Policyholders facing serious asbestos, product defect, and environmental claims usually need coverage from their umbrella and excess insurance companies. The courts have generally accepted most arguments advanced by policyholders to maximize coverage. But there are pitfalls for the unwary. There are no standard-form umbrella or excess policies. Careful attention must therefore be paid to a bewildering variety of coverage provisions and a rapidly evolving case law in this dynamic area.

The starting point for analysis is the Supreme Court’s adoption of the continuous trigger of coverage theory in Montrose Chem. Corp. v. Admiral Ins. Co.,10 Cal. 4th 645 (1995) which held that each policy in effect during a period of alleged injury that takes place over multiple policy years must provide coverage. Successive insurers on the risk when continuous or progressive damage takes place are separately and independently obligated to indemnify the insured. Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38, 57 n. 10 (1997). Thus, a single claim of continuous injury potentially triggers many years of insurance coverage.

Which policies pay and in which order? When the issue is defense coverage, each policy in effect during the period of alleged injury has a separate, individual duty to defend in full. The policyholder can tender its defense claim to one or all of its insurers; each is obligated to provide a full defense, without pro-rating that defense amongst insurance companies or pro-rating that defense according to periods in which the policyholder was self-insured. Aerojet, supra. In practice, one "lead carrier" usually pays for the defense and then collects a share of defense costs from other insurance companies that are "on the risk".

When the issue is indemnity coverage – payment for settlements or judgments – the "continuous injury" theory has been applied in a variety of contexts, with different results, and no fixed rule. The issue is this: if a single claim, or a large number of similar claims, reach into excess layers, can the policyholder select a single year of coverage, tapping excess insurance in a single "vertical" column of coverage? Or must the claims be spread "horizontally", exhausting all primary policies first over a number of years, before any excess layer is implicated? The answer is yes to both questions, but the result reached in a given case may be driven by the facts of the underlying claims, the language of the excess policies, or both.

The first California case adopting vertical exhaustion of coverage is Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal. App. 4th 1 (1996) which held that the manufacturer of asbestos was entitled to one year of indemnity coverage for a single asbestos claim. By their nature asbestos related injuries are cumulative and progressive, taking place over many years, sometimes implicating ten, twenty or thirty years of coverage. The court reasoned that it was not reasonable for the policyholder to expect more than one year of coverage for a single claim and therefore could not "stack" multiple years of coverage horizontally for such a claim. This so-called "anti-stacking rule" (referring to the horizontal stacking of policies to pay for a single claim) was followed in FMC Corp. v. Plaisted and Cos.,61 Cal. App. 4th 1132 (1998) which involved continuous environmental damage at a single site in which coverage was triggered under seven successive insurance policies. Following Armstrong, the court held that only one year of policy limits could apply to the claim; and that " the policyholder may select the policy under which it is to be indemnified." Id. at 1183. The rationale of both cases is that if there is one injury, there should be one year of coverage; otherwise the insured will be receiving more than was bargained for. While seeming at first blush to limit coverage, this ruling actually provides a "silver lining" to policyholders that wish to stack coverage "vertically", placing a particular claim or claims in the year in which the policyholder has the most excess coverage; and avoiding years in which there is less available coverage.

The "anti-stacking rule" was critiqued in Alpha Therapeutic Corporation v. Home Ins. Co., 109 Cal. Rptr. 2d 698 (2001)( depublished following Supreme Court review ( 2002 Cal. Lexis 1687 (Mar. 13, 2002) and subsequent settlement), when the excess insurance companies tried to force multiple claims in multiple policy years into a single year of coverage. The policyholder faced thousands of AIDS-related claims from hemophiliacs infected with HIV after using a blood factor concentrate processed and distributed by the policyholder. The parties stipulated that the marketing and sale of blood factor concentrate constituted a single occurrence that took place over seven policy years. Invoking FMC, the insurers argued that the policyholder was limited to single year of coverage for all claims because there was one occurrence. The Second Appellate District rejected this argument and questioned the rationale of the “anti-stacking rule”. The court distinguished the facts of FMC as limited to situations where there is a single claim and a single injury taking place over many policy years. In the court’s view that rule should not apply where there are thousands of claims taking place in different years. The court held that "there is no specific allocation rule that must be employed in every case" Id. at 715.The court remanded the case for the trial court to determine the "best" way to allocate indemnification.

