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Table of Contents    Cover   

Los Angeles Lawyer
The Magazine of the Los Angeles County Bar Association

February 2001

Featured Article: Driven to Excess 

In judging the potential liability of excess insurers, courts must look to the language of the contract to determine whether vertical or horizontal exhaustion is required  

By Jeffrey S. Raskin  

Jeffrey S. Raskin is an associate in the San Francisco office of Zevnik Horton Guibord McGovern Palmer & Fognani, L.L.P., where he frequently represents policyholders in comprehensive insurance coverage disputes with their insurers. Zevnik Horton is representing Safety-Kleen Corporation in Safety-Kleen Corporation v. Continental Insurance Company

In California, a company encountering potentially massive environmental and toxic tort claims throughout the United States (and even in other countries) often will be able to seek assistance from both its current and previous insurers for help in resolving those claims.1 In doing so, the company will not only make claims against its "primary" insurance companies but will frequently seek declarations of rights regarding coverage from all its "excess" insurance companies as well.

In ensuing coverage litigation, the company may sue the perhaps dozens of insurance companies that sold it and its subsidiaries hundreds of millions (if not billions) of dollars' worth of insurance coverage over several decades. The company may do this even if it has not paid a single settlement or been found liable to a single plaintiff at the time it sues its insurance companies. Instead, the extent of the company's environmental and toxic tort liabilities may be pleaded only as "possibilities" and "potentialities." Nevertheless, the company will allege that these possible and potential liabilities are sufficiently large that they could consume all its historic insurance coverage.

Insurance companies, not surprisingly, do not like these lawsuits. Excess insurance companies, in particular, dislike defending against comprehensive insurance coverage actions. They argue that they received modest premiums from the policyholder filing suit based, in part, on the understanding of the policyholder that its excess insurance coverage would become applicable only after all underlying insurance is exhausted. In a comprehensive insurance coverage action, however, excess insurers may be sued even though some, most, or even all of the policyholder's underlying insurance remains available.

In response, excess insurance companies have invariably employed a two-step strategy to attack what they believe is an incongruity between the contracts they entered and the lawsuits filed by their policyholders. First, they demur based on Iolab Corporation v. Seaboard Surety Company,2 a federal summary judgment case that, according to the excess insurance companies, requires the exhaustion of all underlying insurance before an excess insurer is subject to any lawsuit by its policyholder-even one for declaratory relief. Second, if the first step fails, the excess insurance companies will seek summary judgment based in part on Community Redevelopment Agency v. Aetna Casualty and Surety Company,which, according to the excess insurers, created a rule of law that requires all underlying insurance to be exhausted, layer by layer, before a policyholder can access any of its particular excess insurance policies.

Relying, in part, on imprecise language appearing in Iolab and Community Redevelopment, trial courts in California often have accepted these arguments. In so doing, these courts have relieved excess insurance companies of their obligations at the pleading and summary judgment stages, thus depriving policyholders of hundreds of millions of dollars of insurance coverage that they purchased precisely to cover the potentially enormous environmental and toxic tort liabilities that they might face.

These trial court decisions may represent the end of an era, however. Last year, two court of appeal cases clarified the law in California on exhaustion and excess insurance in a manner that should dispose of some of the arguments that excess insurance companies typically make in demurrers and motions for summary judgment. In one of the cases, Ludgate Insurance Company v. Lockheed Martin Corporation,4 the Sixth District held that the actual exhaustion of underlying limits is not required before a policyholder can assert declaratory relief claims against its excess insurance companies. Instead, policyholders who wish to state claims for declaratory relief against their excess insurance companies need only plead that an "actual controversy" exists concerning the parties' respective rights and duties under their excess insurance contracts.5 This is all that is required under California's declaratory judgment statute.6

In the other case, Montgomery Ward and Company, Inc. v. Imperial Casualty and Indemnity Company,7 the Second District held that Community Redevelopment did not create a rigid rule that always requires the exhaustion of all underlying coverage before the policyholder may reach its excess insurance. Instead, the court reasoned, Community Redevelopment held that liability attaches under an excess insurance policy based solely on the terms of that policy.8 Therefore, if a policy states that it is in excess solely of a specifically designated policy, then the policyholder need only exhaust the described policy before obtaining coverage under the excess policy. If, however, the excess policy states that all underlying insurance must be exhausted, then the policyholder needs to exhaust all underlying coverage before reaching the excess policy.

