'Viking Pump': Landmark Victory for Policyholders

Ruling on allocation and a related issue, exhaustion, the Court of Appeals granted the policyholders' request to employ "all sums" and "vertical exhaustion" approaches to policies containing "non-cumulation" and "prior insurance" provisions. These two methods allow a policyholder to maximize coverage by (1) picking policy year(s) in which triggered policies will be tapped, and (2) accessing excess or umbrella coverage immediately upon exhausting the underlying primary policy.

This article introduces the concepts of allocation and exhaustion; discusses the dominant approaches to these issues; examines the context and import of the Viking Pump decision; and discusses practical lessons for continuous damage claims under New York law. While specific policy wording remains controlling in every coverage case, Viking Pump represents a significant victory for policyholders in New York and has important national ramifications.

Allocation and Exhaustion

Commercial General Liability (CGL) policies typically cover bodily injury or property damage caused by an "occurrence" during the policy period. Certain types of claims, such as latent environmental or bodily injury exposures, present a continuing process that may span multiple successive policy periods. Because CGL policies usually define a "continuous or repeated exposure to conditions" as a single occurrence, courts frequently hold that multiple policies may be triggered by one occurrence. For example, in Continental Casualty Co. v. Rapid-American Corp., the Appellate Division held that numerous CGL policies issued over a nine-year period were all triggered by claims of asbestos-related illness where the claimants allegedly inhaled asbestos fibers during a corresponding period of time. 177 A.D.2d 61, 65-66 (1st Dept. 1992), aff'd, 80 N.Y.2d 640 (1993). Similarly, the U.S. Court of Appeals for the Second Circuit, applying New York law, held that progressive damage to soil and groundwater resulting from environmental contamination implicated multiple successive policies. Olin Corp. v. Insurance Co. of North America, 221 F.3d 307 (2d Cir. 2000).

When multiple policies are triggered in such a way, courts must determine how coverage is allocated among the triggered policies. This issue has given rise to epic litigation in many jurisdictions. Policyholders typically invoke CGL insurers' agreement to reimburse "all sums" or "those sums" the insured becomes legally obligated to pay due to an "occurrence" during the policy period, stressing that once an occurrence "triggers" coverage under a policy, each insurer becomes "jointly and severally" liable to pay "all sums" up to its policy limits. When multiple policies are triggered, insurers may use equitable contribution to sort out the allocation of liability among themselves.

Insurers, on the other hand, often seek pro rata allocation, which apportions damages to coverage based on each insurer's "time on the risk," corresponding to the damage presumed to occur during each policy period. Insurers argue this approach is more efficient and equitable. But practically speaking, pro rata allocation reduces each insurer's liability, while the policyholder faces increased exposure. Because the loss is prorated among multiple "triggered" years, significant parts of the loss may be allocated to years in which no coverage is available for the loss, whether because it could not be purchased in the market or individual insurers have become insolvent. Moreover, by triggering multiple years, pro rata allocation makes the policyholder absorb multiple self-insured retentions or deductibles, such that a much larger portion of the loss—and often the entire loss—fails to reach in the insurers' coverage at all.

While courts in other jurisdictions have been sharply divided, "all sums" appears to be the better rule. It is based upon contract construction, as opposed to debatable extra-contractual notions of "fairness." It is more easily applied, insofar as it avoids complex disputes about the precise method of proration. It leads to more predictable results, and is also in concert with many insureds' reasonable expectations as consumers, in the absence of contrary policy language. At the macro level, it may also provide an incentive to purchase insurance, ultimately furthering the public policy goal of compensating injured parties. Still, no clear "majority view" has emerged. Viking Pump, however, teaches that some policies may contain particular provisions arguably favoring an all sums approach, such as non-cumulation or prior insurance clauses.

A related issue, on which courts also have taken different approaches, is determining when and how excess or umbrella policies are triggered by the exhaustion of underlying primary coverage. When policies in multiple periods are triggered, insurers often argue for "horizontal exhaustion," requiring the policyholder to exhaust primary policy limits in all policy periods before excess coverage can be invoked in any period. That approach effectively imposes a form of pro rata allocation before any excess insurance can be tapped, and thereby reduces the policyholder's recovery significantly.

Policyholders frequently favor "vertical exhaustion," under which excess coverage is tapped upon the exhaustion of immediately underlying primary coverage, regardless of exhaustion in other policy periods, allowing easier access to the highest limits of excess coverage. Courts have been more likely to apply vertical exhaustion when the excess policy specifically identifies the primary policy over which it sits, and horizontal exhaustion where the excess policy does not specifically identify the primary policy and "other insurance" clauses purport to include all triggered primary policies as part of a retained limit.

Like all sums allocation, vertical exhaustion seems generally to be the better rule—it is more easily applied, leads to predictable results, and conforms to policyholders' expectations. Even so, there is no "majority rule," and specific policy language may be dispositive.

