The New York Appellate Court recently advised the Delaware Supreme Court on the complexities of New York insurance law on coverage allocation. In the matter of Viking Pump, Inc. & Warren Pumps LLC v. TIG, et al, TIG argued that it was only obligated to indemnify Viking Pump for the time they insured the company (Pro Rata), while Viking Pump sought coverage for the entirety of its defense (All Sums). The Delaware Supreme Court asked the New York Appellate Court to interpret its own laws in order to determine the answers to these questions: If excess insurance policies exist that have non-cumulation provisions and follow the form of underlying policies, which allocation method is appropriate? “All sums[1]” or “pro-rata[2]?” Is vertical or horizontal exhaustion[3] necessary in order to trigger this excess coverage? [AM4]
If an excess policy ‘follows form,’ it adopts, word-for-word, provisions from the underlying (primary and umbrella) coverage. The non-cumulation provision says, in effect: if your injury spans more than one policy period and an insurer other than us insured you for that period, then the amount we indemnify you for is going to be reduced by the amount your other insurer pays for the injury that occurred during their policy period.
There was agreement from the court of Chancery all the way to the New York Appellate Court: in this case, the non-cumulation provisions in the underlying policies were clear in their intent to allocate using an all-sums method (which Liberty Mutual, the underlying insurer, customarily used).
TIG adopted the policy part-and-parcel by following form, but wanted a pro-rata approach – a legal fiction that takes an injury that occurred/continued to occur over multiple policy periods and treats it as if a discrete injury occurred in the separate policy periods. Pro-rata exists in a universe where, unless there was overlapping coverage, the injured party/insured can only recover under one policy at a time.
Non-cumulation policies, on the other hand, absolutely expect that more than one policy may be indemnifying the insured and, as a result, nullify a pro-rata approach. (A precept of contractual interpretation is that you do not interpret a provision of a contract in such a way as to nullify another provision in the contract rendering it redundant or insignificant; it’s called surplusage). In addition, several of the excess policies contained ‘continuing coverage’ provisions which expressly extend coverage past the policy period which, again, is completely incompatible with a pro-rata approach. The New York Appellate Court found for Viking Pump on the allocation question.
That left the second question to be answered. What kind of exhaustion applies to the excess policies: do the insureds need to exhaust all underlying coverage prior to triggering any excess policies (horizontal) or can the insureds simply exhaust one primary policy in order to trigger the overlying policy (vertical)? The court found that, mainly due to the fact that the excess policies’ form-following and specific identification of the underlying policies to which they provided excess coverage for meant that vertical exhaustion was the proper approach.
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[1] In “all sums,” instances one insurer may be responsible for paying “all sums” related to the defense of the policyholder. After (or perhaps during) the claim, the insurer may pursue other carriers for equitable contribution.
[2] In “pro rata,” instances, an individual carrier is only responsible for paying those sums that occur while the carrier was ‘on the risk’ or insuring the policyholder while a long-tail claim (like an environmental spill) is occurring.
[3] In vertical exhaustion, excess or umbrella coverage is triggered as soon as the policy underneath it is exhausted. In horizontal exhaustion, all primary policies must be exhausted before the first excess or umbrella policy is triggered.
