Santafe Braun v. Insurance Company of North America

In this action, SantaFe Braun, Inc. (Braun), formerly known as C.F. Braun & Co.,

seeks coverage for numerous asbestos-related claims under various excess insurance

policies. In phased proceedings lasting over 10 years, the trial court entered judgment in

favor of the excess insurers based on Braun’s failure to establish that the primary and, in

some cases, underlying layers of excess insurance had been exhausted.1

On appeal, Braun challenges the trial court’s interpretation of the policies as

requiring exhaustion of all underlying layers of insurance (horizontal exhaustion) rather

than exhaustion of only those policies specified in each policy (vertical exhaustion).

Braun also contends the trial court abused its discretion in refusing to consider additional

evidence of exhaustion presented almost four years after the evidentiary phase of the trial

was completed.



1 The excess insurers remaining in the litigation on appeal are, TIG Insurance Company,

United States Fire Insurance Company, Associated International Insurance Company,

Everest reinsurance Company, Allianz Underwriters Insurance Company, First State

Insurance Company, New England Reinsurance Company Corporation, Insurance

Corporation of New York, Pennsylvania Lumbermans Mutual Insurance Company,

Progressive Casualty Insurance Company, Ranger Insurance Company, Republic

Insurance Company and Houston General Insurance Company.

2

After briefing was complete, the Supreme Court decided Montrose Chemical

Corp. of California v. Superior Court (2020) 9 Cal.5th 215 (Montrose III),

2

in which the

court addressed the sequence in which the insured could access its excess insurance

policies for coverage of claims for continuous environmental damage caused between

1947 and 1982. Interpreting the language of the excess policies before it, the court in

Montrose III held the insured “is entitled to access otherwise available coverage under

any excess policy once it has exhausted directly underlying excess policies for the same

policy period.” (Id. at p. 222.) We requested and have received supplemental briefing

addressing the effect of the Supreme Court’s decision on the present appeal.

We now conclude, based on the reasoning in Montrose III, that the trial court erred

in interpreting the policies at issue in this case to require horizontal exhaustion of all

primary and underlying excess insurance coverage before accessing coverage under the

excess policies at issue. We also conclude that the trial court abused its discretion in

refusing to consider Braun’s new evidence of exhaustion. Accordingly, we shall reverse

the judgment and remand for further proceedings.

Background

For the relevant time period, Braun had primary general liability insurance

coverage from three companies and multiple layers of excess insurance above the

primary insurance. In 1992, when asbestos-related claims were first filed against Braun,

Braun tendered its defense to its primary insurers. In August 1998, the primary insurers

entered into a written agreement with Braun under which the underlying claims would

continue to be defended and settled while the primary insurers resolved allocation

arrangements among themselves.

In February 2004, Braun filed the present declaratory relief action. Among other

things, Braun sought a declaration that its excess insurers “are obligated to pay the costs



2 The Supreme Court’s decision is the third in the Montrose action. We refer to the

most recent decision as Montrose III to be consistent with the short forms used frequently

to describe the Montrose decisions.

3

and expenses—including without limitation the costs of investigation, defense,

settlement, and judgment—arising from or in connection with the present and future”

“bodily injury lawsuits” alleging “injurious exposure to certain materials at oil refineries

constructed, serviced and/or maintained by Santa Fe Braun.”

In 2006 and 2007, the primary insurers entered into an agreement pursuant to

which they each paid the limits of their polices into a trust, which would continue to pay

defense costs and claims on behalf of Braun. Subsequently, certain excess insurers settled

the present action and made contributions to the trust.

