Kaiser Cement v. ICSOP: Court Of Appeal Grapples With Horizontal Exhaustion And Stacking

A recent decision by the California Court of Appeal for the Second District grappled with the concepts of "horizontal exhaustion" and "stacking" of policy limits in the context of an insured attempting to tap excess policies in a case involving continuous losses spanning multiple policy periods. Kaiser Cement and Gypsum Corp. v. Insurance Co. of the State of Pennsylvania, 2011 Cal.App.LEXIS 686 (filed June 3, 2011), involved an increasingly familiar factual scenario in which thousands of bodily injury claims were brought against Kaiser arising out of asbestos products manufacturing activities in ten different Kaiser facilities operated from 1944 until the 1980s.

The court initially addressed coverage for these claims in its earlier opinion in London Market Insurers v. Superior Court, 146 Cal.App.4th 648 (2007) ("LMI"), where it held that the claims against Kaiser did not constitute a single annual "occurrence" within the meaning of policies issued by Truck Insurance Exchange, but were separate occurrences.

In this new case, the court has taken on the formidable task of apportioning liability for continuing injuries among the insurers on the risk over time. This decision specifically addressed a primary layer policy issued by Truck to Kaiser covering the period from 1974 to 1981, which contained a $500,000 "per occurrence" liability limit, with no annual limit and no limit to the number of occurrences, and, in policy years 1974 and 1975, a $5,000 deductible for "each occurrence." Kaiser had certain other Truck primary policies applicable to this time period, and also was insured by three additional primary carriers during the relevant period. It entered into cost sharing agreements with all the primary carriers. Eventually, all the carriers except Truck gave notice of exhaustion of their policies, leaving Truck as the only primary carrier continuing to pay defense and indemnity costs for the asbestos bodily injury claims.

Truck filed for declaratory relief that its primary policies had been exhausted and that it had no further obligations to Kaiser. Kaiser responded by cross-claiming against its excess insurers, including Insurance Co. of the State of Pennsylvania (ICSOP), seeking a declaration that the excess insurers were obligated to defend and indemnify Kaiser with respect to the claims once the primary coverage was exhausted.

After the LMI decision was rendered, Kaiser selected the 1974 Truck primary policy to respond to all claims...