The Death of the Iolab Demurrer

In Iolab, a manufacturer sued four primary and 11 excess insurers to satisfy a settlement entered into by the manufacturer to resolve a patent infringement action for $13.5 million.9 The manufacturer also sought coverage for an additional $1 million in costs that it had incurred in the action for patent infringement.10 The manufacturer's aggregate primary coverage for the 11 years that it sold the infringing product was $36 million.11

In affirming the trial court's grant of summary judgment in favor of 10 excess insurance companies, the Ninth Circuit began by stating that "under California law, it is clear that '[a]ll primary insurance must be exhausted before liability attaches under a secondary policy.'"12 Thus, the court reasoned, "Iolab could not have sued the excess insurers for breach of contract until the legal obligations of the primary insurers had been determined and the excess policies had been triggered."13 Still, could the manufacturer nevertheless assert claims for declaratory relief against its excess insurance companies? Could it simply seek a declaration from the court that the patent claims were covered under the excess policies? The Ninth Circuit answered both questions in the negative:

Iolab has not established that the [patent] loss will ever trigger excess coverage. Regardless of how Iolab's claim against the excess insurers is labeled, requiring the excess insurers to defend against Iolab's claim would impose on the excess insurers the unnecessary cost of litigating a claim that might never trigger excess coverage and thereby would frustrate the policy adopted by the California courts.14

Since Iolab had more than enough primary insurance coverage ($36 million) to satisfy the patent infringement claim and related costs ($14.5 million), the Ninth Circuit agreed that the 10 excess insurance companies were properly dismissed from Iolab's action on summary judgment.15

Iolab seems to have limited applicability, even to a trial court judge willing to accept the Ninth Circuit's interpretation of California law and public policy. At best, the case could absolve excess insurance companies from liability when their policyholder's fixed and determined losses are equal to or less than the total amount of responsive primary insurance at the policyholder's disposal. However, unless the policyholder unambiguously pleaded these facts in its complaint, this factually intensive analysis would seem to be particularly inappropriate at the pleading stage.

Nevertheless, excess insurance companies cite Iolab routinely in demurrers and argue that the case requires the policyholder to plead and even demonstrate the actual exhaustion of all underlying insurance before proceeding against the excess insurance companies. They assert this position even when the policyholder has only sued them for declaratory relief and has pleaded facts stating that its continuing liabilities could exhaust all its insurance coverage, not just the coverage underlying any particular excess policy. They argue this position without regard to whether the policyholder pleaded facts attesting to an actual controversy with its excess insurance companies concerning the parties' respective contractual rights and duties. Notwithstanding these and other types of pleadings, many trial courts have agreed with the excess insurance companies' expansive reading of Iolab and have dismissed them from comprehensive insurance coverage actions at the pleading stage because the policyholder did not plead that all underlying insurance coverage was exhausted at the time the policyholder's lawsuit was filed.

