Appellate Law Update

June – July 2024

The following published decisions may be of interest to attorneys practicing insurance law:

UNITED STATES SUPREME COURT

An insurer with financial responsibility for claims has standing to assert objections to an insured’s bankruptcy plan. Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al. (2024) 602 U.S. __; 144 S.Ct. 1414.

Kaiser Gypsum filed for Chapter 11 bankruptcy and sought to establish an asbestos bankruptcy trust to respond to its ongoing liability for asbestos claims.  Its primary insurer, Truck, which potentially owed $500,000 per asbestos personal injury claim, sought to object to Kaiser’s reorganization plan on the ground that it lacked sufficient protections against the assertion of fraudulent claims.  The district court and federal appellate court declined to consider Truck’s challenges to the plan on the ground that Truck was not a “party in interest” because the plan was “insurance neutral” insofar as it did not increase or decrease Truck’s contractual obligations from what they would have been without the bankruptcy petition.

The United States Supreme Court reversed.  A reorganization plan can impact an insurer’s rights to defend and settle claims, seek contribution, and defend against fraudulent claims.  Thus, “[a]n insurer with financial responsibility for a bankruptcy claim is sufficiently concerned with, or affected by, the proceedings to be a ‘party in interest’ that can raise objections to a reorganization plan.”  The “insurance neutrality” doctrine relied upon by the lower courts “is conceptionally wrong and makes little practical sense” because it “conflates the merits of an objection with the threshold party interest inquiry.” 

CALIFORNIA SUPREME COURT

Under standard policy language, horizontal exhaustion of all primary policies covering a continuing environmental loss is not required before an insured can seek coverage under excess policies sitting above an exhausted primary policy. Truck Insurance Exchange v. Kaiser Cement and Gypsum Corp, et. al. (2024) __ Cal.5th __.

After making $50 million in indemnity payments to resolve its insured Kaiser Cement’s asbestos liabilities, Truck Insurance Exchange commenced this action in 2001 seeking declaratory relief that its primary coverage had been exhausted and that it had no further duty to defend or indemnify Kaiser.  Truck also sought equitable contribution from Kaiser’s excess insurers.  Kaiser cross-claimed against Truck and the excess insurers, seeking declarations concerning coverage.  After a multiphase trial, the trial court found, among other things, that not all of Truck’s primary policies had exhausted and no excess insurers had a duty to “drop down” and equitably contribute to Truck before all primary policies exhausted (“horizontal exhaustion”).  The trial court rejected Truck’s argument that as long as one primary policy had exhausted, the excess policies above that exhausted primary policy were triggered (“vertical exhaustion”) and the excess carriers were therefore obligated to contribute.  Truck appealed, and the Court of Appeal (Second Dist., Div. Four), affirmed, following Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, and disagreeing with SantaFe Braun, Inc. v. Insurance Co. of North 65 America (2020) 52 Cal.App.5th 19, which held that primary insurance need not be horizontally exhausted across all policy years before excess coverage in a particular policy year is triggered. The Supreme Court reversed.  The rule announced in Montrose Chemical Corp. v. Superior Court of Los Angeles County (2020) 9 Cal.5th 21—that the vertical exhaustion rule applies to excess policies–also applies to primary policies.  Once a primary policy for a given policy year is exhausted, the insured may access excess policies in the tower for that year before calling on another policy year’s primary policy.  However, the Supreme Court remanded to the Court of Appeal for further consideration of whether Truck, as a primary carrier, could be entitled to contribution from the excess carriers above exhausted primary policies, since equitable contribution principles are not derived from the contract and equitable considerations may counsel against allowing a primary carrier to obtain contribution from an excess carrier.

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.