The Matter of Viking Pump Inc. and Warren Pumps LLC , 27 N.Y.3d 244 ( 2016 )

This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 59
In the Matter of Viking Pump,
Inc. and Warren Pumps, LLC,
Insurance Appeals.
--------------------------------
Viking Pump, Inc. and Warren
Pumps, LLC,
Appellants,
TIG Insurance Company, et al.,
Respondents.
Michael P. Foradas, for appellant Viking Pump, Inc.
Robin Cohen, for appellant Warren Pumps, LLC.
Kathleen M. Sullivan, for respondents.
Complex Insurance Claims Litigation Association et al.;
New York State Electric & Gas Corporation; United Policyholders
et al.; Olin Corporation; ITT Corporation, amici curiae.
STEIN, J.:
In this complex insurance dispute, we have accepted two
certified questions from the Delaware Supreme Court asking us to
determine (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
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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. We reaffirm 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.
I.
The facts and procedural history of the underlying
litigation are explained in more detail in decisions of the
Delaware courts (see In re Viking Pump, Inc., ___ A3d ___, ___,
2015 WL 3618924, 2015 Del LEXIS 278 [Del June 10, 2015]; Viking
Pump, Inc. v Century Indem. Co., 2014 WL 1305003, 2014 Del Super
LEXIS 707 [Del Super Feb. 28, 2014]; Viking Pump, Inc. v Century
Indem. Co., 2013 WL 7098824, 2013 Del Super LEXIS 615 [Del Super
Oct. 31, 2013]; Viking Pump, Inc. v Century Indem. Co., 2 A3d 76
[Del Ch 2009]). As relevant here, 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,
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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 (see generally Viking Pump, Inc. v Liberty
Mut. Ins. Co., 2007 WL 1207107, 2007 Del Ch LEXIS 43 [Del Ch Apr
2, 2007]). 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"
(emphasis added).
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"Occurrence" is defined, in relevant part, as "injurious exposure
to conditions, which results in personal injury" which, in turn,
is defined as "personal injury or bodily injury which occurs
during the policy period" (emphasis added). The policies also
state that, "[f]or the purpose of determining the limits of [the
Insured's liability]: (1) all personal injury . . . arising out
of continuous or repeated exposure to substantially the same
general conditions . . . shall be considered as the result of one
and the same occurrence." The excess policies issued by the
Excess Insurers either follow form to (i.e., incorporate) these
provisions, or provide for substantively identical coverage.
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, which provides
that
"[i]f the same occurrence gives rise to
personal injury, property damage or
advertising injury or damage which occurs
partly before and partly within any annual
period of this policy, the each occurrence
limit and the applicable aggregate limit or
limits of this policy shall be reduced by the
amount of each payment made by [Liberty
Mutual] with respect to such occurrence,
either under a previous policy or policies of
which this is a replacement, or under this
policy with respect to previous annual
periods thereof."
Those excess policies that do not follow form to the Liberty
Mutual non-cumulation provision, contain a similar two-part
"Prior Insurance and Non[-]Cumulation of Liability" provision,
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sometimes referred to as "Condition C," as follows:
"It is agreed that if any loss covered
hereunder is also covered in whole or in part
under any other excess Policy issued to the
[Insured] prior to the inception date
hereof[,] the limit of liability hereon . . .
shall be reduced by any amounts due to the
[Insured] on account of such loss under such
prior insurance.
Subject to the foregoing paragraph and to all
the other terms and conditions of this Policy
in the event that personal injury or property
damage arising out of an occurrence covered
hereunder is continuing at the time of
termination of this Policy the Company will
continue to protect the [Insured] for
liability in respect of such personal injury
or property damage without payment of
additional premium."
In the underlying litigation, the parties cross-moved
for summary judgment with respect to the availability of coverage
and the allocation of liability under the excess policies. The
Delaware Court of Chancery granted Viking and Warren summary
judgment on those issues, and denied the Excess Insurers' cross
motions (2 A3d at 130). As a threshold matter, the Court of
Chancery held that New York law applied to the dispute and that
Viking and Warren were each entitled to coverage under the excess
policies (see id. at 90).1
With regard to the allocation issue, the Court of
Chancery agreed with Warren and Viking (hereinafter,
collectively, "the Insureds") that the proper method of
allocation was the all sums approach, as compared with the pro
1
Neither of those holdings is before us.
