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Montrose Chemical Corporation of California v. Superior Court (Canadian Universal Insurance Company, Inc.)

California Court of Appeals, Second District, Third Division

August 31, 2017

MONTROSE CHEMICAL CORPORATION OF CALIFORNIA, Petitioner,
v.
SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF LOS ANGELES, Respondent CANADIAN UNIVERSAL INSURANCE COMPANY, INC., ET AL., Real Parties in Interest.

         Petition for writ of mandate from an order of the Superior Court of Los Angeles County No. BC005158, Elihu Berle, Judge. Granted in part and denied in part with directions.

          Latham & Watkins, Brook B. Roberts, John M. Wilson and Drew T. Gardiner for Petitioner.

          No appearance on behalf of Respondent.

          Sinnott Puebla Campagne & Curet, Kenneth H. Sumner and Lindsey A. Morgan for Real Party in Interest AIU Insurance Company.

          Sinnott, Puebla, Campagne & Curet and Randolph P. Sinnott; Cozen O'Conner and John Daly for Real Party in Interest Zurich International (Bermuda) Ltd.

          Duane Morris, Max H. Stern and Jessica E. La Londe for Real Party in Interest American Centennial Insurance Company.

          Craig & Winkelman and Bruce H. Winkelman for Real Parties in Interest American Re-Insurance Company.

          Selman & Breitman, Ilya A. Kosten and Kelsey C. Start for Real Parties in Interest Transport Insurance Company and Lamorak Insurance Company.

          Selman & Breitman and Elizabeth M. Brockman for Real Party in Interest Federal Insurance Company.

          Berkes, Crane, Robinson & Seal, Steven M. Crane and Barbara S. Hodous for Real Party in Interest Continental Casualty Company and Columbia Casualty Company.

          Lewis Brisbois Bisgaard & Smith, Peter L. Garchie and James P. McDonald for Real Party in Interest Employers Mutual Casualty Company.

          Barber Law Group and Bryan M. Barber for Real Party in Interest Employers Insurance of Wausau.

          McCurdy & Fuller, Kevin G. McCurdy and Vanci Y. Fuller for Real Parties in Interest Everest Reinsurance Company, et al.

          Chamberlin Keaster & Brockman, Kirk C. Chamberlin and Kevin J. Schettig for Real Parties in Interest Providence Washington Insurance Company, et al.

          Tressler, Linda Bondi Morrison and Ryan B. Luther for Real Parties in Interest Allstate Insurance Company.

          Archer Norris, Charles R. Diaz and GailAnn Y. Stargardter for Real Parties in Interest Fireman's Fund Insurance Company, et al.

          Lewis, Brisbois, Bisgaard & Smith, Jordon E. Harriman and Shannon L. Santos for Real Parties in Interest General Reinsurance Corporation, et al.

          Hinshaw & Culbertson, Thomas R. Beer and Peter J. Felsenfeld for Real Party in Interest Gerling Konzern Allgemeine Versicherungs-Aktiengesellschaft.

          O'Melveny & Myers, Richard B. Goetz, Zoheb P. Noorani and Michael Reynolds for Real Party in Interest TIG Insurance Company.

          McCloskey, Waring & Waisman and Andrew McCloskey for Real Parties in Interest Westport Insurance Corporation, et al.

          Simpson Thacher & Bartlett, Peter R. Jordon and Andrew T. Frankel for Real Parties in Interest Travelers Casualty and Surety Company and The Travelers Indemnity Company.

          Morgan Lewis & Bockius, Michel Y. Horton, Jeffrey S. Raskin and David S. Cox for ITT LLC and Santa Fe Braun, Inc. as Amicus Curiae on behalf of Petitioner.

          EDMON, P. J.

