In The Matter Of Viking Pump, Inc., N.E.3d, 2016 WL 1735790 (2016), the Court of Appeals of New York addressed two questions certified from the Delaware Supreme Court: (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.
The court “reaffirm[ed] that, under New York law, the contract language of the applicable insurance policies controls each of these questions, and we answer the certified questions in accordance with the opinion herein, concluding that all sums allocation and vertical exhaustion apply based on the language in the policies before us.”
The insured acquired pump manufacturing businesses that later subjected the insured to significant liability from asbestos exposure claims. At issue were primary and excess insurance policies issued to the acquired companies spanning from 1972 to 1985. The court noted that the policies at issue generally contained or followed form to insuring agreement language that required the insurer to “pay on behalf of the insured all sums;” defining “personal injury” to include that which “occurs during the policy period;” and non-cumulation, anti-stacking and/or prior insurance provisions that operated to reduce the limits of liability under the policy by any amounts paid under previous policies for occurrences or losses covered under previous policies.
Regarding the question of allocation, the court noted that the language at issue in this case differed from the specific language at issue in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002), which applied a pro rata allocation under the facts of that case. The court acknowledged that in Consolidated Edison, it is suggested that in the absence of language weighing in favor of a different conclusion, pro rata allocation was the preferable method, but concluded that the inclusion of the non-cumulation clauses and prior insurance provisions distinguished the policy language in this case, and compelled an all sums allocation.
In New York, non-cumulation clauses have been enforced as written to prevent stacking of insurance limits in non-allocation contexts, even when this result limited the insured’s recovery. The court concluded that it would be inconsistent with non-cumulation language to use pro rata allocation because policies containing such clauses “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
[p]olicy issued to the Insured prior to the inception date’ of the instant policy.”
Per the court, 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. Because a pro rata allocation would render non-cumulation clauses to be surplusage, which is inconsistent with New York principles of contract interpretation, and because a pro rata allocation would conflict with the New York courts’ previous recognition that such clauses are enforceable, the court applied an “all sums” allocation to the policies containing such provisions.
Regarding the question of exhaustion, the court stated that vertical exhaustion is more consistent than horizontal exhaustion with language in excess policies that ties their attachment to the exhaustion of the specific underlying policies identified, and that vertical exhaustion is conceptually consistent with an all sums allocation, permitting the insured to seek coverage though the layers of coverage available for a specific year. The court rejected the application of “other insurance” clauses to the analysis, finding that the policies’ “other insurance” clauses only apply to concurrent policies, not successive policies.
Tressler Comments
While the In The Matter of Viking Pump, Inc. decision seems to stray from the rather secure path of pro rata allocation under New York law established by Consolidated Edison, the silver lining is that the Court of Appeals limited the effect of the “all sums” allocation to those cases involving policies with language such as that at issue inViking Pump. Specifically, the policies at issue must provide that the insurers will pay “all sums” and must further contain non-cumulation, anti-stacking or prior insurance language which, in the words of the Court of Appeals, plainly contemplate that multiple successive insurance policies cover an occurrence or loss by specifically acknowledging that an occurrence or loss can take place in multiple policy periods. This limits a more global reach of the Viking Pump decision which, by its own ruling, applies to the policy language and facts at issue only.