Opinion
Case No. C96-434D.
January 27, 1998
ORDER GRANTING IN PART AND DENYING IN PART SUMMARY JUDGMENT
This matter comes before the Court on a motion by defendants London Market Insurers for partial summary judgment on two issues of insurance coverage. Having considered the supporting and opposing memoranda and other documents, the Court hereby grants summary judgment to the effect that defendants do not "drop down" to cover losses insured by insolvent underlying insurers and denies summary judgment to the effect that plaintiff must horizontally exhaust its underlying insurance policies before making claims for excess coverage.
The Court finds the record adequate to decide the motion without oral argument.
I. INTRODUCTION
The Port of Seattle seeks damages and a declaratory judgment that its insurance companies will cover the cleanup of toxic substances at several of its sites in the state of Washington. On this motion, the defendants known as the London Market Insurers (LMIs), the issuers of "excess" or "umbrella" insurance policies to the Port, seek summary judgment on two legal issues. First, that where the Port's underlying insurers are insolvent, the excess insurers do not "drop down" and become underlying insurers. If the Court agrees, it would mean that for some periods the Port would be its own insurer up to the limits in the policies that are now defunct. Second, that if the Court finds there is a continuous injury, lasting a long time and triggering successive underlying insurance policies, no excess policy will be triggered until the aggregate liability limit in all triggered underlying policies has been paid. The LMIs want the Court to rule that plaintiff must "horizontally exhaust" primary and secondary coverage before recovering anything from them.DISCUSSION
A. "Drop Down"
The LMIs claim they should not be obligated to assume the underlying liability for the Port (i.e., "drop down") in the cases where the Port's underlying insurer is now insolvent. The parties agree this is a question of contract interpretation. In Washington, the interpretation of insurance policies is a matter of law. Transcontinental Ins. Co. v. Washington Public Utility District, 111 Wn.2d 452, 456 (1988). If the language in the contract is unambiguous, courts enforce it as written; if it is "fairly susceptible to two different but reasonable interpretations," the court must attempt to discern the parties' intent. Id. at 456-57. The question whether the LMIs' coverage should drop down to fill the gap left by others' insolvency depends on the insurance contracts between the LMIs and the Port.
At issue are eight similar contracts between the LMIs and the Port. Those contracts provide: "Underwriters hereon shall only be liable the excess of either (a) the limits of the underlying insurances as set out in the attached schedule . . . or (b) [a specific minimum amount]." PS 007014. This provision does not explicitly answer the question presented here, but it is not ambiguous. The contract covers losses above a minimum amount, not losses beyond a particular policy. Therefore, the contracts are clear that whether or not the underlying insurer actually indemnifies the Port's loss, the LMIs will deduct the amount of that coverage from their own liability on the loss.
All Bates numbers cited refer to the exhibits attached to Declaration of Coleen A. Christensen, filed 12/16/97.
Moreover, the contracts contain provisions that appear to address the "drop down" question directly. They each contain a "Non-Concurrent Endorsement" that reads in part:
[I]n the event of reduction or exhaustion of the aggregate limit or limits contained in such primary and/or underlying policy or policies solely by payment of losses in respect to accidents or occurrences . . . such insurance as is afforded by this policy . . . shall apply as underlying insurance.
PS 007021 (emphasis added). Thus, the contracts state that the coverage drops down only where the underlying insurance has been exhausted by payment of claims. The bankruptcy of the underlying insurers is therefore not insured against by the LMIs. See Federal Ins. Co. v. Sheet Metal, Inc., 54 Wn. App. 514, 520 (1989).
The Port devotes virtually no argument to this issue, except to cite Federal Insurance Co. v. Scarsella Bros., Inc., 931 F.2d 599, 603-04 (9th Cir. 1991), which resolved the drop down question in favor of the insured. However, the contract in Scarsella Bros, stated that its coverage applied "after all underlying insurance has been exhausted" Id. at 603. This is ambiguous where the contracts here are not. Therefore, as a matter of law, the LMIs are not bound to drop down and provide underlying coverage where the Port's underlying insurers are insolvent.
There was another provision in the Scarsella Bros. contract, titled "Maintenance of Underlying Insurance," which required the insured to maintain its insurance "in full effect" except for reduction "solely by payment of claims." 931 F.2d at 603. The court refused to apply this to the drop down question because the provision addressed only the insured's duties to keep payments up, not the coverage supplied by the excess insurers. See id. at 604 n. 7.
