To be Argued by:
MICHAEL P. FORADAS
(Time Requested: 30 Minutes)
CTQ-2015-00003
Court of Appeals
of the
State of New York
In the Matter of Viking Pump, Inc. and Warren Pumps LLC, Insurance Appeals,
––––––––––––––––––––––––––––––
VIKING PUMP, INC. and WARREN PUMPS LLC,
Appellants,
– against –
TIG INSURANCE COMPANY, et al.,
Respondents.
––––––––––––––––––––––––––––––
ON APPEAL FROM THE QUESTIONS CERTIFIED
BY THE SUPREME COURT OF THE STATE OF DELAWARE
(DOCKET NOS. 518, 2014; 523, 2014; 525, 2014; 528, 2014)
BRIEF FOR APPELLANT VIKING PUMP, INC.
PETER A. BELLACOSA
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, New York 10022
Tel.: (212) 446-4800
Fax: (212) 446-4900
MICHAEL P. FORADAS, P.C.
LISA G. ESAYIAN
WILLIAM T. PRUITT
KIRKLAND & ELLIS LLP
300 North LaSalle
Chicago, Illinois 60654
Tel.: (312) 862-2000
Fax: (312) 862-2200
Attorneys for Appellant
Viking Pump, Inc.
Date Completed: August 21, 2015
i
CORPORATE DISCLOSURE STATEMENT
Appellant Viking Pump, Inc. (“Viking”) is a corporation organized under the
laws of Delaware. Viking is a subsidiary of IDEX Corporation, a publicly owned
company.
ii
TABLE OF CONTENTS
Page
CORPORATE DISCLOSURE STATEMENT ......................................................... i
PRELIMINARY STATEMENT ............................................................................... 1
JURISDICTIONAL STATEMENT .......................................................................... 3
CERTIFIED QUESTIONS PRESENTED FOR REVIEW AND SHORT
ANSWERS ...................................................................................................... 3
STATEMENT OF THE CASE .................................................................................. 4
A. Asbestos-Related Injury Claims Against Viking And Warren ............. 4
B. Insurance Coverage Available To Viking And Warren For
Their Asbestos-Related Losses ............................................................. 5
C. Warren’s Consumption Of The Shared Insurance Coverage and
the Excess Insurers’ Unequal Treatment of Viking and Warren .......... 6
D. The Delaware Superior Court’s Horizontal Exhaustion Rulings .......... 8
ARGUMENT ........................................................................................................... 12
I. UNDER NEW YORK LAW, THE POLICY LANGUAGE
CONTROLS THE EXHAUSTION METHODOLOGY .............................. 12
A. New York Enforces Insurance Policies As Written ............................ 12
B. The Excess Policies’ Plain Language Allows Viking And
Warren To Access Triggered Insurance Coverage Vertically ............ 14
C. The Superior Court Recognized That The Policy Language
Supports Vertical Exhaustion .............................................................. 18
II. NEW YORK HAS NO HORIZONTAL EXHAUSTION RULE OF
LAW THAT WOULD OVERRIDE THE PARTIES’
CONTRACTUAL INTENT .......................................................................... 19
III. CASES FROM OTHER JURISDICTIONS CONFIRM THE
PRIMACY OF CONTRACT LANGUAGE ................................................. 25
TABLE OF CONTENTS (CONT'D)
Page
iii
IV. ANY DOUBT ABOUT WHETHER VERTICAL EXHAUSTION
APPLIES TO THE EXCESS POLICIES MUST BE RESOLVED IN
THE INSUREDS’ FAVOR ........................................................................... 27
CONCLUSION ........................................................................................................ 29
iv
TABLE OF AUTHORITIES
Page(s)
Cases
American Home Assurance Co. v. International Insurance Co.,
90 N.Y.2d 433 (1997) .................................................................................... 20, 22
Bovis Lend Lease LMB, Inc., v. Great American Insurance Co.,
53 A.D.3d 140 (N.Y. App. Div. 2008). ......................................................... 20, 23
Cadet Manufacturing Co. v. American Insurance Co.,
391 F. Supp. 2d 884 (W.D. Wash. 2005) ............................................................. 25
Cantanucci v. Reliance Insurance Co.,
43 A.D.2d 622 (N.Y. App. Div. 1973) ................................................................. 28
Consolidated Edison Co. of New York v. Allstate Insurance Co.,
98 N.Y.2d 208 (2002) .................................................................................... 12, 23
Fieldston Property Owners Association v. Hermitage Insurance Co.,
16 N.Y.3d 257 (2011) ........................................................................................... 12
Home Insurance Co. v. Liberty Mutual Insurance Co.,
678 F. Supp. 1066 (S.D.N.Y. 1988) ........................................................ 20, 21, 22
J.P. Morgan Securities Inc. v. Vigilant Insurance Co.,
21 N.Y.3d 324 (2013) ................................................................................ 2, 12, 13
Kaiser Aluminum & Chemical Corp. v. Certain Underwriters at Lloyd’s, London,
Case No. 312415, 2003 Extra LEXIS 174, (Cal. Super. Ct. June 13, 2003) ........ 27
Kaiser Cement & Gypsum Corp. v. Insurance Company of Pennsylvania
126 Cal. Rptr. 3d 602 (Ct. App. 2011) .......................................................... 26, 27
Lumbermens Mutual Casualty Co. v. Allstate Insurance Co.,
51 N.Y.2d 651 (1980) ........................................................................................... 24
Northbrook Excess & Surplus Insurance Co. v. Chubb Group of Insurance Cos.,
113 A.D.2d 319 (N.Y. App. Div. 1985) ............................................................... 24
Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.,
86 N.Y.2d 685 (1995) .................................................................................... 13, 19
TABLE OF AUTHORITIES (CONT'D)
Page(s)
v
Preston v. Aetna Insurance Co.,
193 N.Y. 142 (1908) ............................................................................................. 12
State Farm Fire & Casualty Co. v. LiMauro,
65 N.Y.2d 369 (1985) ........................................................................................... 24
State v. Continental Insurance Co.,
88 Cal.Rptr.3d 288 (Ct. App. 2009) ..................................................................... 27
Travelers Casualty & Surety Co. v. Transcontinental Insurance Co.,
19 Cal. Rptr. 3d 272 (Ct. App. 4th Dist. 2004).............................................. 25, 26
White v. Continental Casualty Co.,
9 N.Y.3d 264 (2007) ............................................................................................. 28
Statutes
N.Y. COMP. CODES R. & REGS. tit. 22, § 500.27 ....................................................... 3
Treatises
1 STEVEN PLITT & JORDAN ROSS PLITT, PRACTICAL TOOLS FOR HANDLING
INSURANCE CASES § 4:3 (Update July 2015) (WestlawNext) .............................. 20
4-39 ALAN S. RUTKIN ET AL., NEW APPLEMAN INSURANCE LAW PRACTICE GUIDE
§ 39.13[5] (2014) (Lexis) ...................................................................................... 21
BARRY R. OSTRAGER & THOMAS R. NEWMAN, HANDBOOK ON INSURANCE
COVERAGE DISPUTES § 13.14 (16th ed. 2013) ...................................................... 20
PRELIMINARY STATEMENT
Viking Pump, Inc. (“Viking”) files this Appellant’s Brief to address the
second of the two certified questions from the Delaware Supreme Court in this
matter. That question asks whether, in light of the policy language at issue, Viking
and Warren Pumps LLC (“Warren”) may exhaust their multi-layer, multi-year
insurance coverage vertically, accessing an excess policy once the directly
underlying insurance policies in the same policy year are exhausted, or whether
they must exhaust it horizontally—exhausting all triggered primary and umbrella
policies in every policy year before accessing any excess coverage in any year.