         Petitioner Montrose Chemical Corporation of California (Montrose) for many years manufactured the pesticide dichloro-diphenyl-trichlorethane (DDT). Real parties in interest are insurers that issued excess comprehensive general liability (CGL) policies to Montrose in relevant years. The present dispute concerns the sequence in which Montrose may access its excess CGL policies to cover its liability for environmental injuries caused by DDT.

         Through a motion for summary adjudication, Montrose sought a declaratory judgment that it may “electively stack” excess policies-i.e., that it may access any excess policy issued in any policy year so long as the lower-lying policies for the same policy year have been exhausted. All of the excess insurers opposed Montrose's motion for summary adjudication; many of the excess insurers also sought through a cross-motion for summary adjudication a ruling that no insurer had a duty to pay a covered claim until Montrose had “horizontally exhausted” its lower-lying excess policies in all triggered policy years.

         The trial court rejected “elective stacking” in favor of “horizontal exhaustion, ” ordering that higher-level excess policies could not be accessed until lower-level policies had been exhausted for all policy years. It thus denied Montrose's motion for summary adjudication and granted the excess insurers' cross- motion for summary adjudication. Montrose then filed the present petition for writ of mandate challenging the trial court's summary adjudication order.

         We agree with the trial court that “elective stacking” is inconsistent with the policy language of at least some of the more than 115 excess policies at issue and is not compelled by California Supreme Court authority. We therefore conclude that the trial court properly denied Montrose's motion for summary adjudication. Our holding is not as expansive as the trial court's, however. Specifically, we do not hold that policies must be horizontally exhausted at each coverage level and for each year before higher-level policies may be accessed. Instead, we conclude that the sequence in which policies may be accessed must be decided on a policy-by-policy basis, taking into account the relevant provisions of each policy. We therefore reverse in part the trial court's grant of the insurers' motion for summary adjudication.

         FACTUAL AND PROCEDURAL HISTORY

         I.

         Background

         From 1947 to 1982, Montrose manufactured DDT at a facility in Torrance, California. During the 1960's, conservationists began to raise concerns about the effects of DDT on the environment, and in 1972 the federal government prohibited its use within the United States. Montrose continued to manufacture DDT for export at its Torrance facility until 1982. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 292-293 (Montrose I).)

         In 1990, the United States and the State of California sued Montrose in the United States District Court for the Central District of California under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. § 9607 et seq.) (CERCLA). (United States, et al. v. Montrose Chemical Corporation of California, et al. (U.S. Dist. Ct. C.D.Cal.), 1990, No. CV 90-3122-AAH (JRx) (CERCLA action).) The CERCLA action alleged that Montrose's operation of its Torrance facility caused environmental contamination that damaged land, water, and wildlife in the Los Angeles Harbor and neighboring waters. (Montrose I, supra, 6 Cal.4th at pp. 292-293.)

         Montrose represents that it has entered into partial consent decrees in the CERCLA action through which it has incurred damages in excess of $100 million, and that additional future damages could approach or exceed that amount.

         II.

         The Present Coverage Litigation

         Montrose purchased “layers” of CGL policies from various insurance carriers to cover its operations at the Torrance facility from 1960 to 1986. In each of the relevant years, Montrose purchased a layer of “primary” CGL insurance policies that required the insurers to defend and indemnify Montrose for covered losses up to the policy limits. (Montrose I, supra, 6 Cal.4th at pp. 292-293.) Above the “primary” insurance policies were multiple layers of “excess” CGL coverage, which provided additional coverage once underlying insurance was exhausted. In the early years, Montrose purchased just a few layers of excess coverage; in some later years, Montrose appears to have purchased more than 40 layers of excess coverage, with aggregate limits of liability in excess of $120 million. Montrose asserts that because the policies provide for different amounts of coverage in different years, the layers of excess coverage are not uniform. To provide just a single example, in some policy years the first layer excess policies provided coverage of up to $1 million; in other years, the first layer excess policies provided coverage of up to $2 million, $5 million, or $10 million.