The lower court in Ludgate was one of those trial courts. In Ludgate, Lockheed sought insurance coverage for environmental liabilities arising from, among other places, a manufacturing site in Burbank.16 Several underwriting syndicates in the London market, with Ludgate among them, initiated the action by suing Lockheed for declaratory relief in Santa Clara County Superior Court. The syndicates sought a judgment holding that they had no duty to defend or indemnify Lockheed for its environmental claims.17

Lockheed's operative cross-complaint sought a judgment "declaring the present and future rights, duties, and liabilities of the parties under the subject insurance policies with respect to certain present and future claims by the United States, various state and local governmental entities and or private parties.…"18 Lockheed also alleged that Ludgate's policies required that Ludgate, as an excess insurance company, defend and indemnify Lockheed for claims arising from the Burbank site.19

Ludgate ultimately moved for judgment on the pleadings with respect to Lockheed's operative cross-complaint by seeking to apply the trial court's rulings on previous insurance company motions.20 The trial court granted Ludgate's motion with reference to a prior ruling that Lockheed had not "adequately pled the exhaustion of the underlying layers as to each excess insurer it seeks to reach."21 The trial court held that Lockheed "failed to allege facts to show, e.g., that all primary coverage for this site will actually be exhausted, or that the terms and conditions of each excess policy it seeks to implicate provide an exception to that requirement.…"22

But the Sixth District reversed the trial court for several reasons. First, the appellate court noted that Ludgate itself asserted that an actual controversy existed between it and Lockheed under Ludgate's excess insurance policies when it filed its own operative complaint.23 Consequently, Ludgate was "bound by these allegations" and could not subsequently deny the existence of an actual controversy between itself and Lockheed in seeking dismissal from Lockheed's operative cross-complaint.24 Ludgate's contradictory posturing thus received a stern rebuke from the court:

Ludgate's insistence on specific allegations demonstrating exhaustion of primary coverage was unnecessary and improper. It was unnecessary because by alleging in the first amended complaint and representing to the court the existence of an actual and justiciable controversy, Ludgate waived further demonstration of the existence of that controversy.25

Indeed, the court reasoned, Ludgate admitted to all the material allegations in Lockheed's cross-complaint-including the allegation that an actual controversy existed between the parties under Ludgate's excess policies-when it moved for judgment on the pleadings.26 That admission was binding on Ludgate. The court noted further that the actual controversy pleaded by Lockheed-the dispute between the parties concerning coverage for Lockheed's liabilities in Burbank-"was the very same actual controversy that Ludgate claimed in its first amended complaint."27 Again, Ludgate was in no position to deny the existence of a controversy that it sought to adjudicate.28

Second, the court discussed the markedly different standards that govern the pleading of a declaratory relief claim and a policyholder's ultimate entitlement to recovery under an excess insurance policy. The declaratory judgment statute29 did not support the trial court's requirement that Lockheed needed to show a "reasonable probability" of exhaustion of its primary coverage before it could state a declaratory relief claim against its excess insurance companies.30 Instead, the statute only required Lockheed to plead facts showing the existence of an actual controversy between the parties:

Exhaustion of underlying limits, while necessary to entitle the insured to recover under an excess policy, is not necessary to create an actual controversy. Exhaustion is merely an issue of proof and entitlement of recovery, not pleading. A cardinal rule of pleading is that only the ultimate facts need be alleged. In a declaratory relief action, the ultimate facts are those facts establishing the existence of an actual controversy.31

According to the court, a party is not even required to establish that it is entitled to a favorable judgment to obtain declaratory relief. As long as an actual controversy exists between the parties to a written instrument, a trial court is required to declare the rights of the parties "whether or not the facts alleged establish that the plaintiff is entitled to a favorable declaration."32 With Ludgate and Lockheed both alleging an actual controversy under the Ludgate policies, the trial court was compelled to issue a declaratory judgment concerning Lockheed's coverage rights.33

Third, notwithstanding this lenient standard, the court of appeal concluded that Lockheed sufficiently alleged exhaustion of the insurance underlying the Ludgate policies. For example, documents attached to Lockheed's operative pleading showed that the underlying limits of Lockheed's primary policies totaled less than $90 million.34 Lockheed, however, alleged that it 1) had already incurred at least $140.6 million in indemnity costs at the Burbank site, 2) was expecting to incur additional costs of at least $254.3 million in complying with governmental orders and directives, and 3) was also subject to other claims alleging property damage, personal injury, and bodily injury resulting from the alleged environmental contamination at the Burbank site.35 Lockheed thus was entitled to a declaration of its rights under Ludgate's excess policies because Lockheed alleged that its liabilities exceeded the available underlying limits.36