The resolution of this issue should begin and end with the plain terms of
Viking’s and Warren’s shared excess insurance policies (the “Excess Policies”),1
which unambiguously provide that their obligations attach once the lower-layer
policies in the same policy year have exhausted. In particular, it is undisputed that
each Excess Policy expressly provides that its obligations attach once specific
“Underlying Insurance” is exhausted. Each Excess Policy identifies that
“Underlying Insurance” as the underlying policies in the same policy year. No
Excess Policy’s “Underlying Insurance” provision includes policies in other years.
Eschewing the language of their own policies, the Excess Insurers have argued—
and the trial court agreed—that horizontal exhaustion should apply because some
1 The insurers that issued the Excess Polices are referred to in this brief as the “Excess
Insurers.”
2
principle of New York law compels that result. But there is no per se rule of law in
New York that would override the terms of the parties’ agreement and impose
horizontal exhaustion. To the contrary, the controlling rule of New York law is
this Court’s repeated confirmation that insurance policies, like any contracts, are
enforced as written. J.P. Morgan Securities Inc. v. Vigilant Ins. Co., 21 N.Y.3d
324, 334 (2013). This tenet of contract interpretation is built on a foundation of
public policy favoring citizens’ rights to contract as they see fit and of requiring
parties to adhere to the consequences of their contractual bargains.
The Excess Insurers base their perception of a New York rule compelling
horizontal exhaustion on demonstrably inapplicable cases that have nothing to do
with horizontal exhaustion. The cases they cited, and which the Delaware Superior
Court (the Honorable Fred Silverman) found controlling, were contribution suits
between insurers that had issued policies to multiple parties being sued for the
same single-year loss. Those cases did not address, let alone apply, horizontal
exhaustion, because they all involved losses in a single policy period. In a
subsequent opinion, the Superior Court conceded that no New York court has
adopted a horizontal exhaustion rule for continuous injuries that span multiple
policy years. Indeed, even the Excess Insurers admit that the issue of horizontal
versus vertical exhaustion arises only in the context of “long-tail” losses triggering
multiple policy periods, which were not at issue in the cases on which the Superior
Court relied.
3
This Court should answer Certified Question #2 by holding that the plain
language of the Excess Policies allows Viking to exhaust its excess insurance
coverage on a vertical basis, once underlying primary and umbrella policies in the
same policy year have been exhausted. There is no per se rule of law in New
York’s jurisprudence that would require application of horizontal exhaustion.
JURISDICTIONAL STATEMENT
This matter is before the Court based on its acceptance of certified questions
from the Delaware Supreme Court, pursuant to Rule 500.27 of this Court, N.Y.
COMP. CODES R. & REGS. tit. 22, § 500.27.
CERTIFIED QUESTIONS PRESENTED FOR
REVIEW AND SHORT ANSWERS
1. Under New York law, is the proper method of allocation to be used all
sums or pro rata when there are non-cumulation and prior insurance
provisions?
Short Answer:
For the reasons explained in Warren’s Appellant’s Brief, Viking submits that
the plain language of the Excess Policies requires all sums allocation. Viking joins
Warren’s brief as to Certified Question #1 but does not separately address the issue
here.
4
2. Given the Court’s answer to Question #1, under New York law and based
on the policy language at issue here, when the underlying primary and
umbrella insurance in the same policy period has been exhausted, does
vertical or horizontal exhaustion apply to determine when a policyholder
may access its excess insurance?
Short Answer:
Irrespective of this Court’s answer to Question #1, under New York law, the
plain language of the Excess Policies is dispositive and vertical exhaustion applies,
meaning that Viking and Warren may seek coverage from a triggered Excess
Policy once the policies directly underlying that Excess Policy in the same policy
year are exhausted. The insuring agreements and underlying insurance provisions
of the Excess Policies provide that their policies attach once specified “underlying
insurance” is exhausted, and that, for each Excess Policy, the “underlying
insurance” is the directly underlying policies in the same year, not any policy in
any other year. No rule of law in New York supports a different result. To the
contrary, New York law requires this language to be enforced as written.
STATEMENT OF THE CASE
A. Asbestos-Related Injury Claims Against Viking And Warren
Viking has owned and operated a pump manufacturing business since 1911.
A1616. Houdaille Industries, Inc. (“Houdaille”) owned both Viking and Warren
from 1972 to 1985, when Houdaille spun off Warren as a separate entity. A1500;
A1502 ¶¶ 4, 16. Houdaille sold Viking to IDEX Corporation in 1988. A1502 ¶
17.
5
Viking has been named as a defendant in more than 30,000 asbestos-related
personal injuries suits since the early 1990s. A1541; A1543; A1506 ¶ 45. The
underlying plaintiffs typically allege exposures to and injuries from asbestos over a
period of years, implicating multiple years of liability insurance coverage. A1612-
13. Warren has faced an even larger number of asbestos claims. A1555-56;
A1558; A1561-63.
B. Insurance Coverage Available To Viking And Warren For Their
Asbestos-Related Losses
Most of the Excess Policies at issue in this case were issued to Houdaille
from 1972 to 1985, when it owned both Viking and Warren. A295-97. The
Excess Policies were part of a general liability insurance program that included
underlying primary and umbrella insurance, and which the Delaware Superior
Court described as “a seamless, layered plan.” A1729. The Superior Court
explained that in “[e]ach year from 1972 through 1985, Houdaille purchased
occurrence-based primary, or ‘first layer’ insurance and umbrella, or ‘second layer’
insurance, from Liberty Mutual,” that “cover asbestos claims for any year that
exposure is alleged.” A1729-30. Sitting above these Liberty policies, “Houdaille
purchased layers of excess insurance. In total, Houdaille purchased 35 excess
policies through 20 different carriers” from 1972 to 1985. A1729. The Delaware
Chancery Court ruled that Viking and Warren both have rights to this shared
insurance coverage. A315; A322; A328-29.
6
Viking and Warren also each have their own, separate insurance coverage
during certain periods in which they were not under common ownership. For
Viking, Liberty Mutual Insurance Company (“Liberty Mutual”) issued four
primary policies between 1968 and 1972 (each with $250,000 in limits) and
primary and umbrella coverage in 1986. A1730; A1844. Viking also has a limited
amount of primary coverage in the pre-1968 period. A1546-47. Viking’s 1968-71
primary-layer coverage with Liberty Mutual has been exhausted since trial in this
case (A1861 n.9), but its pre-1968 and 1986 coverage is not exhausted. A1550-51.
Warren had separate primary-layer insurance coverage issued by Liberty Mutual in
the pre-1968 period and umbrella coverage issued by First State in 1971. A1730.
Warren contends this coverage is exhausted. A1508-09 ¶¶ 53-57.
C. Warren’s Consumption Of The Shared Insurance Coverage and
the Excess Insurers’ Unequal Treatment of Viking and Warren
Viking filed this lawsuit ten years ago in the Delaware Chancery Court
because Warren was consuming an ever-growing portion of the shared coverage in
light of its asbestos claim history. A1731; A297-98. Viking initially sued Liberty
Mutual, Warren intervened, and the Excess Insurers were later added as
defendants. A1731; A1809. In 2008, Viking and Warren each reached settlements
with Liberty Mutual resolving their disputes. A1731.
By August 2010, the shared Liberty Mutual primary and umbrella policies
from 1972 to 1985 were exhausted. A1511 ¶¶ 66, 67; A1600; A1606. Warren
7
received the lion’s share. At the start of trial in 2012, Liberty Mutual had paid
about $2 million in Viking asbestos settlements and over $40 million in Warren
settlements. A1617; A1513.
