On May 3, 2016, the New York Court of Appeals answered two certified questions posed by the Delaware Supreme Court regarding the appropriate allocation method for long-tail claims among successive excess carriers. The first question was whether “all sums” or “pro rata” allocation applied to policies that contained an anti-stacking, or non-cumulation, provision. Prior to this decision, the general rule in New York had been that pro rata allocation applied to long-tail exposure. With its Viking Pump1 decision, however, the Court of Appeals relied on non-cumulation provisions in concluding that all sums allocation applied. This theory permits the insured to collect its total liability from any one policy in effect during the period that the damage occurred, up to the limit of that policy.
The second question was whether the insureds must exhaust all triggered primary or lower level excess policies before reaching any higher level excess policy (horizontal exhaustion), or whether they could access excess coverage for certain years even where primary or lower level policies for other years had not been exhausted (vertical exhaustion). The court rejected the insurers’ argument that the “other insurance” clauses required horizontal exhaustion, and ruled that vertical exhaustion may apply to long-tail claims involving successive policy periods.
The facts of the underlying Delaware action are straightforward. Viking Pump, Inc. and Warren Pumps, LLC (“insureds”), had acquired pump manufacturing businesses from Houdaille Industries in the 1980s. While owned by Houdaille, both businesses manufactured products that contained asbestos, and the insureds now face numerous tort claims for the harm that those products allegedly caused. Houdaille had maintained an extensive, multi-layer insurance program that covered the time period at issue, 1972 to 1985. Liberty Mutual Insurance Company provided the primary and umbrella layers of coverage, totaling nearly $60 million. Above that, Houdaille had purchased additional layers of excess insurance through annual policies issued by multiple insurers, the defendants in the Delaware action (“excess insurers”). As the Liberty Mutual policies approached exhaustion, a dispute arose between the insureds and the excess insurers as to how indemnity should be allocated across triggered policy periods.
Importantly, each of the policies issued by the excess insurers contained a variation of a non-cumulation provision, such as the following:
If the same occurrence gives rise to personal injury, property damage or advertising injury or damage which occurs partly before and partly within any annual period of this policy, then each occurrence limit and the applicable aggregate limit or limits of this policy shall be reduced by the amount of each payment made by [the insurer] with respect to such occurrence, either under a previous policy or policies of which this is a replacement, or under this policy with respect to previous annual periods thereof.
The excess insurers argued that pro rata allocation should apply, relying on the rule established in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co.2 that “policies provide indemnification for liability incurred as a result of an accident or occurrence during the policy period, not outside that period … [p]roration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular period.” In response, the insureds argued that all sums allocation should apply, pursuant to which joint and several liability is imposed on the insurers. Under all sums allocation, an insured may select insurance proceeds from any one year, and the burden then shifts to the targeted insurer(s) to seek contribution from other liable insurers.
In Viking Pump, the Court of Appeals stated that the pro rata allocation method set forth in Consolidated Edison is not a blanket rule for allocation in New York. Rather, the holding in that case was based on the fact that those policies provided indemnification only for liability incurred as a result of an accident or occurrence during the policy period, not outside that period. Although in its Consolidated Edison decision, the court suggested that pro rata allocation was preferable, it recognized that differing policy language may compel all sums. The non-cumulation clauses at issue in Viking Pump created such an exception, according to the court, as these clauses cannot be reconciled with pro rata allocation.
We agree that it would be inconsistent with the language of the non-cumulation clauses to use pro rata allocation here. Such policy provisions plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence by acknowledging that a covered loss or occurrence may “also [be] covered in whole or in part under any other excess [p]olicy issued to the [insured] prior to the inception date” of the instant policy.
By contrast, the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period – meaning that no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence. Pro rata allocation is a legal fiction designed to treat continuous and indivisible injuries as distinct in each policy period as a result of the “during the policy period” limitation, despite the fact that the injuries may not actually be capable of being confined to specific time periods. The non-cumulation clause negates that premise by presupposing that two policies may be called upon to indemnify the insured for the same loss or occurrence.3
In a footnote, the Court of Appeals acknowledged that several of the policies at issue in Consolidated Edison did contain non-cumulation provisions. Nonetheless, in Viking Pump, the court disregarded these provisions because the Consolidated Edison decision did not address them.
After the Court of Appeals applied all sums allocation, it considered whether horizontal or vertical exhaustion should apply. The excess insurers argued that horizontal exhaustion should apply based upon the “other insurance” clauses in the underlying and excess policies. The court rejected this argument, holding that other insurance clauses apply only when two or more policies provide coverage during the same policy period, not successive policy periods. The attachment point of each excess policy is specifically tied to the underlying policy in effect during the same policy year. The court stated:
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. Further, vertical exhaustion is conceptually consistent with an all sums allocation, permitting the Insured to seek coverage through the layers of insurance available for a specific year.4
As a result of the Viking Pump decision, where there is a non-cumulation clause, insureds are likely to seek indemnification from the insurance tower with the highest limits and lowest retentions or deductibles. The excess policies in that tower will be triggered well before lower level policies in other years, and the paying insurers will then be forced to seek contribution from other insurers.
New York law regarding allocation of long tail claims across successive policy periods is no longer well-settled. While pro rata allocation is the preferred approach, the presence of a non-cumulation, or anti-stacking provision, now creates an exception to the rule. Notably, this decision does not provide direction for allocating long tail claims where some, but not all, policies on the risk contain a non-cumulation provision. Nor does it address whether an insured, after exhausting one tower, may then attempt to “stack” limits by seeking coverage under another tower. The Viking Pump decision leaves these questions open for future litigation.