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rata allocation method propounded by the Excess Insurers (see id.
at 119-127). The Court of Chancery acknowledged that this Court
had previously applied the pro rata method in Consolidated Edison
Co. of N.Y. v Allstate Ins. Co. (98 NY2d 208, 222 [2002]), where
the policy language similarly provided that the insurer would pay
"all sums" for an occurrence happening "during the policy period"
(see 2 A3d at 120-121). However, the Court of Chancery
distinguished the policy language at issue here from that
interpreted in Consolidated Edison on the ground that the
non-cumulation and prior insurance provisions in the policies
here evinced a clear and unambiguous intent to use all sums
allocation (see id. at 119-127). The Court of Chancery rejected
the argument of the Excess Insurers that these provisions would
not apply if liability was apportioned on a pro rata basis
because, according to that court, such an interpretation would --
contrary to New York principles of contract interpretation --
render the non-cumulation and prior insurance provisions
surplusage (see id. at 124-126). The Court of Chancery also
observed that, even if the policy language was ambiguous, "the
only substantial extrinsic evidence offered by the parties weighs
in favor of the use of the all sums method" because, the court
asserted, Liberty Mutual had, in the past, routinely allocated
its liability under its own policies -- to which the excess
policies followed form -- in accordance with the all sums method
(id. at 119, 127-129). The Court of Chancery further noted that,
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to the extent the policies are ambiguous, any ambiguity must be
resolved in favor of the Insureds (see id. at 129-130).
The matter was transferred to the Delaware Superior
Court (2010 WL 2989690 [Del Ch June 2010]), where a trial was
ultimately held (2013 WL 7098824, at *6-7, 2013 Del Super LEXIS
615, *21-22). A verdict was returned largely in the Insureds'
favor, and the parties made post-judgment motions. As relevant
here, the Superior Court rejected the Excess Insurers' renewed
arguments that pro rata allocation applied. The Superior Court
also determined that, as a matter of New York law, the Insureds
were obligated to horizontally exhaust (i.e., deplete) every
triggered primary and umbrella layer of insurance before
accessing the excess policies. While the Superior Court agreed
with the Insureds that policy language supported vertical
exhaustion, in the court's view, New York law required that
horizontal exhaustion be utilized with respect to primary and
umbrella policies.2
On appeal, the Delaware Supreme Court concluded that
resolution of the allocation and exhaustion disputes between the
Excess Insurers and the Insureds "depends on significant and
unsettled questions of New York law that have not been answered,
2
The Superior Court subsequently limited that ruling to
the primary/umbrella layers, holding that horizontal exhaustion
did not apply among additional layers of excess coverage (see
Viking Pump, Inc. v Century Indem. Co., 2014 WL 1305003, 2014 Del
Super LEXIS 707 [Del Super Feb. 28, 2014]). The propriety of
that holding is not before us.
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in the first instance, by the New York Court of Appeals" (___ A3d
___, ___, 2015 WL 3618924, at *2, 2015 Del LEXIS 278, at *9-10).
Therefore, the Delaware Supreme Court certified, and we accepted,
the following questions:
"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?"
(id. 2015 WL 3618924, at *3, 2015 Del LEXIS 278, at *10; see
Matter of Viking Pump, Inc., 25 NY3d 1188 [2015]).
II. Allocation
(A)
Courts across the country have grappled with so-called
"long-tail" claims -- such as those seeking to recover for
personal injuries due to toxic exposure and property damage
resulting from gradual or continuing environmental contaminations
-- in the insurance context. These types of claims present
unique complications because they often involve exposure to an
injury-inducing harm over the course of multiple policy periods,
spawning litigation over which policies are triggered in the
first instance, how liability should be allocated among triggered
policies and the respective insurers, and at what point insureds
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may turn to excess insurance for coverage. Given the particular
certified questions presented here, we are not asked to review
the Delaware courts' rulings regarding which policies were
triggered and upon what events such triggering occurred, and we
do not pass on those issues here.3 Rather, we consider only the
allocation and exhaustion issues, and we first address the
question of allocation.
The Insureds argue that the losses should 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 (Roman
Catholic Diocese of Brooklyn v National Union Fire Ins. Co. of
Pittsburgh, Pa., 21 NY3d at 154, quoting Consolidated Edison, 98
NY2d 208, 222 [2002]; see United States Fid. & Guar. Co. v
American Re-Ins. Co., 20 NY3d 407, 426 [2013]). The burden is
then on the insurer against whom the insured recovers to seek
contribution from the insurers that issued the other triggered
policies (see Consolidated Edison, 98 NY2d at 222).