B. Horizontal Exhaustion
The LMIs argue that the excess insurance they issued to the Port cannot be triggered to cover a continuous loss until all of the underlying insurance covering the period of loss is exhausted. They refer to this as horizontal exhaustion. The alternative, they say, would allow the Port to choose one year in which the loss triggered coverage, claim the underlying limit in that year, and then gain access to the entire coverage under the excess policies (issued by the LMIs) for that year. Since the Washington courts have not yet decided this issue, the parties argue their positions by analogy and reference to other juris dictions.
1. Defendants' Legal Theory
The LMIs argue that Washington cases recognize the "continuous trigger theory," which allows an insured who suffers a continuing or deteriorating injury from one event or source to recover from any policy in effect during any part of the injury period. See Montrose Chemical Corp. v. Admiral Ins. Co., 913 P.2d 878, 894 (Cal. 1995) (describing the theory); American Nat'l Fire Ins. Co. v. B L Trucking Construction Co., 82 Wn. App. 646, 664-666 (1996), rev. granted, 130 W.2d 1017 (1996) (alluding to and utilizing the theory); Groul Construction Co. v. Ins. Co. of N. America, 11 Wn. App. 632, 637 (1974) (same). Next, the LMIs argue that since this theory is consistent with horizontal exhaustion, the Court should apply the latter in this case.
In this case, the Port will argue that contamination has occurred each year from 1973-1986. The defendants will contest this, but on this motion the LMIs assume it to be true. Therefore, the Port complains that the LMIs should not be allowed to make this motion, since the horizontal exhaustion issue will only become dispositive if the Court or jury find a continuous injury. The LMIs say they are merely using the standard mechanics of summary judgment — assuming the non-moving party's version of facts. The Court agrees.
This argument proves too much. While horizontal exhaustion is consistent with the continuous trigger theory, so is its opposite, vertical exhaustion. The one does not really have any bearing on the other. When courts apply the continuous trigger theory and find injuries spanning many policies, some require each primary insurance policy to be exhausted before any excess policy is triggered, see Community Redevelopment Agency v. Aetna Casualty and Surety Co., 50 Cal.App.4th 329, 340 (1996), and some allow the insured to choose the most convenient primary policy and its corresponding excess policy. See Dayton Indep. Sch. Dist. v. Nat'l Gypsum Co., 682 F. Supp. 1403, 1411 n. 23 (E.D. Tex. 1988) rev'd on other grounds sub nom W.R. Grace Co. v. Continental Casualty Co., 896 F.2d 865 (5th Cir. 1990). Therefore, Washington's use of the continuous trigger theory in no way compels adoption of horizontal exhaustion. 2. Plaintiff's Legal Theory
The Port offers an argument that horizontal exhaustion is inconsistent with Washington law. It argues that in Washington, where multiple insurance policies are triggered by an insured's injury, the insurers are jointly and severally liable, unless the contract specifically says otherwise. See American Nat'l Fire Ins. Co. v. B L Trucking Construction Co., 82 Wn. App. 646, 666 (1996) rev. granted, 130 W.2d 1017 (1996). This means that in a continuing injury claim implicating several insurance contracts, the insured may sue any of the companies for all its damages, and that company must seek contribution from the others. Id. at 665 (quoting Monsanto Co. v. C.E. Health Compensation Liability Ins. Co., 652 A.2d 30, 31 n. 1 (Del. 1994). "In a dispute between an insured who has sustained damages of a continuing nature, and the insurance carriers providing coverage, the burden of apportionment is on the carriers." Groul Construction Co. v. Ins. Co. ofN. America, 11 Wn. App. 632, 637 (1974). Thus, argues the Port, it would be inconsistent to make the insured recover from each of the primary insurers before it could recover on any excess policy. In other words, the objective of imposing joint and several liability, speedy indemnity for the insured, would be defeated if the insured had to sue each of several primary insurers before it could reach its excess policies.
