Who’s on First?
When an insured carries multiple layers of insurance started with a primary policy and then several layers of excess insurance designed to pay only after the layers of insurance below have been exhausted.
Insurers have the unquestioned right to select those whom it will insure and is allowed to make a wise discrimination in selecting its risks and may limit the risks it is willing to take by clear and unambiguous language in the policy issued. This right is not limited by whether the policy is primary or excess insurance. New York’s highest court was asked to deal with the meaning of primary and excess policies in In re Viking Pump, Inc., Court of Appeals of New York, — N.E.3d —-, 2016 N.Y. Slip Op. 03413, 2016 WL 1735790 (May 3, 2016).
The Questions presented to the highest court in New York:
(1) whether “all sums” or “pro rata” allocation applies where the excess insurance policies at issue either follow form to a non-cumulation provision or contain a non-cumulation and prior insurance provision, and
(2) whether, in light of our answer to the allocation question, horizontal or vertical exhaustion is required before certain upper level excess policies attach.
Viking Pumps, Inc., and Warren Pumps, LLC, acquired pump manufacturing businesses from Houdaille Industries in the 1980s. Those acquisitions later subjected Viking and Warren to significant potential liability in connection with asbestos exposure claims.
Houdaille had extensive multi-layer insurance coverage spanning from 1972 to 1985 that included coverage for such claims. More specifically, Liberty Mutual Insurance Company provided Houdaille with primary insurance (totaling approximately $17.5 million) and umbrella excess coverage (totaling approximately $42 million) through successive annual policies. Beyond that, Houdaille obtained additional layers of excess insurance through annual policies issued by various excess insurers (totaling over $400 million in coverage), including a number of policies issued by defendants, designated herein as “the Excess Insurers.”
Viking and Warren sought coverage under the Liberty Mutual policies, and the Delaware Court of Chancery determined that both companies were entitled to exercise rights as insureds under those policies. As the Liberty Mutual coverage neared exhaustion, litigation arose regarding whether Viking and Warren were entitled to coverage under the additional excess policies issued to Houdaille by the Excess Insurers and, if so, how indemnity should be allocated across the triggered policy periods.
Central to the underlying litigation, the Liberty Mutual umbrella policies provide that the insurer “will pay on behalf of the insured all sums in excess of the retained limit which the insured shall become legally obligated to pay, or with the consent of [the Insurer], agrees to pay, as damages, direct or consequential, because of: (a) personal injury … with respect to which this policy applies and caused by an occurrence”.
The majority of the excess policies at issue also follow form to a “non-cumulation” of liability or “anti-stacking” provision in the Liberty Mutual umbrella policies. Those excess policies that do not follow form to the Liberty Mutual non-cumulation provision, contain a similar provision.
Insurance contracts, like other agreements, should be enforced as written, and parties to an insurance arrangement may generally contract as they wish and the courts will enforce their agreements without passing on the substance of them.
When construing insurance policies, the language of the contracts must be interpreted according to common speech and consistent with the reasonable expectation of the average insured. Furthermore, the court must construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.
Generally, non-cumulation clauses prevent stacking, the situation in which “an insured who has suffered a long term or continuous loss which has triggered coverage across more than one policy period wishes to add together the maximum limits of all consecutive policies that have been in place during the period of the loss. Such clauses originated during the shift from “accident-based” to “occurrence-based” liability policies in the 1960s and 1970s, and were purportedly designed to prevent any attempt by policyholders to recover under a subsequent policy—based on the broader definition of occurrence—for a loss that had already been covered by the prior “accident-based” policy.
In policies containing non-cumulation clauses or non-cumulation and prior insurance provisions, such as the excess policies before the court, all sums is the appropriate allocation method. It would be inconsistent with the language of the non-cumulation clauses to use pro rata allocation. Such policy provisions plainly 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 policy issued to the Insured prior to the inception date of the policy.
By contrast, the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period—meaning that no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence. Pro rata allocation is a legal fiction designed to treat continuous and indivisible injuries as distinct in each policy period as a result of the “during the policy period” limitation, despite the fact that the injuries may not actually be capable of being confined to specific time periods.
The non-cumulation clause presupposes that two policies may be called upon to indemnify the insured for the same loss or occurrence. In a pro rata allocation, the non-cumulation clauses would, therefore, be rendered surplusage—a construction that cannot be countenanced under New York’s principles of contract interpretation and a result that would conflict with previous recognition by New York courts that such clauses are enforceable.
Based on the policy language and the persuasive authority holding that pro rata allocation is inconsistent with non-cumulation and non-cumulation/prior insurance provisions, the court concluded that all sums allocation is appropriate in policies containing such provisions, like the ones at issue here.
All of the excess policies at issue primarily hinge their attachment on the exhaustion of underlying policies that cover the same policy period as the overlying excess policy. Vertical exhaustion is, therefore, more consistent than horizontal exhaustion with this language tying attachment of the excess policies specifically to identified policies that span the same policy period. Further, vertical exhaustion is conceptually consistent with an all sums allocation, permitting the Insured to seek coverage through the layers of insurance available for a specific year.
Here, the Insureds are not seeking multiple recoveries from different insurers under concurrent policies for the same loss, and the other insurance clause does not apply to successive insurance policies. Thus, in light of the language in the excess policies tying their attachment only to specific underlying policies in effect during the same policy period as the applicable excess policy, and the absence of any policy language suggesting a contrary intent, the court concluded that the excess policies are triggered by vertical exhaustion of the underlying available coverage within the same policy period.
The court concluded that, under New York law, the contract language of the applicable insurance policies controls each of these questions, and answered the certified questions concluding that all sums allocation and vertical exhaustion apply based on the language in the policies before the court.
Insurers, and those they insure, may contract as they wish and the courts will enforce their agreements. In this case the clear and unambiguous intent of the parties were that each lawyer of insurance for a single policy period must be exhausted before the next insurer in line is required to defend or indemnify. The highest court in New York, therefore, applied the policy language and refused to rewrite the contract of insurance.
Barry Zalma, Esq., CFE, practiced law in California for more than 49 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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