         In August 1990, Montrose filed the present action, Montrose Chemical Corporation of California v. Canadian Universal Insurance Co., Inc., et al., case No. BC005158, to resolve various coverage disputes with its primary insurers. Subsequently, Montrose amended its complaint to name its excess insurers as additional defendants.

         In 2006, the superior court stayed this action in response to Montrose's concern that discovery in this case could prejudice its defense in the CERCLA action. The court lifted the stay in June 2014.

         In 2012, the California Supreme Court issued a decision in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186 (Continental). As discussed more fully below, Continental held that where an ongoing environmental injury triggers multiple policies across many policy years, the insured may “stack” the policies “ ‘to form one giant “uber-policy” with a coverage limit equal to the sum of all purchased insurance policies.' ” (Id. at pp. 200-201.)

         Following the Supreme Court's decision in Continental, Montrose filed a Fifth Amended Complaint (complaint) in this action in September 2015. The complaint asserted a new 32nd cause of action for declaratory relief, seeking a declaration that:

         “a. In order to seek indemnification under the Defendant Insurers' excess policies, Montrose need only establish that its liabilities are sufficient to exhaust the underlying policy(ies) in the same policy period, and is not required to establish that all policies insuring Montrose in every policy period (including policies issued to cover different time periods both before and after the policy period insured by the targeted policy) with limits of liability less than the attachment point of the targeted policy, have been exhausted; and

         “b. Montrose may select the manner in which [to] allocate its liabilities across the policy(ies) covering such losses.”

         III.

         Cross-Motions for Summary Adjudication

         A. Montrose's Motion for Summary Adjudication

         Montrose moved for summary adjudication of the 32nd cause of action. Montrose asserted that a controversy had arisen between it and its excess insurers about the manner in which it could obtain indemnification under the excess policies. According to Montrose, the excess insurers had taken the position that Montrose could not access coverage under any excess policy until its liabilities exhausted all of the lower-lying excess coverage in every policy period. Montrose depicted the insurers' approach as follows, assuming a hypothetical coverage portfolio and $100 million of liability resulting from continuous property damage over five years. In this example, Montrose must exhaust its first and second layer excess policies (each layer representing $10 million of coverage) in each policy year before accessing any of its third layer excess policies:

Year 1

Year 2

Year 3

Year 4

Year 5

$50 mil Layer 5

$40 mil Layer 4

$30 mil Layer 3

$20 mil Layer 2

$10 mil Layer 1

         Montrose rejected the insurers' horizontal exhaustion approach, asserting that it instead was entitled under the language of the excess policies and the Supreme Court's holding in Continental to “electively stack” its coverage-i.e., to “select any policy to indemnify its liabilities, provided the policies immediately underlying that policy are exhausted” in the same policy period. Montrose provided the following example of how elective stacking might work, using the same hypothetical losses and coverage portfolio depicted above. In this example, Montrose accesses coverage from the first through third excess insurance layers for policy years two and three, and the first through fourth excess insurance layers for policy year four, without accessing any excess coverage for policy years one and five:

Year 1

Year 2

Year 3

Year 4

Year 5

$50 mil Layer 5

$40 mil Layer 4

$30 mil Layer 3

$20 mil Layer 2

$10 mil Layer 1

         B. Insurers' Oppositions and Cross-Motion for Summary Adjudication

         A group of excess insurers (hereinafter, the Continental insurers)[1] filed an opposition to Montrose's motion for summary adjudication, and separately filed their own cross-motion for summary adjudication. That motion sought summary adjudication on two grounds: (1) the 32nd cause of action (by which the Continental insurers sought a determination that Montrose was not entitled as a matter of law to electively stack its excess policies), and (2) the following “issue of duty”: “All underlying policy limits across the years of continuing property damage must be exhausted by payment of covered claims before any of the Insurers' excess policies ha[s] a duty to pay covered claims.” The Continental insurers contended that well-established California law and the language of the relevant policies required Montrose to “exhaust coverage from a ...


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