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)
REPLY 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: October 22, 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
ARGUMENT ............................................................................................................. 5
I. THE EXCESS INSURERS WAIVED THEIR CURRENT “PLAIN
TEXT” ARGUMENTS BY NOT RAISING THEM BEFORE THE
DELAWARE SUPREME COURT ................................................................. 5
II. CERTIFICATION IS NO LONGER APPROPRIATE .................................. 6
III. THE EXCESS POLICIES DO NOT REQUIRE EXHAUSTION OF
LOWER-LEVEL INSURANCE IN OTHER POLICY YEARS
BEFORE THEIR COVERAGE OBLIGATIONS ATTACH ......................... 8
A. The Excess Policies All Identify Specific Underlying Policies
That, Once Exhausted, Trigger The Excess Insurers’ Coverage
Obligations ............................................................................................ 8
B. The Excess Policies Do Not Follow Form To The Insuring
Agreements Or “Retained Limit” Provisions Of The Liberty
Umbrella Policies ................................................................................ 12
C. The Excess Policies’ “Other Insurance” Provisions Do Not
Require Horizontal Exhaustion Or Allow The Excess Insurers
To Withhold Payment From Viking Or Warren ................................. 17
IV. ANY AMBIGUITY CONCERNING APPLICATION OF
VERTICAL OR HORIZONTAL EXHAUSTION MUST BE
RESOLVED IN FAVOR OF THE POLICYHOLDERS .............................. 23
CONCLUSION ........................................................................................................ 25
iii
TABLE OF AUTHORITIES
Page(s)
Cases
ARM Properties Management Group v. RSUI Indemnity Co.,
No. A-07-CA-718-SS, 2008 WL 5973220 (W.D. Tex. Aug. 25, 2008) .............. 12
Assured Guaranty Municipal Corp. v. UBS Real Estate Securities, Inc.,
No. 12 CV 1579 (HB), 2012 WL 3525613 (S.D.N.Y. Aug. 15, 2012) ................ 21
Bazinet v. Concord General Mutual Insurance Co.,
513 A.2d 279 (Me. 1986) ...................................................................................... 20
Bingham v. New York City Transit Authority,
99 N.Y.2d 355 (2003) ............................................................................................. 6
Borg-Warner Corp. v. Liberty Mutual Insurance Co.,
1990 N.Y. Misc. LEXIS 771 (Sup. Ct., Tompkins Cty. June 15, 1990) .............. 22
Bovis Lend Lease LMB, Inc. v. Great American Insurance Co.,
53 A.D.3d 140 (1st Dep’t 2008) ........................................................................... 22
Cadet Manufacturing Co. v. American Insurance Co.,
391 F. Supp. 2d 884 (W.D. Wash. 2005) ............................................................. 16
Cantanucci v. Reliance Insurance Co.,
43 A.D.2d 622, 623 (3d Dep’t 1973) .................................................................... 23
Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co.,
817 F. Supp. 1136 (D.N.J. 1993) .......................................................................... 20
Commissioners of State Insurance Fund v. Aetna Casualty & Surety Co.,
283 A.D.2d 335 (1st Dep’t 2001) ......................................................................... 22
Consolidated Edison Co. of New York v. Allstate Insurance Co.,
98 N.Y.2d 208 (2002). .................................................................................. passim
Continental Casualty Co. v. Rapid-American Corp.,
80 N.Y.2d 640 (1993) ........................................................................................... 19
Dart Industries, Inc. v. Commercial Union Insurance Co.,
52 P.3d 79 (Cal. 2002) .......................................................................................... 20
TABLE OF CONTENTS (CONT'D)
Page
iv
Home Insurance Co. v. American Home Products Corp.,
902 F.2d 1111 (2d Cir. 1990) ........................................................................ 14, 15
IBM Poughkeepsie Employees Federal Credit Union v. Cumis Insurance
Society, Inc.,
590 F. Supp. 769 (S.D.N.Y. 1984) ....................................................................... 21
Kaiser Cement & Gypsum Corp. v. Insurance Co. of Pennsylvania,
126 Cal. Rptr. 3d 602 (Ct. App. 2011) ................................................................. 22
Keene Corp. v. Insurance Co. of North America,
667 F.2d 1034 (D.C. Cir. 1981) ............................................................................ 20
Liriano v. Hobart Corp.,
92 N.Y.2d 232 (1998) ............................................................................................. 8
Morgan Stanley Group Inc. v. New England Insurance Co.,
225 F.3d 270 (2d Cir. 2000) .......................................................................... 23, 24
Muzak Corp. v. Hotel Taft Corp.,
1 N.Y.2d 42 (1956) ............................................................................................... 22
Ogden Corp. v. Travelers Indemnity Co.,
681 F. Supp. 169 (S.D.N.Y. 1988) ....................................................................... 24
