Coverage Quiz (Q2 2024)


By Al Haverkamp of Lucas & Haverkamp

1Question: Santa Fe Braun (“SFB”) faced liability for a continuous loss which extended over 8 years, potentially triggering coverage for 8 policy years. For each of these years SFB had a $1M primary policy below an excess layer. For various reasons, SFB sought to have its excess carrier in year 1 (Lloyd’s) provide coverage once the $1M primary policy below the Lloyd’s policy exhausted, even though the other 7 primary limits were not exhausted. In other words, SFB sought vertical exhaustion. Lloyd’s denied coverage, asserting SFB had to first exhaust limits of the other 7 primary policies before the Lloyd’s policy was implicated, so called horizontal exhaustion. Lloyd’s argued the “other insurance” provision in its policy mandated horizontal exhaustion and that prior California case law had endorsed the principle of horizontal exhaustion of all primary policies before excess coverage attached. Is there coverage?
Answer: Yes. The “other insurance" provision stated that if the insured had other insurance covering the loss, then the Lloyd’s policy would be excess over such insurance. The Court held this provision did not unambiguously call for horizontal exhaustion. This was in contrast to other provisions in the policy which only identified the single policy below it and stated the Lloyd’s policy would be triggered when the $1M limit of that policy was exhausted. The Court found that these provisions specifying when coverage attaches and defining underlying insurance as the policy directly below, suggested only vertical exhaustion was required. This is a significant change in California law. See Santa Fe Braun v INA (2020) 52 Cal. App. 5th 19.