In a major victory for policyholders, the New York Court of Appeals held on May 3, 2016 that manufacturers Viking Pump, Inc. and Warren Pumps, LLC are entitled to coverage under excess insurance policies for liability resulting from asbestos claims, and that the manufacturers are not required to exhaust the available primary policies before accessing the excess coverage. This far-reaching ruling reaffirms the Court’s prior holdings that policy language is controlling in coverage disputes.
New York’s highest court issued the ruling in response to two certified questions by the Delaware Supreme Court. First, the Court was asked whether New York law requires application of an “all sums” or “pro rata” allocation method when policies contain non-cumulation and prior insurance provisions. Second, the Court was asked to determine whether New York law and the policies in question require the manufacturers to “horizontally” exhaust all primary and umbrella policies before tapping into excess policies, or whether the insureds need only “vertically” exhaust the underlying policies before immediately accessing each excess policy, even if other lower-level policies during different policy periods remain unexhausted.
Ruling on the first question, the Court of Appeals held that the “all sums” allocation method applies. Under this theory of allocation, an insured may collect its total liability under any policy in effect during the periods that the damage occurred, up to the policy limits. The Court expressly noted that its prior rulings had not set a “blanket rule” in favor of the pro rata allocation approach, which limits an insurer’s coverage obligation to only those sums incurred by the insured during the policy period. Rather, the court reaffirmed that “under New York law, the contract language of the applicable insurance policies controls.”
The excess policies held by Viking Pump and Warren Pumps included non-cumulation and prior insurance provisions. The Court explained that such provisions “contemplate that multiple successive insurance policies can indemnify the insured 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 [p]olicy issued to the [insured] prior to the inception date’ of the instant policy.” The Court concluded that pro rata allocation would be incompatible with these provisions, since it treats “continuous and indivisible injuries as distinct in each policy period.”
In addition, several of the excess policies in question contained “continuing coverage” clauses that “expressly extend a policy’s protections beyond the policy period for continuing injuries.” The Court found that the presence of such clauses “further compels an interpretation in favor of all sums allocation” since, under a pro rata allocation, “no policy covers a loss that began during a policy period and continued after termination of that period.”
As to the question of exhaustion, the Court of Appeals found that vertical exhaustion was more consistent with the language of the excess policies, which generally ties attachment of the excess polices to the exhaustion of specific underlying policies that cover the same policy period. The Court further found that “vertical exhaustion is conceptually consistent with an all sums allocation” since it permits the insured “to seek coverage through the layers of insurance available for a specific year.”
The Viking Pump decision represents a significant expansion of potential recovery for policyholders in long-tail claims governed by New York law. In disputes involving similar policy language, insureds now have the ability to maximize their coverage by picking which triggered policies to tap into for coverage of their liability costs.