CTQ-2015-00003
Court of Appeals
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 AMICI CURIAE
COMPLEX INSURANCE CLAIMS LITIGATION ASSOCIATION
AND AMERICAN INSURANCE ASSOCIATION
Attorneys for Amici Curiae Complex Insurance Claims
Litigation Association and American Insurance Association
November 24, 2015
d
JOHN H. EICKEMEYER
DANIEL C. GREEN
VEDDER PRICE P.C.
1633 Broadway, 47th Floor
New York, New York 10019
Telephone: (212) 407-7700
Facsimile: (212) 407-7799
LAURA A. FOGGAN
(admission pro hac vice requested)
NICOLE AUDET RICHARDSON
(admission pro hac vice requested)
WILEY REIN LLP
1776 K Street NW
Washington, DC 20006
Telephone: (202) 719-7000
Facsimile: (202) 719-7049
TABLE OF CONTENTS
CORPORATE DISCLOSURE STATEMENT .................................................... 1
INTEREST OF AMICI CURIAE ........................................................................... 2
QUESTIONS PRESENTED ................................................................................... 4
STATEMENT OF FACTS ..................................................................................... 4
SUMMARY OF ARGUMENT ............................................................................ 10
ARGUMENT ......................................................................................................... 10
I. PRO RATA ALLOCATION IS REQUIRED BY THE POLICY
LANGUAGE AS WELL AS THE SETTLED NEW YORK
PRECEDENT OF CON ED . ................................................................. 10
a. The Plain Terms Of The Insurance Policies Require Pro
Rata Allocation ............................................................................. 13
b. Under Well-Settled New York Law, Multiple Insurers
Issuing Successive Policies Are Not Jointly And Severally
Liable .............................................................................................. 18
II. NON-CUMULATION AND PRIOR INSURANCE POLICY
TERMS DO NOT PROVIDE A JUSTIFICATION FOR
ABANDONING THE NOW LONGSTANDING NEW YORK
PRECEDENT SUPPORTING PRO RATA ALLOCATION ........... 23
a. Non-Cumulation Clause Are Included For Reasons Separate
And Apart From Allocation Of Liability Methods, And Do Not
Expand Coverage .......................................................................... 24
b. Similarly, Condition C Is Consistent With Pro Rata
Allocation ....................................................................................... 28
c. The Chancery Court's Conclusions Are Not Supported by
New York Courts .......................................................................... 31
III. THE PRO RATA ALLOCATION DICTATED BY CON ED
AND THE POLICY LANGUAGE IS FAIR AND EFFICIENT,
AND IS WHAT THE PARTIES CONTRACTED FOR ................... 33
a. Making Successive Insurers Jointly And Severally Liable
Violates Fundamental Fairness By Creating Coverage For
Which Policyholders Neither Bargained Nor Paid .................... 33
b. Pro Rata Allocation Is Efficient And Fair, Whereas Joint
And Several Is Inefficient In Forcing Follow-On
1
Contribution Litigation And Encumbering And Potentially
Impairing Insurer Rights To Contribution ................................ 35
c. Failing To Allocate Would Undermine The Public Interest
In Promoting Sound And Predictable Underwriting And
Corporate Responsibility ............................................................. 3 7
d. The Imposition Of Joint And Several Liability Would
Weaken The Insurance Market And Harm Responsible
Purchasers Of Insurance .............................................................. 3 8
CONCLUSION ...................................................................................................... 40
11
TABLE OF AUTHORITIES
Federal Cases
American Home Products Corp. v. Liberty Mutual Insurance Co.,
565 F. Supp. 1485 (S.D.N.Y. 1983), aff'd as modified,
Page(s)
748 F.2d 760 (2d Cir. 1984) ......................................................................... 15, 40
E.R. Squibb & Sons, Inc. v. Lloyd's & Cos.,
241 F.3d 154 (2d Cir. 2001) ............................................................................... 22
Endicott Johnson Corp. v. Liberty Mutual Insurance Co.,
928 F. Supp. 176 (N.D.N.Y. 1996) .................................................................... 26
Greenridge v. Allstate Insurance Co.,
312 F. Supp. 2d 430 (S.D.N.Y. 2004) ................................................................ 26
Hunt Ltd. v. Lifschultz Fast Freight, Inc.,
889 F.2d 1274 (2d Cir. 1989) ............................................................................. 13
Insurance Co. of North America v. Forty-Eight Insulations,
633 F.2d 1212 (6th Cir. 1980) ...................................................................... 16, 17
Liberty Mutual Fire Insurance Co. v. J&S Supply Corp.,
No. 13-CV-4784, slip op. (S.D.N.Y. June 29, 2015) ............................. 21, 28, 30
Miller-Wohl Co. v. Commissioner of Labor & Industries,
694 F.2d 203 (9th Cir. 1982) ................................................................................ 2
Olin Corp. v. Insurance Co. of North America ("Olin I''),
221 F.3d 307 (2d Cir. 2000) ................................................................... 21, 22, 37
Olin Corp. v. Certain Underwriters at Lloyd's London ("Olin If'),
468 F.3d 120 (2d Cir. 2006) ............................................................................... 21
Olin Corp. v. Certain Underwriters at Lloyd's London ("Olin !If'),
704 F.3d 89, 102 (2d Cir. 2012) .................................................................. 21, 37
Stonewall Insurance Co. v. Asbestos Claims Management Corp.,
73 F.3d 1178 (2d Cir. 1996) ............................................................................... 22
11l
Uniroyal, Inc. v. Home Insurance, Co.,
707 F. Supp. 1368 (E.D.N.Y 1988) ........................................................ 16, 33, 38
United States Fidelity & Guaranty Co. v. Treadwell Corp.,
58 F. Supp. 2d 77 (S.D.N.Y. 1999) .............................................................. 22, 23
State Cases
Aetna Casualty & Surety Co. v. Commonwealth,
179 S.W.3d 830 (Ky. 2005) ............................................................................... 11
Agency of Natural Recources v. Glens Falls Insurance Co.,
199 Vt. 426, 732 A.2d 768 (1999) ..................................................................... 11
Atchison, Topeka & Santa Fe Railway Co. v. Stonewall Insurance Co.,
275 Kan. 698, 71 P.3d 1097 (2003) ............................................................. 11, 22
Benjamin Moore & Co. v. Aetna Casualty & Surety Co.,
179 N.J. 87, 843 A.2d 1094 (2004) .................................................................... 11
Borg-Warner Corp. v. Insurance Co. of North America,
577 N.Y.S.2d 953 (N.Y. App. Div. 1st Dep't 1992) .......................................... 31
Boston Gas Co. v. Century Indemnity Co.,
454 Mass. 337, 910 N.E. 2d 290 (2009) ............................................................ 11
Breed v. Insurance Co. of North America,
46 N.Y.2d 351, 385 N.E.2d 180 (1978) ............................................................. 13
Chase Manhattan Bank, N.A. v. Travelers Group, Inc.,
702 N.Y.S. 2d 60 (N.Y. App. Div. 1st Dep't 2000) ........................................... 30
City of Edgerton v. General Casualty Co.,
184 Wis. 2d 750, 517 N.W.2d 463 (1994) ......................................................... 38
County of Columbia v. Continental Insurance Co.,
83 N.Y.2d 618, 634 N.E.2d 946 (1994) ....................................................... 18, 19
Consolidated Edison Co. v. Allstate Insurance Co.,
98 N.Y.2d 208, 774 N.E.2d 687 (2002) ...................................................... passim
Continental Casualty Co. v. Medical Protective Co.,
859 S.W.2d 789 (Mo. Ct. App. 1993) ................................................................ 15
IV
Continental Insurance Co. v. United States Fidelity & Guaranty Co.,
528 P.2d 430 (Alaska 1974) ............................................................................... 11
Crossmann Communities v. Harleysville Mutual Insurance Co.,
717 S.E.2d 589 (S.C. 2011) ................................................................................ 11
Domtar, Inc. v. Niagara Fire Insurance Co.,
563 N.W.2d 724 (Minn. 1997) ........................................................................... 11
Dutton-Lainson Co. v. Continental Insurance Co.,
279 Neb. 365, 778 N.W.2d 433 (2010) .............................................................. 11
EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd's,
156 N.H. 333, 934 A. 2d 517 (2007) ................................................................. 11
Garvey v. State Farm Fire & Casualty Co.,
48 Cal. 3d 395, 770 P.2d 704 (1989) ................................................................. 39
Hercules, Inc. v. AIU Insurance Co.,
784 A.2d 481 (Del. 2001) ............................................................................. 32, 33
Hoang v. Assurance Co. of America,
149 P.3d 798 (Colo. 2007) ................................................................................. 11
Hooper Association v. AGS Computer,
74 N.Y.2d 487, 548 N.E.2d 903 (1989) ............................................................. 13