As the shared Liberty coverage neared exhaustion in 2009, both Warren and
Viking tendered asbestos claims to some of the first-layer Excess Insurers, starting
with Granite State. A1519-20 ¶¶ 96-102. Warren claimed that its Warren-only
insurance coverage was exhausted. A1588-93; A1508-09 ¶¶ 53-57. Although the
Excess Insurers disputed this claim, several of them nonetheless paid millions of
dollars on account of Warren’s asbestos claims under reservations of rights.
A1519-26 ¶¶ 97, 101-117, 121-126, 130-139. By contrast, the Excess Insurers
refused to defend or indemnify Viking for any of its asbestos-related losses, even
under a reservation of rights, because the Viking-only primary and umbrella
policies in other time periods were not yet fully exhausted. See id. ¶¶ 98-100, 118-
120, 127-129. In short, while the Excess Insurers asserted that both Warren and
Viking had unexhausted coverage in other time periods, they paid Warren claims
while refusing to pay Viking claims.2 In all, the Excess Insurers have paid Warren
over $29 million. They have paid Viking nothing.
2 Granite State accepted Warren’s tender subject to a reservation of rights that included a
defense based on Warren’s failure to exhaust all available underlying insurance. A1519-20
¶¶ 101, 103, 106. Despite its horizontal exhaustion defense, Granite State paid its full limits
for Warren’s asbestos claims. Id. ¶¶ 101-104. Granite State denied Viking’s tender and
refused to pay any of its asbestos claims, asserting a horizontal exhaustion defense. Id. ¶
101. In December 2009, Warren tendered asbestos claims to first-layer Excess Insurer
International, which, like Granite State, paid Warren’s asbestos-related losses subject to a
8
Viking presented evidence of this disparate treatment at trial, and the jury
returned a verdict for Viking, finding that the Excess Insurers’ duties of good faith
and fair dealing barred them from treating Viking and Warren differently. The
Jury Verdict stated that the Excess Insurers who had paid Warren but not Viking
“were not permitted under their policies to pay Warren subject to a reservation of
rights while at the same time refusing to pay Viking.” A426 ¶ 16. The Superior
Court’s Final Judgment incorporated the jury’s verdict on this issue, and the
Excess Insurers did not appeal that ruling. A442; A438 ¶ 24.
D. The Delaware Superior Court’s Horizontal Exhaustion Rulings
By agreement of the parties, the issue of horizontal versus vertical
exhaustion was decided by the Superior Court, not the jury. A1782. Viking and
Warren argued that the plain language of the Excess Policies compelled vertical
exhaustion. Viking and Warren pointed out, for example, that Granite State’s 1979
Excess Policy attaches by its terms “after the Underlying Umbrella Insurers have
paid or have been held liable to pay the full amount of their respective ultimate net
loss liability . . . .” A1090 § II. The Granite State policy specifies that the term
reservation of rights questioning underlying exhaustion. A1619-24; A1521-23 ¶¶ 112, 115-
116, 123. Viking also tendered asbestos claims to International (A1522 ¶¶ 118-119) but
International exhausted its policy limits satisfying Warren’s losses while denying coverage to
Viking and taking no steps to preserve any of its policy limits for Viking. A1631-32; A1523
¶ 120. Following the exhaustion of International’s policy, Excess Insurer Century paid
Warren’s asbestos claims subject to a similar reservation of rights concerning exhaustion of
underlying insurance while refusing to pay Viking. A1524 ¶¶ 127-129; A1525 ¶ 131; A1526
¶ 134; A1625-26; A1633.
9
“Underlying Umbrella Insurers” refers only to the underlying $3 million Liberty
Mutual umbrella policy in the 1979 policy year and not, for example, to umbrella
insurance in other years. Id., “Schedule”. It is undisputed that the other Excess
Policies have substantively identical insuring agreements and underlying insurance
provisions.3
No Excess Insurer contended that any policy differed materially from the
Granite State exemplar. And none pointed to any language of their policies
supporting horizontal exhaustion. Instead the Excess Insurers claimed before the
Superior Court that the issue of vertical versus horizontal exhaustion was
controlled by some per se rule of law in New York, irrespective of policy
language. A1654. They asserted that “New York embraces the horizontal
exhaustion rule” and that “New York law requires the insured to exhaust all such
3 The underlying insurance provisions of the Excess Policies fall into four general categories:
(1) Excess Policies providing that they are excess of certain underlying insurance identified
in the policy declarations expressly by name, policy period, or policy number (or some
combination of those) that is consistent with the directly underlying policies in the same
policy year (A546; A656; A812; A869; A983-85; A1000; A1044; A1101, A1099, A1110;
A1124, A1126; A1146-47; A1165-66; A1200, A1198; A1212-13; A1227, A1223; A1235-36;
A1254, A1259-60; A1273, A1270; A1278; A1291, A1286; A1308); (2) Excess Policies
providing that they are excess of a specific aggregate amount of insurance limits that
coincides with the aggregate limits of the directly underlying policies in the same policy
period (A642-43; A1131-32; A1150, A1152; A1175, A1177; A1187; A1206; A1247; A1264;
A1299, A1293; A1317); (3) a first-layer Excess Policy providing that it is excess of primary
insurance issued by “Liberty Mutual, Policy Number To Be Agreed,” which supports vertical
exhaustion because Viking had lower-level insurance issued by carriers other than Liberty
Mutual in certain earlier policy periods (A787, A789); and (4) first-layer Excess Policies
providing that they are excess of umbrella insurance issued by Liberty Mutual and stating the
aggregate limits of the directly underlying policy issued by Liberty Mutual, in the same
policy year (A546; A749; A941).
10
policies ‘horizontally’ before seeking excess coverage.” A1692; A1654 (emphasis
in original).
The Superior Court ultimately sided with the Excess Insurers in spite of—
and not because of—the Excess Policies’ language. Construing the Excess
Policies, the trial court found that “there is policy language supporting Plaintiffs’
argument for vertical exhaustion,” and that, “[b]ut for New York’s law, the court
could reject horizontal exhaustion.” A1783-84. Based on its mistaken belief that
some principle of New York law controlled the issue irrespective of the actual
terms of the policies (id.), however, the court found that Viking “must exhaust its
primary and umbrella insurance layers before tapping the excess.” A1785. The
Superior Court’s conclusion was untethered to any contractual language, and it
made no effort to compare the policy language at issue in this case with the
language at issue in the cases on which it based its ruling. The Final Judgment
reflects the court’s adoption of horizontal exhaustion. A429 ¶ 5.
In a subsequent opinion on a Warren motion to reconsider certain aspects of
its horizontal exhaustion ruling, the Superior Court conceded that no New York
court had ever applied a horizontal exhaustion rule in continuous injury cases
spanning multiple policy periods. A1831 (“while Illinois and California have
expressly applied horizontal exhaustion to continuous injury cases, such as
asbestos, New York has not.”). In light of that fact, the court “clarified” its
horizontal exhaustion ruling as it pertained to policies “within” the layers of shared
11
excess insurance—that is, whether an excess insurer can refuse to pay due to the
availability of unexhausted lower-level excess insurance in other policy years.
Even though the same policy language was at issue with respect to the issue of
primary and umbrella exhaustion as well as the issue of exhaustion within the
excess layers, the court announced different rules, predicting that “the New York
high court would hold horizontal exhaustion governs only the primary and
umbrella policies here, not the excess coverage.” A1839. No Excess Insurer has
appealed that ruling.