The Excess Insurers, by contrast, advocate for pro rata
3
After the Delaware Court of Chancery held that the
policies were triggered upon an injury-in-fact that occurred upon
asbestos exposure (2 A3d 76, 110-111 [Del Ch 2009]), the trigger
issue was litigated at trial, and the Superior Court declined to
alter the jury's verdict on this point (see 2013 WL 7098824, at
*17-18, 2013 Del Super LEXIS 615, *55-58 [Del Super Oct. 31,
2013]).
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allocation. Under this method, an insurer's liability is limited
to sums incurred by the insured during the policy period; in
other words, 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 (see Roman Catholic Diocese of
Brooklyn, 21 NY3d at 154; Consolidated Edison, 98 NY2d at 223).4
Generally, "[p]roration of liability among the insurers
acknowledges the fact that there is uncertainty as to what
actually transpired during any particular policy period" in
claims alleging a gradual and continuing harm (Consolidated
Edison, 98 NY2d at 224).
Courts of different states and federal jurisdictions
are divided on the issue of allocation in relation to long-tail
claims. Some jurisdictions have expressed a preference for the
all sums method, usually relying on language in policies
obligating an insurer to pay "all sums" for which an insured
becomes liable (see e.g. State of California v Cont. Ins. Co., 55
Cal 4th 186, 199, 281 P3d 1000, 1007 [2012], as mod [Sept. 19,
2012]; Plastics Eng'g Co. v Liberty Mut. Ins. Co., 315 Wis 2d
556, 583, 759 NW2d 613, 626 [2009]; Goodyear Tire & Rubber Co. v
Aetna Cas. & Sur. Co., 95 Ohio St 3d 512, 515, 769 NE2d 835, 840
[2002]; Hercules, Inc. v AIU Ins. Co., 784 A2d 481, 491 [Del
4
Courts have devised different methods of fixing losses
between policy periods (see Consolidated Edison Co. of N.Y. v
Allstate Ins. Co., 98 NY2d 208, 224-225 [2002]). Again, we have
no occasion to discuss these methods in this case.
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2001]; American Physicians Ins. Exch. v Garcia, 876 S.W.2d 842, 855
[Tex 1994]; J.H. France Refractories Co. v Allstate Ins. Co., 534
Pa 29, 39, 626 A2d 502, 507 [1993]; Keene Corp. v Ins. Co. of N.
Am., 667 F2d 1034, 1047 [DC Cir 1981]). Others have, instead,
utilized the pro rata method, emphasizing language in the
insurance policies that may be interpreted as limiting the "all
sums" owed to those resulting from an occurrence "during the
policy period," or public policy reasons supporting pro rata
allocation, or a combination of the two (see e.g. EnergyNorth
Nat. Gas, Inc. v Certain Underwriters at Lloyd's, 156 NH 333,
344, 934 A2d 517, 526 [2007]; Public Serv. Co. of Colorado v
Wallis and Cos, 986 P2d 924, 940 [Colo 1999]; Owens-Illinois,
Inc. v United Ins. Co., 138 NJ 437, 473, 650 A2d 974, 992 [1994];
Insurance Co. of N. Am. v Forty-Eight Insulations, Inc., 633 F2d
1212, 1225 [6th Cir 1980], decision clarified on reh, 657 F2d 814
[6th Cir 1981], cert denied 454 U.S. 1109 [1981]).
We first confronted the question of pro rata versus all
sums allocation in Consolidated Edison (98 NY2d at 222). In that
case, we applied the pro rata method to claims involving
environmental contamination over a number of years and insurance
policy periods. Significantly, we did not reach our conclusion
in Consolidated Edison by adopting a blanket rule, based on
policy concerns, that pro rata allocation was always the
appropriate method of dividing indemnity among successive
insurance policies. Rather, we relied on our general principles
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of contract interpretation, and made clear that the contract
language controls the question of allocation.
We emphasized in Consolidated Edison, and have
reiterated thereafter, that "'[i]n determining a dispute over
insurance coverage, [courts] first look to the language of the
policy'" (Roman Catholic Diocese of Brooklyn, 21 NY3d at 148,
quoting Consolidated Edison, 98 NY2d at 221; see Selective Ins.