The court conducted the trial in phases. Phase I involved an excess insurer no

longer at issue in this case. Phase II concerned eight first-level excess policies issued

between 1961 and 1973 and from 1979 to 1981 by the London Market Insurers (London),

Stonewall Insurance Company, and INSCO, Ltd. (the designated policies).3 Part A of

Phase II answered, among other questions, what “facts must Braun show to demonstrate a

prima facie case under the designated umbrella/excess insurance policies’ terms and

conditions that the limits of the liability of the applicable primary policy/policies have

been paid/satisfied/exhausted?” As relevant here, the court ruled that in order to trigger

coverage under the designated policies, Braun must establish horizontal exhaustion if the

policy either “expressly so provides or . . . contains an ‘other insurance clause’ and does

not provide for vertical exhaustion of specific policies.”

Part B of the Phase II trial was to be conducted in two parts. First, the court would

determine, based on the language of the designated policies, whether horizontal or

vertical exhaustion was required and then whether Braun’s evidence established

exhaustion. Following trial on these issues, the court determined that “each of the eight

first level policies requires horizontal exhaustion of all primary insurance applicable to a



3 London, Stonewall Insurance Company, and INSCO, Ltd. settled with Braun and

were dismissed from the appellate proceedings in February 2019. We consider the

arguments regarding their policies, however, as those rulings formed the basis of the

judgment in favor of many of the remaining insurers.

4

loss before being triggered for that loss.” At the second part of the Phase IIB trial, held on

October 25, 2012, Braun attempted to prove exhaustion with documents purportedly

obtained from its three primary insurers, along with three declarations stating that the

documents reflected the amounts paid in settlement of asbestos claims. The trial court

excluded that evidence as hearsay, leaving Braun with no evidence of exhaustion.4

Accordingly, the court granted the insurers’ motion for nonsuit under Code of Civil

Procedure section 631.8.

The purpose of the Phase IIC trial was to determine the impact of the various

Phase IIB decisions on the 137 remaining excess policies. The court indicated that it

would interpret each of the remaining excess policies but that Braun was bound by the

finding in the Phase IIB trial that “[n]one of the first level excess policies were triggered”

so that “[n]one of the remaining excess policies that require ‘exhaustion’ of any or all of

the first level excess policies can attach because of the failure of those first level excess

policies to have attached.”

In its Phase IIC decision, the trial court concluded that each of the remaining

policies require horizontal exhaustion. The court found that Braun was bound by its

failure to prove horizontal exhaustion in the Phase IIB trial and refused to consider new

evidence proffered in support of exhaustion.

Thereafter, judgment was entered in favor of the excess insurers and Braun timely

filed a notice of appeal. The excess insurers timely filed a protective cross-appeal

challenging an element of the trial court’s Phase IIA decision.

Discussion

I. The Direct Appeal

Braun contends the court erred in interpreting the excess insurers’ policies to

require horizontal rather than vertical exhaustion and alternatively, if the policies require

horizontal exhaustion, that the court erred in excluding its new evidence of exhaustion

proffered during Phase IIC of the trial.



4 On appeal, Braun does not challenge the court’s evidentiary ruling.

5

A. Policy Interpretation

Whether an excess insurer’s policy is subject to horizontal or vertical exhaustion is

a matter of contract interpretation subject to our de novo review. (Powerine Oil Co., Inc.

v. Superior Court (2005) 37 Cal.4th 377, 389-390.) The rules governing the interpretation

of insurance contracts are well settled. “ ‘ “While insurance contracts have special

features, they are still contracts to which the ordinary rules of contractual interpretation

apply.” [Citations.] “The fundamental goal of contractual interpretation is to give effect

to the mutual intention of the parties.” [Citation.] “Such intent is to be inferred, if

possible, solely from the written provisions of the contract.” [Citation.] “If contractual

language is clear and explicit, it governs.” [Citation.]’ [Citation.] [¶] ‘ “A policy

provision will be considered ambiguous when it is capable of two or more constructions,

both of which are reasonable.” [Citations.] The fact that a term is not defined in the

policies does not make it ambiguous. [Citations.] Nor does “[d]isagreement concerning

the meaning of a phrase,” or “ ‘the fact that a word or phrase isolated from its context is

susceptible of more than one meaning.’ ” [Citation.] “ ‘[L]anguage in a contract must be