The Superior Court’s two rulings on the proper exhaustion method create a
bizarre result: horizontal exhaustion applies until primary and umbrella policies
are exhausted, then vertical exhaustion applies. The “seamless”4 insurance
program is thus now subject to diametrically opposed exhaustion methodologies
depending on where the policies are located within the coverage tower. No
provision of the Excess Policies supports this result; to the contrary, as noted above
(footnote 3, supra) and detailed further below, all of the policies contain materially
identical policy language concerning the underlying insurance that must be
exhausted prior to their obligations attaching.
The effect of a horizontal exhaustion rule is that the disparity that prompted
Viking to file this lawsuit ten years ago is preserved: Warren still enjoys greater
access to the shared insurance despite both companies having equal rights. Thus,
4 See A1729.
12
as a result of having purchased additional coverage in years outside the block it
shares with Warren (and consuming it at a slower rate), Viking will likely end up
with less reimbursement from and far-delayed access to the shared insurance as
Warren continues to exhaust those policies, while Viking cannot access them in
light of the remaining limits in the Viking-only primary and umbrella policies in
other years. Neither the language of the Excess Policies nor New York law
supports this inequitable result.
ARGUMENT
I. UNDER NEW YORK LAW, THE POLICY LANGUAGE CONTROLS
THE EXHAUSTION METHODOLOGY
A. New York Enforces Insurance Policies As Written
One of the bedrock principles of New York law is that “insurance contracts,
like other agreements, will ordinarily be enforced as written.” J.P. Morgan
Securities Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324, 334 (2013); Preston v. Aetna
Ins. Co., 193 N.Y. 142, 144 (1908) (“But the rule is equally well settled that
contracts of insurance, like other contracts, are to be construed according to the
sense and meaning of the terms which the parties have used . . .”). Thus, as with
any contractual dispute, New York courts “first look to the language of the
applicable policies” when resolving disputes over insurance coverage. Fieldston
Property Owners Association v. Hermitage Insurance Co., 16 N.Y.3d 257, 264
(2011); see also Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d
13
208, 221-22 (2002) (“In determining a dispute over insurance coverage, we first
look to the language of the policy.”).
The circumstances in which the courts of New York have refused to enforce
a contract as written are narrow and few in number. As this Court has held, the
“[f]reedom of contract prevails in an arm’s length transaction between
sophisticated parties such as these, and in the absence of countervailing public
policy concerns there is no reason to relieve them of the consequences of their
bargain.” Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685,
695 (1995). In the insurance context, the Court has only “recognized two
situations in which a countervailing public policy will override the freedom to
contract, thereby precluding enforcement of an insurance agreement.” J.P.
Morgan, 21 N.Y.3d at 334-35. The first is that parties may not contractually agree
to insure punitive damages, and, in a similar vein, the second is that parties may
not agree to insure losses resulting when one “engages in conduct with the intent to
cause injury.” Id. (inner quotation and citation omitted).
The Excess Insurers have never suggested that the choice between horizontal
and vertical exhaustion implicates any public policy that merits overriding the
plain terms of Excess Policies. Yet they still maintain that New York law requires
horizontal exhaustion irrespective of policy language, and the Delaware Superior
Court agreed. For the reasons explained below, the Excess Insurers’ argument is
wrong, the Superior Court’s judgment adopting horizontal exhaustion was error,
14
and this Court should rule that the plain language of the policies compels the
conclusion that vertical exhaustion applies to answer the certified question.
B. The Excess Policies’ Plain Language Allows Viking And Warren
To Access Triggered Insurance Coverage Vertically
The plain language of the Excess Policies affords Viking and Warren the
right to access the shared excess insurance once the directly underlying policies, in
the same policy year, are exhausted. Three considerations confirm this conclusion.
First, all of the Excess Policies state that their coverage obligations attach once
certain, specified underlying insurance policies are exhausted. Second, all of the
Excess Policies identify only the directly underlying policies, in the same policy
year, as the underlying coverage that must first be exhausted. Third, none of the
Excess Policies identifies coverage in other policy years as “Underlying
Insurance.” The Excess Insurers have never disputed any of these points. Taken
together they lead to an inescapable conclusion: the plain language of the Excess
Policies mandates vertical exhaustion. This is the bargain that was struck, and the
Excess Insurers must provide the coverage that their policies afford—attachment
when the underlying policies in the same policy year are exhausted.
The 1979 Excess Policies illustrate why vertical exhaustion applies. In that
year, Granite State Insurance Company issued the first-layer Excess Policy sitting
directly above Liberty Mutual’s umbrella policy. The insuring agreement of that
policy states that Granite State’s obligations “attach to the Company only after the
15
Underlying Umbrella Insurers have paid or have been held liable to pay the full
amount of their respective ultimate net loss liability. . . .” A1090 § II. The
Schedule of Underlying Insurance on the declarations page specifically lists only a
single umbrella policy issued by “Liberty Mutual Insurance Company” with an
aggregate limit of “$3,000,000,” which is the aggregate limit of Liberty Mutual’s
umbrella policy in 1979. Id., “Schedule”. Liberty Mutual had previously issued
umbrella policies to Houdaille in each year from 1972 to 1978, each having limits
of $3 million; none of them is listed as Underlying Insurance. If Granite State had
intended that they too must be exhausted before its policy attached, the listed
underlying aggregate limits would have been at least $24 million, not $3 million,
and that figure only would have accounted for the policies issued prior to the
Granite State policy.
International Surplus Lines Insurance Company (“ISLIC”) issued the
second-layer Excess Policy in 1979. That policy similarly states that it provides
coverage “in excess of the applicable limits of liability of the underlying insurance
described in Item 4 of the declarations.” A1101 at “1. Excess Liability
Indemnity.” Item 4 of the declarations, in turn, contains a detailed list identifying
the “underlying insurance” as the policies directly beneath the ISLIC policy in
1979—i.e., the $3 million Liberty Mutual 1979 umbrella policy and the $7 million
1979 Granite State policy:
16
IT IS UNDERSTOOD AND AGREED THAT ENDORSEMENT #1,
UNDERLYING INSURANCE, IS COMPLETED TO READ:
1) $3,000,000 EACH OCCURRENCE AND IN THE AGGREGATE
WHERE APPLICABLE UMBRELLA LIABILITY WITH LIBERTY
MUTUAL INSURANCE COMPANY POLICY # LEI 681-004091-
809 EXCESS OF $500,000 EACH OCCURRENCE AND $1,000,000
AGGREGATE COMPREHENSIVE GENERAL LIABILITY AND
$500,000 EACH PERSON AND $500,000 EACH OCCURRENCE
COMPREHENSIVE AUTOMOBILE WITH LIBERTY MUTUAL
INSURANCE COMPANY POLICY #S VARIOUS, FORMS ON
FILE WITH THE COMPANY.
2) $7,000,000 COMBINED SINGLE LIMIT EACH OCCURRENCE
AND IN THE AGGREGATE WHERE APPLICABLE EXCESS OF
THE ABOVE LIMIT WITH THE GRANITE STATE INSURANCE
COMPANY POLICY # TBD.”
A1110.
Manhattan Fire and Marine Insurance Company issued the third- and
highest-layer Excess Policy for the 1979 policy year. It too states that its
obligations attach “only after the Underlying Umbrella Insurers have paid or have
been held liable to pay the full amount of their respective ultimate net loss
liability . . . .” A1124 §II. The policy defines “Underlying Umbrella Policies” as
those “issued by ISLIC, C.V. Starr,5 Liberty Mutual (hereafter called the
‘Underlying Umbrella Insurers’).” Id. § I. The only year in which all three of
these insurers issued policies to Houdaille is 1979. A1844. And removing any
doubt that the list might include policies issued by insurers in other years, Item 3 of
the policy’s Declarations identifies the three policies’ collective “Underlying
5 C.V. Starr & Co. is listed as “Underwriting Managers” on the declarations page of the 1979
Granite State policy. A1085.