Co. of Am. v County of Rensselaer, 26 NY3d 649, 655 [2016]). We
did not adopt a strict rule mandating either pro rata or all sums
allocation because 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'" (J.P. Morgan Sec. Inc. v Vigilant Ins. Co., 21 NY3d 324,
334 [2013], quoting New England Mut. Life Ins. Co. V Caruso, 73
NY2d 74, 81 [1989]).
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" (Dean v Tower Ins. Co. of N.Y., 19 NY3d 704, 708 [2012],
quoting Cragg v Allstate Indem. Corp., 17 NY3d 118, 122 [2011]).
Furthermore, "we 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"
(Roman Catholic Diocese of Brooklyn, 21 NY3d at 148 [internal
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quotation marks and citations omitted]). Significantly,
"surplusage[ is] a result to be avoided" (Westview Assoc. v
Guaranty Natl. Ins. Co., 95 NY2d 334, 339 [2000]). Moreover,
while "'[a]mbiguities in an insurance policy are to be construed
against the insurer'" (Dean, 19 NY3d at 708, quoting Breed v
Insurance Co. of N. Am., 46 NY2d 351, 353 [1978]; see Federal
Ins. Co. v International Bus. Machs. Corp., 18 NY3d 642, 650
[2012]), a contract is not ambiguous "if the language it uses has
a definite and precise meaning, unattended by danger of
misconception in the purport of the [agreement] itself, and
concerning which there is no reasonable basis for a difference of
opinion" (Selective Ins. Co. of Am., 26 NY3d at 655 [internal
quotation marks and citation omitted]).
In Consolidated Edison, we applied the foregoing
principles to the parties' arguments in support of, and in
opposition to, pro rata allocation. The arguments presented in
that case, and our resulting decision, turned exclusively upon
the interpretation of two phrases in the insurance policies that
were before us: (1) that an insurer agreed to indemnify the
insured for "all sums" for which the insured was liable and which
were caused by or arose out of an "occurrence;" and (2) that the
"policies provide[d] indemnification for liability incurred as a
result of an accident or occurrence during the policy period, not
outside that period" (Consolidated Edison, 98 NY2d at 224
[emphasis added]). The Court concluded that "[p]ro rata
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allocation under th[o]se facts, while not explicitly mandated by
the policies, [was] consistent with the language of the
policies," whereas the mere use of the phrase "all sums" was
insufficient to establish a contrary view (98 NY2d at 224
[emphasis added]). To be sure, we also suggested that, in the
absence of language weighing in favor of a different conclusion,
pro rata allocation was the preferable method of allocation in
long-tail claims in light of the inherent difficulty of tying
specific injuries to particular policy periods. Nevertheless, we
recognized that "different policy language" might compel all sums
allocation (98 NY2d at 223), citing, as a point of comparison, to
the Delaware Supreme Court's decision in Hercules, Inc. v AIU
Ins. Co., wherein the Delaware Court adopted the all sums method
(784 A2d 481).
The policy language at issue here, by inclusion of the
non-cumulation clauses and the two-part non-cumulation and prior
insurance provisions, is substantively distinguishable from the
language that we interpreted in Consolidated Edison, and the
arguments that were made to us in that case were, likewise,
different.5 Indeed, the excess policies before us here present
the very type of language that we signaled might compel all sums
allocation in Consolidated Edison. Inasmuch as the question is
now squarely before us, we must determine whether the presence of
5
While such provisions were included in some of the
policies at issue in Consolidated Edison, there was no reference
in our decision to their existence.
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a non-cumulation clause or a non-cumulation and prior insurance
provision mandates all sums allocation.
(B)
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" (12 Couch on Ins. § 169:5 [3d ed]; see Barry
R. Ostrager & Thomas R. Newman, Handbook on Ins. Coverage
Disputes § 11.02 [e] [16th ed 2013]). 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 (see Jan M. Michaels et al., The
"Non-Cumulation" Clause: Policyholders Cannot Have Their Cake and
Eat It Too, 61 U Kan L Rev 701, 717 [2013]; Christopher C.
French, The "Non-Cumulation Clause": An "Other Insurance" Clause
by Another Name, 60 U Kan L Rev 375, 386 [2011]). More recently,
courts have been called upon to analyze the impact of these
clauses on the allocation question. Significantly, we have
enforced non-cumulation clauses in accordance with their plain
language (see Nesmith v Allstate Ins. Co., 24 NY3d 520, 523
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[2014]; Hiraldo v Allstate Ins. Co., 5 NY3d 508, 513 [2005]),
despite the limiting impact that such clauses may have on an
insured's recovery (and, by extension, that of an injured
plaintiff). However, we have never addressed the interplay
between non-cumulation/prior insurance provisions and allocation.