construed in the context of that instrument as a whole, and in the circumstances of that

case, and cannot be found to be ambiguous in the abstract.’ ” [Citation.] “If an asserted

ambiguity is not eliminated by the language and context of the policy, courts then invoke

the principle that ambiguities are generally construed against the party who caused the

uncertainty to exist (i.e., the insurer) in order to protect the insured’s reasonable

expectation of coverage.” ’ ” (Id. at pp. 390-391.) In addition, “We must give

significance to every word of a contract, when possible, and avoid an interpretation that

renders a word surplusage.” (In re Tobacco Cases I (2010) 186 Cal.App.4th 42, 49.)

a. Montrose III

In Montrose III, supra, 9 Cal.5th at page 237, the court held, under the language of

the excess insurance policies before it, that “in a case involving continuous injury, where

all primary insurance has been exhausted, . . . the insured [may] access any excess policy

for indemnification during a triggered policy period once the directly underlying excess

insurance has been exhausted.” Although the decision related only to whether vertical or

6

horizontal exhaustion is required to trigger coverage under higher level excess policies

once all primary coverage has been exhausted, the Supreme Court’s reasoning is

instructive in determining whether horizontal exhaustion is required before all

outstanding primary coverage has been exhausted. The court rejected the insurers’

argument that horizontal exhaustion is required by the “other insurance” clauses included

in those policies. (Id. at pp. 224-225) The court explained that the language of “other

insurance” clauses does not unambiguously call for horizontal exhaustion.5 The court

pointed out that policy language disclaiming coverage for amounts covered by “other

underlying insurance,” or requiring exhaustion of “all underlying insurance,” can “fairly

be read to refer only to other directly underlying insurance in the same policy period that

was not specifically identified in the schedule of underlying insurance, anticipating that



5 The excess policies in Montrose III described “other insurance” coverage in a

variety of ways. The court provided the following examples: “Some policies provide that

they will ‘indemnify the insured for the amount of loss which is in excess of the

applicable limits of liability of the [scheduled] underlying insurance,’ and then define

‘loss’ as ‘the sums paid as damages in settlement of a claim or in satisfaction of a

judgment for which the insured is legally liable, after making deductions for all

recoveries, salvages and other insurances (whether recoverable or not) other than the

underlying insurance and excess insurance purchased specifically to be in excess of this

policy.’ Some policies state that the insurer is liable for ‘the ultimate net loss in excess of

the retained limit’ and define ‘retained limit’ to mean, among other things, the ‘total of

the applicable limits of the underlying policies listed in [a schedule] [and] the applicable

limits of any other underlying insurance collectible by the insured.’ Under a ‘Loss

Payable’ provision, one policy provides it will pay ‘any ultimate net loss,’ which is

separately defined as ‘the sums paid in settlement of losses for which the Insured is liable

after making deductions for all recoveries, salvages and other insurance (other than

recoveries under the underlying insurance, policies of co-insurance, or policies

specifically in excess hereof).’ Under a ‘Limits’ provision, some policies provide that

‘the insurance afforded under this policy shall apply only after all underlying insurance

has been exhausted.’ One policy states that ‘[i]f other valid and collectible insurance with

any other insurer is available to the Insured 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 in excess of and shall not contribute with such

other insurance.’ ” (Montrose III, supra, 9 Cal.5th at pp. 224-225.)

7

the scheduled underlying insurance may later be replaced or supplemented with different

policies.” (Id. at pp. 230-231.)