Finally, the court of appeal rejected Ludgate's reliance on Iolab and Community Redevelopment. Iolab was irrelevant to Ludgate's attack on Lockheed's cross-complaint because this federal decision "involved a summary judgment that did not address the sufficiency of the pleadings."37 Community Redevelopment was similarly immaterial because the declaratory judgment in the case was entered after a full trial and after fact-finding by the court.38 Also, the pleadings in Community Redevelopment were not deemed deficient.

Despite the rejection of Iolab by a state appellate court, excess insurance companies still cling tenaciously to the "Iolab demurrer." In a brief filed shortly after Ludgate was decided, a group of excess insurance companies in Safety-Kleen Corporation v. Continental Insurance Company, a comprehensive coverage action, argued that the companies' Iolab demurrer should be sustained because Ludgate involved unique circumstances not present in their case.39 In Ludgate, the excess insurance companies actually initiated the declaratory relief action and admitted the existence of an actual controversy between the parties.40 In the brief in Safety-Kleen, the excess insurance companies asserted that they specifically denied the existence of an actual controversy between the parties and contended that the policyholder therefore was still required to plead specific facts that showed exhaustion.41 Without the benefit of such a pleading, the excess insurance companies stated that they could not possibly know what the policyholder had spent in defense and indemnity, and therefore they denied that their policies were triggered.42

While the trial court in Safety-Kleen agreed that Ludgate arose under unique pleading circumstances, it nevertheless held that "the [Ludgate] court's comments are instructive to the lower courts and, therefore, are followed by this court."43 After disposing of the excess insurance companies' reliance on Iolab because Iolab was a summary judgment case and the excess insurance companies had filed a demurrer, the Safety-Kleen trial court noted:

Defendants cite no cases which address the sufficiency of the pleadings and require that a plaintiff must plead exhaustion in order to show an actual and justiciable controversy. In fact, it may be argued that the mere dispute over whether there is exhaustion is sufficient to show an actual and justiciable controversy between the parties.44

The trial court in Safety-Kleen therefore overruled the Iolab demurrer put forth by the excess insurance companies.45

In both theory and in practice, Ludgate confirms what policyholders have been telling trial courts for several years:

  • Iolab does not apply to demurrers, motions to dismiss, or motions for judgments on the pleadings.            
  • Declaratory relief claims against excess insurance companies do not depend on the actual exhaustion of any particular underlying insurance policy.            
  • Declaratory relief claims can be stated against excess insurance companies even if none of the underlying insurance has been exhausted.            
  • Declaratory relief claims against excess insurance companies need only contain facts alleging an actual controversy between the policyholder and the insurance companies. 

Ludgate thus should preclude excess insurance companies from filing Iolab demurrers. However, for those companies that resist this conclusion by continuing to attack their policyholders' pleadings on exhaustion grounds, the decision should nevertheless ensure that demurrers by excess insurance companies do not become contested fact hearings seeking to determine whether any underlying insurance is in fact exhausted. Instead, that determination should occur at a later time.

Horizontal Exhaustion

In Community Redevelopment, a group of developers embarked on a major redevelopment effort in the Monterey Hills area of Los Angeles.46 From the late 1970s through 1984, the developers and various subcontractors designed and constructed a number of multifamily residences in the redevelopment area.47 For various reasons, the construction proved to be defective. The trial court later found that construction activities caused continuous damage at the site.48

One of the developers and its successor had purchased several liability policies that were potentially responsive to these losses. United Pacific Insurance Company issued three successive policies providing primary coverage between May 31, 1982, and May 31, 1985.49 State Farm issued a primary policy for the period of June 15, 1985, to June 15, 1986.50 Scottsdale Insurance Company sold the developer a $5 million umbrella policy for the period of July 19, 1985, to June 14, 1986, that was "specifically (but not exclusively) excess of the State Farm policy."51

The underlying liability cases were resolved by settlement. At that time, "[a]lthough State Farm's liability limits were reached, United's clearly were not."52 The court then analyzed whether Scottsdale's coverage obligations were triggered by the exhaustion of the State Farm policy. It held that they were not.