Owens-Illinois, Inc. v. United Insurance Co.,
138 N.J. 437 (1994) .............................................................................................. 18
RLI Insurance Co. v. Hartford Accident & Indemnity Co.,
980 F.2d 120 (2d Cir. 1992) ................................................................................. 20
Slabic v. Hendrickson,
556 N.Y.S.2d 236 (Sup. Ct. 1990) ........................................................................ 19
Travelers Casualty & Surety Co. v. Transcontinental Insurance Co.,
19 Cal. Rptr. 3d 272 (Ct. App. 4th Dist. 2004)..................................................... 16
Statutes
22 N.Y.C.R.R. §500.27(a) .....................................................................................2, 7
TABLE OF CONTENTS (CONT'D)
Page
v
Other Authorities
6 APPLEMAN, INSURANCE LAW & PRACTICE § 3905 (1st ed.) .................................. 19
ARTHUR KARGER, THE POWERS OF THE NEW YORK COURT OF APPEALS §10:13
(3d ed. 2005) ........................................................................................................... 8
Douglas R. Richmond, Issues and Problems in “Other Insurance,” Multiple
Insurance, and Self-Insurance,
22 Pepp. L. Rev. 1373 (1995) ............................................................................... 21
PRELIMINARY STATEMENT
Viking explained in its opening brief that resolution of the second certified
question, concerning the choice between vertical and horizontal exhaustion,
“should begin and end with the plain terms of Viking’s and Warren’s shared excess
insurance policies.” Viking Op. Br. at 1. The Excess Insurers apparently now
agree, but this is a new revelation for them. The Excess Insurers gave short-shrift
to their policies’ language in the Delaware courts, arguing instead that horizontal
exhaustion is required by some New York per se rule of law. Now they have
changed course here and claim that horizontal exhaustion should apply because
“the Excess Policies follow form to the requirement in the Liberty umbrella
policies that amounts payable under ‘other insurance’ be retained by the
policyholder” and because their own policies’ “other insurance” provisions
“unambiguously require[] horizontal exhaustion under all sums allocation . . . .” EI
Br. at 47-48, 52.1 Neither of these contract-based arguments was raised in the
Delaware Supreme Court, and the Court should reject them as waived.
The Excess Insurers’ newfound focus on policy language also shows that
application of vertical or horizontal exhaustion is an issue that no longer merits
certification. Certification is appropriate where “determinative questions of New
York law are involved in a case pending before [another] court for which no
1 The Excess Insurers’ October 8, 2015 Brief for Respondents is abbreviated for citation
purposes as “EI Br.”
2
controlling precedent of the Court of Appeals exists . . . .”2 The Excess Insurers
sought certification arguing that this was true of horizontal versus vertical
exhaustion. But with the contract arguments they now make before this Court, the
Excess Insurers assert that the decision turns on the “unambiguous” terms of the
Excess Policies, and thus involves no determinative question of New York law.
This Court should therefore decline to address the second certified issue and return
it to the Delaware Supreme Court.
Even if the Court chooses to address what all parties now agree is a matter of
contractual interpretation, none of the Excess Insurers’ new arguments helps them
avoid the unambiguous terms of their policies, which provide that their obligations
attach upon exhaustion of the “underlying insurance” in the same policy year.
First, the Excess Insurers belatedly concede that the “underlying insurance”
provisions of their policies refer only to the underlying insurance in the same
policy year. EI Br. at 47. But they now claim that exhaustion of the specified
“underlying insurance” is a “necessary, but not sufficient,” condition to their
coverage obligations. Id. This argument is based on language in some of the
Excess Policies’ insuring agreements, stating that their obligations attach “only
after”—as opposed to “once”—the “underlying insurance” is exhausted.3
2 22 N.Y.C.R.R. §500.27(a).
3 Fourteen of the Excess Policies do not even use the “only after” language on which the
Excess Insurers base this argument.
3
However, the very next clause in the same insuring agreement—which the Excess
Insurers ignore altogether—expressly states that once the directly underlying
insurers “have paid” their applicable limits, the Excess Insurer “shall then be liable
to pay.” This, in no uncertain terms, makes exhaustion of the directly “underlying
insurance” a sufficient (and not just necessary) trigger to the Excess Insurers’
coverage obligations.
Second, the Excess Policies’ follow-form provisions foreclose the Excess
Insurers from relying on the Liberty umbrella policies’ “retained limit” provision
to suggest that Viking and Warren must exhaust lower-level policies in other years.