While the “other insurance” provisions did not unambiguously require horizontal

exhaustion, the court found that the policy provisions specifying when coverage attaches

and defining “underlying insurance” strongly suggest that only vertical exhaustion was

required. The court noted that most excess policies explicitly reference an attachment

point, typically by reference to a specific dollar amount of underlying insurance in the

same policy period that must be exhausted, and that the excess policies regularly include

or reference schedules of underlying insurance for the same policy period that must be

exhausted before that excess policy may be accessed.6 To explain why only vertical

exhaustion should be required, the court referred to one of the policies under which the

excess insurer agreed “to indemnify Montrose once it has exhausted $30 million of

underlying insurance. But under the insurers’ theory of horizontal exhaustion, Montrose

would not be permitted to access this policy until it has exhausted $30 million of

underlying insurance for every relevant policy period—which would add up to

substantially more than $30 million. Indeed, here, where the continuous injury occurred

over the course of a quarter century, such a rule would increase the operative attachment

point for this policy from $30 million to upwards of $750 million. Thus, where aggregate

liability amounts to approximately $200 million, Montrose would not be able to access an



6 The excess policies all contain language requiring the insured to “exhaust” the

limits of “underlying insurance” before the policy provides coverage. The court described

the four main ways the policies describe underlying insurance: “(1) Some policies contain

a schedule of underlying insurance listing all of the underlying policies in the same policy

period by insurer name, policy number, and dollar amount. [¶] (2) Some policies

reference a specific dollar amount of underlying insurance in the same policy period and

a schedule of underlying insurance on file with the insurer. [¶] (3) Some policies

reference a specific dollar amount of underlying insurance in the same policy period and

identified one or more of the underlying insurers. [¶] (4) Some policies reference a

specific dollar amount of underlying insurance that corresponded with the combined

limits of the underlying policies in that policy period.” (Montrose III, supra, 9 Cal.5th at

pp. 223-224.)

8

insurance policy that, by its terms, kicks in after $30 million of underlying insurance is

exhausted.” (Id. at pp. 233-234.) The court continued, “Relatedly, the excess policies

regularly include or reference schedules of underlying insurance—all for the same policy

period. Under Montrose’s reading, these schedules provide a presumptively complete list

of insurance coverage that must be exhausted before the excess policy may be accessed,

with the ‘other insurance’ clauses serving as a backstop to prevent double recovery in the

rare circumstance where underlying coverage changes after the excess policy is written.

[Citation.] But under the insurers’ rule of horizontal exhaustion, these schedules would

represent only a fraction—perhaps only a small fraction—of the insurance policies that

must be exhausted before a given excess policy may be accessed.” (Id. at p. 234.)

The court’s opinion expressly leaves unanswered the question now before us:

when the insured has incurred continuous losses extending over the coverage periods in

multiple primary policies, whether all primary insurance covering all time periods must

be exhausted (“horizontally”) before the first level excess policies are triggered, or, as

Braun contends, whether coverage under the excess policies is triggered once the directly

underlying primary policies specified in each excess policy is exhausted (“vertically”).

(Montrose III, supra, 9 Cal.5th at p. 226, fn. 4 [“Because the question is not presented

here, we do not decide when or whether an insured may access excess policies before all

primary insurance covering all relevant policy periods has been exhausted.”].)

b. The Designated First-level Excess Policies

Five of the designated policies (London policy Nos. 1331, 1336, 2046, and 5003A

and Stonewall policy No. D11178) provide that liability attaches “only after the primary

and underlying excess insurers have paid or have been held liable to pay the full amount

of their respective ultimate net loss liability as set forth in the schedule in item 8(a)” and

that “the limits of the underwriters’ liability will be such amount of ultimate net loss as

will provide the assured with total limits under the policy/ies of the primary and

underlying excess insurers and this insurance combined as set forth in item 8(b) of the

schedule under the designation of ‘total limits’ . . . .” The schedule of underlying policies

identifies certain primary insurance policies and their limits and concludes with the

9

language “and any and all policies arranged by or on behalf of the assured as renewals,

replacements or otherwise.” The policies define the excess insurer’s “ultimate net loss” as

“the amount payable in settlement of the liability of the assured after making deductions

for all recoveries and for other valid and collectable insurances, excepting however the

policy/ies of the primary and underlying excess insurers, and shall exclude all expenses

and costs.” The policies incorporate the “other insurance” clauses in the primary policies,

which provide, “If the named insured has other insurance against a loss covered by this

policy, the insurance provided by this policy shall be in excess of such other valid and

collectable insurance.”

