What you need to know

The New York Court of Appeals ruled that the aggregate limit of an excess liability insurance policy covering asbestos claims was renewed annually.

What you need to do

Insurers should consider the impact of the New York Court of Appeals’ decision in evaluating the nature and extent of coverage for policy limits as between primary and excess layers of coverage.

Background

Union Carbide Corp., a seller of asbestos, sought liability insurance coverage from various insurers. UCC’s fifth excess layer provided $30 million of coverage, divided equally among six insurers, with each insurer responsible for $5 million. The layer incorporated by reference a “follow-the-form” clause from the underlying policy, which had a three-year duration. UCC argued that the policy limits could be annualized, that is, it was entitled to $15 million from each insurer, i.e., $5 million for each year of the policy’s three years. It further argued that a two-month extension of the policy entitled it to a separate policy limit. The New York Court of Appeals held that the policies provided separate limits of liability for each year of the multi-year policies. However, it held that it could not be determined whether the two-month extension entitled UCC to a separate set of limits under the policy. See Union Carbide Corp. v. Affiliated FM Ins. Co., 2011 N.Y. LEXIS 219 (Feb. 22, 2011).

The Court’s Ruling

The New York Court of Appeals held that:

  • The excess liability insurance policy’s aggregate limit was renewed annually. The Court concluded that the policy’s “follow-the-form” clause incorporated the conditions of the underlying policy, and one such condition was that aggregate limits be annualized.
  • The Court stated that the “follow-the-form” clause from the underlying policy “serves the important purpose of allowing an insured, like UCC, that deals with many insurers for the same risk to obtain uniform coverage, and to know, without a minute policy-by-policy analysis, the nature and extent of that coverage.” The Court found it unlikely that an insured with “as large and complicated an insurance program as UCC” would have sought policies that differed “as between primary and excess layers” during the period over which the policy limits spread.
  • The Court ruled that because the declarations in the subscription form policy provided that the limit of liability will be “$30 million, each occurrence and in the aggregate,” $30 million was not the maximum that could be paid on the entire policy. The Court also concluded that industry custom supported annualization of policy limits.
  • Finally, the Court held that UCC failed to meet its burden on summary judgment of showing that an insurer’s two-month extension of coverage entitled UCC to a separate set of policy limits. The Court concluded that the facts of the case did not clearly establish whether the extension was intended to be treated as a separate annual period.

Conclusion

The New York Court of Appeals ruled that the aggregate limit of an excess liability insurance policy was renewed annually. The Court also ruled that the insured had not met its burden of showing that an insurer’s two-month extension of coverage afforded a new policy limit.