The Excess Policies’ follow-form obligation is expressly limited, so that the
policies follow form to the underlying Liberty umbrella policy “except as
otherwise provided herein.” The Excess Policies’ own insuring agreements
supplant the “retained limit” language in the Liberty umbrella policies’ insuring
agreements. Thus, the Excess Policies’ insuring agreements govern, and those
provisions only require the policyholder to exhaust the “underlying insurance”
listed in the policies’ declarations.
Lastly, the Excess Policies’ own “other insurance” provisions provide no
support for horizontal exhaustion. As this Court has recognized, “other insurance”
provisions apply only “when two or more policies provide coverage during the
4
same period . . . .”4 Because the choice between horizontal and vertical exhaustion
is limited to situations where a loss spans more than one policy period, “other
insurance” provisions have no bearing on the issue. In addition, courts have
recognized that the purpose of “other insurance” provisions is to address only the
rights and obligations of insurers vis-à-vis one another when their policies cover
the same loss. Courts have routinely held that insurers cannot use “other
insurance” provisions to deny coverage to their policyholders, as the Excess
Insurers seek to do here.
In sum, the Excess Insurers have now conceded that their policies’
“underlying insurance” provisions—which list the policies that must be exhausted
before the Excess Insurers are liable—are limited to the directly underlying
policies in the same year. EI Br. at 47. Neither the “retained limit” provisions of
the Liberty umbrella policies nor the Excess Policies’ “other insurance” provisions
requires exhaustion of coverage in other years before the Excess Insurers’
obligations attach.
Because the Excess Insurers now concede that Question #2 does not present
any issue of New York law needing this Court’s intervention, the Court should
vacate its decision granting review of the Question and return the issue to the
Delaware Supreme Court. In the alternative, the Court should answer Certified
4 Consolidated Edison Co. of NY v. Allstate Ins. Co., 98 N.Y.2d 208, 223 (2002).
5
Question #2 by holding that the plain language of the Excess Policies allows
Viking to exhaust its excess insurance coverage vertically.
ARGUMENT
I. THE EXCESS INSURERS WAIVED THEIR CURRENT “PLAIN
TEXT” ARGUMENTS BY NOT RAISING THEM BEFORE THE
DELAWARE SUPREME COURT
The arguments in the Excess Insurers’ brief in support of horizontal
exhaustion were never made to the Delaware Supreme Court and should be
rejected as waived. Both of the Excess Insurers’ contractual arguments—based on
adoption of the Liberty umbrella policies’ “retained limit” provisions and the
Excess Policies’ own “other insurance” provisions—are made nowhere in, and
represent a fundamental shift in focus from, the Excess Insurers’ Delaware
Supreme Court briefs, where they relied on a purported rule of law in New York
that they claimed compelled horizontal exhaustion. A2116-18. Viking’s opening
brief to the Delaware Supreme Court argued that “[t]he plain language of the Joint
Excess Policies only requires exhaustion of the directly underlying insurance
policies before the policy attaches.” A1872 (emphasis original). In their response
brief addressing the exhaustion issue and responding to Viking’s contract-based
arguments in favor of vertical exhaustion, the Excess Insurers did not argue—as
they do now—that their policies followed form to Liberty’s “retained limit”
6
provisions5 or that horizontal exhaustion is required because of their own policies’
“other insurance” provisions. See A2113-2121. By not raising these contract-
based arguments before the Delaware Supreme Court, the Excess Insurers have
waived them. See Bingham v. New York City Transit Auth., 99 N.Y.2d 355, 359
(2003) (“As we have many times repeated, this Court with rare exception does not
review questions raised for the first time on appeal.”).
II. CERTIFICATION IS NO LONGER APPROPRIATE
The Excess Insurers’ shift in focus also demonstrates that the issue now
before the Court—which the Excess Insurers describe as turning on “the plain text
of the Excess Policies”—is not one that merits certification. EI Br. at 45. In the
Delaware Supreme Court, the Excess Insurers argued that New York law (as
developed in the context of contribution disputes involving policies covering joint
tortfeasors for the same policy period) established a horizontal exhaustion rule of
law that should also apply to situations like this case, where the losses in question
span successive policy periods. See A2117 (claiming “New York precedents
provide that all primary coverage must be exhausted before the policyholder may
access higher-level policies.”) This legal argument, while demonstrably wrong
and now apparently abandoned by the Excess Insurers, at least arguably supported
certification to this Court. The Excess Insurers’ answering brief in these
5 See footnote 10, infra.
7
proceedings, however, is notably devoid of any claim that a per se rule of law in
New York requires horizontal exhaustion.