In reaching this decision, the court cited Iolab for the proposition that "[i]t is settled under California law that an excess or secondary policy does not cover a loss, nor does any duty to defend the insured arise, until all of the primary insurance has been exhausted."53 The court noted that this "California general rule…favors and results in what is called 'horizontal exhaustion.'"54 This was contrasted with "vertical exhaustion," which the court described as providing for coverage under an excess policy "when the limits of a specifically scheduled underlying policy is exhausted and the language of the excess policy provides that it shall be excess only to that specific underlying policy."55

The court then examined the Scottsdale policy and noted that it contained very exact language regarding when the company's coverage obligations arose. In particular, the policy was not only excess over the exhausted State Farm policy, even though it was purchased to cover roughly the same time period. Indeed, the Scottsdale policy was also excess to "the applicable limits of any other insurance collectible by the [insured parties]."56 The policy stated that its coverage "'shall be excess insurance over any other valid and collectible insurance available to the [insured parties] whether or not described in the Schedule of Underlying Insurance' (which schedule listed State Farm's $1 million policy)."57

Given this language, and based on the "California general rule" of horizontal exhaustion, the court concluded that Scottsdale had no coverage obligations because its policy also was excess over United's primary policies, which had not been exhausted: "Scottsdale's responsibility to respond was not triggered by State Farm's exhaustion; not until United's [primary policies were exhausted], would Scottsdale have any duty to provide a defense to the insureds."58

Nevertheless, the court noted that its holding was not absolute and that, ultimately, policy language should determine the application of horizontal or vertical exhaustion:

If an excess policy states that it is excess over a specifically described policy and will cover a claim when that specific policy is exhausted, such language is sufficiently clear to overcome the usual presumption that all primary coverage must be exhausted. However, that is not the case here.…[The Scottsdale policy] was intended to be excess to all underlying insurance, whether such insurance was described in the schedule of underlying insurance or not.59

Despite this statement, excess insurance companies assert routinely that Community Redevelopment requires horizontal exhaustion in all cases. They do this even if their excess policies state that they are "excess over a specifically described policy and will cover a claim when the specific policy is exhausted," in the words of the Community Redevelopment court.60

Sometimes, the excess insurance companies also make this assertion even after their underwriters have testified that they priced an excess policy assuming that the policy would respond to a loss only after the immediately underlying policies are exhausted. Underwriters have testified that, when pricing their policies, they never even bothered to look at, let alone analyze, all the policyholder's past insurance policies, and they did not speculate into the policyholder's future insurance needs. In these instances, the evidence invariably shows the policyholder paid a premium to the excess insurance company consistent with the parties' mutual intentions at the time of contracting that the excess insurance policy would respond to losses after exhaustion of the immediately underlying policy.

Despite this testimony and evidence, many trial courts nevertheless have agreed with the excess insurance companies that Community Redevelopment absolutely requires horizontal exhaustion. These trial courts have therefore granted summary judgment for excess insurance companies because the policyholder could not prove the exhaustion of all underlying insurance policies. Montgomery Ward, however, should put an end to the improper rewriting of excess insurance policies by some trial courts in California.

In that case, Montgomery Ward sought insurance coverage under general liability policies issued between 1962 and 1976 for environmental contamination that allegedly occurred over a number of years at three automotive service centers.61 With possibly one exception, the coverage was in excess of a self-insured retention (SIR).62 In other words, the insurance companies agreed to indemnify Montgomery Ward for losses that exceeded certain amounts.63 Montgomery Ward was self-insured for losses below those amounts. 