Johnson v. Travelers Insurance Co.,
269 N.Y. 401, 199 N.E. 637 (1936) ................................................................... 13
K2 lnvvestment Group, LLC v. American Guarantee & Liability Insurance Co.,
22 N.Y.3d 578, 6 N.E.3d 578 (2014) ................................................................... 3
KeySpan Gas East Corp v. Munich Reinsurance America, Inc.,
998 N.Y.S.2d 781 (N.Y. Sup. Ct. 2014) ............................................................ 27
KeySpan Gas East Corp. v. Munich Reinsurance America, Inc.,
23 N.Y.3d 583, 15 N.E.3d 1194 (2014) ............................................................... 3
Liberty Mutual Insurance Co. v Wheelwright Trucking Co.,
851 So. 2d 466 (Ala. 2002) ................................................................................ 11
v
Matter of Liquidation of Midland Insurance Co.,
709 N.Y.S.2d 24 (N.Y. App. Div. 1st Dep't 2000), overruled in part on other
grounds, 16 N.Y.3d 536, 947 N.E.2d 1174 (2011) ............................................ 26
Mayor & City Council of Baltimore v. Utica Mutual Insurance Co.,
145 Md. App. 256, 802 A.2d 1070 (2002) ......................................................... 12
Mt. McKinley Insurance Co. v. Corning, Inc.,
No. 602454/2002, 2012 NY Misc. Lexis 6531
(N.Y. Sup. Ct. Sept. 7, 2002) ....................................................................... 23, 32
Munzer v. St. Paul Fire & Marine Insurance Co.,
538 N.Y.S.2d 633 (N.Y. App. Div. 3d Dep't 1989) .......................................... 35
Northern States Power Co. v. Fidelity & Casualty Co. of N. Y.,
523 N.W.2d 657 (Minn. 1994) ........................................................................... 15
Ohio Casualty Insurance Co. v. Unigard Insurance Co.,
268 P.3d 180 (Utah 2012) .................................................................................. 11
Owens-Illinois, Inc. v. United Insurance Co.,
138 N.J. 437, 650 A.2d 974 (1994) .............................................................. 11, 22
Public Service Co. v. Wallis & Co.,
986 P.2d 924 (Colo. 1999) ................................................................................. 11
Quincy Mutual Fire Insurance Co. v. Borough of Bellmawr,
172 N.J. 409, 799 A.2d 499 (2002) .................................................................... 11
Roman Catholic Diocese of Brooklyn v. National Union Fire Insurance
Co. of Pittsburgh, 21N.Y.3d139, 991N.E.2d666 (2013) ......................... 17, 21
Southern Silica v. Louisiana Insurance Guaranty Association,
979 So. 2d 460 (La. 2008) .................................................................................. 11
Security Insurance Co. of Hartford v. Lumbermens Mutual Casualty Co.,
264 Conn. 688, 826 A.2d 107 (2003) ................................................................. 11
Sentinel Insurance Co., v. First Insurance Co. of Hawaii, Ltd.,
76 Hawaii 277, 875 P.2d 894 (1994) ................................................................. 11
Serio v. Public Service Mutual Insurance Co.,
759 N.Y.S.2d 110 (N.Y. App. Div., 2d Dep't 2003) ......................................... 12
Vl
Sharon Steel Corp. v. Aetna Casualty & Surety Co.,
931 P.2d 127 (Utah 1997) .................................................................................. 11
Towns v. Northern Security Insurance Co.,
184 Vt. 322, 964 A.2d 1150 (2008) ............................................................. 11, 12
Viking Pump, Inc. v. Liberty Mutual Insurance Co. ("Viking I''),
No. CIV.A. 1465-VCS, 2007 WL 1207107 (Del. Ch. Apr. 2, 2007) ............ 5, 14
Viking Pump, Inc. v. Century Indem. Co. ("Viking II''),
2 A.3d 76, 83-84 (Del. Ch. 2009) ............................................................... passim
Viking Pump, Inc. v. Century Indem. Co. ("Viking III''),
C.A. No. lOC-06-141, 2013 WL 7098824 (Del. Super. Ct. Oct. 31, 2015) ........ 9
Viking Pump, Inc. v. Century Indem. Co. ("Viking IV"),
C.A. No. lOC-06-141, 2013 WL 7098824 (Del. Super. Ct. Oct. 31, 2015) ...... 10
Wrecking Corp. of Am., Va., Inc. v. Insurance Co. ofN. Am.,
574 A.2d 1348 (D.C.C. 1990) ...................................................................... 15, 33
State Statutes
Ambiguity Rule and Insurance Law ........................................................................ 40
Other Authorities
Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage
Disputes (17th ed. 2015) .................................................................................... 26
David S. Miller, Insurance as Contract: The Arguments for Abandoning the
Ambiguity Doctrine, 88 Colum. L. Rev 1849 (1988) ......................................... 38
Jan M. Michaels, Michael J. McNaughton & Shridevi R. Krishman, The "Non-
Cumulation" Clause: Policyholders Cannot Have Their Cake and Eat it Too,
61 U. Kan. L. Rev. 701 (2013) ........................................................................... 25
Michael B. Rappaport, The Ambiguity Rule and Insurance Law: Why Insurance
Contracts Should Not Be Construed Against the Drafter, 30 Ga. L. Rev. 171
(1995) ················································································································· 40
Vll
CORPORATE DISCLOSURE STATEMENT
Pursuant to the Rules of the Court of Appeals (22 NYCRR) § 500.l(f), the
Complex Insurance Claims Litigation Association ("CICLA") and American
Insurance Association ("AIA") state that they are trade associations incorporated
under the laws of Delaware. Neither CICLA nor AIA are publicly held companies
or have any parents, subsidiaries or affiliates.1
1 This brief is not submitted on behalf of any party to this appeal, including Century Indemnity
Company, Liberty Mutual Insurance Company, The Travelers Indemnity Company and
Travelers Casualty and Surety Company, and TIG Insurance Company who are or whose
affiliates are parties to this appeal or a related action.
1
INTEREST OF AMICI CURIAE
The Complex Insurance Claims Litigation Association ("CICLA") and the
American Insurance Association ("AIA") are trade associations of major property
and casualty insurance companies (collectively, "amici"). Amici's members
underwrite a substantial portion of the general liability insurance in the State of
New York. Further, they have entered into numerous insurance contracts in New
York and nationally that contain provisions similar to those at issue here. Thus,
amici are vitally interested in the outcome of this case.
As associations of insurers, amici have special expertise in the application of
insurance policy terms and the issues now before this Court. Thus, amici seek to
fulfill "the classic role of amicus curiae by assisting in a case of general public
interest, supplementing the efforts of counsel, and drawing the court's attention to
law that escaped consideration." Miller-Wohl Co. v. Comm 'r of Labor & Indus.,
694 F.2d 203, 204 (9th Cir. 1982). Specifically, amici's proposed brief addresses
the proper application of the insurance contract terms at issue in this appeal and the
proper method for allocation of loss under New York law. Amici demonstrate that,
under New York law, where liability is to be allocated among insurance policies
that limit coverage to injuries occurring "during the policy period" and where the
insured's liability arises from injury spanning multiple years, the liability must be
allocated "pro rata" among all policies in effect during the period of harm if the
2
timing and extent of the underlying claimant's injuries in each period cannot be
shown. This approach was set forth in clear terms by this Court in Consolidated
Edison Co. v. Allstate Insurance Co. ("Con Ed''), 98 N.Y.2d 208, 774 N.E.2d 687
(2002). Amici also address Appellants' interpretation of the non-cumulation and
prior insurance provisions. Specifically, amici demonstrate that pro rata allocation
does not render the non-cumulation and prior insurance provisions surplusage, and
that many of the policies in Con Ed included the very same provisions. As amici
show, the non-cumulation and prior insurance provisions do not justify a departure
from the settled pro rata allocation rule dictated by the "during the policy period"
language.
AIA and CICLA, or CICLA's predecessor Insurance Environmental
Litigation Association ("IELA") have appeared as amici curiae in numerous state
and federal cases. Amici have had the privilege to appear in prior cases before this
Court, see, e.g., KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., 23
N.Y.3d 583, 15 N.E.3d 1194 (2014); K2 Investment Group, LLC v. American
Guarantee & Liability Insurance Co., 22 N.Y.3d 578, 6 N.E.3d 578 (2014),
including in Con Ed. Accordingly, CICLA and AIA respectfully submit this brief
to assist the Court in addressing the important issues posed in this case.
3
QUESTIONS PRESENTED
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?
The trial cou.rt answered that each insurer must pay "all sums" up to the
policy limit. Amici disagree and respectfully urge this Court to reverse the trial
court's decision in this regard and apply pro rata allocation based on the policy
periods, consistent with established New York law.
