A building supply company beset by asbestos lawsuits doesn’t need to exhaust all of its primary insurance coverage before those primary insurers can seek to compel other insurers, who have issued the company excess liability policies, to also chip in to cover the building supply makers’ liabilities from the lawsuits, the California Supreme Court has ruled.
However, the state high court said more proceedings are needed to determine if those excess liability insurers actually must be made to pay out.
On June 17, a unanimous California Supreme Court sided substantially with insurer Truck Insurance Exchange in a legal dispute, nominally against Kaiser Gypsum Company, but really against several of Kaiser’s other insurers.
These other insurance company defendants included London Market Insurers; Insurance Company of the State of Pennsylvania; Granite State Insurance Company; Allianz Underwriters Insurance Company; Fireman’s Fund Insurance Company; First State Insurance Company; Westchester Fire Insurance Company; Continental Insurance Company; Evanston Insurance Company; National Casualty Company; Sentry Insurance a Mutual Company; and Transport Insurance Company.
In the decision, the California Supreme Court specifically determined the so-called rule of “vertical exhaustion” should be used by courts to determine if and when certain excess liability insurance coverage can be triggered.
The decision essentially allows Truck Insurance Exchange to move forward with its attempt to secure judgments requiring the defendant excess liability insurance providers to cover asbestos-related claims against Kaiser.
The decision also marks the second significant win for Truck in litigation surrounding the asbestos lawsuits against Kaiser, following Truck’s victory earlier in June at the U.S. Supreme Court on a separate question.
Since the 1950s, Kaiser had made building supplies, including drywall joint compound and cement and fiberboard products, all of which contained asbestos.
In recent decades, Kaiser has faced an avalanche of thousands of lawsuits from people who claimed they contracted the deadly lung cancer known as mesothelioma from working with Kaiser’s building products.
To deal with the claims, Kaiser in recent years moved to establish a so-called asbestos personal injury trust, using the Chapter 11 bankruptcy process. Under federal law, companies beset with such massive asbestos-related liability can create and fund such a trust and then steer the asbestos claims through that trust.
As Kaiser’s primary insurer, Truck is obligated to indemnify Kaiser for up to $500,000 per asbestos-related claim, minus a $5,000 per claim deductible, according to court documents.
Truck sought to oppose the creation of the trust, arguing it would obligate the insurer to potentially pay out many millions of dollars in fraudulent claims it could not contest. In its June 6 ruling, the U.S. Supreme Court agreed that its financial obligations gave Truck the right to contest the creation of Kaiser’s asbestos claims trust in bankruptcy court.
At the same time, Truck was in California state court, seeking to reduce its potential exposure to asbestos claims against Kaiser by forcing Kaiser’s excess liability insurers to also contribute to Kaiser’s defense and indemnity.
Truck lost in both Los Angeles County Superior Court and at California’s Second District Appellate Court. In those rulings, judges determined those excess insurers had no obligation to pay until Kaiser had exhausted the full extent of its primary insurance policies.
Such a legal rule is known as “horizontal exhaustion.”
Truck appealed those decisions to the California Supreme Court, which overruled the lower courts.
In the decision authored by Justice Joshua P. Groban, and joined by all his colleagues, the justices of the state high court said Truck isn’t barred from seeking to trigger coverage from insurers who had issued Kaiser so-called “first-level excess policies,” now that Truck’s “directly underlying primary policies” had been exhausted.
In the decision, Groban and his colleagues concluded the language in the excess policies closely match that contained in policies at the heart of a 2020 California Supreme Court decision, known as Montrose Chemical Corp. of California v Superior Court, or Montrose III, for short.
In Montrose III, the state high court ruled “vertical exhaustion” applied to a case in which the Montrose company sought to trigger excess liability coverage from insurers who had issued policies “with a lower attachment point across all relevant policy periods.” The Montrose III decision, however, left unanswered whether similar “vertical exhaustion” should apply to claims for additional coverage from primary insurers.
Groban said the answer to that question is the same as in Montrose III.
“In sum, we believe that the language of the first-level excess policies, when considered in conjunction with the insureds reasonable expectations and the historical role of ‘other insurance’ provisions, is most naturally read to mean that the insured may access the policies upon exhaustion of the directly underlying policies that were purchased for the same period,” Groban wrote. “Excess insurers do, however, remain free to write their future excess policies in a manner that expressly requires horizontal exhaustion.”
The decision, however, did not necessarily require the excess insurers to pay out just yet.
The high court noted Kaiser and its excess insurers have argued it would be “unjust” to allow Truck to compel excess insurance to kick in at this point, as doing so could “effectively allow Truck to pay less coverage than it promised” and “would simultaneously leave Kaiser (and asbestos claimants) with less overally coverage by prematurely exhausting excess insurance that could otherwise be used to cover individual asbestos claims that exceed Truck’s $500,000 per occurrence limit.”
Groban and his colleagues sent the case back to the Second District Appellate Court – and potentially to L.A. County Superior Court – to weigh those questions.
Truck has been represented in the action by attorneys Scott R. Hoyt and Adam L. Hoyt, of Pia Anderson Moss Hoyt, of Southlake, Texas and Salt Lake City; and Robert A. Olson, Jonathan H. Eisenman and Edward L. Xanders, of Greines, Martin, Stein & Richland, of Los Angeles.
Kaiser has been represented by attorneys Philip E. Cook and Brian J. Wright, of The Cook Law Firm, of Los Angeles.
The excess liability insurers were represented before the California Supreme Court by attorney Brian A. Kelly, and others with the firms of Duane Morris; Lynberg & Watkins; Squire Patton Boggs; Selman Breitman; Crowell & Morning; Kendall Brill & Kelly; Shipman & Goodwin; Aiwasian & Associates; Davis Wright Tremaine; and Traub Lieberman Straus & Shrewsberry.