How “Exhausted” Must Underlying Policies Be Before an Umbrella Policy Must Respond to a Loss?

Triggering umbrella coverage is often a confusing and grueling process for insureds, specifically when trying to answer the question of when exactly that “trigger” may occur.  In August 2021, the Washington State Court of Appeals in Gull Industries, Inc. v. Granite State Insurance Company, 493 P.3d 1183 (Wash. Ct. App. Div. I, Aug. 23, 2021) tackled this very question.  Specifically, the Court analyzed whether umbrella coverage is triggered when the underlying policy for that same policy year exhausts (known as “vertical exhaustion”), or if the insured must wait to exhaust all underlying policies, regardless of their policy year, before they may trigger any of their umbrella coverage (known as “horizontal exhaustion”).  What the Gull Industries court ultimately found is that absent express language mandating otherwise, “vertical exhaustion” should apply.

Gull Industries (“Gull”) historically owned or operated a number of retail gas stations throughout the Pacific Northwest.  Granite State Insurance Company (“Granite State”) “provided Gull excess umbrella liability insurance from 1980 to 1983 under three consecutive policies.”[1] The Granite policies “each…provided $15,000,000 in coverage per occurrence and in the aggregate.”[2]

Granite had issued a policy “excess to insurance issued by the Home Insurance Company (Home)…[which] provided Gull comprehensive general liability (CGL) coverage for property damage with a per occurrence limit of $100,000 and [Auto Liability] coverage for property damage with a per occurrence limit of $100,000.”[3]

Gull tendered its defense to its primary insurer (TIG) who agreed to defend Gull under a reservation of rights (“ROR”).  Gull later filed a lawsuit against Granite State[4] seeking declaratory judgment, damages, and attorneys’ fees and costs associated with the response costs incurred for environmental cleanups.

Gull then “moved for partial summary judgment seeking a ruling that Granite State’s duty to indemnify is triggered upon the exhaustion of Gull’s primary insurance immediately beneath the Granite State policy in the same policy period (vertical exhaustion).”[5]  Granite State argued that this was incorrect, and that “horizontal exhaustion” should apply, meaning “that its excess policy coverage is not triggered until all of Gull’s ‘valid and collectible’ underlying insurance is exhausted, regardless of the years in which those primary policies were issued.”[6]  The trial court agreed with Granite State.[7]

Both the trial court and the Washington state court of appeals noted that there was no binding Washington authority on this issue.  However, the California Supreme Court had recently resolved an identical issue in Montrose Chem. Corp. v. Superior Court of Los Angeles County, 9 Cal. 5^th 215, 460 P.3d 1201, 1210, 260 Cal. Rptr. 3d 822 (2020).[8]  The Washington court further explained that Montrose is directly applicable because “California and Washington courts similarly interpret and construe insurance policies.”[9]

Applying the California Court’s reasoning in Montrose, the appellate court in Gull Industries first looked to the language of the Granite State policies and found “no explicit terms that require Gull to horizontally exhaust all of its underlying primary insurance as a condition of triggering excess coverage obligations.”[10]  Specifically, the Gull Industries court looked to the “Other Insurance” portion of Gull’s policies which stated in pertinent part:

If other valid and collectible insurance with any other insurer is available to the Assured covering a loss also covered by this policy, other than insurance that is in excess of the insurance afforded by this policy, the Insurance afforded by this policy shall be excess of and shall not contribute with such other insurance. Nothing herein shall be construed to make this policy subject to the terms, conditions and limitations of other insurance.[11]

The Court found that this provision did “not expressly identify any other specific primary insurance that Gull must exhaust in order to trigger Granite State’s excess coverage.”[12]  Thus, “vertical exhaustion” should apply.

As a result of the Gull Industries decision, absent express language within the underlying policies mandating that horizontal exhaustion apply, insureds in Washington State may now seek indemnification under their umbrella policies as soon as the policy directly under it for that same coverage year has exhausted.

Please contact Holly Stafford at HStafford@Chmelik.com or Sara Frase at SFrase@Chmelik.com in our Insurance Practice Group if you have questions regarding your umbrella coverage.

[1] 493 P.3d, at 1187.

[2] Id.

[3] Id.

[4] Gull also sued twelve other insurance companies in this same lawsuit.

[5] Id. at 1189.

[6] Id. 

[7] Between 2015 and 2018, Gull and Granite State (along with the other insurers involved) continued litigating on other matters that do not relate to the issue of “vertical” v. “horizontal” exhaustion.

[8] See Montrose Chem. Corp. v. Superior Court of Los Angeles County, 9 Cal. 5^th 215, 460 P.3d 1201, 1210, 260 Cal. Rptr. 3d 822 (2020).

[9] Gull Industries, at 1192.

[10] Id. at 1195.

[11] Id. at 1196.

[12] Id. (emphasis in original).  The Court also looked to the “Limit of Liability” and “Ultimate Net Loss” provisions in the Gull policies and found no language requiring horizontal exhaustion.