New York Endorses Pro Rata Allocation

In a decision issued this week, a New York court endorsed pro rata time-on-the-risk allocation under multiple insurers’ policies for defense and indemnity costs arising from asbestos bodily injury claims against a Corning subsidiary. Mt. McKinley Ins. Co. v. Corning Inc., No. 602454/02 (N.Y. Sup. Ct. Sept. 7, 2012). With respect to indemnity costs, the court held that language in the relevant primary, umbrella and excess general liability policies, which limits each insurer’s indemnity obligations to injury that occurs “during the policy period,” comported with pro rata allocation. In so ruling, the court rejected Corning’s contention that “all sums” or joint and several allocation was appropriate in light of the policies’ non-cumulation or non-stacking clauses. Additionally, the court expressly disapproved of Viking Pump v. Century Indem. Co., 2 A.3d 76 (Del. Ch. 2009), in which a Delaware Chancery court, applying New York law, applied joint and several allocation. (See December 2009 Alert). The McKinley court found that “Viking Pump ignores established New York precedent, is not controlling on this court and is limited to the facts and policy language of that case itself.”

The McKinley court also adopted pro rata allocation with respect to defense costs. The court based its decision on principles of equity, finding that “joint and several allocation does not comport with fairness to be found in the benefit of the bargain to which Corning agreed with its respective primary insurers.” The court held that pro rata allocation is the proper method of apportioning defense costs among primary insurers that issued successive policies covering the same risk, together with an insolvent insurer and periods of selfinsurance.  

California Endorses “All Sums” Allocation With Stacking  

In contrast to New York’s pro rata approach endorsed in McKinley, the California Supreme Court endorsed an “all-sums-with-stacking” allocation rule in State v. Continental Ins. Co., 281 P.3d 1000 (Cal. 2012), an environmental coverage litigation involving continuous damage spanning multiple policy periods. Relying on California precedent, the court affirmed an appellate court ruling holding that each insurer whose policy was triggered by the ongoing injury was liable up to its policy limits. In so ruling, the court rejected a pro rata allocation scheme, reasoning that the phrase “during the policy period” did not operate to limit each insurer’s indemnity obligation to the insured. However, the court noted that if the entire loss was within the limits of one insurer’s policy, that insurer could subsequently “seek contribution from other insurers on the risk during the same loss.”

The court also held that the insured was permitted to stack the consecutive policies and recover up to the policy limits of those policies. The court noted that the policies did not contain anti-stacking clauses and that stacking comported with the “immeasurable aspects of a long-tail injury.” Prior to Continental, courts in California had issued mixed decisions on stacking, but the Continental court specifically disapproved of anti-stacking rulings in the absence of clear policy language precluding stacking. In this respect, Continental highlights the importance of policy language in allocation and stacking rulings. As the court observed, “contracting parties can write into their policies whatever language they agree upon, including limitations on indemnity, equitable pro rata coverage allocation rules, and prohibitions on stacking.”

Importantly, Continental’s endorsement of “all sums” allocation does not alter two fundamental tenets of insurance coverage: (1) before any allocation considerations come into play, a policy must be triggered in the first place by injury “during the policy period”; and (2) regardless of “all sums” language, once policy limits have been exhausted, an insurer has no further indemnity obligation.