2. Given the Court's answer to Question # 1, under New York law and
based on the policy language on at issue here, when the underlying primary and
umbrella insurance in the same policy period has been exhausted, does vertical or
horizontal apply to determine when a policyholder may access its excess
insurance?
Given AIA and CICLA's position on Question #1, amici respectfully submit
that this Court need not address Question #2.
STATEMENT OF FACTS
Amici adopt the Statement of the Facts presented by Respondents-Insurers.
The brief summary presented here is for the Court's convenience.
In the mid- l 980s, Plaintiffs Warren Pump LLC ("Warren") and Viking
Pump, LLC ("Viking"), through various corporate transactions, effectively
acquired pump manufacturing businesses from Houdaille Industries, Inc.
4
("Houdaille"), an industrial conglomerate headquartered in New York and later in
Florida. Warren and Viking faced a substantial number of asbestos-related claims
by claimants contending that they were injured as a result of alleged exposure to
asbestos contained in Houdaille's pump products. Viking Pump, Inc. v. Liberty
Mut. Ins. Co.("Viking I''), No. CIV.A. 1465-VCS, 2007 WL 1207107, at *2-3 &
*27 n.113 (Del. Ch. Apr. 2, 2007); Viking Pump, Inc. v. Century lndem. Co.
("Viking II''), 2 A.3d 76, 83-84 (Del. Ch. 2009). Facing numerous litigations,
Warren and Viking sought to avail themselves of Houdaille's insurance coverage
for the claims (collectively, the "Houdaille Policies"), which consisted of primary
liability policies ("Primary Policies") and umbrella excess policies ("Umbrella
Policies") from various insurers, as well as excess insurance policies ("Excess
Policies"), consisting of nearly forty-five policies issued by twenty different
insurers. Viking II, 2 A.3d at 83-83.
Houdaille's Primary Policies at issue covered Houdaille, as well as any other
business that Houdaille "owns, during the policy period, an interest ... of more
than fifty per cent (50%)[,]" on an "occurrence" basis and protected the insured
from injury during the policy period if caused by an "occurrence," even if suit is
brought after the policy's term. A-490; Viking II, 2 A.3d at 108-10. The Umbrella
Policies sat above these Primary Policies and promised to "pay all sums in excess
of the retained limit which the Insured shall become obligated to pay ... because
5
of ... personal injury ... with respect to which this policy applies and caused by
an occurrence." A-517. The term "occurrence" was defined to mean "injurious
exposure to conditions, which result in personal injury ... neither expected nor
intended from the standpoint of the Insured," and further defines "personal injury"
to mean "personal injury or bodily injury which occurs during the policy period."
A-519 (emphasis added).
Included in each Umbrella Policy's "Limit of Liability" section is a clause
captioned "Non-Cumulation of Liability-- Same Occurrence" (''Non-Cumulation
Clause"). This clause provides:
If the same occurrence gives rise to personal injury . . . which occurs
partly before and partly within any annual period of this policy, the
each occurrence limit and the applicable aggregate limit or limits of
this policy shall be reduced by the amount of each payment made by
[the insurer] with respect to such occurrence, either under a previous
policy or policies of which this is replacement, or under this policy
with respect to previous annual periods thereof.
A-518.
As to the thirty-four Excess Policies, these policies were purchased from a
variety of carriers with different amounts of excess insurance in each year. Viking
II, 2 A.3d at 84. By the Chancery Court's count, twenty-eight of the Houdaille
Excess Policies followed form to the applicable underlying umbrella policies'
definition of "occurrence" and "personal injury," and to the Non-Cumulation
Clause recited above. Id. at 121. The remaining Excess Policies have substantially
6
similar "occurrence" and "personal injury" provisions2, and a two-paragraph
"Condition" (referred to as "Condition C"). Condition Chas a first paragraph
which is substantially similar to the Non-Cumulation Clause found in the other
policies, plus a second paragraph. A-1176. Condition C provides:
Id.3
Prior Insurance and Non Cumulation of Liability
It is agreed that if any loss covered hereunder is also covered in whole
or in part under any other excess policy issued to the Assured prior to
the inception date hereof1,] the limit of liability hereon . . . shall be
reduced by any amount due to the Assured on account of such loss
under such prior insurance.
Subject to the foregoing paragraph and to all the other terms and
conditions of this policy[,] in the event that personal injury or property
damage arising out of an occurrence covered hereunder is continuing
at the time of termination of this Policy[,] the Company will continue
to protect the Assured for liability in respect of such personal injury or
property damage without payment of additional premium.
In the first phase of the coverage action between Warren, Viking and Liberty
Mutual Insurance Company ("Liberty"), the Delaware Court of Chancery ruled
that Warren was entitled to exercise the rights of an insured under Houdaille's
primary and umbrella insurance policies issued by Liberty. Viking II, 2 A.3d at 85-
86. Warren, Viking and Liberty then reached a global resolution of their dispute
2 A-644, A-923, A-1092, A-1101, A-1125, A-1145, A-1166, A-1176, A-1273, A-1279, A-1309.
3 See also A-644, A-923, A-1092, A-1101, A-1125, A-1145, A-1166, A-1273, A-1279, A-1309.
7
and after Warren and Viking broadened the litigation to include the excess carriers,
the case proceeded to the next phase. Id.
In the Chancery Court, Warren, Viking, and the excess insurers moved for
summary judgment on two questions: (1) whether Warren and Viking may exercise
the rights of an insured under the Excess Policies, and (2) if so, how liability for
claims triggering multiple policy periods should be allocated among the Excess
Policies. Id. at 86. After determining that New York law applied, the Chancery
Court ruled in favor of Warren and Viking, holding that they were entitled to
exercise the rights of an insured under the Excess Policies. Id. at 89. With respect
to the allocation issue, the excess insurers then urged that controlling New York
precedent requires a pro rata allocation as set forth in Con Ed, while Warren and
Viking argued for all sums liability. Id. at 107-13.
The Chancery Court held that an insured could collect "all sums" from "any
insurer whose policy is triggered, up to the policy's relevant per-occurrence total
limits," leaving the insurer to absorb loss or seek contribution from the other
triggered insurers. Id. at 111. In so holding, the Chancery Court acknowledged
that this Court had reached a different outcome in Con Ed, where it rejected joint
and several allocation as inconsistent with widely-used policy language - present
in the policies at issue here - limiting coverage to injury "during the policy period."
Id. at 118. Even though the provisions at issue in Con Ed contained language
8
similar or identical to the Condition C provision included in some of the policies in
this case, the Chancery Court justified its departure from controlling New York
precedent by stating that the non-cumulation provision contained in certain of the
Excess Policies ( as well as the prior insurance provisions found in Condition C
contained in certain of the other Excess Policies at issue here) somehow
"differentiates this case from the policy examined" in Con Ed. Id. at 119. The
Chancery Court said that the "very presence" of the non-cumulation and Condition
C provisions demonstrates "that the words 'during the policy period"' do not mean
what the Con Ed court said they mean. Id. at 123.
The matter was then transferred to the Delaware Superior Court for
determination of the remaining issues, including whether the excess policies are
subject to "vertical" or "horizontal" exhaustion. Viking Pump, Inc. v. Century
Indem. Co. ("Viking III''), C.A. No. lOC-06-141, 2013 WL 7098824, at *1 (Del.
Super. Ct. Oct. 31, 2015). On that issue, the Superior Court held horizontal
exhaustion applies as a matter of New York law and, accordingly, entered post-
trial judgment for the excess insurers on this issue. Id. at *21.
Following the decision of the Delaware Superior Court, the parties cross-
appealed to the Delaware Supreme Court - the excess insurers appealing the
Chancery Court's holding that the insurers must pay "all sums" up to their policy
limits, and Warren and Viking appealing the Superior Court's holding that
9
horizontal exhaustion is required. Viking Pump Inc. v. Century Indem. Co.
("Viking IV'), C.A. No. lOC-06-141, 2014 WL 1305003, at *4 (Del. Super. Ct.,
Feb. 28, 2014). The Delaware Supreme Court certified the questions to this Court.
Id. at *3. These questions were accepted and are now before this Court.
SUMMARY OF ARGUMENT
This brief will address the first question certified to this Court. AIA and
CICLA believe the clear answer is that pro rata allocation is required, and thus in
this case there is no need to determine the exhaustion method.
ARGUMENT
I. PRO RATA ALLOCATION IS REQUIRED BY THE POLICY
LANGUAGE AS WELL AS THE SETTLED NEW YORK
PRECEDENT OF CON ED.