7 Two of the designated policies (INSCO policy Nos. F3B2/0871-

FC/R and F4B2/0871-FC/R) also provide that coverage is triggered upon the exhaustion

of specified scheduled policies plus “any and all policies arranged by or on behalf of the

assured as renewals, replacements or otherwise.” These two policies incorporate the

“other insurance” provisions of the underlying policies but do not contain the definitions

of “ultimate net loss” contained in the other designated policies.

These first-level excess policies contain comparable language to that interpreted in

Montrose III. The “other insurance” clauses are similarly ambiguous and the “other

aspects of the insurance policies” including the scheduling of the applicable primary

policies and definitions of ultimate net loss suggest “the exhaustion requirements were

meant to apply to directly underlying insurance and not to insurance purchased for other

policy periods.” (Montrose III, supra, 9 Cal.5th at p. 233.) Despite the similarity in

language, the excess insurers contend that Montrose III “did not disturb longstanding

California law requiring exhaustion of all primary insurance before any excess policy

attaches.” They argue, “The fundamental distinctions between primary and excess

insurance have been noted and reaffirmed time and time again by California courts that

have uniformly required primary insurance to be exhausted in continuous injury cases



7 One policy (London policy No. 1384) is identical to these policies except that the

schedule is missing. According to the stipulation of the parties, the schedule is missing

because it has not been found rather than it never existed.

10

before excess policies are implicated. [Citation.] Indeed, the rule of horizontal exhaustion

at the primary level is premised on several factors that were absent in Montrose,

including that: (i) primary policies attach as first dollar coverage and have an immediate

obligation to respond; (ii) primary policies receive significantly higher premium and offer

lower limits in consideration for greater claims adjustment and defense resources; and

(iii) primary coverage has the right to control defense and settlement without input from

excess insurers.” (Fn. omitted.) The excess insurers cite cases discussing these

“qualitative differences” between primary and excess policies and argue that these

differences compel the conclusion that an insured under an excess policy must be

required to horizontally exhaust all primary coverage before the excess policy is

triggered. (See Signal Companies v. Harbor Insurance Company (1980) 27 Cal.3d 359,

365 [“The policyholder pays for two kinds of liability coverage, each at a different rate.

The premium charged by the primary insurer . . . takes into account costs of defense,

including legal fees, which the primary insurer normally provides.”] Diamond Heights

Homeowners Association v. National American Insurance Company (1991) 227

Cal.App.3d 563, 577-578 [“Generally, the primary insurer alone owes a duty to provide

and bear all costs of the defense, with a corresponding right of control over the defense.

The excess carrier has no right or duty to participate in the defense, absent contract

language to the contrary, until the primary policy limits are exhausted.”].)

Initially, we note that the differences between primary and excess coverage hold

true whether vertical or horizontal exhaustion applies. More importantly, the differences

provide little justification for construing the policy language interpreted in Montrose III

differently simply because primary coverage purchased often many years later for other

policy periods remains outstanding.

As to the difference in the premiums paid for primary and excess coverage, the

designated policies calculated premiums on a percentage ranging from 6 percent to

25 percent of the underlying primary insurance premiums. The premiums reflect the

different risks and obligations assumed by primary and excess insurers. The evaluation of

risk based on the assumption of vertical exhaustion is straightforward and can be made

11

based on known parameters. However, if the risk assessment were to be made based on

the assumption of horizontal exhaustion, the evaluation would be speculative and

unpredictable. Under the eight designated policies, coverage is specified to attach on six

of the policies after $1,000,000 in ultimate net loss and after $250,000 in ultimate net loss

for the remaining two policies. If horizontal exhaustion of all primary insurance were

required to trigger the coverage, the level of liability at which the excess coverage would

attach would be unascertainable. Braun would not be permitted to access coverage under

the excess policies until it had exhausted all primary insurance for each of the years

during which damage occurred. In a continuing loss case such as this, coverage would not

be triggered until Braun had incurred losses far in excess of $250,000 or $1 million. The

difference between premiums paid for excess and for primary policies does not justify an

interpretation that renders the point of attachment so unpredictable and unascertainable

when the policy is issued.