The Excess Insurers’ request for certification thus appears to have been
nothing more than a thinly veiled attempt at forum shopping. If the choice
between horizontal and vertical exhaustion is simply a matter of contract
interpretation—which Viking has always maintained—the Delaware Supreme
Court is more than capable of deciding the issue. The Court’s Rules of Practice
permit certification of “dispositive questions of law to the Court of Appeals.” 22
N.Y.C.R.R. §500.27(a) (emphasis added). More specifically, the Court’s Rules
state that certification may be appropriate where “determinative questions of New
York law are involved in a case pending before [another] court for which no
controlling precedent of the Court of Appeals exists . . . .” Id. (emphasis added).
While the Excess Insurers initially suggested to the Delaware Supreme Court that
this was true of the proper exhaustion method,6 it is now clear that they simply
wish this Court to engage in contractual interpretation of the terms of the Excess
Policies. That issue does not warrant certification, and the Court should act on its
discretionary powers and decline to answer the second certified question on the
6 Defending the Delaware Superior Court’s horizontal exhaustion ruling, the Excess Insurers
argued, “[i]t was certainly not error for the Superior Court to follow New York cases on a
question of New York law.” A2118. They then cautioned the Delaware Supreme Court that
“[t]he Delaware Courts are not the proper forum for . . . judicial innovation in New York
law.” Id. (inner citation and quotation omitted).
8
grounds that it involves no controlling question of New York law and the Delaware
Supreme Court is fully competent to decide matters of straightforward contract
interpretation. See Liriano v. Hobart Corp., 92 N.Y.2d 232, 236 (1998) (“We
answer the first part of the certified question in the affirmative and decline to
answer the second part of the question in deference to the Second Circuit’s review
and application of existing principles of law to the facts, as amplified by the full
record before that Court.”); see also ARTHUR KARGER, THE POWERS OF THE NEW
YORK COURT OF APPEALS §10:13 (3d ed. 2005) (“the Court has
emphasized . . . that its function is limited to providing an answer to the unsettled
question of New York law which has been certified.”).7
III. THE EXCESS POLICIES DO NOT REQUIRE EXHAUSTION OF
LOWER-LEVEL INSURANCE IN OTHER POLICY YEARS
BEFORE THEIR COVERAGE OBLIGATIONS ATTACH
A. The Excess Policies All Identify Specific Underlying Policies That,
Once Exhausted, Trigger The Excess Insurers’ Coverage
Obligations
The Excess Insurers fare no better on the merits. As Viking demonstrated in
its opening brief, the Excess Policies all provide that their coverage obligations
attach once the limits of certain, specified “underlying insurance” have been
7 The Excess Insurers’ suggestion that the matter should be referred back to the Delaware
courts to resolve any ambiguities in the policies underscores this point. EI Br. at 54-55. The
Delaware courts have ten years of experience with this litigation and are likely in a better
position to resolve any disputed issues concerning the proper interpretation of the Excess
Policies.
9
exhausted, and the Excess Policies define that “underlying insurance” as only the
directly underlying policies in the same policy year. Viking Op. Br. at 14-18.
Significantly, the Excess Insurers admit in their answering brief for the first time in
any court the central premise of this argument: they concede that “the Excess
Policies define the underlying insurance to mean only the umbrella policies
covering the same period.” EI Br. at 47 (emphasis added).
The Excess Insurers argue, however, that their policies’ underlying
insurance provisions create “a necessary, but not sufficient, condition” to their
coverage obligations because, they claim, under the policy language, their
obligations attach “only after” exhaustion of the directly underlying policies
instead of “so long as” the directly underlying policies are exhausted. EI Br. at 47.
Although strained and logically pedantic, the Excess Insurers’ “sufficient
condition” argument fails as a gating matter because it ignores that (a) many of the
Excess Policies do not include the “only after” language on which the argument is
based and (b) the Excess Policies that do include that language also contain
language expressly making exhaustion of the “underlying insurance” a sufficient
trigger to the Excess Insurers’ coverage obligations.
Fourteen of the Excess Policies do not even use the “only after” language
that the Excess Insurers claim creates a “necessary, but not sufficient, condition.”
Instead, the language of those policies—which the Excess Insurers ignore—creates
10
an affirmative obligation on the part of the Excess Insurers to provide insurance
coverage “in excess of” the limits of the policies identified as “underlying
insurance.” An example is the 1979 ISLIC policy, which states that ISLIC agrees
to indemnify the policyholder for its losses “in excess of” the limits of the
underlying insurance described in the policy’s declarations:
International Surplus Lines Insurance Company . . . agrees with the
insured, named in the declarations made a part hereof, in
consideration of the payment of the premium and in reliance upon the
statements in the declarations and subject to the limits of liability,
exclusions, conditions and other terms of this policy; . . . [t]o
indemnify the insured for the amount of loss which is in excess of the
applicable limits of liability of the underlying insurance described in
Item 4 of the declarations . . .
