Yesterday, New York’s high court took a giant step forward in protecting policyholders facing latent injury claims, allowing them to avoid multiple deductibles, retentions and insolvent coverage. In the Matter of Viking Pump, Inc. and Warren Pumps, LLC, Insurance Appeals (N.Y. Court of Appeals No. 59 May 3, 2016). The court held that, for policies that contain non-cumulation clauses, “all sums” allocation with vertical exhaustion is the only appropriate method for allocating losses among policies. This ruling is a game-changer for policyholders facing asbestos and environmental claims with insurance policies governed by New York law.
The case came to the New York Court of Appeal via certified questions from the Delaware Supreme Court. The policyholders, Viking Pump, Inc. and Warren Pumps, LLC, are defendants in many cases alleging injuries as a result of exposure to asbestos-containing materials. They had argued (and the lower Delaware courts had agreed) to apply pro rata allocation where the insurance policies in question included Prior Insurance and Non Cumulation clauses. A typical clause contained in the Viking/Warren policies is:
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.
Subject to the foregoing paragraph and to all the other terms and conditions of this Policy in the event that personal injury or property damage arising out of an occurrence covered hereunder is 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 or property damage without payment of additional premium.
This clause, the court found, is incompatible with pro rata allocation.
The New York high court had left an opening for this type of attack in its original opinion applying pro rata allocation in 2002, advising that it might reach a different result if the policy language guided it to do so. Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 NY2d 208, 222-23 (2002).
Interestingly, the court admitted that pro rata allocation is a “legal fiction” that should be dispensed with in the face of non-cumulation clauses.
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 noncumulation clause negates that premise by presupposing that two policies may be called upon to indemnify the insured for the same loss or occurrence.”
Slip op at p. 18. The court held that basic rules of contract construction require this result:
In a pro rata allocation, the non-cumulation clauses would, therefore, be rendered surplusage – a construction that cannot be countenanced under our principles of contract interpretation, and a result that would conflict with our previous recognition that such clauses are enforceable.
Slip op at p. 20 (citations omitted).
Courts across the United States have split over the question of whether to adopt a pro rata versus an “all sums” rule. Yesterday’s decision provides the road map to walk back existing pro rata decisions in other states.