Nor do the differing defense obligations compel horizontal exhaustion. It is well

settled that an excess insurer has no duty to defend unless the underlying primary

insurance is exhausted, absent policy language to the contrary. (Signal Companies, Inc. v.

Harbor Ins. Co., supra, 27 Cal.3d 359, 368–369.) This rule applies whether horizontal or

vertical exhaustion is required. From the perspective of the insured, one would

reasonably expect the excess insurer to contribute to the defense once the scheduled

primary policies have been exhausted and the attachment points reached. (See

Montrose III, supra, 9 Cal.5th at p. 234 [“Consideration of the parties’ reasonable

expectations favors a rule of vertical exhaustion rather than horizontal exhaustion.”].)

That is the benefit for which the insured paid premiums. (Id. at p. 236 [“[V]ertical

exhaustion in a continuous injury case” allows for “immediate access to the insurance it

purchased.”].) Interpreting the provisions of the excess policies to mean what the

Supreme Court in Montrose III held they mean will, in the absence of explicit language to

the contrary, require the excess carriers to assume responsibility for defense and

indemnity once the directly underlying primary policies have been exhausted. Whatever

the rights of the excess carriers may be to contribution from primary insurers whose

12

policies do not directly underlie the excess policy is a different question that is not now

before us, and on which we express no opinion. We hold simply that (absent an explicit

policy provision to the contrary) the insured becomes entitled to the coverage it

purchased from the excess carriers once the primary policies specified in the excess

policy have been exhausted.

Prior to the Supreme Court’s decision in Montrose III, some appellate courts

concluded that in a continuing loss situation, an excess insurer has no obligation “to ‘drop

down’ and provide a defense to a common insured before the liability limits of all

primary insurers on the risk have been exhausted.” (Community Redevelopment Agency v.

Aetna Casualty & Surety Co. (1996)50 Cal.App.4th 329, 332; see also Padilla Constr.

Co. v. Transportation Ins. Co. (2007) 150 Cal.App.4th 984, 986 [“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.”].) These cases, however, rely on an interpretation of policy

language rejected by the Supreme Court in Montrose III. (See Community

Redevelopment, supra, 50 Cal.App.4th at p. 341; Padilla Constr. Co. v. Transportation

Ins. Co., supra, 150 Cal.App.4th at p. 988.) While those cases hold, for example, that

“other insurance” clauses preclude attachment of coverage until there has been horizontal

exhaustion, Montrose III holds otherwise. Moreover, insofar as Community

Redevelopment, supra, 50 Cal.App.4th at p. 341 addresses the relative obligations as

between the various insurers, and not the excess insurer’s obligations to the insured, it is

distinguishable. While the court in Padilla, supra, 150 Cal.App.4th at page 988, involved

an action by an insured seeking declaratory relief against its excess insurer, the court’s

extension of Community Redevelopment can no longer be justified after Montrose III.

c. The remaining excess insurance policies

The trial court concluded that each of the remaining 137 excess insurance policies

require horizontal exhaustion. Braun challenges the trial court’s conclusion as to two

categories of policies. First, Braun challenges the court’s determination with respect to

five higher level excess policies issued between 1981 and 1986 to Santa Fe International

13

and its subsidiaries, which includes Braun.

8 Each policy includes among the “interest

covered” “all sums which the assured shall be obligated to pay or incurs as costs and/or

expenses by reason of liability imposed on the assured by law or assumed by the Assured

under contract or agreement on account of personal injury . . . all in connection with the

land and/or airborne and/or waterborne operations of the assured.” The policies provide

that the insurers “shall only be liable for the excess of . . . the amount covered under

assured’s primary comprehensive general and automobile liability, protection and

indemnity and excess emp1oyers’ liability policies where interests are insured thereunder

and also hereunder, it being understood and agreed that such primary insurances may

have anniversary dates other than 1st July.”