Courts in other states that have addressed this issue
-- both those that have adopted all sums allocation and a few
that have followed a pro rata approach -- have concluded that
non-cumulation clauses cannot be reconciled with pro rata
allocation. For example, in Chicago Bridge & Iron Co. v Certain
Underwriters at Lloyd's, London, a Massachusetts appellate court
rejected pro rata allocation, in part, on the ground that the
non-cumulation/prior insurance provision "would be superfluous
had the drafter intended that damages would be allocated among
insurers based on their respective time on the risk" (59 Mass App
Ct 646, 656, 797 NE2d 434, 441 [Mass App Ct 2003]). Similarly,
the Supreme Court of Wisconsin supported its determination that
all sums allocation applied by pointing to non-cumulation clauses
contemplating indemnity where an injury occurs "'partly before
and partly within the policy period'" (Plastics Eng'g Co., 315
Wis 2d at 583, 759 NW2d at 626; see also Riley v United Services
Auto. Ass'n, 161 Md App 573, 592, 871 A2d 599, 611 [Md Ct Spec
App 2005] [noting that prohibiting stacking would run counter to
pro rata allocation], affd 393 Md 55, 899 A2d 819 [2006]).
In addition, at least two courts in jurisdictions that
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have adopted the pro rata allocation method, have held that non-
cumulation clauses cannot be enforced in conjunction with that
method (see Spaulding Composites Co., Inc. v Aetna Cas. and Sur.
Co., 176 NJ 25, 44-46, 819 A2d 410, 422-423 [2003]; Outboard
Marine Corp. v. Liberty Mut. Ins. Co., 283 Ill App 3d 630, 219
Ill Dec 62, 670 NE2d 740 [1996], appeal denied 169 Ill 2d 570,
221 Ill Dec 439, 675 NE2d 634 [1996] [declining to enforce non-
cumulation clause with pro rata allocation]). In Spaulding
Composites Co., Inc. v Aetna Cas. and Sur. Co., the New Jersey
Supreme Court explained that, "even if the non-cumulation clause
was not facially inapplicable, . . . it would thwart the
. . . pro-rata allocation modality" (176 NJ at 44, 819 A2d at
422). That Court reasoned that,
"[o]nce the court turns to pro rata
allocation, it makes sense that the
non-cumulation clause, which would allow the
insurer to avoid its fair share of
responsibility, drops out of the policy
. . . . The pro-rata sharing methodology
has, at its core, a public policy that favors
maximizing, in a fair and just manner,
insurance coverage for cleanup of
environmental disasters. By applying the
non-cumulation clause, insurers who were
actually 'on the risk' would be insulated
from their fair share of liability. . . ."
(id. at 44-45; see 15 Couch on Ins. § 220:30 [3d ed 1999] ["Once
a court has determined that a loss is to be shared among
sequential insurers on a pro rata basis, 'prior insurance' and
'non[-]cumulation of liability' clauses in the policies become
unenforceable"]).
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These cases are persuasive authority for the
proposition that, in policies containing non-cumulation clauses
or non-cumulation and prior insurance provisions, such as the
excess policies before us, all sums is the appropriate allocation
method. We agree that it would be inconsistent with the language
of the non-cumulation clauses to use pro rata allocation here.