The court’s critique of the "anti-stacking rule" was adopted in Employers Ins. Co. v. Granite State Ins. Co., 2003 U.S. App. Lexis 11111 )(9th Cir. June 4, 2003), in a dispute between two insurance companies over a $7 million settlement for a single construction defect claim. The primary insurer, Wausau, issued five policies from 198-85 with a $2 million limit; the excess insurer, Granite State, issued five successive policies over each Wausau policy with a $5 million limit. The parties stipulated that there was one occurrence that took place continuously and equally over five successive policy periods. Invoking FMC, the primary insurer argued that one single year of coverage should apply, triggering one primary policy ($2 million) and one excess policy ($5 million). The Ninth Circuit rejected this argument, relying upon and instead chose to follow Stonewall Ins. Co. v. City of Palos Verdes Estates, 46 Cal. App. 4th 1810 (1996), which the Second Appellate District applied a "horizontal stacking" approach in a case involving a $1.6 million settlement of a case alleging negligence that took place continuously from 1975 to 1980. In a dispute between insurance companies, the court prorated the settlement over five years with the result that the primary policies were not exhausted. .Applying this rule, the Ninth Circuit determined that Wausau’s primary policies were sufficient to pay the entire settlement; the excess policy was not reached. The Ninth Circuit declined to follow FMC, relying in part upon Alpha Therapeutics for doing so.

The rule of "horizontal exhaustion" is premised on the concept that all primary policies must first be exhausted before any excess insurance applies. The basis for this rule is the language in excess policies that typically states that an excess policy does not apply until all underlying insurance has been exhausted. See generally Community Redevelopment Agency v. Aetna Cas. & Surety Co., 50 Cal. App. 4th 329, 339-340 (1996). There is considerable tension between the "vertical" and "horizontal" rule , since the "vertical rule" would allow the policyholder to choose a single year of coverage, rather than being forced to allocate claims to all primary policies first, before any excess coverage applies. Furthermore, the "vertical rule" has focused on the rights of a policyholder to select a year of coverage for a particular claim, while the "horizontal rule" has emerged from allocation disputes where the only parties are insurance companies. It is well recognized that there are different rules that apply in suits by a policyholder against insurance companies, as opposed to suits between insurance companies.See Armstrong, at

It is difficult to harmonize the cases, or the ways in which the courts have distinguished the cases they choose not to follow. It is difficult to say that there should be one rule that applies to all cases. It may well be that each case must be decided on its own facts, without any overarching legal theories. The guiding principle ought to be maximizing insurance coverage for the policyholder. The policyholder should have the choice to employ whatever method produces the most coverage. The fact is that the insurance policies do not explain how to apply multiple insurance policies to multiple years of loss. That being so, the policyholder would reasonably expect the result that provides the most coverage. That is why multiple policies were purchased in the first place.

At the very least, the continuous trigger of coverage should lead to more coverage for policyholders, not less. It certainly adds insult to injury when insurance companies argue that the more coverage one has bought and paid for , the less coverage one actually gets. These attempts to turn the continuous trigger of coverage into a sword against the policyholder should be rejected, as the court did in Alpha Therapeutic. Similar attempts have also been rejected in cases involving how many deductibles to apply. Insurance companies have tried to turn the continuous trigger of coverage to their advantage, by arguing that if a single claim triggers coverage in multiple years, that single claim must be subject to new deductible in each year, Courts have consistently rebuffed this misapplication of the continuous trigger rule. See, e.g., California Pacific Homes, Inc. v. Scottsdale Ins. Co., 70 Cal. App. 4th 1187 (1999); The Vons Companies, Inc.v. U.S. Fire Ins. Co., 78 Cal. App. 4th 52 (2000); Montgomery Ward & Co. v. Imperial Cas. and Indem. Co., 81 Cal. App. 4th 356 (2000). Without these rulings, policyholders facing a single continuous injury, allocated over multiple policy periods, would find coverage eaten away, if not eliminated entirely, by application of repeated deductibles in successive policy years.

In sum, the rules for tapping excess insurance for continuous injury claims remain in flux. There is no one rule that will apply in all fact situations. Close attention must therefore be paid to every detail of a case, from the underlying facts, to the language of excess policies, to the principles underlying insurance. To the extent that cases are fact specific, counsel need to present those facts in a cogent and compelling manner.

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Jordan Stanzler represents policyholders in insurance coverage disputes. He is a partner in the San Francisco office of Stanzler, Funderburk & Castellon and is co-author of Insurance Coverage Litigation (Aspen Publishing 2002).