A1101 (emphasis added).8 This language avoids altogether the concept of
exhaustion as a condition to the insurers’ obligations, let alone whether it is
“necessary” or “sufficient.” The Excess Insurers’ obligations under policies with
language providing that their obligations apply “in excess of the applicable limits
of liability of the underlying insurance” are thus plainly triggered once losses
exceed the stated underlying limits. Id.
For the other twenty-one Excess Policies, which do use the “only after”
language, the Excess Insurers’ “sufficient condition” argument fails because they
ignore policy language in the very same provision that definitively makes
8 See also A788; A982; A1131-32; A1198, A1200; A1206; A1212; A1223, A1227; A1235;
A1247; A1253-54; A1286-87; A1293, A1295; A1317.
11
exhaustion of the “underlying insurance” a sufficient trigger to the Excess Insurers’
coverage obligations. Specifically, those Excess Policies state that once the
directly underlying insurers “have paid” their limits of liability, the Excess Insurer
“shall then be liable to pay only the excess thereof, up to [the Excess Policy’s limit
of liability].” See, e.g., A1090. An example of the full policy provision is below:
It is expressly agreed that liability shall attach in the Underwriters
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 as follows:-
$10,000,000.00 ultimate net loss in respect of each
occurrence but,
$10,000,000.00 in the aggregate for each annual period
during the currency of this Policy in respect of any
hazard insured with an aggregate limit,
and the Underwriters shall then be liable to pay only the excess
thereof up to a further:
$10,000,000.00 ultimate net loss in all respect of each
occurrence - subject to a limit of
$10,000,000.00 in the aggregate for each annual period
during the currency of this Policy in respect of each
hazard insured with an aggregate limit in the Underlying
Umbrella Policy
A1044 (emphasis added). This language takes what the Excess Insurers claim is a
necessary, but not sufficient, condition (“only after”) and clarifies in no uncertain
terms that it is in fact a sufficient condition (“the Underwriters shall then be liable
to pay”).
12
Tellingly, the Excess Insurers fail to cite any authority supporting their
construction of the “underlying insurance” provisions in the Excess Policies, and
Viking’s own research has yielded none. To the contrary, courts construing excess
policies with similar language, providing that their coverage obligations attach
“only after” specified underlying insurance has been exhausted, have found that
exhaustion of those specific policies “is sufficient to trigger [the excess insurer’s]
duties . . . .” See, e.g., ARM Properties Mgmt. Group v. RSUI Indem. Co., No. A-
07-CA-718-SS, 2008 WL 5973220, at *7 (W.D. Tex. Aug. 25, 2008) (“[t]he
simple fact that both underlying insurers have paid their policy limits as defined in
Item 6 of the excess insurance contract is sufficient to trigger RSUI’s duties under
this clause.”).
In sum, the Excess Policies are triggered by their plain terms upon
exhaustion of the stated “underlying insurance,” and the Excess Insurers now
admit that the “underlying insurance” described in their policy declarations is
limited to the directly underlying policies in the same policy year. EI Br. at 47.
B. The Excess Policies Do Not Follow Form To The Insuring
Agreements Or “Retained Limit” Provisions Of The Liberty
Umbrella Policies
The Excess Insurers made no attempt in the Delaware Supreme Court to
argue that their policies follow form to the “retained limit” concept found in the
13
Liberty umbrella policies.9 And for good reason: to do so would clearly violate
the Excess Policies’ follow-form provisions.10 The Excess Policies all have
follow-form provisions stating in substance that the policies will follow the terms
and conditions of the underlying Liberty Mutual umbrella policy “except as
otherwise provided herein.” See, e.g., A1092 (emphasis added). Courts have
construed these provisions as adopting the terms and conditions of the underlying
policy to which the excess policy follows form, except where the excess policy
9 The Excess Insurers bizarrely cite Warren’s August 24, 2015 brief to this Court in support of
their assertion that “[t]he Excess Policies follow form to the Liberty umbrella policies’
requirement that the insured itself retain a specified threshold sum before the umbrella policy
will pay.” EI Br. at 48. Warren made no such statement. Instead, Warren’s brief correctly
states simply that “the Excess Policies ‘follow form’ to the Liberty Umbrella Policies.”
