California Landmark Cases on Vertical Exhaustion (Insurance)

When multiple policies apply during a single policy period, the insured is entitled to stack limits. (State Farm Mut. Auto. Ins. Co. v. Partridge, supra, 10 Cal.3d at pp. 96-97, 106.) The sole exception is statutory. Under Insurance Code section 11580.2, subdivision (q), the policy limits of two or more applicable uninsured motorist policies cannot be stacked. However, the very existence of this statutory exception demonstrates that in other situations, stacking is the rule. Sometimes, it is not the insured who is trying to stack limits, it is an excess insurer. Assume that an insured is covered under one excess policy and more than one primary policy. "Vertical exhaustion" means that the policy limits under just one particular primary policy must be exhausted before the excess policy kicks in. By contrast, "horizontal exhaustion" means that the limits under all applicable primary policies must be exhausted before the excess policy kicks in. Thus, horizontal exhaustion is essentially the same thing as stacking the limits of primary policies on behalf of the excess insurer. As a general rule, California requires horizontal exhaustion. Vertical exhaustion applies if, and only if, the excess policy provides that it is excess to a specified primary policy. (Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, 339-340 & fn. 6 [57 Cal. Rptr. 2d 755]; see Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, 8:236 to 8:237.) This is true even when the primary policies apply to different policy periods. (See Community Redevelopment Agency, at p. 334.) Technically, the horizontal exhaustion rule only governs the relationship between the primary and excess insurers. Nevertheless, it necessarily implies that the insured, too, is entitled to stack the primary policies; otherwise, the primary policies would never be exhausted. (See Iolab Corp. v. Seaboard Sur. Co. (9th Cir. 1994) 15 F.3d 1500, 1504 [applying California law; insured was not entitled to indemnity from excess insurers because it had not yet exhausted all primary policies].)