The trial court ultimately granted the insurance companies' motions for summary judgment. In so doing, it applied its previous rulings that required horizontal exhaustion and held that the SIRs for all applicable policies "were the equivalent of primary insurance, and must be exhausted before the excess insurance had the obligation to indemnify Montgomery Ward."64 The trial court held that the damages at one site did not exceed the SIRs and that Montgomery Ward thus had no coverage available for those losses.65 The court allocated Montgomery Ward's settlement amounts with insurance companies that had been dismissed from the case to losses at another site, determined that Montgomery Ward had already been compensated for those damages, and thus disposed of these claims as well.66

The Second District reversed these rulings. First, the court followed a previous ruling by the First District67 and noted that SIRs are neither underlying insurance nor primary policies.68 The principle of horizontal exhaustion thus did not apply to Montgomery Ward's coverage claims.69 Second, and more important, the court also discussed its holding in Community Redevelopment. As in all insurance cases, the court explained, the salient point of Community Redevelopment is that policy language determines the rights and obligations of the parties.70

The Scottsdale policy at issue in Community Redevelopment specifically and unambiguously stated that it was excess to "the applicable limits of any other underlying insurance collectible by the [insured parties]."71 Aside from that language, the court confirmed that Community Redevelopment "does not stand for the proposition that all primary coverage must be exhausted before excess policies may be reached without regard to policy

language."72 Indeed, the policies sold by Montgomery Ward's insurance companies "state they are excess over a specifically

designated SIR and will cover a claim when the SIR is exhausted."73 Thus, even if Montgomery Ward's SIRs were primary insurance policies (which they were not), those insurance policies would be exhausted vertically, not horizontally, consistent with policy language and the intent of the parties.

The excess insurance companies respond to Montgomery Ward just as they respond to Ludgate-by attempting to limit the case to its narrow factual situation. In their estimation, Montgomery Ward simply involved a policyholder's attempt to secure coverage after satisfying its SIR. Since the Montgomery Ward court held that SIRs are not underlying insurance and are not primary policies, its subsequent discussion of exhaustion, policy language, and Community Redevelopment was superfluous. Consequently, the excess insurance companies argue, the rule of horizontal exhaustion remains completely unaffected by Montgomery Ward's dicta.

This argument is problematic for several reasons:

  • Montgomery Ward was decided by the same district court of appeal that decided Community Redevelopment.            
  • The Montgomery Ward court stated that Community Redevelopment based its actual holding on the language contained in the particular excess policy, not the rule of horizontal exhaustion.            
  • Using the language of Montgomery Ward's excess insurance policies at least for illustrative purposes, the court noted that the policies stated that they were excess of specifically designated SIRs and would therefore provide coverage once the listed SIR was exhausted. Thus Montgomery Ward confirms that the Community Redevelopment court really meant what it said when it concluded that policy language must ultimately determine the exhaustion analysis. 

Like Ludgate, Montgomery Ward gives policyholders a powerful tool to keep excess insurance companies from being excused from comprehensive insurance coverage actions until the extent of the policyholder's liability for any particular loss is determined. Montgomery Ward gives primacy to policy language, not judicially created presumptions, and precludes trial courts from rewriting insurance contracts to protect excess insurance companies.

In fact, the typical excess insurance policy actually requires vertical, not horizontal, exhaustion because it usually states that it is excess only over a specifically described policy. In cases involving this type of policy, Montgomery Ward should preclude a trial court from requiring a policyholder to exhaust all underlying insurance before reaching its excess policies.

Ludgate and Montgomery Ward thus significantly fortify policyholders in doing battle with their excess insurance companies. By doing so, the cases considerably strengthen the ability of policyholders to achieve favorable settlements from their insurers to pay for potentially massive environmental and toxic tort liabilities. 

