California law has become more favorable toward companies facing liabilities based on alleged events spanning multiple years. Previously, California intermediate appellate decisions favored “horizontal exhaustion,” which means that in cases involving a continuous loss, a first-level excess policy that sat over a primary policy could not be accessed until the applicable limits of any other underlying collectible insurance had been exhausted.

But now the California Supreme Court has ruled that vertical exhaustion applies to determine how a policyholder can access its excess insurance policies. Truck Ins. Exch. v. Kaiser Cement, 16 Cal.5th 67 (2024) (“Kaiser”). This means that the excess policy for a policy period can be accessed as soon as the underlying primary policy for that same period is exhausted. There is no need to wait for other years’ policies to be exhausted.

In a recent article published in PropertyCasualty360, Hunton attorneys Syed S. Ahmad, Scott P. DeVries and Yosef Itkin examined the Kaiser decision in more detail. In short, the court found support for its decision relying on the language of the excess policies, along with the policyholder’s reasonable expectations and the history of “other insurance” provisions.

There are some key practical takeaways policyholders can take from this decision:

First, policyholders no longer have to play a waiting game to access their bargained-for insurance benefits. The high court’s ruling enhances the accessibility of excess insurance coverage for policyholders, providing them with a more straightforward path to obtaining the benefits of their policies. Previously, horizontal exhaustion created challenges for policyholders. All of their primary policies would have to be exhausted before an excess policy could be accessed. This could be problematic, for example, where insurers for decades-old policies are no longer solvent and questions arise about the ability to exhaust these other policies. The horizontal exhaustion rule also had the potential to create protracted litigation over coverage issues in order to exhaust multiple primary policies. This effectively delayed benefits owed to policyholders. But these concerns should be mitigated by the adoption of a vertical exhaustion rule.

Second, the court’s decision continues the trend in California towards applying vertical exhaustion, indicating the approach is here to stay. The court, in 2020, had weighed in on the issue of exhaustion as between higher and lower-level excess policies. In that case, the court held that vertical exhaustion applied. Montrose Chemical Corporation v. Superior Court, 9 Cal.5th 215 (2020), as modified (May 27, 2020). The Kaiser ruling now broadens the scope of scenarios where vertical exhaustion will be helpful for policyholders.

Third, Kaiser signals that policyholders must pay careful attention to the language in future policies. Like any other contract, language in insurance policies control case outcomes, and not all policies are the same. The Kaiser court expressly noted that excess carriers are free to write policies in a way that requires horizontal exhaustion. Policyholders should heed this warning and pay close attention to how future policies are worded and negotiate improvements to align with their desired method of exhaustion.

When negotiating new insurance contracts or renewing existing ones, policyholders should consider obtaining assistance from insurance coverage counsel to ensure that the terms clearly reflect the principles of vertical exhaustion. By doing so, experienced counsel can help identify excess insurers who may be trying to contract around the vertical exhaustion rule.