17
Umbrella Limits” as “$20,000,000,” which is the total aggregate limits of the three
directly underlying policies issued by Liberty Mutual, Granite State, and ISLIC in
1979. A1126.
The Excess Insurers have never argued that the policy language means
anything other than what Viking says it means. Nor have they ever pointed to any
policy language in the Excess Policies that could trump the result mandated by the
provisions detailed here: coverage attaches once the directly underlying policies in
the same policy year have been exhausted. And, of course, this construction makes
sense for policies, like these, that are purchased together on an annual basis as part
of “a seamless, layered plan.” A1729. There is no evidence in the record (or any
inferences to be drawn from it) that the parties ever intended for any of the Excess
Policies to require exhaustion of lower-layer insurance in prior or future years
before their obligations attach. There likewise is no language supporting the
Excess Insurers’ argument for horizontal exhaustion: none of the Excess Policies
lists underlying policies from other years in its schedule of underlying insurance
that must be exhausted.
At bottom, the Excess Insurers effectively ask to re-write the insuring
agreements and underlying insurance provisions of their policies so they require
exhaustion not just of the directly underlying policies in the same policy year but
also all other lower-layer insurance in other years. Inserting such language would
18
certainly have been permissible at the time the policies were negotiated if the
Excess Insurers had bargained for it. But they did not.
C. The Superior Court Recognized That The Policy Language
Supports Vertical Exhaustion
The Delaware Superior Court agreed that “there is policy language
supporting Plaintiffs’ argument for vertical exhaustion.” A1784. And it cited no
policy language that supported horizontal exhaustion. Indeed, it later held that the
Excess Policies require vertical exhaustion of coverage within the excess layers of
the insurance program. Despite the policies’ language, however, as to the primary
and umbrella layers, the court adopted the Excess Insurers’ argument that New
York law broadly “requires each layer’s exhaustion before reaching the next[,]”
regardless of policy language. Id. However, New York has no legal rule
prescribing horizontal exhaustion irrespective of policy language. (See Section II,
infra).
And there is no doubt that it was the Superior Court’s perception of a per se
rule of law that stood in the way of enforcing the policies as written. As the court
acknowledged, but for its notion that New York law mandated horizontal
exhaustion, “the court could reject horizontal exhaustion.” A1784. That is exactly
what it did in deciding the appropriate exhaustion method “within” the layers of
excess insurance, where it found no binding case law in New York and thus
considered the issue “to be a question of first impression under New York
19
law . . . .” A1823. In that context, not believing itself bound by any overriding
rule of law, the court applied vertical exhaustion to the Excess Policies. A1839;
A1842. But the same policy language cannot support two different exhaustion
rules, as nothing in that language distinguishes between “primary and umbrella”
policies and “excess” policies. A horizontal exhaustion rule for the primary and
umbrella layers simply has no support in that policy language.
II. NEW YORK HAS NO HORIZONTAL EXHAUSTION RULE OF
LAW THAT WOULD OVERRIDE THE PARTIES’ CONTRACTUAL
INTENT
There also is no legal support for a horizontal exhaustion rule of law in New
York that applies irrespective of policy language. Such a rule would contravene
this Court’s recognition of the primacy of contract language and admonition that
insurance policies, like any other contracts, are enforced according to their terms.
See Oppenheimer, 86 N.Y.2d at 695.
Although they argued to the Superior Court that “New York embraces the
horizontal exhaustion rule” and “requires the insured to exhaust all such policies
‘horizontally’ . . .” (A1692; A1654 (emphasis in original)), the Excess Insurers
wisely back-peddled before the Delaware Supreme Court and admitted that “New
York Courts have not expressly addressed horizontal exhaustion.” A2117. The
Superior Court too recognized in its February 2014 opinion that no New York
court has applied horizontal exhaustion under the circumstances of this case:
20
Within the concurrent policy context, New York’s horizontal
exhaustion rule is well-developed. But, while Illinois and California
have expressly applied horizontal exhaustion to continuous injury
cases, such as asbestos, New York has not.
A1831 (emphasis added). These concessions are critical, because they confirm
that none of the cases cited by the Excess Insurers—and on which the Superior
Court’s horizontal exhaustion ruling rests—actually compelled that result.
In fact, the New York cases cited by the Excess Insurers and Superior Court
do not even address, let alone, apply horizontal exhaustion. The term “horizontal
exhaustion” does not appear in any of those opinions. See generally Home Ins. Co.
v. Liberty Mutual Ins. Co., 678 F. Supp. 1066 (S.D.N.Y. 1988); Am. Home
Assurance Co. v. Int’l Ins. Co., 90 N.Y.2d 433 (1997); Bovis Lend Lease LMB,
Inc., v. Great Am. Ins. Co., 53 A.D.3d 140 (N.Y. App. Div. 2008). And for good
reason: each of the cases involved losses falling within a single policy year; none
of them involved losses over multiple policy years. The choice between vertical
exhaustion and horizontal exhaustion only arises in the specific context of losses
spanning multiple policy periods, as is the case here. BARRY R. OSTRAGER &
THOMAS R. NEWMAN, HANDBOOK ON INSURANCE COVERAGE DISPUTES § 13.14
(16th ed. 2013) (attached hereto) (horizontal versus vertical exhaustion arises
“[w]hen coverage for more than one policy period is triggered . . .”); 1 STEVEN
PLITT & JORDAN ROSS PLITT, PRACTICAL TOOLS FOR HANDLING INSURANCE CASES
§ 4:3 (Update July 2015) (WestlawNext) (“RULE: Horizontal exhaustion requires
21
each primary insurer to indemnify the insured in each triggered year of a multi-
year time period to the full extent of its policy limits before requiring contribution
of any of the excess policies.”); 4-39 ALAN S. RUTKIN ET AL., NEW APPLEMAN
INSURANCE LAW PRACTICE GUIDE § 39.13[5] (2014) (Lexis) (describing horizontal
exhaustion in multiple-policy period context). The Excess Insurers have conceded
as much, agreeing that “horizontal exhaustion applies only ‘[w]hen coverage for
more than one policy period is triggered.’” A1695 (emphasis added, inner
citations omitted). All of the New York cases cited by the Excess Insurers in
support of a supposed horizontal exhaustion rule of law, however, were
contribution disputes between insurers concerning losses falling within a single
policy period. Their statements concerning priority among policies covering
multiple insured defendants for a single loss in a single policy period therefore had
nothing to do with exhaustion methodology for losses spanning multiple policy
periods.
The New York contribution cases are also inapposite for other reasons. As
contribution disputes, those cases addressed the rights and obligations of insurers
vis-à-vis one another. Home Insurance, for example, involved a claim by an
umbrella insurer of Bassett Furniture against the primary insurer of J.C. Penney
seeking contribution for a settlement payment made by the umbrella insurer to
resolve an underlying personal injury claim in which Bassett and J.C. Penney were
joint tortfeasors. Home Insurance, 678 F. Supp. at 1067-68. As a result, the
22
courts’ rulings in those cases do not even purport to address a policyholder’s
contractual rights as to its own insurer. The insured in Home Insurance, for
instance, had already tapped its excess insurance to pay the settlement, and the
insurers then litigated among themselves how to allocate the loss among their
policies. See id. at 1068.
