Montrose Again: California Adopts Vertical Exhaustion Theory of Access to Upper Level Excess Insurance Policies
In the latest iteration of the Montrose Chemical v. Superior Court litigation, the California Supreme Court unanimously adopted the “vertical exhaustion” rule allowing policyholders to tap excess policies after having exhausted the underlying excess policies with lower attachment points in the same policy period. Notably, the case did not determine whether the horizontal exhaustion or vertical exhaustion rule applies between primary and excess insurance carriers.
The Montrose coverage litigation dates back to 1990, when Montrose sought insurance coverage for more than $100 million it incurred in environmental cleanup efforts following a CERCLA action brought by the federal and state government in relation to its manufacturing of the now banned insecticide DDT.
Between 1961 and 1985, Montrose had purchased a variety of primary and excess CGL policies from a number of carriers. In total, there were 115 excess policies issued by 40 different carriers. The sequence in which Montrose could access its excess policies was the subject of the latest coverage dispute.
Montrose argued that it could access any excess policy in a given year so long as the underlying policies with lower attachment points had been exhausted. In other words, Montrose argued that it could go up vertically within one year so long as the underlying lower level excess policies in that same year had exhausted.
The insurance carriers argued for a horizontal exhaustion rule whereby an insurer had no duty to pay a claim until Montrose had horizontally exhausted its lower lying excess policies in all triggered policy years.
The Court found that, absent any clear language to the contrary, the most natural reading of the policies means that Montrose may access its excess insurance when it has exhausted the other direct underlying excess insurance policies that were purchased for the same policy period. In adopting the vertical exhaustion rule, the Court reasoned that a horizontal exhaustion rule would create significant practical obstacles to the insured’s effort to secure coverage.
While Montrose III was undeniably a win for the insured, the California Supreme Court made it clear that insurers may seek contribution from other insurers that cover the relevant policy periods. The court succinctly stated that the “exhaustion rule does not alter the usual rules of equitable contribution between insurers.” The Court also pointed out that parties to insurance are free to establish their own rules for exhaustion in the future.
Your insurance scenario may vary from the case discussed above. Please contact legal counsel before making any decisions. BPH’s attorneys can be reached via email to answer your questions.
 Montrose Chemical Corp. v. Superior Court (April 6, 2020) S244737
 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)