On July 18, 2017, the U.S. Court of Appeals for the Second Circuit adopted the New York Court of Appeals’ previous holding that the “all sums” provision in the insuring agreement permits an insured to access the limits of all policies in any triggered year, when the insurance policies contain “prior insurance” or “non-cumulation” clauses. The Second Circuit also broadly interpreted the prior insurance provision at issue and agreed that under certain circumstances insurers might be entitled to reduce their available limits of liability by the sum of payments made under any prior, same-level policies issued by different insurers.
In Olin Corp. v. OneBeacon America Ins. Co.,1 OneBeacon America Insurance Company (OneBeacon) issued to Olin Corporation (Olin) a set of excess umbrella policies for the period of 1970 through 1972, each providing $20 million in coverage in excess of a $300,000 primary policy. The policies provided coverage for “all sums” that the insured became obligated to pay by reason of property damage caused by an occurrence. The policies also contained a prior insurance provision (or non-cumulation clause), which stated that where a loss is “also covered in whole or in part under any other excess policy” previously issued to the insured, the excess policies’ limits “shall be reduced by any amounts due to the insured on account of such loss under such prior insurance.”
Since the 1980s, Olin has been litigating with its insurers seeking indemnification for environmental contamination at Olin manufacturing sites throughout the United States. In 2015, a New York federal judge issued a pair of orders directing OneBeacon to reimburse Olin for $44.5 million in costs and $42.7 million in interest for certain costs in connection with cleaning up five sites. OneBeacon appealed.
On appeal, the Second Circuit was asked to (i) resolve the proper method for allocating loss at each site when damage continues across a number of years and (ii) decide whether OneBeacon may reduce its policy limits by amounts due under prior insurance policies within the same layer of coverage. One of the key issues on appeal was the effect of the New York Court of Appeals’ May 2016 decision in Viking Pump,2 which addressed allocation of insurance coverage for “long-tail” claims over multiple years.
The Court of Appeals held in Viking Pump that, where policies contain prior-insurance or non-cumulation provisions, allocation is governed by the all sums method, which allows a policyholder to hold the policies in any triggered year liable for a loss up to the policy limits. The New York justices rejected the application of a “pro rata” allocation approach, which spreads liability proportionally among all triggered policies. The Viking Pump court observed that pro rata allocation is based on policy language limiting liability to only those losses occurring during a particular policy period. The presence of a non-cumulation provision conflicts with that principle. Those provisions “plainly contemplate that multiple successive insurance policies can indemnify insureds 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 policy.” The court also held that vertical exhaustion is appropriate when an all sums allocation is applicable. This permits the policyholder to exhaust the layers of coverage in a specific policy year. (Horizontal exhaustion requires all applicable primary layers of coverage to be exhausted before triggering excess insurance.)
In Olin, OneBeacon argued for a “hybrid” approach to policy allocation and exhaustion, where liability for Olin's cleanup costs would be prorated among all its triggered primary policies, which would all have to be exhausted before OneBeacon’s excess layer would be implicated. Only then would all sums allocation apply and allow Olin to vertically exhaust the excess policies one after the other, OneBeacon contended. According to the insurer, if the hybrid approach were applied, its excess policies were never reached because Olin hadn’t exhausted all of its triggered primary policies.
Relying on Viking Pump, the Second Circuit rejected OneBeacon’s argument, finding that only the primary policy directly below the OneBeacon policies had to be exhausted before the excess coverage was triggered. The court stated: “Because OneBeacon’s policies call for all sums allocation, and the New York Court of Appeals’ decision in Viking Pump dictates vertical exhaustion where the all sums approach is the proper method for allocation, we conclude that Olin’s underlying policies have been exhausted and OneBeacon’s policies have attached.”
OneBeacon also challenged the lower court's rejection of the argument that the prior-insurance provision in OneBeacon’s policies required that its limits be reduced by amounts paid under prior policies at the same level. The district court concluded that the provision referred only to past policies issued by the same insurer, not different insurers. On this point, the Second Circuit agreed with OneBeacon, holding that the excess insurer should be permitted to reduce its liability by previous amounts paid by different insurers to settle claims regarding Olin’s costs to clean up the sites at issue. Lloyd’s of London insurers had issued policies offering the same layer of coverage as OneBeacon’s to Olin between the 1950s and 1969, and Olin had settled with these insurers several years prior. The Second Circuit allowed OneBeacon to reduce its limits by any amounts previously paid by these insurers.
The Second Circuit’s holding in Olin is likely to be significant. The decision affords insurers the opportunity to share costs for multiyear losses with other insurers and will likely be considered by courts around the country when called upon to decide allocation issues in long-tail claims. While the long-term consequences of the decision remain to be seen, it puts a “stamp of approval” on the Viking Pump holding that, where a policy contains a non-cumulation clause, all sums allocation is required by New York law.