The American Home decision cited by both the Excess Insurers and Superior
Court, which again involved a loss falling within a single policy period, has even
less relevance to this case. As the Court explained in American Home, the sole
issue on appeal in that case was whether the notice-prejudice rule applied to excess
insurance: “[t]he issue in this case is whether the analysis in Unigard should be
applied to a breach of the prompt-notice clause in a policy providing excess
liability coverage.” American Home, 90 N.Y.2d at 437. In concluding that it did
not, the Court found that excess insurance had more in common with primary-layer
insurance than it did with reinsurance, and it was in that context the Court stated
that excess “coverage does not immediately attach after an occurrence but rather
attaches only after the primary coverage for the occurrence is exhausted. . . .” Id.
at 443. To imply a horizontal exhaustion rule of law from the dicta of this general
observation, made in the context of a dispute over the notice-prejudice rule, is a
bridge too far.
Even if these contribution cases had relevance to Viking’s and Warren’s
contract claims—which they do not—they do not support the creation of a per se
23
rule of law. Those cases are simply examples of courts resolving contribution
claims among insurers by looking to the purpose of the policies as evidenced by
their terms. In its February 2014 clarifying opinion, for example, the Delaware
Superior Court cited Bovis Lend Lease LMB, Inc. v. Great American Insurance Co.
for the proposition that “[i]n New York, horizontal exhaustion is also the settled
rule.” A1829. As explained above, this case did not address horizontal exhaustion
because the loss fell within a single policy period. But even if it had, the appellate
court there stressed that “the extent of coverage (including a given policy’s priority
vis-à-vis other policies) is controlled by the relevant policy terms . . . .” Bovis
Lend Lease, 53 A.D.3d at 145. In resolving the contribution claims before it, the
court in Bovis Lend Lease relied heavily on policy language that differs materially
from the language of the Excess Policies and the policies’ “Other Insurance”
provisions. The Bovis court, for instance, gave great weight to the policies’
underlying insurance provision, which unlike the Excess Policies had catch-alls for
“‘[o]ther collectible primary insurance’” and “‘[a]ny other primary insurance
available to you . . .’.” Id. at 148-149. And, as this Court has confirmed, “Other
Insurance” provisions have no bearing on losses spanning multiple policy periods,
because they apply only “when two or more policies provide coverage during the
same [time] period.” See Consolidated Edison, 98 N.Y.2d at 223.
The cases cited in the Home Insurance decision likewise make clear that its
ruling concerning priority among insurers issuing coverage in the same policy
24
period was based, first and foremost, on policy language and not some abstract rule
of law. See State Farm Fire & Cas. Co. v. LiMauro, 65 N.Y.2d 369, 374 (1985)
(priority among policies providing coverage in the same policy period “turns on
consideration of the purpose each policy was intended to serve as evidenced by
both its stated coverage and the premium paid for it, as well as upon the wording of
its provision concerning excess insurance”) (inner citation omitted); Lumbermens
Mut. Cas. Co. v. Allstate Ins. Co., 51 N.Y.2d 651, 655 (1980) (despite “general
rule” that “where there are multiple policies covering the same risk, and each
generally purports to be excess to the other, the excess coverage clauses are held to
cancel out each other . . .,” “this rule is inapplicable to the case before us because
its use would effectively deny and clearly distort the plain meaning of the terms of
the policies of insurance here involved.”); Northbrook Excess & Surplus Ins. Co. v.
Chubb Group of Ins. Cos., 113 A.D.2d 319, 324 (N.Y. App. Div. 1985) (focusing
on policy language that “provides that it ‘shall be in excess of, and shall not
contribute with’ other collectible insurance covering a loss available to the insured,
except such as in excess of the limits of the umbrella policy.”) (inner citation and
quotations omitted). At bottom, the cases cited by the Excess Insurers and
Superior Court all confirm that the language of the policies is determinative, and
that the Excess Insurers’ argument for a per se rule of law requiring horizontal
exhaustion irrespective of policy language is contrary to the settled law of this
State.
25
III. CASES FROM OTHER JURISDICTIONS CONFIRM THE
PRIMACY OF CONTRACT LANGUAGE
Courts in other jurisdictions construing language similar to that in the Excess
Policies have also found that the policies call for vertical exhaustion. In Cadet
Manufacturing Co. v. American Insurance Co., for example, the U.S. District
Court for the Western District of Washington construed a Granite State excess
policy with policy language substantively identical to the language in the Granite
State policy addressed in Section I.B. above. 391 F. Supp. 2d 884 (W.D. Wash.
2005). The court found that “each of the Granite State policies requires that [the
insured] exhaust only the ‘underlying insurances’ before its coverage is triggered.”
Id. at 892. The court noted that “[t]he ‘underlying insurances’ are the Royal
polices,” which Granite State conceded had been properly exhausted. Id.
Rejecting Granite State’s argument for horizontal exhaustion, the court said that it
was “unpersuaded by Granite State’s proposal that the Court should require
horizontal exhaustion of all primary insurers because to do so flies in the face of
the terms of Granite State’s own policies . . . .” Id.
A California appellate court reached a similar result in Travelers Casualty &
Surety Co. v. Transcontinental Insurance Co., 19 Cal. Rptr. 3d 272, 277 (Ct. App.
4th Dist. 2004). There, the court rejected an excess insurer’s argument for
horizontal exhaustion under a policy that, like the Excess Policies here, was
triggered by its terms when the limits of the “underlying insurance” were
26
exhausted. Explaining its ruling, the court noted that the excess policy defined the
term “Underlying Insurance” as the “specific policies listed in the Schedule of
Underlying Insurance.” Id. Turning to the Schedule of Underlying Insurance, the
court found that “[t]he only applicable underlying insurance policy is the Primary
Policy, which has been exhausted.” Id. The court held that this language was
“‘sufficiently clear’ to trigger Federal’s defense obligations under the Excess
Policy upon the exhaustion of the underlying insurance, regardless of the existence
or exhaustion of other insurance.” Id. at 279 (emphasis added).
By contrast, the non-New York cases that Excess Insurers have cited—
including a different California case relied upon by the Superior Court—applied
horizontal exhaustion to all years of primary-layer coverage precisely because the
policies before them contained language requiring exhaustion of “any other”
available underlying insurance, which those courts held required exhaustion of
underlying insurance in other policy years. In Kaiser Cement & Gypsum Corp. v.
Insurance Company of Pennsylvania, for example, a California state court required
horizontal exhaustion of primary-layer policies before the excess policy at issue
could be accessed because the excess policy’s insuring agreement expressly
required the insured to exhaust “the applicable limit(s) of any other underlying
insurance collectible by the Insured.” 126 Cal. Rptr. 3d 602, 614 (Ct. App. 2011)
(emphasis in original). The court concluded that the policy’s reference to “any
other underlying insurance” included primary insurance from other years: “we
27
believe that the policy’s reference to ‘any other underlying insurance’ necessarily
means ‘whatever’ or ‘whichever’ primary insurance is available to Kaiser—not, as
Kaiser suggests, only that primary insurance that expressly covers the 1974 policy
year.” Id.; see also Kaiser Alum. & Chem. Corp. v. Certain Underwriters at
Lloyd’s, London, Case No. 312415, 2003 Extra LEXIS 174, at *6-7 (Cal. Super.