Warren Op. Br. 9 (inner citation omitted). Significant to the Excess Insurers’ “retained limit”
argument, Warren then added that the Excess Policies do not follow form to terms and
conditions from the underlying Liberty umbrella policies where “an Excess Policy
specifically provides otherwise.” Id. As described here, the Excess Policies plainly contain
provisions addressing underlying insurance that supplant the terms of the Liberty umbrella
policies addressing the “retained limit.”
10 The Excess Insurers made a fundamentally different (but equally incorrect) argument to the
Delaware Supreme Court concerning the Liberty umbrella policies. There, the Excess
Insurers argued that the Excess Policies do not attach by their terms until the directly
underlying Liberty umbrella policy is exhausted, and according to the Excess Insurers, “as a
matter of New York law, ‘an umbrella policy is not required to contribute to the payment of a
settlement until all other applicable policies have been exhausted.’” A2116 (emphasis
original). Thus, the thrust of the Excess Insurers’ argument to the Delaware Supreme Court,
which they do not make here, was that Liberty had improperly exhausted its umbrella
policies and, therefore, had not triggered coverage under the Excess Policies: “the Excess
Policies are not triggered until the umbrella policies are exhausted, and the umbrella policies
cannot be exhausted until all underlying policies are exhausted.” A2117. That issue—
whether Liberty’s umbrella policies are exhausted—remains before the Delaware Supreme
Court, which will decide it in due course after this Court’s rulings. Notably absent from the
Excess Insurers’ Delaware Supreme Court briefs, however, was any suggestion that the
Excess Policies followed form to the insuring agreements or “retained limit” provisions of
the Liberty umbrella policies.
14
contains terms that differ from the terms of the underlying policy. See Home Ins.
Co. v. Am. Home Products Corp., 902 F.2d 1111, 1113 (2d Cir. 1990). In
situations of conflict between the excess and underlying policies, the excess
policy’s terms will control. Id. (“the Home policy controls Home’s obligations if
there is any conflict between the two insuring agreements.”).11
The “retained limit” concept appears in the Liberty umbrella policies’
insuring agreement, which states that Liberty “will pay on behalf of the insured all
sums in excess of the retained limit which the insured shall become legally
obligated to pay . . .” See, e.g., A517 (emphasis added). The policy then
separately defines “retained limit” to include, among other things, “any other valid
and collectible insurance . . . which is available to the insured.” A519. It is this
quoted text (“any other valid and collectible insurance”) that the Excess Insurers
want to incorporate into their policies because, as they now concede, their own
policies do not include it. EI Br. at 47 (“the Excess policies define the underlying
insurance to mean only the umbrella policies covering the same period.”). But the
Excess Policies’ follow-form provisions expressly bar reliance on Liberty’s
insuring agreement, because the Excess Policies all have their own insuring
agreements that plainly conflict with the Liberty insuring agreements—
11 Consistent with this proposition, the Excess Insurers maintain that certain of the Excess
Policies that contain their own non-cumulation provisions do not follow form to the Liberty
non-cumulation provisions. EI Br. at 9-10.
15
specifically, by substituting the Excess Policies’ “underlying insurance” concept
discussed above for the Liberty policies’ “retained limit” concept:
LIBERTY UMBRELLA
INSURING AGREEMENT
EXAMPLE EXCESS POLICY
INSURING AGREEMENT
“The company will pay on
behalf of the insured all sums in
excess of the retained limit
which the insured shall become
legally obligated to pay . . .”12
“[Excess Insurer agrees] [t]o
indemnify the Insured for that
amount of loss which exceeds
the amount of loss payable by
underlying policies described in
the Declaration . . .”13
As discussed above, it is this very “underlying insurance” provision which compels
the conclusion that the Excess Policies attach once the directly underlying
insurance in the same policy year is exhausted. Because their own policies’
insuring agreements conflict with the Liberty insuring agreements, the Excess
Policies’ insuring agreements control the Excess Insurers’ obligations to Viking
and Warren. See Home Ins. Co., 902 F.2d at 1113 (“the Home policy controls
Home’s obligations if there is any conflict between the two insuring
agreements”).14
12 A517 (emphasis added).
13 A1227 (emphasis added).
14 In addition, adopting the “retained limit” definition alone would not help the Excess Insurers
because it is clearly inconsistent with the parallel “underlying insurance” concept used in the
Excess Policies and, even if the definition were adopted without also adopting the Liberty
umbrella insuring agreement, there are no terms or conditions in the Excess Policies that use
the term “retained limit” to give it any effect.
