Big Win for Policyholders in NY: “All Sums” Allocation, Vertical Exhaustion Apply
On May 3, 2016, the New York Court of Appeals issued a much-anticipated and significant decision on allocation and exhaustion issues in the context of long-tail liability insurance. The case was styled Viking Pump, Inc. v. TIG Ins. Co., and the New York court ruled on two certified questions of New York law submitted by the Delaware Supreme Court. The court ruled that in the context of insurance policies containing so-called “non-cumulation” clauses, an “all sums” allocation method applies to the allocation of a policyholder’s claims. The court also ruled that a vertical, as opposed to horizontal, approach to the exhaustion of underlying policies was proper. Both issues came out in favor of policyholders.
The case involves long-tail coverage for asbestos claims. Liberty Mutual wrote coverage for Houdaille Industries over a number of years, consisting of both a primary layer and an umbrella policy. There was also an extensive program of excess coverage in place, written by other carriers, totaling over $400 million. The appellants here, Viking Pump, Inc., and Warren Pumps, LLC, bought their pump businesses from Houdaille in the 1980s. They have both been previously adjudicated as entitled to coverage under policies issues to Houdaille.
Viking and Warren have both been subject to extensive liability for asbestos personal injury claims. The present dispute arises between the excess insurers and Viking and Warren because the Liberty Mutual coverage is at or nearing exhaustion.
The litigation has been ongoing in Delaware state courts for some time, and those courts concluded that it was governed by New York law. The Delaware Supreme Court determined that resolution of two important issues depended on unsettled questions of NY law and sent certified questions to the New York Court of Appeals, which that court accepted.
The first issue was how a court applying New York law should allocate an asbestos personal injury loss where the exposure spanned multiple policy years. The insurers argued that the loss must be allocated across the policies in effect during each year of exposure on a pro rata basis, with each insurer paying its proportionate share of the loss − thus requiring the policyholder to recover from each insurer separately. This is referred to as the “pro rata” approach. The petitioners argued that they were entitled to recover the entire amount of each loss against any policy that was in force during the period. This latter method is referred to as the “all sums” approach.
The New York court reiterated its adherence to traditional contract principles: that the parties are free to make their bargain, and the court will enforce it, construing the policies in such a way as to afford a fair meaning to all the language and in a manner that “leaves no provision without force and effect.”
The court distinguished its prior decision in Consolidated Edison Co. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002), noting that while it had addressed the allocation issue in that case and held that a pro rata allocation should apply, that decision was specific to the contract at issue and not a general rule. The court wrote: “[W]e did not reach our conclusion in Consolidated Edison by adopting a blanket rule, based on policy concerns, that pro rata allocation was always the appropriate method of dividing indemnity among successive insurance policies. Rather, we relied on our general principles of contract interpretation, and made clear that the contract language controls the question of allocation.”
Importantly, the Liberty Mutual policies issued to Houdaille contain non-cumulation clauses, and the various excess policies all either follow form or contain substantially similar non-cumulation clauses. The court analyzed the effect of the non-cumulation clauses in the policies on the allocation issue, concluding that where the policy contains a non-cumulation clause, the all sums approach must be followed because the pro rata method is inconsistent with the non-cumulation clause. The court noted that at least two states, New Jersey and Illinois, which have adopted the pro rata approach to allocation, have also expressly held that the non-cumulation clauses cannot be reconciled with the pro rata approach and are to be disregarded.
The court observed that the purpose of a non-cumulation clause is to prevent an insured from stacking limits across multiple policies, which necessarily assumes that each policy can respond for the full amount of the loss. Since the court was determined to give effect to all the language in the policy, it was unwilling to accept the pro rata approach, which it reasoned would have rendered the non-cumulation clauses as surplusage.
On the exhaustion issue, the court considered whether the insureds are required to “horizontally exhaust” all of the first layer and umbrellas policies before accessing the excess policies, or whether a particular excess policy can be accessed by “vertically exhausting” the underlying policies for that particular year alone. The court held that because each excess policy attaches when the underlying cover in the same policy year is exhausted, vertical exhaustion is the correct approach under the policies at issue.
The court specifically rejected the argument raised by the carriers that vertical exhaustion was prohibited by the “other insurance” clauses in the excess policies. The carriers asserted that because the injury spanned multiple policy years, the underlying policies issued in other coverage years had to respond before the excess policies. The court held that “other insurance clauses are not implicated in situations involving successive – as opposed to concurrent – insurance policies.”
The New York court’s decision in Viking Pump adds yet another win to the policyholder column on whether “all sums” or pro rata allocation applies. It is a significant victory for policyholders in general, and asbestos defendants in particular.
The opinion can be found here.