Pollution: Olin / Viking Pump (NY)

Prior Insurance Clause entitles insurer to $2.6M setoff of $58M judgment after complex allocation analysis

A New York federal district judge, applying New York law, held that Lamorak Insurance Company was only entitled to a set-off of $2.6 million against the nearly $58 million judgment Olin Corporation obtained against it in connection with costs incurred relating to environmental contamination at five Olin sites.

Olin Corporation (“Olin”), a manufacturing company, brought an insurance coverage action against its historical insurers seeking coverage for environmental contamination at certain of its properties.  While Olin has dozens of manufacturing sites throughout the United States, the opinion only addressed insurance coverage regarding five sites.

One of Olin’s insurers, Lamorak Insurance Company (“Lamorak”), issued umbrella policies, as well as second and third level excess policies, to Olin from 1970 to 1973.  In a prior decision, the district court ruled that Lamorak was liable to Olin for $57,729,689, representing the entirety of Olin’s remediation-related costs incurred at the five sites.

The nearly $58 million judgment resulted from a prior ruling that, under New York law, Olin was entitled to hold Lamorak responsible for “all sums” relating to the contamination.  Olin obtained the “all sums” ruling as a result of the decision reached in In re Viking Pump, Inc., 52 N.E.3d 1144 (N.Y. 2016).  Viking Pump held that an insurance policy that includes a “prior insurance” clause is subject to an “all sums” allocation of liability rather than “pro rata” allocation.  Because the Lamorak policies contained “prior insurance” clauses, Olin was entitled to seek all of its costs relating to the five sites from Lamorak.

The opinion primarily addressed Lamorak’s entitlement to a set-off under the “prior insurance” clause and how to calculate the set-off.  Lamorak’s “prior insurance” clause stated as follows:  “Prior Insurance.  It is agreed that if any loss covered hereunder is also covered in whole or in part under any other excess policy issued to the Insured prior to the inception date hereof, the limit of liability hereon … shall be reduced by any amounts due to the Insured on account of such loss under such prior insurance.”  In effect, “the prior insurance provision allows the insurer to offset its indemnification obligations by amounts already paid to cover the loss by another insurer in the same coverage tier….”

Olin purchased numerous pre-1970 umbrella and excess policies in the same coverage tiers as the 1970-1973 Lamorak policies.  However, Olin had reached a settlement with all of those insurers.  Typically, in exchange for a monetary payment, Olin released the settling insurers from any liability relating to the five sites, as well as dozens of other sites owned by Olin.  In addition, for the most part, the settlement agreements did not allocate the settlement payments to the five sites.

Olin and Lamorak disputed how to account for Olin’s settlements with its prior insurers in calculating the appropriate set-off to the nearly $58 million judgment.  Lamorak argued that its judgment (1) should be reduced by the limits of the insurance policies issued by the settling insurers or (2) the pro rata shares of the damages amount of Lamorak’s settled co-insurers who are jointly and severally liable for the five sites.  The district court held that Lamorak’s arguments were contrary to decisions already made by the Second Circuit which held that a non-settling insurer is entitled to, “at most, a credit in the amount that the policyholder actually obtained from the settled insurers for the pertinent claim.”

The district court, therefore, was left to resolve the question of how to calculate how much of the settling insurers’ lump sum settlement payments were attributable to the five sites.  The district court ultimately adopted a methodology proposed by Olin, which involved the following six steps:

  1. Compute the total per-occurrence policy limits for each insurer’s released policies issued prior to and that are at the same layer of coverage as Lamorak’s 1970 policies;
  2. Multiply that total by five (since those limits were available for each of the five sites);
  3. Multiply the total from step one by the minimum number of sites released in that prior insurer’s settlement with Olin (since those limits were available for each settled site);
  4. Divide the product from step two by the product from step three to yield a percentage of policy limits for all sites released comprised by the policy limits for all five sites;
  5. Multiply the result from step four by the amount of the settlement to determine, for each settled insurer, the share of the settlement that can be apportioned to the five sites; and
  6. Sum the result from step 5 for each prior insurer that settled, to obtain the total amount of settlement proceeds apportioned to the five sites.

Among other reasons, Lamorak objected to this methodology “on the ground that it might lead to gaming and manipulation of the number of sites and the particular policy limits that are included in [future] global settlement agreements.”  The district court agreed that an opportunity for manipulation theoretically existed, “but the risk of such opportunity for manipulation is mitigated by the fact that the non-settling insurer has an opportunity to prove that the settlement agreement included policies and/or sites that could not result in liability for the non-settling insurer.”  Based on the methodology it adopted, the district court held that Lamorak was entitled to a set-off of $2,664,486.26.  The district court held that the nearly $55 million judgment be held in a third-party escrow account pending a final resolution of Lamorak’s New York state court suit seeking contribution from certain London excess insurers.  The judgment will be reduced by any amount for which the London insurers are found liable. Olin Corp. v. Lamorak Ins. Co., 84-cv-1968 (S.D.N.Y. Apr. 18, 2018).