NY High Court Holds That "All Sums" Allocation And "Vertical Exhaustion" Apply To Coverage For Asbestos Claims Under Excess Liability Insurance Policies

Cases involving continuing injuries over multiple years, such as asbestos and other toxic exposures, create complicated questions for purposes of determining liability insurance coverage for such claims. Courts in many states have struggled with numerous issues in this context, including determining when injuries are sustained, how policies are triggered, the allocation of liability among multiple policies, and how and when excess insurance policies are triggered.

Recently, in considering questions certified by the Delaware Supreme Court, the New York Court of Appeals issued an important decision regarding a few of these issues in the context of policyholders seeking excess insurance coverage for asbestos exposure claims. See Matter of Viking Pump, Inc., 2016 NY Slip Op 03413, ____ N.Y.3d ___ (May 3, 2016). The excess policies at issue contained several provisions pertaining to how and when the policies are triggered. Specifically, the policies contained "all sums" provisions, stating 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" as damages because of "personal injury . . . caused by an occurrence." The policies further stated that, "[f]or the purpose of determining the limits of" liability, "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."

Most of the excess policies at issue also contained a "non-cumulation" of liability or "anti-stacking" provision, which provided that "[i]f the same occurrence gives rise to personal injury . . . 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 [the insurer] 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."

The Court of Appeals addressed whether, under New York law and the above policy language, "all sums" or "pro rata" allocation applies, and whether "horizontal" or "vertical" exhaustion is required before the excess policies are triggered. Significantly, this is the first time New York's highest court has ruled on the issues of allocation and exhaustion in the context of the above policy language.

As for allocation, the policyholders argued that "all sums" should apply, meaning that they should be permitted to recover their total liability under any policy in effect during the periods that the underlying injuries occurred (placing the burden on the insurer(s) to seek contribution from any insurers that issued the other triggered policies). The excess insurers argued for "pro rata" allocation, meaning that each insurer's liability should be limited to sums incurred by the policyholders during the specific policy period.

The Court held that under the language of the subject policies, all sums allocation applied. The Court reasoned that in policies containing non-cumulation/prior insurance clauses, it would be inconsistent to use pro rata allocation because such policy provisions "plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence."

As for the issue of exhaustion, the policyholders argued that they needed only to "vertically" exhaust the primary and umbrella policies in order to access each excess policy once the immediately underlying policies' limits were depleted, even if other lower-level policies during different policy periods remained unexhausted. The excess insurers argued that if "all sums" allocation is used, then the policyholders are required under the terms of the excess policies to "horizontally" exhaust all triggered primary and umbrella excess layers before accessing any additional excess insurance policies. The excess insurers primarily relied upon the "other insurance" clauses in the policies, which provide 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," which, 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 insurers contended that the "other insurance" available to the policyholders includes coverage provided by successive insurance policies, meaning that "horizontal" exhaustion should apply.

The Court rejected the excess insurers' arguments, holding that "other insurance" clauses apply when two or more policies provide coverage during the same period and have nothing to do with whether any coverage potentially exists under policies in place during successive years. Since the policyholders were not seeking multiple recoveries from different insurers under concurrent policies for the same loss, the "other insurance" clause did not apply. Thus, the Court held, because the language in the excess policies tied their attachment only to specific underlying policies in effect during the same applicable policy period, and the absence of any policy language suggesting a contrary intent, the excess policies were triggered by "vertical" exhaustion of the underlying available coverage within the same policy period.

Although the Court of Appeals reiterated that its decision is limited because issues of policy construction and interpretation center on the specific policy language at issue, the Viking Pump decision nevertheless is significant for insurers and policyholders examining claims of injury occurring over multiple years in New York. The decision provides a framework for analyzing whether and how excess coverage is triggered for such claims under New York law. In addition, the decision contains a lengthy discussion of decisions from several other jurisdictions regarding the issues of allocation and exhaustion. Practitioners who deal with these issues on a regular basis should read the decision closely when examining how different states treat these issues.