California Court of Appeal Decision Increases Options for Many Policyholders to Maximize Coverage at Less Cost for Progressive Injury Losses

The California Court of Appeal, Second Appellate District, recently issued a decision in Legacy Vulcan Corp. v. Superior Court of Los Angeles, 2010 WL 1730788 (Apr. 30, 2010), that makes it easier for policyholders to access coverage under excess liability policies for third-party progressive injury claims. The decision clarifies the law that gives many policyholders more than one option for how to use both primary and excess liability policies to cover claims.

Where progressive injury claims are involved, such as is often the case with environmental contamination property damage claims and bodily injury claims associated with exposure to asbestos or toxic chemicals, the law in many jurisdictions, including California, with respect to third-party general liability policies, is that all policies are triggered that are in effect during each year that the property damage or bodily injury takes place. This is commonly referred to as the "continuous trigger" rule. Many policyholders have excess liability policies to provide coverage for such continuous-trigger and other third-party liability claims when their primary coverage is not sufficient to cover the full extent of their liability. Excess insurance typically provides coverage only upon the exhaustion of specified primary (and sometimes underlying excess) insurance.

The issue of a policyholder's right to access coverage under its excess policies for progressive injury claims raises the question of whether the policyholder must exhaust all of its primary policies that cover such claims before it is allowed to seek coverage under any of its excess policies (commonly referred to as "horizontal exhaustion"), or whether it may access coverage under an excess policy once the primary policy directly below it—the policy providing primary coverage during the same policy year—is exhausted (commonly referred to as "vertical exhaustion").

The answer to this question, of course, depends on the specific language of the excess policy regarding when the insurer's indemnity obligations attach upon exhaustion of the underlying policy or policies. Excess policies have specific provisions, often referred to as "attachment provisions," that tell the insured what underlying policies or limits of liability must be exhausted or satisfied before the excess policy will begin to provide coverage. For several years, the leading case in California on the "horizontal vs. vertical exhaustion" question has been Community...

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