even if excess Policy 2A does not expressly require the policyholder to do so?  The Court referred to this as "horizontal exhaustion."  This is the position the insurers argued, and the California Supreme Court rejected.

The Montrose IX Decision

As required by longstanding California law, Montrose IX focused initially on the language of the insurance policies, construing them under well-established principles of interpretation. Montrose IX at 15-16. These principles include the longstanding rule that a court must adopt a policyholder's coverage-maximizing interpretation so long as it is reasonable. Montrose IX at 16. That rules applies even if an insurer's coverage-minimizing interpretation is also reasonable. Id. see also MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 655 (2003) (A court's role is not to "select one 'correct' interpretation from the variety of suggested readings[;]" rather, it must find "coverage so long as there is any … reasonable interpretation under which recovery would be permitted.") (citations omitted). Accordingly, an insurer's coverage-minimizing interpretation should not be given effect unless it "is the only reasonable one." Id. at 648.

The "other insurance" provisions at issue in Montrose IX were varied, and included:

• Policies promising to "indemnify the insured for the amount of loss which is in excess of the applicable limits of liability of the [scheduled] underlying insurance," but then defining "loss" as "the sums paid as damages in settlement of a claim or in satisfaction of a judgment for which the insured is legally liable, after making deductions for all recoveries, salvages and other insurances (whether recoverable or not) other than the underlying insurance and excess insurance purchased specifically to be in excess of this policy." 

• Policies promising that the insurer will pay "the ultimate net loss in excess of the retained limit" but defining "retained limit" to mean, among other things, the "total of the applicable limits of the underlying policies listed in [a schedule] [and] the applicable limits of any other underlying insurance collectible by the insured." 

• Policies stating that "[i]f other valid and collectible insurance with any other insurer is available to the Insured covering a loss also covered by this policy, other than insurance that is in excess of the insurance afforded by this policy, the insurance afforded by this policy shall be in excess of and shall not contribute with such other insurance." 

The insurers argued that all of these clauses "call for a rule of horizontal exhaustion because they restrict indemnification from any excess policy until the insured has exhausted all other available insurance—which, in a case of long-tail injury, means every policy with a lower attachment point from every policy period triggered by the continuous injury." Montrose IX at 9. While commenting that the insurers' interpretation was "not an unreasonable one," the Court found that it was "not the only possible interpretation of the policy language." Montrose IX at 16. Rather, any of the "other insurance" clauses could be fairly read as being limited to the policies or underlying coverage specifically identified in the excess policy itself or underlying it in the same year. Id. at 16-17.

In reaching this result, the Court addressed numerous contract interpretation arguments advanced by the parties:

• Responding to the insurers' point that some policies purport to be excess of both the "scheduled underlying insurance" and all "other underlying insurance," the Court ruled that the reference to "other underlying insurance" could "fairly be read to refer only to other directly underlying insurance in the same policy period that was not specifically identified in the schedule of underlying insurance, anticipating that the scheduled underlying insurance may later be replaced or supplemented with different policies."  Id. at 17.

• The insurers' argument that "other insurance" includes policies issued in other periods leads, the Court observed, to the absurd conclusion that before any excess insurance policy attaches "every other insurance policy at every attachment point" would have to be exhausted first and "not merely, as the insurers' theory of horizontal exhaustion would have it, excess policies from other policy periods that contain lower attachment points."  Id. at 17.  While the insurers tried to distance themselves from that conclusion by arguing that "other insurance" really only meant "other underlying insurance," the Court found that argument to be without support in the policy language.  Id.  In short, the interpretation advanced by the insurers was rejected in part because it led to an absurd result.

• The Court agreed that construing the "other insurance" clauses in the manner urged by the insurers would conflict with the insurers' promises elsewhere in their policies to provide coverage once losses exceeded the limits of the directly underlying policies, if not render such promises entirely meaningless.  Id. at 21.  For instance, one of the policies promised that coverage would be provided once losses reached $30 million, but under the insurers' interpretation of the "other insurance" clause that policy would not have been reached until losses totaled "upwards of $750 million."  Id. at 22.   

