California regulation has change into extra favorable towards firms dealing with liabilities based mostly on alleged occasions spanning a number of years. Beforehand, California intermediate appellate selections favored “horizontal exhaustion,” which implies that in circumstances involving a steady loss, a first-level extra coverage that sat over a main coverage couldn’t be accessed till the relevant limits of every other underlying collectible insurance coverage had been exhausted.
However now the California Supreme Courtroom has dominated that vertical exhaustion applies to find out how a policyholder can entry its extra insurance coverage insurance policies. Truck Ins. Exch. v. Kaiser Cement, 16 Cal.fifth 67 (2024) (“Kaiser”). Because of this the surplus coverage for a coverage interval will be accessed as quickly because the underlying main coverage for that very same interval is exhausted. There is no such thing as a want to attend for different years’ insurance policies to be exhausted.
In a latest article revealed in PropertyCasualty360, Hunton attorneys Syed S. Ahmad, Scott P. DeVries and Yosef Itkin examined the Kaiser choice in additional element. In brief, the court docket discovered help for its choice counting on the language of the surplus insurance policies, together with the policyholder’s cheap expectations and the historical past of “different insurance coverage” provisions.
There are some key sensible takeaways policyholders can take from this choice:
First, policyholders now not must play a ready sport to entry their bargained-for insurance coverage advantages. The excessive court docket’s ruling enhances the accessibility of extra insurance coverage protection for policyholders, offering them with a extra easy path to acquiring the advantages of their insurance policies. Beforehand, horizontal exhaustion created challenges for policyholders. All of their main insurance policies must be exhausted earlier than an extra coverage could possibly be accessed. This could possibly be problematic, for instance, the place insurers for decades-old insurance policies are now not solvent and questions come up concerning the skill to exhaust these different insurance policies. The horizontal exhaustion rule additionally had the potential to create protracted litigation over protection points to be able to exhaust a number of main insurance policies. This successfully delayed advantages owed to policyholders. However these issues ought to be mitigated by the adoption of a vertical exhaustion rule.
Second, the court docket’s choice continues the pattern in California in the direction of making use of vertical exhaustion, indicating the strategy is right here to remain. The court docket, in 2020, had weighed in on the difficulty of exhaustion as between larger and lower-level extra insurance policies. In that case, the court docket held that vertical exhaustion utilized. Montrose Chemical Company v. Superior Courtroom, 9 Cal.fifth 215 (2020), as modified (Might 27, 2020). The Kaiser ruling now broadens the scope of situations the place vertical exhaustion can be useful for policyholders.
Third, Kaiser indicators that policyholders should pay cautious consideration to the language in future insurance policies. Like every other contract, language in insurance coverage insurance policies management case outcomes, and never all insurance policies are the identical. The Kaiser court docket expressly famous that extra carriers are free to write down insurance policies in a manner that requires horizontal exhaustion. Policyholders ought to heed this warning and pay shut consideration to how future insurance policies are worded and negotiate enhancements to align with their desired technique of exhaustion.
When negotiating new insurance coverage contracts or renewing current ones, policyholders ought to take into account acquiring help from insurance coverage protection counsel to make sure that the phrases clearly mirror the ideas of vertical exhaustion. By doing so, skilled counsel may also help establish extra insurers who could also be attempting to contract across the vertical exhaustion rule.
