United States: Time For A Fresh Look At General Liability Insurance Claims: New York Court Of Appeals Applies Pro-Policyholder "All Sums" Rule To Long Tail Exposure Claims Under Excess CGL Policies

On May 3, 2016, the New York Court of Appeals issued a groundbreaking, pro-policyholder decision, In the Matter of Viking Pump, Inc. and Warren Pumps, Inc. Insurance Appeals ("Viking Pump"), on questions certified to it by the Delaware Supreme Court. New York's highest court ruled that the "all sums" method of allocation would be applied to a series of excess comprehensive general liability ("CGL") insurance policies with respect to asbestos bodily injury claims. This decision reaffirms the rights of policyholders to the benefits under CGL insurance coverage in connection with claims that allege injury or damage continuing over multiple, successive policy periods, and it expands the potential avenues available to policyholders for obtaining coverage under New York law.

Allocation is one of the oldest and hardest-fought issues in insurance law. When injury or damage spans multiple policy periods, policyholders typically claim that, consistent with the terms of the policies, the full amount of liability should be covered up to policy limits under any triggered policy year (i.e., "all sums"), while insurers argue that the liability should be apportioned among all triggered years, with only a small fraction of the liability paid in any given year (i.e., "pro rata"). The effects of all sums versus pro rata can vary depending on the facts of the case and the availability of insurance in potentially applicable policy years, but generally all sums leads to substantially greater recovery for policyholders than pro rata. In Viking Pump, the court acknowledged that courts in different states are split between the two approaches. Viking Pump, Slip Op. at 10.

Since the New York Court of Appeals' decision in Consolidated Edison Co. of N.Y. v. Allstate Insurance Company, 98 N.Y.2d 208 (2002), a pro rata ruling, New York has been counted among the pro rata states. Viking Pump, Slip Op. at 11. In Viking Pump, however, the Court of Appeals has clarified that New York does not automatically follow the pro rata rule, but rather that courts applying New York law must look to the language of the particular insurance policy at issue when deciding between all sums and pro rata, and that certain provisions that appear routinely in CGL insurance policies clearly support an all sums determination. Id.

The provisions in the Viking Pump insurance policies that the court relied upon are known as "non-cumulation," "prior insurance," and "continuing coverage" clauses, and all of them purport to address the treatment of injuries or damage taking place in policy periods other than the year of the insurance policy for which the policyholder seeks to obtain coverage benefits. Viking Pump, Slip Op. at 15-18. The court found that each of these provisions would be rendered "superfluous" under pro rata allocation, which turns on the "legal fiction" that continuous, indivisible injuries can be split into separate pieces, with each piece slotted independently into each policy year. Id. at 16, 18. Therefore, based on the fundamental rule of contract interpretation followed by New York (and most, if not all states) that every term in a contract must be afforded some meaning, the court ruled that the inclusion of one or more of these provisions in a CGL insurance policy supports finding coverage to be available on an all sums basis. In so doing, the court also noted and squarely rejected the insurance companies' inconsistent arguments on this issue before the Delaware lower court and New York's highest court. Id. at 19, n.6.

The court noted that it was not directly overruling its earlier decision in Con Edison but rather was holding that in all contract cases, courts must be faithful to the wording of the contract for which the parties bargained. Because the policies at issue in Viking Pump contained policy provisions that were compatible with all sums, and wholly incompatible with pro rata, the court applied the all sums rule.

In a related ruling, the court also held that excess insurance policies may be accessed "vertically," as opposed to "horizontally," meaning that when a policyholder seeks coverage under an excess policy, it need exhaust only the underlying coverage in the same year as the policy under which it seeks coverage, not each and every one of the underlying policies in all applicable years. Viking Pump, Slip Op. at 24-28. Once again, the insurers' arguments to the contrary were squarely rejected by the court.

The effect of these two rulings is that policyholders should be able to recover greater benefits under their CGL insurance policies than was possible under Con Edison and other earlier decisions. Moreover, while Viking Pump involves New York law, its contract interpretation analysis should be equally applicable for policyholders seeking to maximize their insurance coverage under CGL insurance coverage in other states. The Court of Appeals observed that no decisions applying pro rata have done so with respect to insurance policies containing non-cumulation and prior insurance clauses, and it noted that the insurers failed to cite any cases reconciling these clauses with their pro rata allocation arguments. Viking Pump, Slip Op. at 23. Policyholders seeking to maximize their insurance rights under CGL insurance policies containing these provisions in any state, even those with established pro rata precedent, should consider citing the analysis in Viking Pump in favor of an all sums interpretation.

Policyholders may also want to consider taking a fresh look at their CGL policies for periods encompassed by long tail injury claims, particularly those governed by New York law, and consider whether opportunities are available to more fully maximize the full insurance coverage benefits to which they are entitled.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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