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Pacific Coast Building Products, Inc. v. AIU Insurance
Citation: 300 F. App'x 546Docket: No. 07-15137
Court: Court of Appeals for the Ninth Circuit; November 18, 2008; Federal Appellate Court
The action involves a dispute between Pacific Coast Building Products, Inc. and AIU Insurance Company regarding the horizontal exhaustion rule within California insurance law. Pacific Coast appeals the district court’s ruling on the applicability of this rule, which mandates that all primary insurance must be exhausted before an excess insurer, such as AIU, is required to provide coverage. The court affirms the lower court's decision, clarifying that the explicit language in the AIU policy requires exhaustion of "any other underlying insurance" prior to AIU's obligations. Pacific Coast's argument that the AIU policy is ambiguous is dismissed, with the court upholding the plain meaning of the policy provisions. It emphasizes that the classification of first-level policies as either primary or excess does not change their underlying status relative to AIU's coverage. The court further asserts that bodily injury and property damage that spans multiple policy periods may be covered by all applicable policies during those periods. The notion of "coverage" in this context is defined as the inclusion within the policy’s scope, independent of the collectibility of those policies. Pacific Coast also contends that the horizontal exhaustion rule improperly requires it to exhaust self-insured retentions (SIRs) before accessing the AIU policy. The court references previous case law to clarify that the exhaustion of SIRs on potentially applicable policies must be addressed before any insurer has a duty to indemnify. Overall, the ruling reinforces the requirement of horizontal exhaustion in this insurance dispute. A first level insurer cannot reduce its liability through 'stacking' Self-Insured Retentions (SIRs) from other policies during a continuous injury period, as established in California Pac. Homes, Inc. v. Scottsdale Ins. Co. However, the case distinguishes itself from Montgomery Ward because National Union fulfilled its policy obligations without requiring Pacific Coast to exhaust all SIRs for subsequent policy years. The horizontal exhaustion rule necessitates exhausting all first level insurance before any coverage from excess policies attaches. The prohibition against horizontal exhaustion of SIRs does not apply here. Additionally, Pacific Coast's argument regarding AIU’s duty to provide coverage despite unexhausted SIRs in its primary policies is rejected, supported by Padilla Constr. Co. v. Transportation Ins. Co., which states that treating SIRs as separate from the primary policy undermines the reasonable expectations of all parties. Therefore, SIRs are integral to the primary policy, and AIU is not obligated to provide coverage until all first-level insurance in the form of SIRs is exhausted. An explicit reference to SIRs in the excess insurer's policy is unnecessary, as established in Padilla. The principle of horizontal exhaustion applies even without direct mention of SIRs in the excess policy. The decision is affirmed and is not intended for publication as precedent, except as outlined by 9th Cir. R. 36-3.