16
Because the Excess Policies’ insuring agreements control and do not follow
form to the “retained limit” language of the Liberty policies, the Excess Insurers’
attempt to distinguish the Cadet and Travelers decisions is unsuccessful. EI Br. at
50-51. In both cases, the court addressed policy language substantively identical to
the Excess Policies and found that the language permitted the policyholder to
exhaust its coverage vertically. See Cadet Mfg. Co. v. Am. Ins. Co., 391 F. Supp.
2d 884, 892 (W.D. Wash. 2005) (rejecting horizontal exhaustion where “each of
the Granite State policies requires that [the insured] exhaust only the ‘underlying
insurances’ before its coverage is triggered”); Travelers Cas. & Sur. Co. v.
Transcontinental Ins. Co., 19 Cal. Rptr. 3d 272, 279 (Ct. App. 4th Dist. 2004)
(excess policy’s “schedule of underlying insurance” listing only the directly
underlying policies in same policy year 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.”). The Excess Insurers try to distinguish these cases based solely on the
“retained limit” provision of the Liberty umbrella policies, arguing that Cadet and
Travelers did not involve policy language requiring exhaustion of “other available
insurance.” EI Br. at 50. But neither do the Excess Policies. Setting aside
Liberty’s “retained limit” provisions, to which their policies do not follow form,
the Excess Insurers provide no grounds for distinguishing the Cadet and Travelers
17
decisions rejecting horizontal exhaustion based on policy language. In fact, the
Excess Insurers’ observations that the policy language in Cadet and Travelers
provided “no basis . . . for requiring horizontal exhaustion” and “created an
‘unmistakable implication’ that vertical exhaustion was required . . .” apply with
equal weight to the Excess Policies. EI Br. at 50-51.
C. The Excess Policies’ “Other Insurance” Provisions Do Not
Require Horizontal Exhaustion Or Allow The Excess Insurers To
Withhold Payment From Viking Or Warren
In another argument not made in their briefing to the Delaware Supreme
Court, the Excess Insurers claim that their policies’ “other insurance” provisions
override the terms of the Excess Policies’ “underlying insurance” provisions and
require the exhaustion of additional, lower-level policies in other policy years prior
to their obligations attaching. EI Br. at 51-53. This argument fails for several
reasons.
First, the argument mistakes the scope of “other insurance” provisions, as
recognized by this Court. In Consolidated Edison Co. v. Allstate Insurance Co.
(“Con Ed”), the Court held that “other insurance” provisions apply only “when two
or more policies provide coverage during the same period . . .” and, then, only “to
prevent multiple recoveries from such policies.” 98 N.Y.2d 208, 223 (2002).
Here, the Excess Insurers seek to apply their “other insurance” provisions to
require exhaustion of insurance policies in policy years outside the 1972-1985 span
18
of the Excess Policies. Viking Op. Br. at 6. As the Court’s opinion in Con Ed
makes clear, the Excess Policies’ “other insurance” provisions have no bearing on
this issue. Con Ed, 98 N.Y.2d at 223 (citing Owens-Illinois, Inc. v. United Ins.
Co., 138 N.J. 437 (1994)); see also Owens-Illinois, 138 N.J. at 479 (“Because
multiple policies of insurance are triggered under the continuous-trigger theory, it
becomes necessary to determine the extent to which each triggered policy shall
provide indemnity. ‘Other insurance’ clauses in standard CGL policies were not
intended to resolve that question.”).
The Excess Insurers’ argument that their “other insurance” provisions apply
because, under all sums allocation, the Excess Policies and Viking’s remaining
lower-level policies from other policy years “do cover losses in the same time
period” misreads the Con Ed opinion. EI Br. at 53. While the Court noted in Con
Ed that “other insurance” provisions address situations where two or more policies
“provide coverage during the same period,” the Court distinguished such policies
from those that are “in force during successive years”—clarifying that “same
period” in the previous sentence meant “same policy period.” Con Ed, 98 N.Y.2d
at 223. Even under all sums, the Excess Policies do not provide coverage during
the same policy periods as Viking’s available lower-level insurance, so the Excess
Policies’ “other insurance” provisions have no impact on whether horizontal
exhaustion applies. Id.
19
Second, like the policyholder in Con Ed, the Excess Insurers also confuse
the purpose of “other insurance” provisions, which govern the rights and
obligations of insurers covering the same risk vis-à-vis one another but do not
affect a policyholder’s right to recovery under those policies. The Appleman
treatise cited by the Court in Con Ed makes this point well. See Con Ed, 98
N.Y.2d at 223. Appleman explains that “other insurance” provisions are “inserted
in insurance policies to relieve the insurer of the burden of litigating with the
insured as to the validity of other policies, and to eliminate any inducement to the
insured to commit fraud.” 6 APPLEMAN, INSURANCE LAW & PRACTICE § 3905 (1st
ed.). But, as the treatise further explains, insurers’ rights under “other insurance”
provisions “must yield to the right of the insured to be fully indemnified.” Id.;
accord Cont’l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640, 655-56 (1993)
(addressing insurer’s “other insurance” clause defense and finding that “the insured
should not be denied initial recourse to a carrier merely because another carrier
may also be responsible.”); Slabic v. Hendrickson, 556 N.Y.S.2d 236, 237 (Sup.