9 The policies do not contain schedules

identifying the primary or underlying insurance to which they are excess. The policies

also include a generally worded “other insurance” provision.

10 Under Montrose III,

supra, 9 Cal.5th at pages 232-233, the excess insurers’ reliance on the “other insurance”

provision is not well taken. To the contrary, the reference in the policies to underlying

primary insurance by date supports the conclusion that exhaustion is required only of

primary policies that overlap with the policy period of the excess policies.

Finally, Braun challenges the trial court’s ruling with respect to a single excess

policy issued by London covering the period from December 1985 to December 1986.



8 These policies provide a layer of coverage between $10 million and $100 million

in “towers” of coverage that total between $100 million and $290 million in coverage

annually. By extension, Braun challenges the court’s determination as to an additional 21

policies that follow form to one of the five policies at issue.

9 Four of the policies are identical. The fifth policy, which was the first entered,

reads: “It being understood and agreed that such primary insurance has an anniversary

date of 1st December but 1st January [with] respect [to Braun’s] primary automobile

liability policy.”

10 The “other insurance” provisions read: “Other insurances are permitted. [¶] If

any named assured hereunder, or any person or organization now or hereafter named as

assured or additional assured, has any other valid and collectible insurance against loss

covered by this policy, the insurance afforded by this policy with respect to such assured

or additional assured and such loss shall, in all cases, be excess of all other insurance

carried by or inuring to the benefit of such assured or additional assured.”

14

This policy provides $5 million in coverage for each occurrence in excess of $5 million

per occurrence. The policy provides, “The assurer shall be liable for the excess where the

amount deductible under this policy is exceeded by (A) the cost of investigating and/or

successfully defending any claim or suit against the assured based on liability or an

alleged liability of the assured covered by this insurance, or (B) the amount paid by the

assured either under judgment or an agreed settlement based on the liability covered

herein including all costs, expenses of defense and taxable disbursements.” This policy

expressly attaches upon satisfaction of the deductible amount and does not require

horizontal exhaustion. (State of California v. Continental Ins. Co. (2017)15 Cal.App.5th

1017, 1032.) The fact that the policy incorporates a generally worded “other insurance”

clause from another policy does not negate the unambiguous language requiring vertical

exhaustion. (Montrose III, supra, 9 Cal.5th at pp. 232-233; Carmel Development Co. v.

RLI Ins. Co. (2005) 126 Cal.App.4th 502, 511.) The trial court erred in concluding

otherwise.

B. Evidence of Exhaustion

The excess insurers contend that even if the trial court incorrectly interpreted their

policies to require horizonal exhaustion of the primary policies, this court must still

affirm the judgment because the error was not prejudicial. They point out that Braun

failed to present admissible evidence of exhaustion of any primary policy during the

Phase II trial and argue that Braun’s subsequent attempts to introduce such evidence was

properly rejected. The excess insurers explain, “To be clear, respondents are not arguing

that Braun can never try to establish that there has been exhaustion of primary policies

based solely on post-Phase IIB payments of claims that exhaust the primary aggregate

limits. But this judgment should be affirmed. Braun may not introduce in this case any

evidence of claim payments that existed at the time of the October 2012 Phase IIB trial.

. . . Braun cannot now seek to prove primary exhaustion by combining better evidence of

‘old’ payments and ‘new’ payments.” (Boldface omitted.)

We cannot agree. Faced with a ruling requiring horizontal exhaustion of all

primary policies, there was no reason for Braun to introduce evidence of vertical

15

exhaustion. The failure to do so hardly suggests the absence of such evidence. The error

in interpretation alone requires remand for the opportunity to present such evidence.