• The Court also faulted the insurers' proffered interpretation on ground that it would render the policies' "schedules of underlying insurance" almost meaningless, as they "would represent only a fraction—perhaps only a small fraction—of the insurance policies that must be exhausted before a given excess policy may be accessed."  Id. at 22.

• The Court also observed that the insurers' proposed rule that all "lower level" policies must be exhausted before any excess policies can be accessed would lead to impractical results that the parties could not have expected.  Id. at 23-24.  Given that corporate insurance programs are rarely uniform from year to year, these results would include, for example, difficulties in determining whether a policy is really a "lower level" policy with respect to policies in other years, and the likelihood that it would "create as many layers of additional litigation as there are layers of policies."  Id. at 24.  Another absurdity entailed by the insurers' position is that if a lower-level insurer in a different policy period claimed that an exclusion applied, the insured would not be able to access a higher-level policy in another policy period that contained no exclusions until a court determined whether the other insurer's exclusion barred coverage.  Id. at 24.

• The Court also brushed aside the insurers' argument that if Montrose were entitled to "immediate access to the insurance it purchased," that result would be "totally unfair" to them, commenting that "[t]here is no evident unfairness to insurers when their insureds incur liabilities triggering indemnity coverage under the negotiated policy contract."  Montrose IX at 25.    

Supplementing its view that the plain language of the policies did not support the insurers' position, the Court found additional support in prior decisions addressing "other insurance" clauses. These decisions reflect that "'[h]istorically, 'other insurance' clauses were designed to prevent multiple recoveries when more than one policy provided coverage for a particular loss.'" Montrose IX at 18 (quoting Dart Industries, Inc. v. Commercial Union Ins. Co., 28 Cal. 4th 1059, 1079 (2002)). They also can be relevant in inter-insurer disputes about how to apportion a loss once the policyholder has been fully compensated. Id. at 19; see also id. at 20 (other insurance clauses are generally understood as addressing inter-insurer "[a]llocation questions with respect to overlapping concurrent policies.") (quoting Restatement of the Law of Liability Insurance § 40, com. c, p. 345 (2019)). The Court emphasized, however, that any such apportionment between insurers "has no bearing upon the insurers' obligations to the policyholder," which "is to cover the full extent of the policyholder's liability (up to the policy limits).'" Id. (internal quotations and citations omitted).

Accordingly, when "read in conjunction with the actual language of other provisions in the policies, and in light of ['other insurance' clauses'] historical role of governing allocation between overlapping concurrent policies," the Court concluded that "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." Id. at 22-23.

Conclusion

The Montrose IX decision affirms that even for long-tail claims a policyholder may seek payment from any excess policy that by its terms provides coverage for the loss, provided only that it satisfies any requirement to exhaust any underlying coverage in the same policy period. This ruling will reduce the complexity and cost of recovery for companies seeking payment for such claims from their liability insurers and thus is another of the long line of significant victories for policyholders in the California courts.

Footnote

As one court put it nearly 50 years ago, the problem with "other insurance" clauses arises when "an Insurer who has written the policy and taken the Assured's premium" later invokes the "other insurance" clause in its policy to direct its policyholder "to go elsewhere [for coverage] … because another insurer is, or ought to be, or may be, liable for the whole, half, or part of a loaf." Marwell Constr., Inc. v. Underwriters at Lloyd's, London, 465 P.2d 298, 300 (Alaska 1970) (quoting American Fidelity & Cas. Co. v. St. Paul-Mercury Indem. Co., 248 F.2d 509, 510 (5th Cir. 1957) (citations omitted)). David Goodwin ([email protected]) and René Siemens ([email protected]) are Partners in Covington & Burling LLP's insurance recovery practice group. Jeff Kiburtz ([email protected]) is Of Counsel in Covington & Burling LLP's insurance recovery practice group. The opinions expressed here are the authors' own.