United States: New York Court Of Appeals "Annualizes" Limits In Following-Form Multiyear Excess Subscription Policy

The New York Court of Appeals recently held that the aggregate policy limits of a multiyear excess policy following form to a multiyear subscription policy program should be "annualized." The ruling came in the case Union Carbide Corporation v. Affiliated FM Insurance Co., et al., Continental Cas. Co., et al., 2011 N.Y. Slip op. (Feb. 22, 2011). View the decision

The coverage at issue was a fifth-layer quota share policy issued as part of Union Carbide Corporation's (UCC) insurance program. Union Carbide's asbestos claims were the catalyst for the coverage suit. The $30 million in applicable limits was spread evenly among six participating insurers, leaving each responsible for $5 million. Two issues were in dispute. The first was whether the $5 million aggregate policy limits of the insurers participating in this subscription policy program were annualized or whether a single $5 million limit applied over the three-year life of the policy. The second issue concerned whether the extension of the three-year coverage for a "stub" policy period entitled UCC to another full limit or only a prorated limit.

Annualization of Limits

On the annualization issue, after reviewing the relevant policy wording, the court ruled that "[u]nder the follow-the-form clause, the conditions of the [controlling underlying] policy are part of the subscription policy, and that one of those conditions is that the 'aggregate' limit shall be annualized." pp. 3-4. In reaching this conclusion, the court relied heavily on the public policy considerations:

While the reading [the insurers] give to the word 'aggregate' might be plausible in many contexts, here the follow-the-form clause should prevail. Such clauses serve the important purpose of allowing an insured, like UCC, that deals with many insurers for the same risk to obtain uniform coverage, and to know, without a minute policy-by-policy analysis, the nature and extent of that coverage. It is implausible that an insured with as large and complicated an insurance program as UCC would have bargained for policies that differed, as between primary and excess layers, in the time over which policy limits are spread.

Id. at 4.

The court noted that its decision was bolstered by the fact that, "The fifth layer subscription form policy says that the limit of liability shall be '$30,000,000 each occurrence and in the aggregate.'" Commenting on the significance of this language, the court stated, "If $30 million was the most that could be paid on the entire policy why, UCC asks, did the parties bother to specify a per occurrence limit in an equal amount? [The insurers in question] offer no answer." Id.

The court was also presented with "extrinsic evidence" by UCC on the annualization of limits issue. It did not rely on this evidence in reaching its decision because it found the relevant policy wording clear and unambiguous. Nevertheless, it noted in dictum that this evidence "overwhelmingly" supported UCC's position:

. . . even assuming that there is an ambiguity, the extrinsic evidence – all of it submitted by UCC – overwhelmingly supports UCC's position. UCC has submitted expert testimony that annualization of limits was the universal custom of the industry. It has also submitted contemporaneous evidence showing the existence of that custom, and other evidence showing that at least some participants in the transaction at issue assumed that the limits under the fifth-layer excess policy would be annualized.

Id. at 5.

Stub Policy

On the question of whether a full limit or prorated limit applied to the "stub" policy, the Court of Appeals found a fact question existed. It remanded that issue to the lower court for further proceedings.

Conclusion

The practical lesson of Union Carbide is clear – at least in the context of "large and complicated insurance programs" such as UCC's. Absent evidence to the contrary, where a controlling underlying subscription policy provides for annualized aggregate limits, New York courts are likely to find that the aggregate limits of any policies following form to the subscription policy should likewise be annualized.

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