New York law provides “All Sums” with vertical exhaustion for excess policies with non-cumulation clauses

A Virginia federal court, applying New York law, issued a sprawling opinion addressing certain excess insurers’ coverage obligations for its policyholder’s asbestos liabilities.  The court held that non-cumulation clauses in excess policies required an all sums allocation under New York law.  In addition, the court held that the policyholder could access the excess limits upon demonstrating exhaustion of the immediately underlying limits (vertical exhaustion), as opposed to having to exhaust all lower level policies before accessing the excess policy (horizontal exhaustion).

From the 1930s until 2003, Hopeman Brothers, Inc. (“Hopeman”) specialized in the installation of marine interiors on ocean-going vessels.  This included installation of asbestos-containing panels.  Since 1979, Hopeman has been named in over 123,000 asbestos bodily injury claims.

Beginning in 1937, Hopeman purchased primary level coverage.  Hopeman started purchasing excess level coverage in 1965.  During the relevant policy periods of 1971 through 1977, Hopeman had purchased $500,000 in primary limits, $10 million in first level excess coverage, and $10 million in second level excess coverage – all on an annual basis.  Defendants Continental Casualty Company and Lexington Insurance Company (collectively, “the Insurers”) issued some of the second level excess coverage from 1971 through 1977.

Among other things, Hopeman sought a declaration that an “all sums” allocation applied to the Insurers’ policies, as compared to a “pro rata” allocation.  Under all sums, the policyholder can choose any triggered policy and demand that the insurer pay the entire loss, subject to policy limits.  Under pro rata, each triggered insurance policy is allocated a pro rata share of the total loss.

Hopeman argued that the all sums allocation method must be applied because the Insurers’ policies contained non-cumulation clauses like those in In re Viking Pump.  In Viking Pump, the New York Court of Appeals found that the non-cumulation language – which stated that the clause applied if ‘the same occurrence gives rise to … injury or damage which occurs partly before and partly within any annual period” – contemplated ‘that multiple successive insurance policies can indemnify the insured for the same loss or occurrence.’  The New York court concluded that this was inconsistent with a pro rata approach, and held that the all sums allocation method applied to the policies at issue.

The Virginia federal court agreed with Hopeman.  The Insurers’ policies contained or followed form to non-cumulation clauses identical to those in Viking Pump:  “For this Court to reach a different conclusion regarding these NCCs [non-cumulation clauses], Defendants would have to point to some additional policy language or provisions that would indicate that the NCCs have a different meaning than those in Viking Pump [].  Defendants have failed to make such a showing, and therefore this Court is precluded from interpreting the NCCs differently from the New York Court of Appeals.”

In agreeing with Hopeman, the court also rejected the Insurers’ argument that Hopeman should be bound by its prior course of conduct, specifically, that Hopeman entered into settlements with other insurers that called for a pro rata allocation.  The court held that the Insurers had not successfully asserted any theory under which Hopeman’s prior course of conduct should bind it in the litigation before the court.

The court also addressed whether the Insurers’ policies required vertical or horizontal exhaustion.  “[U]nder horizontal exhaustion, an insured is required to ‘exhaust all triggered primary and umbrella excess layers before tapping into any of the additional excess insurance policies.’  Under vertical exhaustion, an insured party can ‘access each excess policy once the immediately underlying policies’ limits are depleted, even if other lower-level policies during different policy periods remain unexhausted.’”  The court again looked to Viking Pump and held that vertical exhaustion was appropriate, because the Insurers’ policies’ hinge their attachment on the exhaustion of underlying policies that cover the same policy period and are identified by either name, policy number, or policy limits.  Thus, to access the Insurers’ policies, Hopeman only needed to demonstrate exhaustion of the immediately underlying policies.  Hopeman Brothers, Inc. v. Continental Cas. Co., No. 4:16-cv-00187 (E.D. Va. Apr. 2, 2018).