Asbestos – Top NY Court Applies All Sums and Rejects Horizontal Exhaustionshoke2013
Court of Appeals rejects Pro Rata allocation and applies “Vertical Exhaustion” to excess coverage for asbestos claims.
In response to certified questions from the Delaware Supreme Court, the New York Court of Appeals held that the “all sums” methodology applied to the asbestos coverage dispute, whereby each excess policy can be held liable for an entire loss. The court rejected the insurers’ “horizontal exhaustion” argument, where the policyholder must exhaust all of its primary and umbrella coverage over all policy periods before being able to trigger excess layers of insurance. Instead, the excess policies are triggered upon exhaustion of the immediately underlying insurance.
Viking Pump, Inc. and Warren Pumps, LLC faced asbestos exposure claims based on their purchase of a pump company from Houdaille Industries (“Houdaille”) in the mid-1980s. Houdaille had insurance coverage from 1972 to 1985 at primary, umbrella, and excess levels. The central issue in the case was how indemnity should be allocated across the excess policies.
The excess policies generally “followed form” to or provided for substantially the same coverage as the primary and umbrella policies issued by Liberty Mutual. Liberty Mutual agreed to pay “all sums…which the insured became legally obligated to pay…as damages….because of…personal injury….which occurs during the policy period.” The Liberty Mutual policies also contained “non-cumulation” of liability provisions. Those provisions provide that, for an injury that implicates more than one consecutively issued Liberty Mutual policy, the policyholder is only entitled to a single year of limits. Some of the excess policies also contained “Prior Insurance and Non[-]Cumulation of Liability” provisions, which provide that, for an injury “continuing at the time of termination of this Policy the Company will continue to protect the [Insured] for liability in respect of such personal injury… without payment of additional premium.”
The Delaware Supreme Court certified the following questions to the New York Court of Appeals:
- Under New York law, is the proper method of allocation to be used all sums or pro rata when there are non-cumulation and prior insurance provisions?
- Given the Court’s answer to Question # 1, under New York law and based on the policy language at issue here, when the underlying primary and umbrella insurance in the same policy period has been exhausted, does vertical or horizontal exhaustion apply to determine when a policyholder may access its excess insurance?
Allocation. Policyholders argued that the “all sums” method applied. “This theory of allocation ‘permits the insured to ‘collect its total liability … under any policy in effect during’ the periods that the damage occurred,’ up to the policy limits.” The excess insurers argued that, under binding New York law as set forth in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 NY2d 208, 222 (2002), the “pro rata” method applied. “Under this method, an insurer’s liability is limited to sums incurred by the insured during the policy period; in other words, each insurance policy is allocated a ‘pro rata’ share of the total loss representing the portion of the loss that occurred during the policy period.”
The court applied “all sums.” In doing so, the court held that its pro rata ruling in Consolidated Edison was based on the policy language at issue in that case, which involved “all sums” and the notion that an insurer is only liable for injury that occurs “during the policy period”: “Significantly, we 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.” The court noted that, unlike in Consolidated Edison, the excess policies in this case included non-cumulation and prior insurance provisions. These provisions “negate…the pro rata premise of treating continuous injuries as distinct in each policy period as a result of the during the policy period limitation…by presupposing that two policies may be called upon to indemnify the insured for the same loss or occurrence.” In addition, some of the excess policies agreed to provide continuing coverage for an injury that is ongoing at the end of the policy period, which is also inconsistent with the pro rata premise. Thus, the court held that “all sums” is the appropriate method based on the policy language.
Exhaustion. The court next addressed whether horizontal or vertical exhaustion applied under the excess policies. This issue involves “whether the Insureds are required…to ‘horizontally’ exhaust all triggered primary and umbrella excess layers before tapping into any of the additional excess insurance policies, or whether the Insureds need only ‘vertically’ exhaust the primary and umbrella policies, which would allow the Insureds to 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 noted that the excess policies primarily hinge their attachment on the exhaustion of underlying policies that cover the same policy period as the overlying excess policies, and that were specifically identified in the excess policies. “In our view, vertical exhaustion is more consistent than horizontal exhaustion with this language tying attachment of the excess policies specifically to identified policies that span the same policy period.” The court rejected the excess insurers’ “other insurance” clause argument, holding that that clause only applies to concurrently issued coverage, not to consecutively issued coverage. In re Viking Pump, Inc., No. 59 (N.Y. May 3, 2016).