In the Matter of Viking Pump, Inc. and Warren Pumps LLC Insurance Appeals, No. CTQ‑2015‑00003 (NY)

Today, on March 29, 2016, the New York Court of Appeals, New York’s highest court, will hear oral argument on two significant allocation questions that could affect policyholders across the country.  In 2015, the Delaware Supreme Court certified questions to the high court of New York regarding (1) whether “all sums” or “pro rata” allocation applies to the policies at issue; and (2) depending on the outcome of the first question, whether vertical or horizontal exhaustion applies to determine when a policyholder can access its excess policies.  See In the Matter of Viking Pump, Inc. and Warren Pumps LLC, Insurance Appeals, No. CTQ-2015-00003 (NY). Policyholders whose policies are governed by New York law will feel the impact of these decisions most directly, although other states may follow New York’s decision and the decision thus could affect policies governed by those states’ laws.

All Sums v. Pro Rata. Policyholders typically prefer “all sums” or “joint and several” allocation as it allows the policyholder to seek coverage for the full amount of loss from bodily injury or property damage that spans multiple policy periods.  Under the classic formulation of this rule, the policyholder is entitled to choose a single triggered policy year to respond and the policies in that year then apply to pay the policyholder’s loss up to policy limits available in that year.  Policyholders argue that this rule is consistent with both the standard-form CGL policy language and the interpretation supported by the insurance industry when it drafted that language.  “Pro rata” allocation, on the other hand, spreads the loss across all policy periods in which injury or damage took place.  Policyholders generally do not favor “proration” because it can allocate loss to years in which the policyholder did not have coverage due to insurer insolvencies, lost or exhausted policies, relevant exclusions or other gaps in coverage.  Under “pro rata” allocation, insurers also argue that policyholders with “non-cumulation” language in their policies could be prevented from recovering the full amount of damages on multiyear claims.           

Vertical v. Horizontal Exhaustion.  Whether a policyholder must exhaust all available primary coverage before excess policies are required to respond can significantly limit a policyholder’s recovery on claims involving injury or damage that spans policy years.  The application of vertical exhaustion allows the policyholder to access coverage under its excess policies in a particular year as soon as the primary policy in that year is exhausted.  Vertical exhaustion often benefits the policyholder as it allows the policyholder to pursue policies in years where it has the most available coverage.  Horizontal exhaustion, on the other hand, requires the exhaustion of all available primary coverage before any excess policies respond.  This may limit the ultimate amount recovered by the policyholder because it could require the policyholder to pay deductibles or retentions in multiple years.

Viking Pump. The policyholders in Viking Pump, Inc. v. Century Indemnity Co. sought insurance coverage for thousands of claims alleging asbestos injuries that continued over many years.  2 A.3d 76 (Del.Ch. 2009).  The policyholders argued that an “all sums” allocation and vertical exhaustion should apply to the policies at issue based on the standard-form policy language at issue.  A Delaware trial court, applying New York law, held that an “all sums” allocation applied, instead of a “pro rata” allocation method.  The New York Court of Appeals has previously endorsed a “pro rata” method under non-standard policy language.  See Consolidated Edison Co. of New York v. Allstate Insurance Co., 98 N.Y.2d 208 (2002).  The court there concluded that adoption of proration in ConEd was “not the last word on allocation” under New York law.  On appeal in Viking Pump, the insurers argued that “pro rata” allocation should apply even under the standard-form CGL policy language at issue there, and that the non-cumulation and prior insurance provision in the policies operate to reduce the total limits available after proration of the claim.

The trial court also held that horizontal exhaustion, not vertical exhaustion, is required under New York law.  The policyholders argue that this ruling is not supported by the policy language. 

On appeal, the Delaware Supreme Court certified the following two questions to the New York Court of Appeals:

1. Under New York law, is the proper method of allocation to be used all sums or pro rata when there are non-cumulation and prior insurance provisions?
2. Given the Court’s answer to Question #1, under New York law and based on the policy language at issue here, when the underlying primary and umbrella insurance in the same policy period has been exhausted, does vertical or horizontal exhaustion apply to determine when a policyholder may access its excess insurance?

All parties, including several amici curiae, have submitted briefing on both issues. 

Importance of Viking Pump.  Policyholders should follow the Viking Pump case closely as the New York court’s ruling could have reverberations not just in New York but also in the many other states in the country whose high courts have not ruled on these issues.  The court’s decision likely will also affect other policyholders whose general liability insurance policies require application of New York law and those with  long-tail or multiyear claims in other states that may consider New York law persuasive.

An extended version of this Update was published in Law360 on 04.06.2016.

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