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Washington Court of Appeals Makes It Easier for Policyholders to Tap Excess Coverage

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A recent Washington Court of Appeals decision held that “horizontal” exhaustion of primary liability policies was unnecessary to trigger coverage by excess policies. This will make it easier for policyholders to tap excess liability insurance coverage for property damage, such as environmental contamination, that spans several successive policy periods.

Most insurance claims involve property damage that occurs quickly. A car accident, for example, causes property damage at the time of the accident, not years later. When that happens, the policy in place when the accident occurs pays the claim until the payments reach – or “exhaust” – the policy’s limits.

If an excess policy lies above the exhausted primary policy, it will cover costs associated with property damage that exceed the primary policy’s limits. In insurance parlance, the excess policy is “triggered” when the primary policy’s limits are “exhausted.” In the car accident example, this is not a difficult task: You simply need to know is which primary and excess policies were in effect when the accident happened.

But now imagine that property damage took place over a longer period covered by three consecutive one-year policies, each with an excess policy overlying it. Graphically, the situation looks like this, with the excess policies A through C “stacked” over the primary policies I through III:

In this graph, Excess Policy C covers only Year 3. It lies above just one primary policy: Primary Policy III, which also covers only Year 3. But because property damage also took place during Years and 1 and 2, the other two primary policies also cover the loss.

This raises the question: When is Excess Policy C triggered? Is it triggered once the policy immediately below it – Primary Policy III – is exhausted, even if the other two primary policies aren’t? Or, alternatively, must all three primary policies be exhausted, even those that don’t underlie Excess Policy C?

If the other primary policies must be exhausted then the policies require “horizontal” exhaustion. This benefits the insurer who sold Excess Policy C, at the expense of nearly everyone else, including the policyholder and most of its primary insurers. It also pushes the policyholder into the unwelcome role of managing disputes among the insurance companies about the allocation of responsibility for the loss.

On the other hand, if the other primary policies need not be exhausted, that is called “vertical” exhaustion. This makes it easier for a policyholder to tap excess coverage and places greater responsibility on its insurers to sort out how much each of them should pay.

In August 2021, the Washington Court of Appeals answered this question in Gull Industries, Inc. v. Granite State Insurance Company, a sprawling, decade-long court battle between Gull Industries and over a dozen insurance companies. Gull sued for coverage of environmental cleanup liabilities at over 200 retail gas stations that it had owned or operated over roughly 50 years.

By the time the case reached the Court of Appeals this year, all but one insurance company had resolved its obligations to Gull. The remaining insurer –Granite State – had issued three consecutive excess liability policies to Gull, just as in the example above.

But Gull had not exhausted coverage under all of its underlying policies. Granite State argued that until Gull did so, none of its policies were triggered. It based its argument on policy provisions that required exhaustion of “other valid and collectible insurance.” This “other” insurance, Granite State insisted, included all insurance, not just policies underlying Granite State’s, which meant that Granite State’s excess policies were triggered only after horizontal exhaustion of all such policies.

The Court of Appeals disagreed. The court concluded that “other valid and collectible insurance” referred only to the policies listed in each excess policy’s “schedule of underlying insurance.” Aligning itself with recent California court decisions, the court held that each Granite State excess policy could be triggered by vertical exhaustion.

This ruling is a win for policyholders who have presented insurance claims for environmental pollution or other continuous property damage. It makes it easier to tap excess coverage, an advantage in its own right. It may also reduce the internal conflicts among insurance companies that can complicate efforts to resolve such coverage claims.

And that’s not all Gull Industries does. In a lengthy opinion worthy of the complicated case that spawned it, the opinion resolves some other important questions concerning the scope of insurance coverage for environmental cleanup liabilities. More on that in a later post.