In this case, Viking and Warren seek to unwind this Court's carefully
constructed precedent under New York law in Con Ed. Although Viking and
Warren would dismiss the Con Ed ruling as the result of "policy predilections of
judges," Viking II, 2 A.3d at 114, Con Ed is a leading precedent in which this
Court determined that pro rata allocation best honors an insuring agreement that
provides "indemnification for 'all sums' of liability that resulted from an accident
or occurrence 'during the policy period."' Con Ed, 98 N.Y.2d at 224, 774 N.E.2d
at 695. (internal citation omitted). This Court's adoption of pro rata allocation is
consistent with the weight of authority across the country on allocation of loss
10
spanning multiple policy periods. State high courts in Alabama,4 Alaska,5
C 1 d 6 C · 1 H .. s I d. 9 K 10 K k 11 L . . 12 o ora o, onnectlcut, awan, n iana, ansas, entuc y, omsiana,
Massachusetts,13 Minnesota,14 Nebraska,15 New Hampshire,16 New Jersey,17 South
Carolina, 18 Utah, 19 and Vermont20 all have endorsed pro rata allocation over joint
and several liability.
Indeed, many courts have followed this Court's lead in Con Ed in
determining that the policy terms plainly require pro rata allocation. See, e.g.
Boston Gas Co., 454 Mass. at 358, 910 N.E.2d at 306-08 (citing Con Ed and
confirming that the court's reading of the policy language is consistent with that of
4 Liberty Mut. Ins. Co. v Wheelwright Trucking Co., 851 So. 2d 466 (Ala. 2002).
5 Cont'! Ins. Co. v. United States Fid. & Guar. Co., 528 P.2d 430 (Alaska 1974).
6 Hoang v. Assurance Co. of Am., 149 P.3d 798 (Colo. 2007); Pub. Serv. Co. v. Wallis & Co.,
986 P.2d 924 (Colo. 1999).
7 Sec. Ins. Co. of Hartfordv. Lumbermens Mut. Cas. Co., 264 Conn. 688, 826 A.2d 107 (2003)
8 Sentinel Ins. Co., v. First Ins. Co. of Haw., Ltd., 76 Hawaii 277, 875 P.2d 894 (1994)
9 Thomson Inc. nlk/a Technicolor USA, Inc. v. Ins. Co. of North America n/k/a Century Indem.
Co., 33 N.E. 3d 1039 (Ind. 2015).
10 Atchison, Topeka & Santa Fe Railway Co. v. Stonewall Ins. Co., 275 Kan. 698, 71P.3d1097
(2003)
11 Aetna Cas. & Sur. Co. v. Commonwealth, 179 S.W.3d 830 (Ky. 2005)
12 S. Silica v. La. Ins. Guar. Assoc., 979 So. 2d 460 (La. 2008)
13 Boston Gas Co. v. Century Indem. Co., 454 Mass. 337, 910 N.E. 2d 290 (2009)
14 Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724 (Minn. 1997)
15 Dutton-Lainson Co. v. Cont'! Ins. Co., 279 Neb. 365, 778 N.W.2d 433 (2010)
16 EnergyNorth Nat. Gas, Inc. v. Certain Underwriters at Lloyd's, 156 N.H. 333, 934 A. 2d 517
(2007)
17 Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 179 N.J. 87, 843 A.2d 1094 (2004); Quincy
Mut. Fire Ins. Co. v. Borough of Bellmawr, 172 N.J. 409, 799 A.2d 499 (2002); Owens-Illinois,
Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994).
18 Crossmann Cmtys. v. Harleysville Mut. Ins. Co., 717 S.E.2d 589 (S.C. 2011)
19 Ohio Cas. Ins. Co. v. Unigard Ins. Co., 268 P.3d 180 (Utah 2012); Sharon Steel Corp. v. Aetna
Cas. & Sur. Co., 931P.2d127 (Utah 1997)
20 Towns v. N. Sec. Ins. Co., 184 Vt. 322, 964 A.2d 1150 (2008); Agency of Nat. Res. v. Glens
Falls Ins. Co., 199 Vt. 426, 732 A.2d 768 (1999)
11
other courts that have construed CGL policies with similar provisions limiting the
applicability of a policy to property damage that occurs during the policy period);
Towns, 184 Vt. at 347, 964 A.2d at 1166-67 (concluding that defense and
indemnity cost was properly allocated based on the percentage of each party's time
on the risk citing Con Ed and the policy provision limiting coverage to damages
occurring during the policy term on which it is based); Serio v. Pub. Serv. Mut. Ins.
Co., 759 N.Y.S.2d 110, 115 (N.Y. App. Div., 2d Dep't 2003) (stating that "the
reasoning of the Consolidated Edison decision is clearly applicable. The loss
herein occurred over three years and Public Service Mutual was 'on the risk' for
two of the three. Therefore, Public Service Mutual rightly bears two-thirds of the
liability for the settlement."); Mayor & City Council of Baltimore v. Utica Mut.
Ins. Co., 145 Md. App. 256, 310-11, 802 A.2d 1070, 1102-03 (2002) (citing Con
Ed in support of conclusion that pro rata allocation by "time on the risk" is
required after being persuaded "that the 'all sums' language of the standard CGL
policy must be read in concert with other language that limits a policy's liability for
damage or loss that occurs during the policy period .... ").
As amici demonstrate below, pro rata allocation is consistent with the
applicable insurance policy terms and settled precedent. Contrary to the arguments
of Viking and Warren Pumps, the non-cumulation and prior insurance provisions
12
in the policies at issue here provide no justification for abandoning the settled law
requiring pro rata allocation.
a. The Plain Terms Of The Insurance Policies Require Pro
Rata Allocation.
It is a fundamental New York rule of contract interpretation that a court
should read a contract in order to give full effect to every term therein. Johnson v.
Travelers Ins. Co., 269 N.Y. 401, 407-08, 199 N.E. 637, 640 (1936). Where a
contract is unambiguous, a court must apply that clear meaning. Id. "Contract
language is not ambiguous if it has 'a definite and precise meaning ... concerning
which there is no reasonable basis for a difference of opinion."' Hunt Ltd. v.
Lifschultz Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir. 1989); quoting Breed v.
Ins. Co. ofN. Am., 46 N.Y.2d 351, 355, 385 N.E.2d 180, 1282 (1978). Courts
must construe the policy in a way that "affords a fair meaning to all of the
language employed by the parties in the contract and leaves no provisions without
force and effect." Con Ed, 98 N.Y.2d at 222, 774 N.E.2d at 693; quoting Hooper
Assoc. v. AGS Computer, 74 N.Y.2d 487, 493, 548 N.E.2d 903, 905 (1989))
(internal quotation marks omitted).
When tasked with reviewing insurance contracts containing the same
temporal language included in the Houdaille Policies, New York courts have found
the policy language "during the policy period" unambiguous and have
appropriately applied the clear meaning of the language, i.e., that coverage is
13
limited to liability incurred as a result of damages taking place during the policy
period. Where there is alleged continuous injury spanning a number of years, New
York courts have further applied the clear meaning of this policy language to call
for the use of pro rata allocation to each policy year. This is because the plain
language of insurance contracts - the language for which the parties bargained and
upon which they relied - explicitly provides coverage for a discrete and finite
period.
Even a cursory reading of an insurance contract's plain language reveals that
an insurer is responsible to provide coverage for a defined policy period only. The
policies at issue only insure property damage "caused by or arising out of each
occurrence." An "occurrence" is a defined term that means "an accident or a
happening or event or a continuous or repeated exposure to conditions which
unexpectedly and unintentionally results in personal injury, property damage or
advertising liability during the policy period."21 (Emphasis added). By their very
terms, these insurance contracts do not require an insurer to pay "all sums" that
21 The Primary Policies provided coverage on an "occurrence" basis. Viking II, 2007 WL
1207107 at *3. The Umbrella Policies also provided by this insurer, which sat above the Primary
Policies just described, promise to "pay all sums in excess of the retained limit which the Insured
shall become obligated to pay ... because of ... personal injury ... with respect to which this
policy applies and caused by an occurrence." A-517. This policy defines "occurrence" to mean
"injurious exposure to conditions, which results in personal injury ... neither expected nor
intended from the standpoint of the Insured," and further defines "personal injury" to mean
"personal injury or bodily iajury which occurs during the policy period." A-519. Thus, read
together, the Umbrella Policies and Primary Policies pay damages for which the policyholder is
liable for bodily injury which occurs during the policy period and that is caused by an
occurrence.
14
result from any harm during any time period. According to this Court, assigning
such a focus to the term "all sums" and ignoring the requirement that injury or
damages must result "during the policy period" would "read this important
qualification out of the policies." Con Ed, 98 N.Y.2d at 224, 774 N.E.2d at 630.