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 [p]olicy issued to the [Insured] prior to the
inception date" of the instant 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 negates that premise by presupposing that two
policies may be called upon to indemnify the insured for the same
loss or occurrence. Indeed, even commentators who have advocated
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for pro rata allocation and propounded the complications that can
be caused by all sums allocation have recognized that
non-cumulation clauses cannot logically be applied in a pro rata
allocation (see Jan M. Michaels et al., The Avoidable Evils of
"All Sums" Liability for Long-Tail Insurance Coverage Claims, 64
U Kan L Rev 467, 489 [2015] ["Provisions such as the
non-cumulation clause [do] not even apply and need not be
analyzed under pro rata allocation"]). In a pro rata allocation,
the non-cumulation clauses would, therefore, be rendered
surplusage -- a construction that cannot be countenanced under
our principles of contract interpretation (see Roman Catholic
Diocese of Brooklyn, 21 NY3d at 148; Consolidated Edison, 98 NY2d
at 221-222; Westview Assoc., 95 NY2d at 339), and a result that
would conflict with our previous recognition that such clauses
are enforceable (see Nesmith, 24 NY3d at 523; Hiraldo, 5 NY3d at
513).6
Several of the excess policies here also contain
continuing coverage clauses within the non-cumulation and prior
6
Notably, the Insurers originally argued to the Delaware
courts that the non-cumulation clauses should not be given effect
in a pro rata allocation. Apparently recognizing that this would
conflict with our principles of contract interpretation -- as the
Delaware Court of Chancery concluded -- the Insurers now take the
position that the non-cumulation clauses can be given effect with
pro rata allocation. Indeed, according to the Delaware Superior
Court, even the Excess Insurers' own witness, an insurance law
professor, conceded that non-cumulation clauses were inconsistent
with pro rata allocation (see 2013 WL 7098824, at *12, 2013 Del
Super LEXIS 615, at *39).
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insurance provisions, reinforcing our conclusion that all sums --
not pro rata -- allocation was intended in such policies. The
continuing coverage clause expressly extends a policy's
protections beyond the policy period for continuing injuries.
Yet, under a pro rata allocation, no policy covers a loss that
began during a particular policy period and continued after
termination of that period because that subsequent loss would be
apportioned to the next policy period as its pro rata share.
Using the pro rata allocation would, therefore, render the
continuing coverage clause irrelevant. Thus, presence of that
clause in the respective policies further compels an
interpretation in favor of all sums allocation (see Hercules,
Inc., 784 A2d at 493-494; Dow Corning Corp. v Cont. Cas. Co.,
Inc., 1999 WL 33435067, at *7, 1999 Mich App LEXIS 2920, at *23-
24 [Mich Ct App Oct. 12, 1999], lv denied 463 Mich. 854, 617 NW2d
554 [2000]; Boston Gas Co. v Century Indem. Co., 454 Mass 337,
362, 910 NE2d 290, 309 [2009]; Liberty Mut. Ins. Co. v Those
Certain Underwriters at Lloyds, 650 F Supp 1553, 1559 [WD Pa
1987]).
The Excess Insurers contend that a conclusion that all
sums allocation is required would be inconsistent with the Second
Circuit's holding in Olin Corp. v Am. Home Assur. Co. (704 F3d
89, 95 [2d Cir 2012] [Olin III]) and those cases that have
followed in its stead (see Liberty Mut. Ins. Co. v Fairbanks Co.,
2016 WL 1169511, *7, 2016 US Dist LEXIS 36662, at *22 [SD NY
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2016]; Liberty Mut. Fire Ins. Co. v J&S Supply Corp., 2015 US
Dist LEXIS 177124, *24-25 [SD NY 2015]). We discern no such
impediment to our holding.
In Olin I, the Second Circuit held that pro rata
allocation applied to distribute the insured's liability to
insurance policies triggered by soil and groundwater
contamination resulting from Olin Corporation's pesticide
manufacturing operations (see Olin Corp. v Ins. Co. of N. Am.,
221 F3d 307 [2d Cir 2000] [Olin I]). There, the Second Circuit
relied both on public policy reasons supporting pro rata
allocation, and on language in the insurance policies limiting
the scope of coverage to damages incurred during the policy
period (see id. at 324-326). In a later appeal in additional
related litigation (see Olin Corp. v Certain Underwriters at
Lloyd's London, 468 F3d 120, 127 [2d Cir 2006] [Olin II]), the
Second Circuit reaffirmed that its conclusion was consistent with
our decision in Consolidated Edison.
Subsequently, in Olin III, the issue on appeal in
related litigation against one of Olin's excess insurance
carriers was whether the attachment point (i.e., the point at
which the insured's liability triggers excess coverage) for two
excess policies had been met (704 F3d at 93-95). Applying strict
pro rata allocation to the underlying policies, as provided for
in Olin I, the attachment point for the two excess insurance
policies was not reached (see id. at 95). The parties' arguments
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in Olin III centered upon the "Prior Insurance and Non-Cumulation
of Liability" provision in the underlying policies to which the
excess policies followed form (id. at 94), which had not been
raised in Olin I or Olin II (see id. at 98). Olin argued that,
although pro rata allocation applied under the Second Circuit's
earlier holding in Olin I, the continuing coverage clause
contained in the non-cumulation/prior insurance provision
required that the losses allocated to subsequent years be swept
back into the policy periods covering the earlier years. The
excess insurer, by contrast, argued, as relevant here, that pro
rata allocation was inconsistent with the non-cumulation and
continuing coverage clauses and, consequently, those provisions
could not be enforced in conjunction with pro rata allocation.
