Long-tail claims from asbestos and other toxic exposures have plagued policyholders and their insurers for decades. Myriad issues arise when trying to determine when injuries are incurred, how policies are triggered, how liability should be allocated among multiple policies and when excess policies are required to cover the losses. None of this is easy and there is no uniformity among the various courts that have dealt with these issues.
That brings us to the latest pronouncement from the New York Court of Appeals, which was asked by the Delaware Supreme Court to answer certified questions under New York law about whether “all sums” or “pro rata” allocation applies in an excess insurance situation that contain non-cumulation and prior insurance provisions and whether horizontal or vertical allocation is required before the excess policies attach in an asbestos situation.
In answering the certified questions, the New York Court of Appeals held in a May 3, 2016 opinion that all sums allocation and vertical exhaustion apply to the specific policies being construed. Viking Pump, Inc. v. TIG Ins. Co., No. 59 (N.Y. Ct. of App. May 3, 2016). The key point to the court’s ruling is that no blanket rule was ever set. As set forth in the opening paragraph of the opinion, the court reaffirmed that “under New York law, the contract language of the applicable insurance policies controls . . . .” The determining contract wording factor in this case is that the policies had or followed form to “all sums” language in their coverage grants along with non-cumulation of liability or anti-stacking provisions.
In holding that the all-sums allocation method applied and vertical exhaustion was appropriate in the context of these specific policies, the court carefully reviewed and analyzed its prior holdings on pro rata versus all sums allocation. It noted that no blanket rule was adopted by its prior holdings in favor of the pro rata allocation approach. it emphasized that under New York law, proper contract construction requires the court to first look to the language of the policy. The court held that by including non-cumulation clauses and non-cumulation and prior insurance provisions in the policies being construed, the language of these policies was substantively distinguishable from the language interpreted in prior cases.
The court held that it would be inconsistent with the language of the non-cumulation provisions to use pro rata allocation in this case. These provisions, found the court, contemplated that multiple successive insurance policies can indemnify the insured for the same loss or occurrence thereby making pro rata allocation impossible to use. Essentially, pro rata allocation treated continuous and indivisible injuries as distinct in each policy period, which is negated by the non-cumulation clause. Using pro rata allocation would render the non-cumulation and continuing coverage clauses surplusage or irrelevant, which cannot be countenanced under New York contract construction principles. The court concluded that the all sums allocation approach is appropriate in policies containing these types of provisions. This now sounds like a blanket rule when these non-cumulation and similar provisions are in the policies. But read all the policy language before jumping to any conclusions.
As to exhaustion, the court felt that vertical exhaustion was more consistent than horizontal exhaustion with the relevant policy language and with an all sums allocation. The excess policies generally had their attachment point relative to the exhaustion of specific underlying polices for the same policy period. The court rejected the argument that the other insurance clause required horizontal exhaustion.
Everyone involved in allocation and exhaustion needs to read this case as it will have influence on future cases where the parties are arguing between pro rata and all sums allocation approaches.