The duration of the policy is an essential term of any insurance contract,
because insurers assume risks for well-defined policy periods only. See Am. Home
Prods. Corp. v. Liberty Mut. Ins. Co., 565 F. Supp. 1485, 1497 (S.D.N.Y. 1983),
aff'd as modified, 748 F.2d 760 (2d Cir. 1984) ("[T]he most basic demand of the
policy language is that to establish [the insurer's] liability the insured must prove
that an 'occurrence' ... arose during the policy period."). An insurer which has
charged a premium based on a fixed and finite policy period is responsible for
liability due to property damage that takes place within, and only within, that
discrete period. See, e.g., N. States Power Co. v. Fid. & Cas. Co. ofN.Y., 523
N.W.2d 657, 662 (Minn. 1994) ("[E]ach insurer is held liable for only those
damages which occurred during its policy period; no insurer is held liable for
damages outside its policy period."); Cont'! Cas. Co. v. Med. Protective Co., 859
S.W.2d 789, 791 (Mo. Ct. App. 1993) (''None of the [insurers] agreed to pay
damages ... which occurred before the inception of coverage or after the
termination of coverage."); Wrecking Corp. of Am., Va., Inc. v. Ins. Co. of N. Am.,
15
574 A.2d 1348, 1351 (D.C.C. 1990) ("[T]he policy is limited to damage occurring
while the policy is in effect.").
This construction of the policy's plain language comports with common
sense. An insurer who is on the risk for a defined policy period should not be
required to pay liability costs arising from injuries that happen outside that period.
Rather, an insurer charges a premium based upon its assessment of the potential
risks during a fixed policy period. In exchange, the insurer agrees to pay losses
and defense costs that arise from the risks specified in the policy if, and only if, the
events insured against take place within the agreed-upon policy period. See, e.g.,
Ins. Co. of N Am. v. Forty-Eight Insulations, 633 F.2d 1212, 1224-25 (6th Cir.
1980) (hereinafter, "Forty-Eight Insulations") ("An insurer contracts to pay the
entire cost ... which has arisen within the policy period. The insurer has not
contracted to pay [for losses] outside the policy period.") (emphasis added).
Policyholders must bear the costs of risks they have elected not to insure.
It makes even more sense when one considers covering the risk of claims for
bodily injury arising out of asbestos exposure where the extent of injury incurred in
any one policy period cannot be ascertained. See Uniroyal, Inc. v. Home Ins., Co.,
707 F. Supp. 1368, 1392 (E.D.N.Y 1988) (stating that "'[i]t is almost impossible
for a doctor to look back and testify with any precision as to when the development
of asbestosis crossed the line and became a disease."') (quoting Forty-Eight
16
Insulations, 633 F.2d at 1218 (internal quotation omitted)). As explained by this
Court in Roman Catholic Diocese of Brooklyn v. National Union Fire Insurance
Co. of Pittsburgh, 21N.Y.3d139, 154, 991N.E.2d666, 675 (2013) and in Con Ed,
'joint and several allocation [would be] particularly inappropriate" in these
situations as "collecting all the indemnity from a particular policy presupposed
[the] ability to pin an accident to a particular policy period." Con Ed., at 98
N.Y.2d 224, 774 N.E.2d 695. Instead, "proration of liability among the insurers
acknowledges the fact that there is uncertainty as to what actually transpired during
any particular policy period." Indeed, one only needs to look at the large number
of policies issued over more than a decade which are at issue in this case to
ascertain that policyholders understand this concept and uncertainty, and broadly
assert claims for coverage as a result. Thus, it would be "inconsistent with the
unambiguous language" of the Excess Policies to apply "all sums" liability to the
underlying asbestos claims. See id. 98 N.Y.2d at 224, 774 N.E.2d at 694.
Imposing all sums liability would reward policyholders who purchased
insurance in just one year by providing them with precisely the same coverage as
those who bought insurance continuously over a period of years. Indeed, the
policyholder who consistently purchased insurance - and who paid premiums far
in excess of those paid by the "intermittent" policyholder - would be substantially
disadvantaged. Unless the Court adheres to settled New York law on pro rata
17
allocation, uninsured companies will enjoy a free ride at the expense of continuous
purchasers of insurance.
As New York courts have repeatedly recognized, contract terms - including
the words "all sums" - must be read in context to give effect to all parts of the
contract. See, e.g., Cnty. of Columbia v. Cont'/ Ins. Co., 83 N.Y.2d 618, 619, 634
N.E.2d 946, 950 (1994) (internal citations omitted) (noting that an insurance
contract "should not be read so that some provisions are rendered meaningless.").
The policy period provisions in these insurance agreements must be given effect;
liability for any harm that happened outside the periods underwritten by the
Insurers should be allocated to whatever other entity (other insurers or Warren and
Viking) bore the risk for such times.
b. Under Well-Settled New York Law, Multiple Insurers
Issuing Successive Policies Are Not Jointly And Severally
Liable.
Beyond the plain meaning of the policy language, well-settled law of New
York mandates the use of pro rata allocation and not all sums liability here. The
seminal New York case with respect to this chosen method is Con Ed. For more
than a decade, courts, litigants, and transacting parties in New York have operated
under Con Ed's straightforward pro rata allocation rule without difficulty, while
many courts across the nation tum to Con Ed for guidance in adopting the pro rata
allocation rule in their respective states.
18
Like Warren and Viking here, the insured in Con Ed contended that joint
and several liability should be imposed on its insurers where pollution-related harm
spanned multiple policy periods. The plaintiff-policyholder in Con Ed sought
indemnification from twenty-four (24) successive insurers for continuous property
damage spanning over fifty years. The policies at issue included the following
pertinent language:
1. Coverage
"To indemnify the insured for all sums which the insured shall be
obligated to pay by reason of the liability (a) imposed upon the
insured by law, or (b) assumed by the insured ... , for damages direct
or consequential, and expenses, all as more fully defined by the term
ultimate net loss, on account of... property damage, caused by or
arising out of each occurrence.
Definitions ...
4. Occurrence
The term 'Occurrence' wherever used herein, shall mean an event, or
continuous or repeated exposure to conditions, which causes injury,
damage or destruction during the policy period. All such exposure to
or .events resulting from substantially the same general conditions
during the policy period shall be deemed one occurrence.
Id. 98 N.Y.2d at 222, 774 N.E.2d at 693. Every one of the policies at issue in this
case contains language materially identical to the controlling language in Con Ed,
extending coverage only for injury "during the policy period." And like Warren
and Viking, the Con Ed plaintiff-policyholder also cited the "all sums" language in
19
the policies, arguing that "it should be permitted to collect its total liability ...
under any policy in effect during the 50 years that the property damage occurred ..
. . " Id. After careful consideration of the insurance contracts at issue, this Court
rejected this "all sums" proposition as ignoring the most "fundamenta[l]" aspect of
the policies - the grant of "indemnification for liability incurred as a result of an
accident or occurrence during the policy period." This Court observed that joint
and several liability is particularly inappropriate where "it is impossible to
determine the extent of the ... damage that is the result of an occurrence in a
particular policy period" because it "presuppose[ d] [an] ability to pin an accident
to a particular policy period." Id. 98 N.Y.2d at 224, 744 N.E.2d at 694-95. This
Court refused to allow the policyholder to "combine [the] uncertainty-based
approach ... with an entitlement to choose a particular policy for indemnity." Id.
98 N.Y.2d at 224, 774 N.E.2d at 695 .
This Court recently affirmed this rule in Diocese of Brooklyn, 21 N.Y.3d at
154-55, 991 N.E.2d at 676-77. There, this Court was tasked with deciding how the
insured-Diocese's total liability for a minor's sexual assault injuries sustained from
1996 to 2002 should be apportioned among several insurance policies. This Court
cited Con Ed as it concluded that pro rata allocation of the liability was required.
In so doing, this Court noted that "it would be consistent to allocate liability across
all implicated policies, rather than holding a single insurer liable for harm suffered
20
in years covered by other successive policies" and that, as in Con Ed, "a joint and
several allocation is not applicable in this case as the [policyholder] cannot
precisely identify the sexual abuse incidents to particular policy periods." Id. 21
N.Y.3d at 154, 991 N.E.2d at 676.
Federal courts applying New York law have likewise recognized that Con
Ed "made clear" where damage "takes place over a number of policy periods, the
liability for that injury is allocated over the time during which the []damage
occurred." Olin Corp. v. Certain Underwriters at Lloyd's London ("Olin II"), 468
F.3d 120, 126 (2d Cir. 2006) (internal citation omitted). As discussed recently by
the United States District Court for the Southern District of New York in a case
involving asbestos claims and identical policy language as the instant case, where
the policies provide coverage for "all sums" arising from an injury "during the
policy period," liability should be allocated pro rata among the insurers based upon
their time on the risk. Liberty Mut. Fire Ins. Co. v. J&S Supply Corp., No. 13-CV-
4784, slip op. at 11-12 (S.D.N.Y. June 29, 2015); citing Olin Corp. v. Ins. Co. of
North America ("Olin I''), 221 F.3d 307 (2d Cir. 2000).
