In a landmark ruling, the New York Court of Appeals held that “all sums” allocation and vertical exhaustion applied in a case involving coverage for injuries related to asbestos exposure. The court based its holding on the language of the insurance policies, which included non-cumulation clauses or non-cumulation and prior insurance provisions.
The plaintiffs, Viking Pumps, Inc. and Warren Pumps, LLC acquired pump manufacturing businesses from Houdaille Industries in the 1980s. These 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. The defendants in the present suit issued excess policies to Houdaille.
The excess policies at issue included language obligating the insurers to pay “all sums” in excess of the retained limit caused by an occurrence. The policies also included non-cumulation provisions or non-cumulation and prior insurance clauses, which essentially provided that payments made by insurers whose policies covered prior policy periods would reduce the per occurrence limit of the excess policies with respect to the same occurrence. Further, several of the excess policies included continuing coverage provisions, which extended coverage for occurrences that began within the policy period but continued after the policy period had expired.
New York courts generally apply pro rata allocation in long-tail injury cases such as those resulting from asbestos exposure. Under the pro rata method, each insurance policy is allocated a “pro rata” share of the total loss representing the portion of the loss that occurred during the policy period. Viking and Warren argued that their losses should instead be allocated through a “joint and several” or “all sums” method. This theory of allocation permits the insured to collect its total liability under any policy in effect during the periods that the damage occurred, up to the policy limits. The burden is then on the insurer against whom the insured recovers to seek contribution from the insurers that issued the other triggered policies.
The court sided with Viking and Warren. The court noted that its prior decisions applying pro rata allocation were based on the particular policy language at issue in those cases and affirmed that the language of the relevant policies would control here as well. The court reasoned that non-cumulation, prior insurance, and continuing coverage provisions clearly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence. In contrast, the pro rata allocation method presupposes 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. Thus, if pro rata allocation applies, then the non-cumulation, prior insurance, and continuing coverage provisions are superfluous. Because the court seeks to avoid interpreting contracts in a way that makes contractual provisions meaningless, the court applied all sums allocation.
The court further held that vertical rather than horizontal exhaustion would apply to the excess policies. The excess insurers argued for horizontal exhaustion, under which all applicable policies at one layer must be exhausted before overlying policies are triggered. Viking and Warren argued for vertical exhaustion, under which as soon as the primary policy in one year is exhausted, the overlying layers in that year may be triggered.
The court again sided with Viking and Warren. It noted that all of the excess policies at issue hinged their attachment on the exhaustion of underlying policies that cover the same policy period as the overlying excess policy and specifically identify the policy on whose exhaustion their attachment relies. The court viewed such language as militating in favor of vertical exhaustion. The court further stated that vertical exhaustion is more consistent with an all sums approach, allowing an insured to recover from all policies that provide coverage in a specific year.
Thus, after In the Matter of Viking Pump, Inc. and Warren Pumps, LLC Insurance Appeals, insurers must look to the language of their policies to determine how coverage will be allocated in long-tail injury cases under New York law. Where the policies contain non-cumulation, prior insurance, or continuing coverage clauses, courts likely will apply all sums allocation and vertical exhaustion.