Moreover, even if the underlying policies were not exhausted in 2012, they may well

have been subsequently exhausted and there is no good reason to require Braun to file

new proceedings to obtain the coverage that has now attached. Contrary to the excess

insurers’ argument, Braun is not barred from relying on evidence of payments made on

claims before October 2012 if together with subsequent payments the primary limits have

been exceeded.

II. Cross-appeal

Respondents filed a protective cross-appeal challenging one aspect of the trial

court’s Phase IIA decision regarding the burden of proof to establish that the claims paid

by Braun’s primary insurers were correctly allocated to products liability claims rather

than “premises/operations” claims. Because we shall remand to permit Braun to submit

additional evidence of exhaustion in conformity with our interpretation of the excess

policies as requiring vertical exhaustion, we address the merits of respondents’ crossappeal.

In its Phase IIA decision, the trial court concluded that “absent provision in a

designated policy expressly to the effect that coverage will not occur unless and until

payment of underlying insurance limits is made and is demonstrated to be properly

allocated then proper allocation need not be shown by Braun as part of its prima facie

case.” The court held that Braun may rely on the allocations made by its primary insurers

in satisfying its burden of proof.11 The court explained that a “requirement that Braun

prove that each payment under the underlying policies was properly allocated would be a

huge if not impossible task. In part each underlying claim and there are large number of

them here would have to be analyzed. This could implicate attorney work product and

attorney client communications held by those who made the original allocation decision.



11 Under the terms of various settlement agreements, all of the underlying claims

were designated as products liability claims.

16

Many payments under the underlying policies likely involved judgment calls by whoever

was administering claims resolution. Revisiting those decisions could be daunting.

[¶] The excess insurers have not demonstrated any ambiguities in any designated policy

threshold of coverage or attachment of liability language. Even if there were such

ambiguities it would not be reasonable to interpret the policies to include the requirement

that Braun prove that each payment under the underlying policies was in accordance with

the terms of such policy. [¶] Further support for this conclusion is found in the duty of

good faith and fair dealing that is implied in every insurance policy under California law.

[Citation.] Among other things this duty requires that the underlying insurers were

obligated to conduct thorough investigations of claims which provides a sufficient degree

of reliability to the decisions made. [Citation.] In light of this duty it would not be

reasonable to interpret the designated policies as requiring that Braun must prove that any

payment allocations of the underlying coverage payments were in accordance with the

provisions of the respective policies.”

The court acknowledged, however, that once Braun has made its prima facie

showing, the excess insurers may submit evidence negating one or more elements of the

prima facie case. The court expressly held that Braun retains the burden of proving all

elements of its claim for coverage and that the excess insurers “do not have the burden of

proof as to matters for which they submit evidence to demonstrate that notwithstanding

Braun’s evidence, Braun cannot establish a prima facie case.”

We find no error in the court’s ruling. The excess insurers assert “ ‘the burden is

on the insured to bring the claim within the basic scope of coverage.’ ” (Waller v. Truck

Insurance Exchange, Inc. (1995) 11 Cal.4th 1, 16; Aydin Corp. v. First State Ins. Co.

(1998) 18 Cal.4th 1183, 1188.) Respondents do not dispute that the underlying claims are

covered. They dispute how payments purportedly on those claims should be allocated.

The trial court correctly held that Braun could satisfy its burden by relying on the primary

insurer’s allocation. Contrary to the excess insurer’s argument, the trial court’s ruling did

not prevent them from challenging that showing with respect to any given claim. The

excess insurers suggest that the “trial court held that the excess insurers could only

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challenge the primary insurers’ characterization [of a claim as a product liability claim] in

very limited circumstances, such as by showing bad faith, fraud or collusion on the part

of Braun.” We find no such limitation in the court’s decision. The court merely held that

respondents carry the burden of producing evidence of any affirmative defenses, but that

Braun retains the burden of proving its right to coverage if presented with evidence

disputing its prima facie showing.12 Accordingly, we find no merit in the excess insurers’

cross-appeal.

The judgment is reversed, and the matter remanded for further proceedings. The

parties are to bear their own costs on appeal.