Ct. June 13, 2003) (“The articulated basis in the cases upholding this [horizontal
exhaustion] rule is one of contract interpretation. The policies interpreted therein
all contained language to the effect that the excess policy was in excess of all other
valid underlying insurance, whether or not scheduled.”). In short, even the cases
cited by the Excess Insurers and the Superior Court recognize the primacy of the
contract language. None of those cases supports ignoring the clear language of the
Excess Policies here.6
IV. ANY DOUBT ABOUT WHETHER VERTICAL EXHAUSTION
APPLIES TO THE EXCESS POLICIES MUST BE RESOLVED IN
THE INSUREDS’ FAVOR
As explained above, the plain language of the Excess Policies requires
vertical exhaustion, and the issue should begin and end there. But even if the
Excess Insurers were able to identify a plausible, alternative reading of the Excess
6 The Excess Insurers also relied on State v. Continental Insurance Co., 88 Cal.Rptr.3d 288
(Ct. App. 2009) in their briefs to the Delaware Supreme Court. However, that case too
confirms that policy language controls the issue and acknowledges that vertical exhaustion
applies if “the excess policy provides that it is excess to a specified primary policy.” Id. at
306 (emphasis in original).
28
Policies supporting horizontal exhaustion—which they have never done—this
Court should still rule that vertical exhaustion applies to the policies.
The Superior Court’s acknowledgment that there is “policy language
supporting Plaintiff’s argument for vertical exhaustion” (A1784) confirms that the
policies are at least ambiguous and compels an interpretation favoring the
policyholders: in New York “ambiguit[ies in insurance policies] must be
construed in favor of the insured and against the insurer.” See White v. Cont’l Cas.
Co., 9 N.Y.3d 264, 267 (2007). Thus, to prevail on this issue, the Excess Insurers
would need to show that the only reasonable construction of the Excess Policies is
that they require horizontal exhaustion—a burden the Excess Insurers cannot meet
in light of the policy language here. See Cantanucci v. Reliance Insurance Co., 43
A.D.2d 622, 623 (N.Y. App. Div. 1973).
Finally, the only extrinsic evidence presented at trial also supports vertical
exhaustion. Specifically, the underwriter for first-layer excess carrier International
agreed on cross examination that the 1982 International policy would be “up to
bat” once the directly underlying primary and umbrella policies had been
exhausted:
Q. And so once that underlying insurance was exhausted in the ’82
year, this International policy would be up to bat?
A. Yes.
A412. The Excess Insurers’ counsel attempted to deflate the admission by
soliciting on re-direct that the 1982 Liberty Mutual umbrella and the International
29
excess policy would not attach until “the primary” had been exhausted, leaving
room to argue that “the primary” included primary coverage in other policy years:
Q. Mr. Foradas just asked you -- I believe he was speaking about
the ’82-83 policy?
A. Yes.
Q. And he said would it follow to the -- would it pay after the
Liberty Mutual policy below it the umbrella exhausted?
A. Yes.
Q. And that Liberty Mutual policy would start paying when, the
umbrella policy?
A. After the primary had exhausted.
A413. But on further re-cross examination by Viking, International’s underwriter
admitted that the only primary policy that would need to be exhausted to trigger
the 1982 Liberty Mutual umbrella policy was the primary policy for 1982:
Q. Mr. Quigley, the underlying primary policy you were just asked
about, would that be the ’82-83 policy as well?
A. Yes.
A414. The Excess Insurers submitted no extrinsic evidence in support of their
horizontal exhaustion argument, choosing instead to rely exclusively on their
contention that horizontal exhaustion is required as a matter of law in New York.
That argument cannot rewrite their policies’ plain terms.
CONCLUSION
For the reasons explained above, Viking respectfully requests that the Court
find, under the plain terms of the Excess Policies, that Viking and Warren may
seek coverage from any triggered Excess Policy once the policies directly
underlying the Excess Policy, in the same policy year, are exhausted.
Dated: August 21, 2015
Respectfully submitted,
KIRKLAND & ELLIS LLP
By:_la_~_7 £-~---
Michael P. Foradas, P.C.
Lisa G. Esayian
William T. Pruitt
300 North LaSalle
Chicago, Illinois 60654
Tel.: (312) 862-2000
Fax: (312) 862-2200
mforadas@kirkland.com
lesayian@kirkland.com
wpruitt@kirkland.com
Peter A. Bellacosa
601 Lexington A venue
New York, New York 10022
Tel.: (212) 446-4800
Fax: (212) 446-4900
pbellacosa@kirkland.com
Attorneys for Appellant Viking Pump, Inc.
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ADDENDUM
H.A.l'I C> B <> C> K. C> l'I
INSURANCE
COVERAGE
SIXTEENTH EDITION
VOLUME 2
BARRY R. OSTRAGER
THOMAS R. NEWMAN
®Wolters Kluwer
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Q
§13.14 INSURANCE COVERAGE DISPUTES
§13.14 HORIZONTALV:S. VERTICAL EXHAUSTION OF
AVAILABLE UNDERLYING INSUR~NCE
When coverage for more than one policy period is triggered, and
the loss exceeds the highest limit of any of the triggered primary poli-
cies, there is a split of authority as to whether an excess insurer is
required to respond to the loss before all the available primary cov-
erage has been exhausted (horizontal exhaustion), or whether exhaus-
tion of the underlying primary coverage triggers the excess insurer's
policy obligations (vertical exhaustion). One practical effect of the
horizontal or "exhaustion by layers" approach is that it will often
maximize coverage because primary policies typically have a supple-
mentary defense obligation under which defense expenses will not
reduce the available amount of indemnity coverage, while excess poli-
cies generally include defense costs within the limit of covered ulti-
mate net loss.
A significant number of cases have favored exhaustion by lay-
ers. See Federal-Mogul U.S. Asbestos Personal Injury Trust v. Conti-
nental Cas. Co., 666 F.3d 384 (6th Cir. 2011); Continental Casualty
Co. v. Armstrong World Indus., Inc., 776 F. Supp. 1296, 1301 (N.D.
Ill. 1991) (Pennsylvania law); Missouri Pac. R.R. v. International Ins.
Co., 288 Ill. App. 3d 69, 679 N.E.2d 801 (2d Dist.), appeal denied,
174 Ill. 2d 567, 686 N.E.2d 1164 (1997); Northern States Power Co.
v. Fidelity & Casualty Co. of New York, 523 N.W.2d 657 (Minn.
1994); Schering Corp. v. Evanston Ins. Co., No. UNNL-97311-88
(N.J. Super. Ct. Law Div. Union County Jan. 24, 1995), appeal denied
(N.J. Super. Ct. App. Div. May 1995), appeal denied, No. 40,481 (N.J.
July 13, 1995); United States Gypsum Co. v. Admiral Ins. Co., 268 Ill.
App. 3d 598, 643 N.E.2d 1226 (1st Dist. 1994), appeal denied, 161
Ill. 2d 542, 649 N.E.2d 426 (1995); Outboard Marine Corp. v. Liberty
Mut. Ins. Co., No. 86 MR 308, slip op. at 24 (Ill. Cir. Ct. Lake County
Mar. 20, 1995), aff'd in relevant part, rev'd in part, 283 Ill. App. 3d
630, 670 N.E.2d 740 (2d Dist.), appeal denied, 169 Ill. 2d 570, 675
N.E.2d 634 (1996). See also Kajima Construction Svs., Inc. v. St. Paul
Fire and Marine Ins. Co., No. 103588 (Ill. Sup. Ct. Nov. 29, 2007);
North River Ins. Co. v. Grinnell Mut. Reins. Co., 369 Ill. App. 3d 563,
1242
LV
,
,
CURRENT ISSUES INVOLVING EXCESS INSURANCE §13.14
860 N.E.2d 460 (1st Dist. 2006). But see Dayton Indep. Sch. Dist. v.
National Gypsum Co., 682 F. Supp. 1403 (E.D. Tex. 1988), rev'd on
other grounds sub nom. W.R. Grace & Co. v. Continental Casualty
Co., 896 F.2d 865 (5th Cir. 1990); SCSC Corp. v. Allied Mut. Ins. Co.,
No. 90-90-021573 (Minn. Dist. Ct. Hennepin County 4th Jud. Dist.
