Padilla Construction Co. v. Transportation Insurance

I. BACKGROUND

California’s rule of “horizontal exhaustion” in liability insurance law requires all primary insurance to be exhausted before an excess insurer must “drop down” to defend an insured, including in cases of continuing loss. (Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, 339 [ 57 Cal.Rptr.2d 755 ].) Unless there is excess insurance that describes underlying insurance and promises to cover a claim when that specific underlying insurance is exhausted (“vertical exhaustion”* ), the rule of horizontal exhaustion applies to cases of alleged continuing property damage—as often happens when the insured is sued for construction defects. (Id. at p. 340.)

Also, in Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal.4th 645 , our Supreme Court adopted a “continuous injury trigger” as the test for the defense obligation of traditional, occurrence-based primary, commercial liability insurance when the underlying claims involve continuous or deteriorating damage. The continuous injury trigger generally means (absent consideration of some defense other than trigger itself that would render no claim in the underlying suit…