No Horizontal Exhaustion By Layer For Excess Under NY Law – A Delaware state court applying New York law held that the horizontal exhaustion rule applies only to primary and umbrella policies, and does not apply to excess layers. Horizontal exhaustion by layer generally means that in a long-tail situation such as asbestos or pollution, an entire layer of insurance (e.g., primary, umbrella, first layer excess, second layer, etc.) must be exhausted before the policyholder can access the next layer of insurance. The court noted that the issue of whether horizontal exhaustion applies to excess policies has only been addressed by a single California trial court, Kaiser Aluminum & Chem. Corp. v. Certain Underwriters at Lloyds, London, No. 312415 (Cal. Super. Ct. June 13, 2003). After evaluating and discussing New York law, the court found that New York’s basic approach to horizontal exhaustion is generally similar to California. Therefore, the court predicted that New York would follow the reasoning of the California case and not require horizontal exhaustion of the excess layers, stating, “[H]orizontal exhaustion is a limitation tending to deny coverage. While that makes sense at a primary/umbrella level where the policies specifically contemplate responding first, this limitation ought not apply to excess.” Viking Pump, Inc. v. Century Indemnity Co., No. 10C-06-141 FSS CCLD (Del. Super. Ct.Feb, 28, 2014).

The horizontal exhaustion by layer issue is currently being litigated in various jurisdictions and the law remains largely undeveloped.  If horizontal exhaustion by layer applies in a given layer, it may require policyholders to assume a greater level of responsibility for deductibles, self-insured, under-insured or insolvent periods of coverage in a given layer.  The extent of this responsibility depends to a degree on exactly how the court implements the protocol.  And, there are many ways that it can be structured.

Excess Can Be Tapped Before Primary Exhausted Under MD Law – A federal district court in Maryland, applying Maryland law, ruled on multiple insurance coverage issues presented in motions for summary judgment by a bankrupt insulation installation company and its insurers in a declaratory action. The court clarified an earlier memorandum order it issued in which it adopted the pro rata time of the risk allocation methodology and horizontal exhaustion. The court explained that “if primary insurance as to a particular year on the risk has been exhausted, then an excess policy applicable to that year must pay its pro rata share.”The court appears to be applying a pure form of horizontal exhaustion also known as the “bathtub approach.”  In other words, it is horizontal exhaustion, but not by layers.

On another issue, the court rejected the insurers’ argument that the Trust for the bankrupt company assumed obligations to claimants without the insurers’ consent in violation of the policies’ voluntary obligation provision. The court found that the Trust notified the insurers of the claims multiple times and sought the insurers’ assistance with evaluating claims, but the insurers chose not to respond and, therefore, waived the voluntary obligation provision. However, the court held that the insurers maintained the right to challenge the reasonableness of the asbestos settlements under Maryland law, even when the insurer refused to defend the insured. The court additionally held that the insurers have the burden to produce sufficient evidence to raise a triable issue, but the insured has the ultimate burden of proof as to the reasonableness of the settlements. The court declined to rule on the reasonableness of the settlements, stating that genuine disputes of material facts remained with regard to that issue.  Nat’l Union Fire Ins. Co. of Pittsburgh v. Porter Hayden Co., Nos. CCB-033408, CCB-03-3414 (D. Md. Mar. 31, 2014).

On another issue, the court rejected the insurers’ argument that the Trust for the bankrupt company assumed obligations to claimants without the insurers’ consent in violation of the policies’ voluntary obligation provision. The court found that the Trust notified the insurers of the claims multiple times and sought the insurers’ assistance with evaluating claims, but the insurers chose not to respond and, therefore, waived the voluntary obligation provision. However, the court held that the insurers maintained the right to challenge the reasonableness of the asbestos settlements under Maryland law, even when the insurer refused to defend the insured. The court additionally held that the insurers have the burden to produce sufficient evidence to raise a triable issue, but the insured has the ultimate burden of proof as to the reasonableness of the settlements. The court declined to rule on the reasonableness of the settlements, stating that genuine disputes of material facts remained with regard to that issue.  Nat’l Union Fire Ins. Co. of Pittsburgh v. Porter Hayden Co., Nos. CCB-033408, CCB-03-3414 (D. Md. Mar. 31, 2014).

Policyholders’ Broad Right To Target Tender In WI – The Wisconsin Supreme Court denied AIG’s petition to review an October 29, 2013 appellate decision, which allowed the policyholder to target multiple policies simultaneously. Cleaver Brooks, Inc. v. AIU Ins. Co., 839 N.W.2d 882 (Wis. 2014).

As summarized in a previous edition of Insurance Bytes, the appellate opinion held that “all sums” language in six excess CGL policies allowed the policyholder, facing 200,000 asbestos suits, to access all six simultaneously.Some of the policies contained a cost-in-addition feature for defense and others were indemnity-only. By utilizing coverage from the policies at the same time, the policyholder was able to prolong the exhaustion of the cost-in-addition policies because they would take longer to exhaust given that they were sharing the indemnity with the indemnity-only policies. The court found that “all sums” is the equivalent of “joint and several” and that “joint and several” means that liability may be apportioned either among two or more parties or to only one member of the group, at the adversary’s discretion. Cleaver Brooks, Inc. v. AIU Ins. Co., 351 Wis. 2d 643 (Ct. App. 2013).

The finding was noteworthy because the policyholder’s right to pick and choose between carriers was even found to extend to selecting among individual carriers participating essentially on a quota share basis in the same policy year and the same excess level. This ruling solidifies Wisconsin as one of the most policyholder-friendly jurisdiction, if not the most policyholder friendly jurisdiction, on allocation and the rights to pick and choose applicable coverage to maximize  recovery.