'All Sums' or 'Pro Rata'

Prior to Viking Pump, New York state and federal courts had, for the most part, applied pro rata allocation in a variety of circumstances. The New York Court of Appeals did not squarely address the allocation of indemnifiable losses until 2002 in Consolidated Edison. 98 N.Y.2d 208 (2002).

Consolidated Edison involved claims arising from environmental contamination from the operation of a manufactured gas plant from 1873 to 1933. The allegedly continuous release and migration of coal tar and other hazardous wastes through groundwater triggered policies over 50 years. One of the excess insurers moved for dismissal, arguing that under a pro rata allocation, the policyholder's highest damages projection would be insufficient to reach its excess coverage

in the relevant year. The trial court applied pro rata allocation and dismissed over a dozen insurers from the case. Id. at 215-16. The Appellate Division and the Court of Appeals affirmed.

The Court of Appeals held that pro rata allocation, "while not explicitly mandated by the policies," was consistent with the policies' definition of "occurrence." Id. at 224. The court, however, declined to construe non-cumulation clauses in some of the policies, which might have argued in favor of an all sums methodology. The door therefore remained open for the Court of Appeals to revisit allocation in a case involving CGL policies with non-cumulation and other applicable provisions.

In Viking Pump, the high court considered questions of allocation and exhaustion on certification by the Delaware Supreme Court, which was reviewing lower Delaware court decisions applying New York law. Viking Pump involved asbestos exposure claims that triggered policies over 13 years. The Court of Appeals was asked to decide "(1) whether 'all sums' or 'pro rata' allocation applies where the excess insurance policies at issue either follow form to a non-cumulation provision or contain a non-cumulation and prior insurance provision, and (2) whether…horizontal or vertical exhaustion is required before certain upper level excess policies attach."

The insurers wanted to extend Consolidated Edison's pro rata ruling. But the Court of Appeals unanimously sided with the policyholders, construing the relevant policy provisions as requiring all sums allocation and vertical exhaustion. Without overruling Consolidated Edison, the court definitively stated that pro rata allocation is not the "blanket rule" in New York.

Generally, non-cumulation clauses purport to prevent an insured from "stacking" together the limits of triggered policies in multiple periods to cover the same loss. The excess policies in Viking Pump either contained, or followed form to policies that contained, such clauses, providing that if personal injury or property damage occurs partly before and partly within the policy period, the policy's limits would be reduced by the amount paid under policies triggered in previous years.

The court held that such language expressly contemplates that the coverage applies to damage before the policy period, subject only to a "credit" to the insurer for amounts recovered for the same occurrence under another policy. Similarly, prior insurance clauses in some of the policies provided that coverage for an occurrence continuing after the policy period would be reduced by amounts recovered under subsequent policies; this likewise contemplated the policy's coverage also extended to losses beyond the policy period. The court held that pro rata "time on the risk" allocation would be inconsistent with these provisions, which clearly indicated the policyholder could recover all loss from a multi-year occurrence under any triggered policy (i.e., all sums), subject to offsets.

With respect to exhaustion, the Court of Appeals rejected the excess insurers' assertion that horizontal exhaustion was the default rule in New York. The excess policies at issue specified that they sat above underlying policies covering the same policy periods that were identified by name, policy number, or policy limit. The clear implication of such excess attachment language is that only the specified underlying policy—but not all primary policies in all years—must be exhausted before the excess coverage is triggered (i.e., vertical exhaustion).

Against this, the insurers argued that "[t]he policy nowhere says that the exhaustion of the directly underlying…policy is the only condition precedent" for the attachment of the excess coverage. They also pointed to the policies' "other insurance" clauses, which, they argued, included sums recoverable under successive policies as part of the insured's retained limit. The court rejected these arguments, noting that "other insurance" clauses only apply when multiple policies provide coverage for the same policy period, and only serve to prevent multiple recovery under such policies. The court also noted that vertical exhaustion is "conceptually consistent with an all sums allocation[.]"

Practical Takeaways

An example illustrates the profound effect of the Viking Pump ruling. Suppose a policyholder has a multi-year environmental claim to which New York law applies. Contamination resulting from site operations continued for 50 years, but only 10 years of insurance policies are available, and in five of those years, the policies contain pollution exclusions barring coverage. Under a pro rata allocation, the policyholder can recover no more than one-tenth of the total loss (five years of available coverage for a 50-year loss)—and even this would likely be subject to five years' worth of retentions or deductibles. But, under an all sums approach, the policyholder can target any one of the five years of available coverage and place the entire loss—vertically—into that single year. Thus, depending on available limits, the policyholder may recover 100 percent of the loss, subject to one policy year's retentions and deductibles.

Many policyholders may be able to take advantage of the Viking Pump ruling to effectuate an all sums recovery for a progressive bodily injury or property damage claim, especially given the fairly common presence of non-cumulation and prior insurance clauses in excess and umbrella policies issued since the 1960s, as well as in policies sold by mutually owned insurers in certain industries. Indeed, other states' high courts have applied all sums even in the absence of such clauses.

Reprinted with permission from the May 23, 2016 edition of the New York Law Journal © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.