When faced with injuries triggering policies over more than one year, courts
interpreting New York law have consistently rejected joint and several liability in
favor of the application of allocation principles. See Stonewall Ins. Co. v. Asbestos
Claims Mgmt. Corp., 73 F.3d 1178, 1203 (2d Cir. 1996) ("The 'all sums' language
21
relied on by the insured ... 'was never intended to cover apportionment when
continuous injury occurs over multiple years."') (quoting Owens-Illinois, 138 N.J.
at 465-66, 650 A.2d at 988-89); see also E.R. Squibb & Sons, Inc. v. Lloyd's &
Cos., 241F.3d154, 172 (2d Cir. 2001) (acknowledging that New York law
requires allocation among triggered policy periods); Olin I, 221 F.3d at 324-25
(finding that "allocation was the proper method to use to determine liability under
the policies."); United States Fid. & Guar. Co. v. Treadwell Corp., 58 F. Supp. 2d
77, 99-100 (S.D.N.Y. 1999) (rejecting joint and several approach advocated by
policyholder). In the context of determining whether to allocate losses to a
policyholder for periods during which it had no insurance, the Stonewall court
further stated that New York law would agree with the analysis requiring a "fair
method of allocation .... " 73 F.3d at 1203 (quoting Owens-Illinois, 138 N.J. at
479, 650 A.2d at 995); see also Olin I, 221 F.3d at 327-29; Treadwell, 58 F. Supp.
2d at 103-105.
The Chancery Court's ruling stands out as the only post-Con Ed decision to
apply joint and several liability under New York law. Indeed, since the Delaware
court's opinion was issued, it has been flatly rejected and described as an outlier
that "critique[ es] the [New York] Court of Appeals," "mock[s] the Second
Circuit[]," and "ignor[ es] established New York precedent." Mt. McKinley Ins.
Co. v. Corning, Inc., No. 602454/2002, 2012 NY Misc. Lexis 6531, at *12-14
22
(N.Y. Sup. Ct. Sept. 7, 2002). In implying that insurers support the pro rata
approach simply because it gives them "material reductions in their exposure by
shifting" risk to the insured, the Chancery Court overlooks not only the plain
policy language that was the result of a contract entered into by both an insured
and an insurer, but also the principled reasoning of this Court and other New York
State courts' in applying the pro rata approach. Viking II, 2 A.3d at 112.
II. NON-CUMULATION AND PRIOR INSURANCE POLICY
TERMS DO NOT PROVIDE A JUSTIFICATION FOR
ABANDONING THE NOW LONGSTANDING NEW YORK
PRECEDENT SUPPORTING PRO RATA ALLOCATION.
The Chancery Court found that the "outcome determinative" fact in this case
was that, allegedly unlike the parties in Con Ed, the parties to the Houdaille
Policies were "explicitly aware of the possibility that a tort plaintiff could suffer
compensable damages on account of Multi-Period Exposure to asbestos, and
crafted specific contractual provisions designed to address those circumstances."
Id. at 119. That is, according to the Delaware Chancery Court, the inclusion of
either or both the non-cumulation provision or Condition C provision in the
Houdaille Policies means that the holdings of Con Ed are inapplicable. Warren
and Viking contend that when the policy includes such provisions, coverage is
somehow expanded to "injuries incurred before, during and after the policy
period." Warren Br. at 3. However, Warren, Viking, and the Chancery Court fail
to acknowledge that, in fact, many of the policies in Con Ed included these very
23
same prov1s1ons. Thus, these provisions actually do not undermine the application
of pro rata allocation to confine coverage to injuries arising "during the policy
period." Accordingly, the presence of these provisions in the policies at issue here
does not dictate an outcome different from Con Ed.
As elaborated further below, departure from the settled pro rata allocation
rule adopted in Con Ed and followed consistently in New York for more than a
decade cannot be justified by reference to the non-cumulation and prior insurance
clauses. As this Court stated in Con Ed when rejecting the policyholder's
argument that an "other insurance" clause was necessary for pro rata allocation,
"[these] clauses have nothing to do with this determination." Con Ed 98 N.Y.2d at
223, 774 N.E.2d at 694.
a. Non-Cumulation Clause Are Included For Reasons
Separate And Apart From Allocation Of Liability Methods,
And Do Not Expand Coverage.
Certain of the Excess Policies at issue here follow form to the Umbrella
Polices that contain a Non-Cumulation clause, which adjusts the policy's limit to
account for payments made by the same insurer under prior policies for personal
injury arising out of the same occurrence:
If the same occurrence gives rise to personal injury . . . which occurs
partly before and partly within any annual period of this policy, the
each occurrence limit and the applicable aggregate limit or limits of
this policy shall be reduced by the amount of each payment made by
[the insurer] with respect to such occurrence.
24
A-518. Contrary to Plaintiffs' argument, this Non-Cumulation clause does not
expand coverage and is not rendered surplusage by pro rata allocation.
The history of the non-cumulation clause in insurance contracts is instructive
here. This clause first appeared as CGL policies were transitioning from accident-
based to occurrence-based policies. The provision was designed, in part, to
prevent policyholders from obtaining a double recovery for the same loss from an
earlier accident-based policy and a later-issued occurrence-based policy where the
cause of the injury or damage happened during the policy period of the accident-
based policy, but the injury and damage itself happened during the policy period of
the occurrence-based policy. The non-cumulation clause was introduced to
prevent this double recovery for a single claim from the same insurer. See
generally Jan M. Michaels, Michael J. McNaughton & Shridevi R. Krishman, The
"Non-Cumulation" Clause: Policyholders Cannot Have Their Cake and Eat it
Too, 61 U. Kan. L. Rev. 701 (2013). Also known as an "anti-stacking" provision,
this clause adjusts the policy's limit to account for payments made by the same
insurer under prior policies for personal injury arising out the same occurrence.
According to the Viking and Warren, the Non-Cumulation provision
expands, rather than limits, a policy's coverage to encompass "injuries incurred
before ... the policy period," Warren Br. at 3, and thus "require[s]" the policy to
"pay for injuries that take place outside, as well as inside, the policy period."
25
Warren Br. at 27. This interpretation completely misstates the Non-Cumulation
provision. There is no expansion of coverage under this provision. To the
contrary, it reduces the policy limits to account for payments made by the same
insurer under prior policies for injury or damage arising out of the same
occurrence.
This limiting, not expanding, of an insurer's liability where several policies
apply to a multi-year loss clause has been uniformly recognized by courts and
commentators. See Ostrager & Newman, Handbook on Insurance Coverage
Disputes § 11.02[ e] (non-cumulation and prior insurance clauses "reduce policy
limits by the amount of coverage available from other, prior insurance"); see also
Matter of Liquidation of Midland Ins. Co.,709 N.Y.S.2d 24, 34 (N.Y. App. Div. 1st
Dep't 2000) (non-cumulation clause "clearly provide[s] that [the insurer's]
coverage obligation ... would be reduced by any sums owed to [the insured] by
other excess policies on the same risk"), overruled in part on other grounds, 16
N.Y.3d 536, 947 N.E.2d 1174 (2011); Greenridge v. Allstate Ins. Co., 312 F. Supp.
2d 430, 440 (S.D.N.Y. 2004) (applying New York law) (non-cumulation clause
dictates policy limit available to insured); Endicott Johnson Corp. v. Liberty Mut.
Ins. Co., 928 F. Supp. 176, 181-82 (N.D.N.Y. 1996) (applying New York law)
(non-cumulation clause reduces limit of liability available by amount paid under
prior policies with respect to the same occurrence).
26
Contrary to the Chancery Court's assertion that the language of the Non-
Cumulation provision voids the "during the policy period" language and "cannot
sensibly be applied within a pro rata allocation scheme," a basic understanding of
the actual language and operation of the Non-Cumulation provision reveals that it
does nothing to affect the pro rata method of allocation called for by the policy.
Indeed the non-cumulation provision does not impact the issue of whether asbestos
losses should be allocated pro rata or all sums. When a single occurrence gives
rise to injuries implicating multiple policies, a court applying a pro rata allocation
first determines the portion of the total loss to be allocated to each policy, typically
by dividing the loss by the number of triggered policies and self-insured periods.
See KeySpan Gas E. Corp v. Munich Reinsurance Am., Inc., 998 N.Y.S.2d 781,
784-85 (N.Y. Sup. Ct. 2014). The court then applies any applicable Non-
Cumulation provision. The Non-Cumulation provision operates under pro rata
allocation exactly as intended- by capping the insured's recovery for losses
arising from a single occurrence at the highest limit applicable to that occurrence.