The Second Circuit held that the plain language of the
continuing coverage clause of the prior insurance provision
"require[d] the insurer to indemnify the insured for personal
injury or property damage continuing after the termination of the
policy" (id. at 100). The court, therefore, divided up the
damages for each year as if allocating them on a pro rata basis,
but then swept the shares attributable to the years outside the
policy period back into the earlier policy periods.
At first glance, the Second Circuit's decision in Olin
III could be viewed as harmonizing the non-cumulation and prior
insurance provision containing the continuing coverage clause
with pro rata allocation. However, the Court's rejection of the
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insurer's argument that these provisions were inconsistent with
pro rata allocation turned on its conclusion that "New York state
court decisions and those prior decisions of this Court endorsing
the pro rata approach foreclose [the Court] from interpreting
[the non-cumulation and prior insurance provision] as imposing
joint and several liability" (id. at 102). As discussed above,
our holding in Consolidated Edison does not require pro rata
allocation in the face of policy language undermining the very
premise upon which the imposition of pro rata allocation rests.
In light of the Second Circuit's view that it was foreclosed from
utilizing all sums allocation -- either by Consolidated Edison or
by its own earlier holding in Olin I imposing pro rata allocation
-- and the fact that the resulting allocation apportioning
numerous years of liability outside the policy period to the
relevant policies closely resembles an all sums allocation, the
Excess Insurers' contention that Olin III supports a pro rata
allocation here is unavailing. Nor have those courts that have
followed Olin III reconciled the language of the non-cumulation
clause and prior insurance provision with pro rata allocation
(see Liberty Mut. Ins. Co. v Fairbanks Co., 2016 US Dist LEXIS
36662, at *22; Liberty Mut. Fire Ins. Co v J&S Supply Corp, 2016
WL 1169511, at *7, 2015 US Dist LEXIS 177124, at *24-25).
Indeed, the Excess Insurers have cited to no authorities
satisfactorily reconciling non-cumulation clauses with pro rata
allocation.
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Accordingly, 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, we hold that all sums allocation is
appropriate in policies containing such provisions, like the ones
at issue here.
III. Exhaustion
With the allocation issue resolved, we turn to the
second question -- namely, whether horizontal or vertical
exhaustion applies under the relevant policies. That is, we must
determine whether the Insureds are required under the terms of
the excess policies to "horizontally" exhaust all triggered
primary and umbrella excess layers before tapping into any of the
additional excess insurance policies, or whether the Insureds
need only "vertically" exhaust the primary and umbrella policies,
which would allow the Insureds to access each excess policy once
the immediately underlying policies' limits are depleted, even if
other lower-level policies during different policy periods remain
unexhausted. The Excess Insurers argue that, if we utilize all
sums allocation, then horizontal exhaustion should be applied.7
7
While, in some situations, horizontal exhaustion may be
beneficial to excess insurers, particularly where the underlying
layers of insurance contain a non-cumulation clause, we note that
-- like with the allocation issue -- neither method necessarily
militates in favor of insurers or insureds, with much depending
on the specifics of the underlying policies and their limits.
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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, and
that are specifically identified by either name, policy number,
or policy limit. In our view, vertical exhaustion is 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 (see Westport
Ins. Corp. v Appleton Papers Inc., 327 Wis 2d 120, 168-169, 787
NW2d 894, 919 [2010], review denied 329 Wis 2d 63 [2010]; Cadet
Mfg. Co. v Am. Ins. Co., 391 F Supp 2d 884, 892 [WD Wash 2005];
J. Stephen Berry, Jerry B. McNally, Allocation of Insurance
Coverage: Prevailing Theories and Practical Applications, 42 Tort
Trial & Ins Prac LJ 999, 1015-1016 [2007]).
The only argument of the Excess Insurers in support of
horizontal exhaustion that merits discussion is their contention
that it is compelled by the "other insurance" clauses in the
Liberty Mutual umbrella policies and the subject excess policies.
