The New York Court of Appeals recently answered two certified questions from the Delaware Supreme Court concerning insurance allocation, and the Court’s answers may impact significantly policyholders litigating “long-tail” coverage claims.
In Viking Pump, Inc. v. TIG Insurance Co., the policyholders sought coverage for third-party asbestos claims under successive annual primary and umbrella policies sold by Liberty Mutual and under various excess liability policies sold by other insurers. As the primary and umbrella coverage neared exhaustion, litigation arose over whether the policyholders could secure coverage under their excess policies and how the parties should allocate indemnity under these policies.
Many of the excess policies included, or followed form to, a “non-cumulation” of liability provision, which insurers argue prevents an insured with long-tail exposures from securing the limits of all consecutive policies in place during the alleged trigger period. Other excess policies included, or followed form to, a similar two-part “Prior Insurance and Non-Cumulation of Liability” provision having the same alleged effect.
The parties’ dispute focused on two excess coverage issues: allocation and exhaustion. The policyholders and excess insurers disagreed on whether New York law requires an “all sums” or “pro rata” allocation method. The “all sums” method allows an insured to collect its total liability under any policy period triggered by the alleged damage. The “pro rata” method allocates to each insurance policy period a “pro rata” share of the total loss representing the portion of loss occurring during that period.
The Viking Court distinguished its prior Consolidated Edison opinion, which adopted a pro rata allocation method for claims involving environmental contamination triggering a number of policy years. The Court emphasized its prior decision arose from the subject policies’ specific language. The Court found that “[t]he [excess] policy language at issue here, by inclusion of the non-cumulation clauses and the two-part non-cumulation and prior insurance provisions, is substantially distinguishable from the language that we interpreted in Consolidated Edison, and the arguments that were made to us in that case were, likewise, different.” Id. at 14.
The Court held “it would be inconsistent with the language of the non-cumulation clauses to use pro rata allocation here.” Id. at 18. The Court also held that under a pro rata allocation method, the non-cumulation clauses would 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.” Id. at 19. The Court, therefore, adopted an all sums allocation for those policies triggered by a long-tail claim.
The Court then considered whether horizontal or vertical exhaustion applied to the excess policies. Horizontal exhaustion, favored by the excess insurers, requires policyholders to exhaust all triggered primary and umbrella layers before tapping into any of the excess policies. Vertical exhaustion, in contrast, allows policyholders to access each triggered excess policy once it exhausts the immediately underlying policies’ limits, even if other triggered lower-level policies during different policy periods remain unexhausted. The Court found vertical exhaustion more consistent with the policy language tying attachment of the excess policies to specifically identified policies within the same policy period. The Court also found vertical exhaustion conceptually consistent with the adopted all sums allocation.
Policyholders defending toxic tort, environmental contamination or other long-tail claims should review carefully their specific policy language to assess the potential allocation and exhaustion arguments available to them. If their insurance policies expressly provide coverage for “all sums” and contain the types of non-cumulation provisions discussed in Viking, then an “all sums” allocation and vertical exhaustion may apply under New York law.