The Second Circuit has reinforced this conclusion under New York law by
making clear that the Non-Cumulation provision is fully operative in a pro rata
regime. The Second Circuit in Olin Corp. v. American Home Assurance Co. ("Olin
III'') specifically held that provisions such as those at issue here are entirely
27
consistent with pro rata allocation under New York law. See 704 F .3d 89, 102 (2d
Cir. 2012).
Further, the United States District Court for the Southern District of New
York in J&S Supply, also recently rejected a policyholder's argument that pro rata
allocation under a policy with an "anti-stacking" clause (such as the Non-
Cumulation provision) results in a windfall by stating "[t]here is ... no 'double
credit"' and pointing out that the only payment reduction under this clause is that
of the insurer's coverage obligations for a particular occurrence by amount of each
payment already made by that insurer with respect "to the same occurrence under
prior policies or prior annual periods of the same policy." Id. at *16 n.13. The
Non-Cumulation provision does not require departure from the settled pro rata
allocation rule adopted in Con Ed and followed consistently in New York for more
than a decade.
b. Similarly, Condition C Is Consistent With Pro Rata
Allocation.
The first paragraph of Condition C is similar, but not identical, to the Non-
Cumulation provision of the majority of the umbrella policies:
[I]f any loss covered hereunder is also covered in whole or in part
under any other excess policy issued to the Assured prior to the
inception date hereofl,] the limit of liability hereon . . . shall be
reduced by any amounts due to the Assured on account of such loss
under such prior insurance.
28
A-1176. As to the issues presented here, this paragraph operates just like that of
the other policies' Non-Cumulation provision by not extending policy coverage to
earlier periods, but instead reducing the policy limit to account for amounts due
under prior insurance for loss arising from the same occurrence. Additionally, this
paragraph's use of the phrase "if any loss covered hereunder is also covered in
whole or in part under any other excess policy" makes clear that the clause applies
where a pro rata (or other) part of the liability is covered under any other policy
issued to the insured.
The second paragraph of Condition C explains what happens when an injury
covered by the policy is "continuing" at the time the policy terminates:
Subject to the foregoing paragraph and to all the other terms and
conditions of this policy[,] in the event that personal injury or property
damage arising out of an occurrence covered hereunder is continuing
at the time of termination of this Policy[,] the Company will continue
to protect the Assured for liability in respect of such personal injury or
property damage without payment of additional premium.
A-1176. Like the Non-Cumulation provision, this provision operates in a manner
entirely consistent with pro rata allocation, and thus no more compels joint and
several liability than does the Non-Cumulation clause, as the Second Circuit
recently concluded in Olin III. ("New York state court decisions and those prior
decisions of this Court endorsing the pro rata approach foreclose us from
interpreting [the continuing coverage provision] as imposing joint and several
liability." Id. at 102).
29
The Condition C provision by its plain terms applies only to a particular,
limited category of injuries, i.e., those injuries that are "continuing" at the time the
policy terminates. See Olin III, 704 F.3d at 100. The clause does not apply to new
exposures or injuries incurred after the policy period. Because this provision is
silent as to the insurer's liability for injuries occurring before the policy period, the
Olin III Court found the provision's existence to be "not enough" to disturb the
usual rule that pro rata allocation applies under a policy requiring the insurer to pay
"all sums" arising during the policy period. After analyzing similar policyholder
arguments regarding a continuing coverage clause, the United States District Court
for the Southern District of New York summarized Olin Ill's ruling in a recent
summary judgment order stating: "In other words, even if a policy provides
continuing coverage after the policy period for an injury that arose during the
policy period, pro rata allocation remains appropriate under New York law when
the nature of the injury makes it impossible to specify the injury's origin." J&S
Supply, at *15. Further, Condition C certainly does not require an insurer to cover
injury occurring before the policy period and, thus, it cannot serve as the basis for
all sums allocation.
In addition, as the party seeking to establish coverage, the policyholder bears
the burden of proving that the claimant's injury was continuing when the policy
terminated. See Chase Manhattan Bank, NA. v. Travelers Grp., Inc., 702 N.Y.S.
30
2d 60, 60 (N.Y. App. Div. 1st Dep't 2000); Borg-Warner Corp. v. Ins. Co. of N.
Am., 577 N.Y.S.2d 953, 957 (N.Y. App. Div. 1st Dep't 1992). In this case,
Plaintiffs have not proven - and no Delaware court has found - that any
underlying claimant's injury was continuing when any particular policy
terminated. Thus, on its face, the Continuing Coverage provision has no
application to this case.
c. The Chancery Court's Conclusions Are Not Supported By
New York Courts.
Although the Chancery Court claimed that its "conclusion that the Non-
Cumulation and Prior Insurance Provisions are inconsistent with pro rata allocation
is in line with the precedent on this question," it admitted that "no New York court
has addressed in any detail whether pro rata allocation can be used with a non-
cumulation or prior insurance provision .... " Viking II, 2 A.3d at 125. It did not
take long for a New York trial court to publicly disagree with the Chancery Court's
characterization and conclusion:
The court notes that it does not find the Delaware Chancery court's
decision in Viking Pump v. Century Indemnity Co., 2 A.3d 76 (Del.
Ch. 2009) as decisive in this case, as apparently argued by [the
insured], to the extent that Viking Pump finds for joint and several
allocation . . . This court understands the methodology of examining
policy language as shown in the Viking Pump decision, but disagrees
with the Delaware court's finding. Viking Pump ignores established
New York precedent, is not controlling on this court and is limited to
the facts and policy language of that case itself. This court notes that
no New York court has adopted the interpretation of policy language
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in, or holding of, Viking Pump to find joint and several allocation, and
this court does not find it decisive now.
Mt. McKinley, 2012 N.Y. Misc. LEXIS 6531, at *11-14. In analyzing an "Other
Insurance" provision, the Mt. McKinley court correctly concluded that "[t]he
provision does not mandate joint and several allocation, and to adopt pro rata
allocation would not render the language 'mere surplusage', but would instead
effect the intent of the policy's language of limiting multiple recover for the same
injury in the same policy period." Id. at * 19-20. This Court should likewise reject
the Delaware trial court's ruling in Viking Pump.
Warren argues that Con Ed's statement that the Delaware Supreme Court
decision in Hercules, Inc. v. AIU Insurance Co., 784 A.2d 481(Del.2001) was
distinguishable from Con Ed, somehow supports its position. Of course, the
Delaware Hercules decision is not binding on New York courts. But more
important, the holding of Hercules is fundamentally at odds with this Court's
decision in Con Ed. Before even turning to the non-cumulation clause at issue in
that case, the Hercules court had held that "the insurers [were] jointly and severally
liable for sums they [were] legally obligated to pay" because "the 'all sums'
language is inconsistent with pro rata allocation based on time on the risk."'
Hercules at 491. The Hercules court's determination that the terms "all sums"
overrides the import of "during the policy period" was expressly rejected by this
Court in Con Ed. Although the Hercules court then went on to discuss other
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elements of that case, including the decision to self-insure and a non-cumulation
clause (which it claimed "undercuts the rationale for pro rata allocation") at bottom
the Hercules decision rejects this Court's principled reasoning in Con Ed.
Hercules at 494 (" .... our holding rests solely our decision in Monsanto based on
the unambiguous 'all sums' provision .... " ).
III. THE PRO RATA ALLOCATION DICTATED BY CON ED AND
THE POLICY LANGUAGE IS FAIR AND EFFICIENT, AND IS
WHAT THE PARTIES CONTRACTED FOR.
a. Making Successive Insurers Jointly And Severally Liable
Violates Fundamental Fairness By Creating Coverage For
Which Policyholders Neither Bargained Nor Paid.
An insurer on the risk for a defined policy period should not be forced to
bear indemnification costs associated with an injury that happened outside that
period. Policyholders purchase insurance against bodily injury or property damage
that might take place within, and only within, that discrete policy period. They do
so in exchange for a premium that was calculated based on the potential risks
posed during a particular time. See Wrecking Corp., 574 A.2d at 1351 (coverage
under a policy "is limited to damage occurring while the policy is in effect.").
Imposing liability on a joint-and-several basis would give policyholders who
purchased insurance against a risk for a single policy period precisely the same
coverage as those who had bought insurance continuously over a period of many
years. See Uniroyal, 707 F. Supp. at 1392 (noting that allowing a policyholder to
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pick and choose an insurer to respond to a loss did not "correlate risks insured with
premiums charged."). Indeed, the policyholder that consistently bought
appropriate insurance, and that paid premiums far in excess of those paid by the
intermittent policyholder, would be put at a marked disadvantage. It would have
been forced to internalize the cost of its risks, while its uninsured competitor would
enjoy a free ride. This would discourage policyholders from purchasing adequate
insurance. In tum, insurers may be reluctant to underwrite policies with higher
limits in all sums jurisdiction for fear of being the unlucky target of an insured's
long-tail claim.
