In a much anticipated decision, New York’s highest court handed policyholders a significant victory in In re Viking Pump, Inc. & Warren Pumps, LLC, Insurance Appeals, No. 59 (N.Y. May 3, 2016). In the context of long-tail bodily injuries or property damage spanning multiple policy periods, the Court declared that policy language is the King of New York and trumps all else when determining whether the “all sums” or “pro rata” allocation approach applies to a liability insurer’s indemnity obligation. Specifically, the Court held that the “all sums” approach applies to an insurer’s indemnity obligation where the policy contains language inconsistent with a pro rata approach. In this case, the Court reasoned that a “non-cumulation” or “anti-stacking” clause is inconsistent with allocating an insurer’s liability on a pro rata basis. Although Viking Pump dealt only with the duty to indemnify, its ruling applies to the broader duty to defend and bolsters existing case law recognizing that the duty to defend language in most general liability policies cannot be reconciled with a pro rata allocation approach.
To put the Viking Pump decision in context, insurers usually prefer a pro rata approach, meaning they can only be liable for their share of a loss based on the time period their policies were in force compared to the overall period that the long term injury or property damage occurred. This rests on the legal fiction that a single indivisible loss taking place over many years can be treated as one occurrence in each successive policy period, which is an expedient method for dividing the indivisible loss among multiple successive policies based upon each policy’s time on the risk, as opposed to the extent of actual injury or damage that took place during any specific period. Id. As the Court stated, the foundation of this approach is that no insurer will have to pay for any injury or damage that occurs outside of its policy period. Viking Pump, slip op. at 11-12.
Insurers usually prefer the pro rata approach because their risk is typically reduced and the risk of lost policies, insurer insolvencies or other gaps in coverage may fall upon the policyholder. In contrast, under the “all sums” approach, each successive insurance policy triggered by a long term injury or damage is, essentially, jointly and severally liable for the entire loss up until the policy’s limits are exhausted. Under this approach, the insured may target one or many insurers for the entire loss, leaving it to the insurers to seek contribution from one another.
Prior to Viking Pump, insurers often brandished Consolidated Edison Co. of New York v. Allstate Insurance Co., 98 N.Y.2d 208 (2002), to assert that New York is a “pro rata” state. But in Viking Pump, the Court of Appeals distinguished and limited the reach of Consolidated Edison by pointing out that it never formed a blanket rule for pro rata allocation and that the policies in Consolidated Edison did not contain non-cumulation or similar clauses. Viking Pump, slip op. at 11-12.
The Viking Pump Court held that non-cumulation clauses are antithetical to the concept of a pro rata allocation. Non-cumulation clauses essentially provide that where a single loss triggers successive policies, any amount paid by a prior policy will reduce the limits of the policy containing the non-cumulation clause. The original purpose of the clause was to prevent policyholders from double dipping when the industry made the switch from accident based policies to occurrence based policies. Non-cumulation clauses are inconsistent with a pro rata allocation because they “plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence,” whereas the entire premise underlying pro rata allocation is that an insurer cannot be liable for the same loss to the extent the loss occurs in another insurer’s policy period – hence the legal fiction that a separate occurrence takes place in each successive policy period. Id. at 18 (emphasis added). The two provisions are logically inconsistent. Thus, adopting the pro rata approach would render the non-cumulation clause superfluous in violation of New York’s principles of policy interpretation. For this reason, the Court determined that the “all sums” approach applies to policies containing a non-cumulation clause.
In addition to the pro rata versus all sums allocation issue, the Court determined that the proper method for allocating between primary and excess layers of insurance under the “all sums” method is vertical exhaustion – meaning that a single primary policy may be required to respond to the long term loss up to its policy limits, at which time the excess coverage above that policy is pierced on an all sums basis. The Court rejected the argument that horizontal exhaustion should apply, where all primary coverage would have to be exhausted before any excess coverage must respond to a loss, noting that the excess coverage was tied to the exhaustion of only the underlying policy, not prior or subsequent policies. Thus, the Court ruled that vertical exhaustion is the appropriate method.
Although Viking Pump specifically addressed the effect of non-cumulation clauses, it undoubtedly stands for the propositions that: (1) no blanket rule controls how an insurer’s indemnity obligation must be allocated, and (2), where language or a clause in an insurance policy is inconsistent with the pro rata approach, pro rata allocation does not apply.
The latter point is especially important when considering the issue of whether the duty to defend is subject to pro rata allocation. Most general liability policies provide that the insurer has a duty to defend “any suit” in which at least one potentially covered claim is alleged. New York courts have interpreted this language as requiring the defense of the entire lawsuit so long as at least one claim is at least in part potentially covered. A pro rata allocation is inconsistent with the language obligating insurers to “defend” “any suit” if at least one potentially covered claim is alleged. Thus, the reasoning in Viking Pump suggests that the “all sums” approach is the appropriate method respecting the duty to defend and is consistent with the duty to defend language found in most liability policies.
To learn more, contact John G. Koch