Why it matters

A Delaware superior court recently predicted that New York’s highest court would not require policyholders to horizontally exhaust excess policies in long-tail coverage cases. The court concluded that the horizontal exhaustion method applies to primary and umbrella policies, but not to excess policies. Recognizing that this was an issue of first impression in New York, the Delaware court concluded that New York courts would require all of the primary and umbrella policies to be exhausted before any of the first- layer excess policies could be triggered. After that, the court predicted, insureds would not be required to exhaust all of the first-layer excess policies across all years before being able to access second-layer excess policies. As long as a lower-level excess policy in a given year is exhausted, the excess policy above that policy can be triggered. Although this decision represents a victory for policyholders, time will tell whether New York courts ultimately agree that this decision accurately reflects New York law.

Detailed Discussion

Viking Pump and Warren Pump sought coverage from primary, umbrella, and excess insurers for asbestos claims filed against them. Eight years of litigation ensued, culminating in a three-week trial in Delaware Superior court. The trial court, applying New York law, held that “all sums” allocation applied, but that horizontal exhaustion was required. The excess insurers filed a motion seeking clarification of how horizontal exhaustion would apply to their policies.

They argued that horizontal exhaustion applies to all layers of coverage so that all first-layer excess policies must be exhausted before any second-layer excess policy is triggered. The insured, on the other hand, argued that horizontal exhaustion applies only to the primary and umbrella policies. Once those have been exhausted, then all excess policies are triggered.

Although horizontal exhaustion is the settled rule in New York, the Delaware court held, its courts have not addressed the problem of whether horizontal exhaustion applies to every layer or only the primary and umbrella layers. In deciding that issue, the court rejected the cases proffered by the insurers and instead looked to the California Superior Court decision in Kaiser Aluminum and Chem. Corp. v. Certain Underwriters at Lloyds, London. In that case, which the court believed squarely addressed this issue, the court applied horizontal exhaustion to the primary layer but vertical exhaustion to the excess layers.

“[T]he New York high court would hold horizontal exhaustion governs only the primary and umbrella policies here, not the excess coverage,” the Delaware court concluded. “New York emphasizes the policies’ purposes as evidenced by their language, premium amounts, and other indicators. New York has also unequivocally held that only policies insuring the same risk should respond simultaneously and that ‘other insurance’ clauses are not relevant in allocating damages to policies over different periods. Accordingly, neither New York law nor the policy language urges, let alone requires, horizontal exhaustion of the excess layers.”

Like Kaiser Aluminum, the Delaware court believed that the excess insurers had not demonstrated a legal or policy-based requirement for horizontally exhausting the excess policies. “It is unassailable that horizontal exhaustion is a limitation tending to deny coverage,” the court said. “While that makes sense at a primary/umbrella level where the policies specifically contemplate responding first, this limitation ought not apply to excess. . . . [The excess insurers] have not shown why, having bought insurance, [insureds] should find [themselves] with less coverage. It is a general tenet of New York law that policies are ‘construed in favor of finding coverage.’”

To read the decision in Viking Pump Inc. v. Century Indemnity Co., click here.