Imposing joint and several liability would also foist upon insurers liabilities
which they have not contractually assumed and for which they have not collected
premiums. Different policies provide different types of coverage. For example,
one policy may include a pollution exclusion, while another may not. Under
Warren and Viking's interpretation, a policyholder whose polluting causes harm
over a period of ten years could target the single insurer during that time whose
policy lacks such an exclusion, and obtain a judgment holding that insurer jointly
and severally liable for all of the harm caused by a pollutant for the entire time.
Yet the other insurers, whose policies may well contain pollution exclusions,
would have a defense against the policyholder -- and therefore against contribution
34
claims by the first insurer as well. Thus, the first insurer could be left "holding the
bag," even though it had collected a premium for only a single year of coverage.
This example underscores the inequities which result when courts invoke the
tort-law concept of joint and several liability when interpreting insurance contracts
that unambiguously restrict the scope of indemnity to injury during the policy
period.
b. Pro Rata Allocation Is Efficient And Fair, Whereas Joint
And Several Is Inefficient In Forcing Follow-On
Contribution Litigation And Encumbering And Potentially
Impairing Insurer Rights To Contribution.
Imposing joint and several liability would unfairly shift the burden of
proving coverage from the policyholder onto the insurer who has been targeted to
provide indemnity. Saddling the insurer with this evidentiary burden is both
improper and untenable considering who is best positioned to have the necessary
information.
In New York, the burden of proving coverage rests on the party claiming
coverage under an insurance policy. Munzer v. St. Paul Fire & Marine Ins. Co.,
538 N.Y.S.2d 633, 636 (N.Y. App. Div. 3d Dep't 1989). There is good reason for
this. Typically, information relevant to the determination of coverage lies in the
exclusive control of the policyholder. Yet imposing liability on a joint-and-several
basis would impose on the insurer unfortunate enough to be singled out to provide
indemnity the obligation to not only prove coverage under the policies of the other
35
insurers from whom it would be seeking contribution, but also to prove the
existence and terms of coverage where policies are missing or incomplete. Pro rata
allocation minimizes needless litigation costs by eliminating the need for complex
and protracted litigation settling contribution among insurers.
Shifting the burden of proof is not only contrary to black-letter law; it is also
unwise and unfair from a practical perspective. One reason policyholders bear the
burden of proving coverage is that their compliance or non-compliance with
conditions precedent can determine whether coverage is available. An insurer
"chosen" to provide coverage has no control over whether the policyholder lives
up to its contractual obligations with other insurers; yet, a policyholder's failure to
comply with the notice requirements or other conditions precedent of other
insurers' policies could forfeit coverage under those policies and prevent the
chosen insurer from recovering contribution from the other insurers. In essence,
the policyholder's problems are now the insurer's problems with the insurer left
"holding the bag" and the insured wiping its hands clean. The unfairness of this
outcome is further highlighted by the fact that under many circumstances (such as
where the policyholder wishes to avoid exhausting an aggregate limit or paying a
retrospective premium or deductible under another policy), a policyholder would
have an incentive (and, under Viking's and Warren's approach, the means) to
36
frustrate the indemnifying insurer's attempt to obtain contribution from the other
msurers.
Moreover, as the Second Circuit explained in Olin, it is proper that the
policyholder, not the policyholder's other insurers, bear the risk of an insurer's
default:
Allocation results in the insured bearing the risk of any of its insurers'
inability to pay . . . There is logic in having the risk of such
defalcation fall on the insured, which purchased the defaulting
insurer's policy, rather than on another insurer which was a stranger to
the selection process.
Olin I, 221 F.3d at 323. Therefore, the regime proposed by Viking and Warren
would unfairly impose on a targeted insurer procedural and evidentiary burdens it
would not otherwise be required shoulder. If accepted, Warren and Viking's
argument would condition an insurer's contribution rights on the policyholder's
compliance with its obligations under other insurance policies. This Court should
not countenance such a one-sided result.
c. Failing To Allocate Would Undermine The Public Interest
In Promoting Sound And Predictable Underwriting And
Corporate Responsibility.
Imposing the costs of harm occurring outside the policy period on insurers
who never agreed to accept such a risk would undermine the insurance mechanism.
An insurance contract expresses an insurer's agreement to accept a defined risk in
return for a premium. Moreover, holding policyholders to the express terms of the
37
insurance contract for which they bargained and paid encourages responsible
corporate behavior.
d. The Imposition Of Joint And Several Liability Would
Weaken The Insurance Market And Harm Responsible
Purchasers Of Insurance.
Judicial disregard of the terms of an insurance contract generates
uncertainty. In order to assure the availability of sufficient financial reserves to
pay future claims, the underwriter must spread the cost of that uncertainty to other
insurance consumers. When such uncertainty extends to broad categories of
losses, rational underwriting becomes impossible. See Uniroyal, 707 F. Supp. at
1392 ("Certainly such a formulation cannot help correlate risks insured with
premiums charged."); City of Edgerton v. Gen. Cas. Co., 184 Wis. 2d 750, 780
n.26, 517 N.W.2d 463, 477 n.26 (1994) ("The original risk assessment becomes a
nullity if the language of the policy is redefined in order to expand coverage
beyond what was planned for by the insurer in the contract of insurance."). Thus, a
viable insurance system requires that the insurer know at the beginning of the
relationship with the policyholder which risks it has agreed to bear. See David S.
Miller, Note, Insurance as Contract: The Arguments for Abandoning the
Ambiguity Doctrine, 88 Colum. L. Rev 1849, 1860-61 (1988). With that certainty,
the insurer can accurately price the cost of coverage for all policyholders.
38
Increasing the scope of coverage under general liability policies where no
such coverage was purchased will have significant adverse implications.
Moreover, if not corrected, the Chancery Court's decision could call into question
the scope of coverage under every policy under New York law. Certainly, that
ruling would distort every policy that includes a non cumulation or prior insurance
clause. Is every insurer required to assume there is a non cumulation clause or
prior insurance clause somewhere out there that a policyholder might rely on to
undercut pro rata allocation and its clear contractual "during the policy period"
language? Insurers underwrite their policies based on certain information and
assumptions about the risk to be undertaken, and application of the Chancery
Court's allocation ruling would disrupt that risk calculus, lead to uncertainty and
the proliferation of litigation and costs. Imposing massive liability on insurers in
the face of clear contractual limitations would improperly invade and deplete the
resources held to pay valid claims.
When insurers cannot rely upon the clear policy language to support rational
premiums, policyholders ultimately suffer the adverse consequences - especially
small and medium sized businesses that cannot afford to self-insure. As the
California Supreme Court has observed, judicially created insurance coverage
leaves "ordinary insureds to bear the expense of increased premiums necessitated
by the erroneous expansion of their insurers' potential liabilities." Garvey v. State
39
Farm Fire & Cas. Co., 48 Cal. 3d 395, 408, 770 P.2d 704, 711 (1989) (internal
citation omitted); accord Am. Home Prods. Corp., 565 F. Supp. at 1511 ("[T]he
persons whom [insurers] now cover may well be grievously hurt in future years by
the lower coverage that results, or by the bankruptcies caused by companies
becoming self-insured in an effort to avoid the higher rates required to pay for
broader theories of coverage."), see Michael B. Rappaport, The Ambiguity Rule
and Insurance Law: Why Insurance Contracts Should Not Be Construed Against
the Drafter, 30 Ga. L. Rev. 171, 203 (1995) (noting that "[ u ]ncertainty about how
judges will interpret insurance contracts may significantly increase the costs of
insurance."). Thus, ignoring the clear contractual language at issue here is not only
unjust, but also short-sighted.
CONCLUSION
Armed with the Chancery Court's decision, policyholders like Warren and
Viking are seeking to alter New York's settled pro rata allocation law. This appeal
is a test of the legal certainty provided by enforcing insurance agreement terms in a
straightforward, common-sense way. New York has already spoken on this issue
in a leading case which cannot be distinguished or discarded here. For the same
reasons this Court expressed in Con Ed, the Court should reject the arguments
advanced by Warren and Viking Pump and affirm the application of pro rata
allocation.
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November d, 2015
Laura A. F oggan
(pro hac admission requested)
Nicole Audet Richardson
(pro hac admission requested)
WILEY REIN LLP
1776 K Street, NW
Washington, D.C. 20006
(202) 719-7000
(202) 719-7049 (fax)
Of Counsel
Respectfully Submitted,
1633 Broadway
New York, NY 10019
(212) 407-7760
(212) 407-7799 (fax)
Attorneys for Amici Curiae Complex
Insurance Claims Litigation
Association and American Insurance
Association
41