The Court agrees that this casts doubt on the propriety of horizontal exhaustion in Washington. It also seems that the Washington courts would refuse to apportion damages between the defendants at all until the total loss and liability are determined. At that point, the insurance companies would have the burden of apportion. 3. The Contract Language
The LMIs also argue that their contracts with the Port require horizontal adoption. They cite a 1981 contract in which the Limited Liability provision says that the LMIs will only be liable for the "ultimate net loss the excess of either (a) the limits of the underlying insurances in respect of each occurrence covered by said underlying insurance, or (b) $500,000.00. . . ." PS 007117. This provision could be read to require all underlying coverage to be paid before the LMIs become liable. However, many of the contracts contain different language, which more clearly requires exhaustion of a particular limit in a particular policy or policies only. Neither party discusses the differences between the contracts, and the LMIs do not suggest the Court might find that some require horizontal exhaustion and others do not. Therefore, from the LMIs' point of view, the contracts are ambiguous at best.
The 1978, 1979, and 1980 policies' Limited Liability provisions limit the excess coverage to "the limits of the underlying insurances as set out in the attached schedule in respect of each occurrence covered by said underlying insurance." See, e.g., PS 007072 (emphasis added). The Schedule of Underlying Insurances varies only slightly on each of these contracts. It does not name underlying policies, but instead says "Existing limits of underlying policies, but in no event will the underwriters be liable for ultimate net loss excess of less than [specific dollar amounts that vary in each contract]." See, e.g., PS 007082.
Washington law requires that courts facing ambiguous contract terms attempt to resolve the problem with extrinsic evidence and, that failing, enforce the interpretation most favorable to the insured. Queen City Farms, Inc., v. Central Nat'l Ins. Co., 126 Wn.2d 50, 68 (1994).
In order to demonstrate that the parties intended horizontal exhaustion, LMIs point to two other provisions in the contracts. First, the "Prior Insurance and Non-Cumulation of Liability" provision says that "if any loss covered hereunder is also covered in whole or in part under any other excess policy issued to the Assured prior to the inception date hereof," the coverage in those policies will reduce the LMIs' liability. See PS 007123. This does not support the LMIs' position because this only defines rights between different excess carriers, not between the primary and excess carriers. Moreover, it only applies to pre-existing or prior policies, whereas horizontal exhaustion would implicate concurrent and subsequent policies as well.
Second, the contracts' "Other Insurance" clauses say that if "other valid and collectible insurance" is available for any covered loss, "the insurance afforded by this policy shall be in excess of and shall not contribute with such other insurance." This conveys an intent to be the insurer of last resort on any loss, and therefore supports the LMIs' argument for horizontal exhaustion. However, the "other insurance" clause might best be construed when liability is settled and apportionment between the insurers ripens. See Note, Effect of Conflicting "Other Insurance" Clauses, 41 Wash. L. Rev. 564 (1966) (discussing the theories and cases on resolving conflicts between concurrent policies containing "other insurance" clauses).
Note that this clause does not suggest that the Port should have to absorb all the coverage, horizontally, that is unavailable due to insolvency, before it could access LMI coverage, because the clause refers only to "valid and collectible" insurance.
The Port presents contrary evidence showing an intent to require exhaustion of only the coverage directly underlying any given LMI contract. It points to the specific dollar figures given in the "Schedule of Underlying Insurances," to which the limit of liability directly refers in some or most of the contracts. In addition, the Port notes that another provision requires the Port to maintain the underlying policies on the schedule "in full effect during the policy period." This suggests that the schedule of underlying insurances contemplates only concurrent policies, not prior or future ones, because the latter could not be "maintained in full effect."
The Court interprets the liability limit clauses as unambiguously requiring only vertical exhaustion, except in the case of the 1981 contract cited by the LMIs. But even were the provisions ambiguous (as is the latter), the extrinsic evidence offered by the parties does not resolve the ambiguity. Therefore, the Court resolves this issue in favor of the insured and denies summary judgment on horizontal exhaustion.
CONCLUSION
In sum, the drop down issue is easily resolved in favor of defendants London Market Insurers, but the horizontal exhaustion issue is not. The Port has the better argument as to which way Washington courts would decide the issue as a legal/procedural matter, and the contract language supports the same result or, in at least one case, remains ambiguous. At the very least, the horizontal exhaustion decision would be premature at this time since the insurers should all be jointly and severally liable to the Port, and divide the losses between themselves.
THEREFORE, defendants' motion for partial summary judgment is GRANTED as to drop down coverage and DENIED as to horizontal exhaustion.
The Clerk of the Court is directed to send copies of this order to all counsel of record.