1 California applies the "continuous trigger" of coverage to "continuous or progressively deteriorating" property damage and bodily injury claims:

The [California Supreme Court] held that when the bodily injury or property damage continues throughout successive policy periods, all of the insured's policies in effect during those periods are triggered. Coverage is not limited to the policy in effect at the time of the precipitating event or conditions. Nor is coverage cut off once the injury or damage begins or becomes manifest.

Armstrong World Indus. Inc. v. Aetna Cas. & Sur. Ins. Co., 45 Cal. App. 4th 1, 40 (1996) (citations omitted).

2 Iolab Corp. v. Seaboard Sur. Co., 15 F. 3d 1500 (9th Cir. 1993).

3 Community Redevelopment Agency v. Aetna Cas. & Sur. Co., 50 Cal. App. 4th 329 (1996).

4 Ludgate Ins. Co. v. Lockheed Martin Corp., 82 Cal. App. 4th 592 (2000).

5 Id. at 606.

6 Id.

7 Montgomery Ward & Co., Inc. v. Imperial Cas. & Indem. Co., 81 Cal. App. 4th 356 (2000).

8 Id. at 369.

9 Iolab Corp. v. Seaboard Sur. Co., 15 F. 3d 1500, 1503 (9th Cir. 1993).

10 Id.

11 Id.

12 Id. at 1504 (quoting Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., 126 Cal. App. 3d 593, 599 (1981)). However, this statement is incorrect to the extent that it ignores the actual language of the insurance contract entered into by the parties. See text, infra.

13 Id.

14 Id. at 1505. The court believed that another federal case-Hartford Accident & Indemn. v. Continental Nat'l Am. Ins. Co., 861 F. 2d 1184 (9th Cir. 1988)-reflected a California public policy to protect excess insurance companies from "unnecessary litigation costs" without regard to whether the policyholder sued the insurance companies for breach of contract or declaratory relief. Id. The California Supreme Court, however, has held that contract language, not public policy, determines the rights and obligations under insurance policies:

[T]he pertinent policies provide what they provide. [The policyholder] and the insurers were generally free to contract as they pleased. They evidently did so. They thereby established what was "fair" and "just" inter se. We may not rewrite what they themselves wrote.…As a general matter at least, we do not add to, or take from, or otherwise modify a contract for "public policy considerations."

Aerojet Gen. Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 75 (1997) (internal citations omitted).

15 Iolab's primary insurance companies also escaped liability because the patent infringement claim that the company settled did not constitute "advertising injury" under its primary policies. Iolab, 15 F. 3d at 1505-07.

16 Ludgate Ins. Co. v. Lockheed Martin Corp., 82 Cal. App. 4th 592, 598 (2000).

17 Id. at 597-98.

18 Id. at 598-99.

19 Id.

20 Id. at 601.

21 Id. at 601-02.

22 Id. (emphasis added).

23 Id. at 603-04.

24 Id. at 604.

25 Id. at 605.

26 Id.

27 Id. at 605-06.

28 Id. at 606.

29 Code Civ. Proc. §1060.

30 Ludgate, 82 Cal. App. 4th at 606.

31 Id.

32 Id.

33 Id.

34 Id. at 607.

35 Id.

36 Moreover, the court noted that Ludgate's own operative complaint "admitted knowledge that Lockheed's claims totaled $340 million in indemnity costs and were likely to reach the Ludgate policies." Id. at 607-08. Since Ludgate's own assessment of Lockheed's claims also greatly exceeded the amount of Lockheed's available underlying coverage, the trial court's requirement that "Lockheed…allege additional facts to establish reasonable probability of exhaustion and actual controversy was superfluous.…" Id. at 608.

37 Id. at 609-10.

38 Id.

39 Safety-Kleen Corp. v. Continental Ins. Co., Los Angeles Superior Court Case No. BC 216723 (brief filed Aug. 31, 2000), Ruling on Demurrer (Sept. 12, 2000).