July 7, 1993), aff'd in relevant part, 515 N.W.2d 588 (Minn. Ct. App.
1994), aff'd in part, rev'd in part and remanded, 533 N.W.2d 603
(Minn. 1995), amended and clarified on denial of reh'g, 536 N.W.2d
305 (Minn. 1995).
Horizontal exhaustion appears to be the general rule in Califor-
nia. See Kaiser Cement and Gypsum Corp. v. Ins. Co. of the State of
Pennsylvania, 196 Cal. App. 4th 140, 126 Cal. Rptr. 3d 602 (2d Dist.
2011) (policy language evidences parties' intent to require exhaustion
of all underlying policies, rather than one specific underlying policy),
review granted and opinion superseded by, 264 P.3d 32, 133 Cal. Rptr.
3d 390 (Cal. 2011); Padilla Construction Co., Inc .. v. Transportation
Ins. Co., 150 Cal. App. 4th 984, 986, 58 Cal. Rptr. 3d 807, 809 (4th
Dist. 2007); In re Vulcan Materials Consoldiated Coverage Litig., No.
BC328022, at *22-*23, *26-*27 (Ca. Super. Ct. Los Angeles County
Apr. 9, 2009); Pacific Coast Building Products, Inc. v. AIU Ins. Co.,
No. 05-cv-04796 (N.D. Cal. Oct. 31, 2006); Iolab Corp. v. Seaboard
Surety Co., 15 F.3d 1500, 1504 (9th Cir. 1994) ("under California law,
it is clear that '[a]ll primary insurance must be exhausted before liabil-
ity attaches under a secondary policy' ");In re Asbestos Ins. Coverage
Cases, Judicial Council Coordination Proceeding No. 1072, Judg-
ment, slip op. at 22 (Cal. Super. Ct. San Francisco County Jan. 24,
1990), aff'd in part, remanded in part sub nom. Armstrong World
Indus. v. Aetna Casualty & Sur. Co., 45 Cal. App. 4th 1, 52 Cal. Rptr.
2d 690 (1st Dist. 1996), review denied (Cal. Aug. 21, 1996); Stone-
wall Ins. Co. v. City of Palos Verdes Estates, 46 Cal. App. 4th 1810,
1852-53, 54 Cal. Rptr. 2d 176, 199 (2d Dist. 1996), review denied
(Cal. Oct. 23, 1996); HDI-Gerling America Ins. Co. v. Homestead Ins.
Co., No. C 08-1716 PJH (N.D. Cal. July 11, 2008) (horizontal exhaus-
tion doctrine applies to duty to defend). But see Associated Int'l Ins.
Co. v. St. Paul Fire & Marine Ins. Co., 220 Cal. App. 3d 692, 269 Cal.
Rptr. 485 (6th Dist. 1990), review denied and opinion ordered not pub-
lished (Cal. Aug. 30, 1990).
1243
]l1
''
,
,
,
§13.14 INSURANCE COVERAGE DISPUTES
In this respect, courts have also addressed whether a policy-
holder must pay a retained limit for all triggered policy periods before
accessing coverage that is excess to the retained limits. In Northern
States Power Co. v. Fidelity & Casualty Co. of New York, 523 N.W.2d
657 (Minn. 1994), the court, employing a pro rata by time-on-the-risk
method of allocation for continuous pollution damage claims, held that
the policyholder had to assume the SIR for each applicable policy,
with the insurer liable only for the "excess portion of the damages
allocated to each policy," up to its per-occurrence policy limit. 523
N.W.2d at 664. See also Missouri Pacific R.R. Co. v. International Ins.
Co., 288 Ill. App. 3d 69, 84, 679 N.E.2d 801, 811 (2d Dist. 1997)
("Missouri Pacific must horizontally exhaust a foll SIR per-
occurrence per-policy period before it may look to coverage under the
policies.").
On the other hand, there is significant authority for the proposi-
tion that an excess insurer's duty to contribute to the defense and
indemnity of progressive injury claims attaches when the primary
insurance for the policy year covered by the excess policy is
exhausted, regardless of whether policy limits of primary insurers for
other policy periods have been exhausted. See Carter-Wallace Inc. v.
Admiral Ins. Co., 712 A.2d 1116, 1123-24 (N.J. 1998) (rejecting hori-
zontal exhaustion); Liberty Mutual Ins. Co. v. Indian Harbor Ins. Co.,
No. ll-CV-0624 (S.D. Cal. Feb. 28, 2012) (language of excess policy
requires only vertical exhaustion of underlying primary policy); Clark
Equipment Co. v. Liberty Mutual Ins. Co., No. 09-09-C-02026 (N.D.
Dist. Ct. Cass County Dec. 10, 2010) (interpreting term "underlying"
in excess policy to require only vertical exhaustion under Michigan
law); Dayton Indep. Sch. Dist. v. National Gypsum Co., 682 F. Supp.
1403, 1411 n.23 (E.D. Tex. 1988), rev'd on other grounds sub nom.
W.R. Grace & Co. v. Continental Casualty Co., 896 F.2d 865 (5th Cir.
1990) ("once the limits immediately underlying a given excess policy
are exhausted, Grace may call upon that excess policy to provide cov-
erage"). See also HDI-Gerling America Ins. Co. v. Homestead Ins.
Co., No. C 08-1716 PJH (N.D. Cal. July 11, 2008) (adopting horizon-
tal exhaustion for duty to defend, but rejecting horizontal exhaustion
for duty to indemnify, given explicit policy language that made cov-
erage excess to a specific primary policy); Continental Cas. Co. v.
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11-CV-
£
CURRENT ISSUES INVOLVING EXCESS INSURANCE §13.14
BorgWarner Inc., No. 04 CH 1708 (Ill. Cir. Ct. Chancery Div. Aug. 23,
2007) (adopting a hybrid method for allocation and exhaustion of cov-
erage based on pro rata time on the risk and vertical exhaustion). Cf.
SCSC Corp. v. Allied Mut. Ins. Co., No. 90-90-021573 (Minn. Dist. Ct.
Hennepin County 4th Jud. Dist. July 7, 1993), aff'd in relevant part,
515 N.W.2d 588 (Minn. Ct. App. 1994), aff'd in part, rev'd in part and
remanded, 533 N.W.2d 603 (Minn. 1995), amended and clarified on
denial of reh'g, 536 N.W.2d 305 (Minn. 1995).
In Atchison, Topeka & Santa Fe Railway Co. v. Stonewall Insur-
ance Co., No. 94-CV-1464 (Kan. Dist. Ct. Shawnee County Sept. 18,
1995), where several thousand noise-induced hearing loss claims trig-
gered coverage under a number of successive policies with self-
insured retentions, the trial court rejected the insurers' contention that
Santa Fe must exhaust all SIRs for all triggered periods before being
entitled to indemnification. In 2003, the Kansas Supreme Court
reversed the trial court's ruling as to SIRs. Atchison; Topeka & Santa
Fe Railway Co. v. Stonewall Ins. Co., 71 P.3d 1097 (Kan. 2003). The
high court held that SIRs constitute "other insurance" in the form of
self-insurance. Accordingly, Santa Fe must exhaust all SIRs for trig-
gered periods before receiving indemnification from its insurers.
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