The Liberty Mutual umbrella policies provide that the insurer
will pay "all sums in excess of the retained limit," which is
defined as the relevant limit of liability of underlying
policies, "plus all amounts payable under other insurance, if
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any." An "underlying policy" is "a policy listed as an
underlying policy in the declarations," which, as already stated,
includes only policies spanning the same policy period as the
respective excess policy. Other insurance, in turn, "means any
other valid and collectible insurance (except under an underlying
policy) which is available to the insured, or would be available
to the insured in the absence of this policy." The excess
policies have similar clauses providing for such policies to be
excess to other insurance.
The Excess Insurers contend that the "other insurance"
available to the Insureds includes coverage provided by
successive insurance policies. Their argument in this regard is
not completely baseless (see Dow Corning Corp., 1999 WL 33435067,
at *9, 1999 Mich App LEXIS 2920, at *26-29; United States Gypsum
Co. v Admiral Ins. Co., 268 Ill App 3d 598, 653, 643 NE2d 1226,
1261 [Ill App Ct 1994], lv denied 161 Ill 2d 542 [1995]).
However, we stated in Consolidated Edison that "other insurance"
clauses "apply when two or more policies provide coverage during
the same period, and they serve to prevent multiple recoveries
from such policies," and that such clauses "have nothing to do"
with "whether any coverage potentially exist[s] at all among
certain high-level policies that were in force during successive
years" (Consolidated Edison, 98 NY2d at 223 [emphases added]).
Those cases relied on by the Delaware Superior Court do not hold
otherwise because they each involved instances of concurrent
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insurance policies (see e.g. American Home Assur. Co. v
International Ins. Co., 90 NY2d 433, 437 [1997]; State Farm Fire
& Cas. Co. v LiMauro, 65 NY2d 369, 372 [1985]; Lumbermens Mut.
Cas. Co. v Allstate Ins. Co., 51 NY2d 651 [1980]; Bovis Lend
Lease LMB, Inc. v Great Am. Ins. Co., 53 AD3d 140 [1st Dept
2008]). Moreover, our conclusion in Consolidated Edison that
other insurance clauses are not implicated in situations
involving successive -- as opposed to concurrent -- insurance
policies finds support in other jurisdictions (see Ohio Cas. Ins.
Co. v Unigard Ins. Co., 268 P3d 180, 184 [2012]; Century Indem.
Co. v Liberty Mut. Ins. Co., 815 F Supp 2d 508, 516 [DRI 2011];
Westport Ins. Corp., 327 Wis 2d at 168-169, 787 NW2d at 919;
Boston Gas Co., 454 Mass at 361, 910 NE2d at 308 [the 'other
insurance' clauses simply reflect a recognition of the many
situations in which concurrent, not successive, coverage would
exist for the same loss]; LSG Tech., Inc. v U.S. Fire Ins. Co.,
2010 WL 5646054, at *12, 2010 US Dist Lexis 140879 [ED Tex Sept.
2, 2010]; Owens-Illinois, Inc. v United Ins. Co., 138 NJ 437,
470, 650 A2d 974, 991 [1994]).
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 (see Consolidated Edison, 98 NY2d at 223).
Thus, in light of the language in the excess policies tying their
attachment only to specific underlying policies in effect during
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the same policy period as the applicable excess policy, and the
absence of any policy language suggesting a contrary intent, we
conclude that the excess policies are triggered by vertical
exhaustion of the underlying available coverage within the same
policy period (see United States Fid. & Guar. Co. v American
Re-Ins. Co., 20 NY3d at 428; Ostrager & Thomas R. Newman,
Handbook on Ins. Coverage Disputes § 13.14).
IV.
Accordingly, following certification of questions by
the Supreme Court of Delaware and acceptance of the questions by
this Court pursuant to section 500.27 of the Rules of Practice of
the New York State Court of Appeals, and after hearing argument
by counsel for the parties and consideration of the briefs and
the record submitted, the certified questions should be answered
in accordance with this opinion.
* * * * * * * * * * * * * * * * *
Following certification of questions by the Supreme Court of
Delaware and acceptance of the questions by this Court pursuant
to section 500.27 of the Rules of Practice of the New York State
Court of Appeals, and after hearing argument by counsel for the
parties and consideration of the briefs and the record submitted,
certified questions answered in accordance with the opinion
herein. Opinion by Judge Stein. Chief Judge DiFiore and Judges
Pigott, Rivera, Abdus-Salaam and Fahey concur. Judge Garcia took
no part.
Decided May 3, 2016
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