40 Id.

41 Id.

42 Id.

43 Id., Ruling on Demurrer at 3.

44 Id. at 4.

45 On Apr. 27, 2000, before Ludgate was issued, the same trial court that heard Safety-Kleen held in another case that Iolab was "instructive and persuasive" and thus sustained an excess insurance company's Iolab demurrer. In doing so, the court concluded that the policyholder's declaratory relief claim against its excess insurance company was "not yet 'ripe' because there are not facts plead[ed] showing an actual controversy between the parties, i.e., there is no allegation that primary coverage has been exhausted, thereby triggering the rights and obligations of the parties pursuant to the terms of the [excess] policy." Agricultural Ins. Co. v. The Newhall Land and Farming Co., Los Angeles Superior Court Case No. BC 199237, Ruling on Demurrer (Apr. 27, 2000) at 3-5.

46 Community Redevelopment Agency v. Aetna Cas. & Sur. Co., 50 Cal. App. 4th 329, 333 (1996).

47 Id.

48 Id. at 334.

49 Id.

50 Id.

51 Id.

52 Id. at 340.

53 Id. at 339.

54 Id.

55 Id. at 339-40.

56 Id. at 338 (emphasis in original).

57 Id.

58 Id. at 340.

59 Id. at n.6. The Community Redevelopment court based its presumption of horizontal exhaustion, in part, on Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., 126 Cal. App. 3d 593 (1981), which it described as "the leading California case" requiring horizontal exhaustion. One court, however, seriously doubted whether Olympic, in fact, "announced a policy that all available primary policies covering a loss must be exhausted as a prerequisite to the triggering of excess coverage, even if one of the primary policies was not listed as underlying insurance by the excess carrier." 20th Century Ins. Co. v. Liberty Mut. Ins. Co., 965 F. 2d 747, 756 (9th Cir. 1992). Indeed, the 20th Century court noted that Olympic defined a primary policy "as one wherein, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability." Id. (emphasis in original). The 20th Century court concluded that "[t]he approach of Olympic thus suggests that we look to the language of each policy to determine when it purports to attach, focusing on the intended application of each policy to the particular [occurrence], and applying judicially created presumptions of priority only when terms of applicable policies are in conflict." Id. The 20th Century court therefore rejected an excess insurance company's "contention that its insurance contract contemplated its liability to be excess to all primary policies" when its contract specifically stated that it was only excess to the "primary insurer," Liberty Mutual. Id. at 757 (emphasis in original).

60 To this end, excess insurance companies often point to the "other insurance" clauses in their policies that purport to make their policies excess over all other insurance. However, a literal reading of these provisions would make every insurance policy excess over every other insurance policy, thereby eviscerating a policyholder's entire coverage. California courts have held that the other-insurance clause simply gives insurance companies the right to equitable contribution from the other targeted insurance companies after the policyholder has been indemnified in full:

The other-insurance clause…does not excuse the insurer from discharging its independent obligation to indemnify the insured up to policy limits, though it gives the insurer a right to an adjudication allocating the indemnity obligation between it and the other insurer.

Shade Foods, Inc. v. Innovative Prod. Sales & Mktg., Inc., 78 Cal. App. 4th 847, 909 (2000).

California law actually is so clear on this point that even an insurance company's "mistaken reliance on the other-insurance clause as limiting its obligation to indemnify" its policyholder can support a bad faith cause of action. Id. at 908-09.

61 Montgomery Ward & Co., Inc. v. Imperial Cas. & Indem. Co., 81 Cal. App. 4th 356, 360 (2000).

62 Id. at 360-61.

63 Id.

64 Id. at 363.

65 Id.

66 Id.

67 California Pacific Homes, Inc. v. Scottsdale Ins. Co., 70 Cal. App. 4th 1187 (1999).

68 Id.

69 Montgomery Ward, 81 Cal. App. 4th at 364.

70 Id. at 366.

71 Id. at 369.

72 Id. (emphasis added).

73 Id.

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