Ct. 1990) (finding that “[t]he [other insurance] exclusion is being applied only for
the purpose of determining the insurers’ rights vis-à-vis each other.”) (internal
quotation and citation omitted).
Courts across the United States have likewise held that “other insurance”
provisions do not relieve insurers of their obligations to the policyholder, as the
20
Excess Insurers are attempting to use them here. See, e.g., RLI Ins. Co. v. Hartford
Accident & Indem. Co., 980 F.2d 120, 122 (2d Cir. 1992) (Connecticut law; “such
‘other insurance’ clauses ‘are valid for the purpose of establishing the order of
coverage between insurers’ and therefore are enforceable, but only ‘as long as their
enforcement does not compromise coverage for the insured.’”); Dart Indus., Inc. v.
Commercial Union Ins. Co., 52 P.3d 79, 93-94 (Cal. 2002) (“even if Commercial
Union had a ‘null and void with excess’ ‘other insurance’ clause, all that would be
established is that it had a right to seek some kind of contribution from successive
insurers also liable to Dart. It would not relieve Commercial Union from either its
obligation to indemnify or defend Dart.”); Bazinet v. Concord Gen. Mut. Ins. Co.,
513 A.2d 279, 281 (Me. 1986) (“We have held that ‘other insurance’ clauses
cannot be used by the insurers to defeat liability to their insureds.”); Chem.
Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 817 F. Supp. 1136, 1154 n.11
(D.N.J. 1993) (“The court notes that the ‘Other Insurance’ clauses found in certain
of defendants’ policies only affect the rights of the insurers among themselves.
They do not implicate [the policyholder’s] right to full recovery under each
triggered policy.”); Keene Corp. v. Ins. Co. of N. Am., 667 F.2d 1034, 1050 (D.C.
Cir. 1981) (“When more than one policy applies to a loss, the ‘other insurance’
provisions of each policy provide a scheme by which the insurers’ liability is to be
apportioned . . . . However, the primary duty of the insurers whose coverage is
21
triggered by exposure or manifestation is to ensure that Keene is indemnified in
full.”); see also Douglas R. Richmond, Issues and Problems in “Other Insurance,”
Multiple Insurance, and Self-Insurance, 22 Pepp. L. Rev. 1373, 1380-81 (1995)
(“‘Other Insurance’ clauses only affect insurers’ rights among themselves; they do
not affect the insured’s right to recovery under each concurrent policy.”).
Finally, interpreting the Excess Policies’ “other insurance” provisions as
requiring horizontal exhaustion violates settled rules of construction and leaves the
Excess Policies’ “underlying insurance” provisions without force or effect. The
Excess Insurers listed in their policy declarations the specific insurance policies
that must be exhausted before the Excess Insurers will “then be liable to pay.” See,
e.g., A1044. They could have provided that lower-level insurance in other years
must also be exhausted, but they did not. From the Excess Insurers’ decision to list
only the directly underlying insurance policies in the same policy year as their own
policies, it can and should be inferred that they intended to exclude any other
policies not listed. IBM Poughkeepsie Employees Fed. Credit Union v. Cumis Ins.
Soc’y, Inc., 590 F. Supp. 769, 773 (S.D.N.Y. 1984) (“Under the doctrine of
expressio unius est exclusio alterius, when certain persons or categories are
specified in a contract, an intention to exclude all others may be inferred.”);
Assured Guar. Mun. Corp. v. UBS Real Estate Sec., Inc., No. 12 CV 1579 (HB),
2012 WL 3525613, at *3 (S.D.N.Y. Aug. 15, 2012) (“Under the principal of
22
expressio unius est exclusio alterius, it is not unreasonable to presume that these
sophisticated parties left off the certificate insurer on purpose when cataloguing
those to whom the Sole Remedy Clause was to apply.”). Indeed, interpreting the
Excess Policies’ “other insurance” provisions as governing the exhaustion issue, as
the Excess Insurers argue, would impermissibly strip the policies’ “underlying
insurance” provision of any purpose or effect; it would be rendered superfluous,
because all of the policies itemized as “underlying insurance” in the policy
declarations would be subsumed within the “other insurance” provisions’ reference
to “any other valid and collectible insurance.” See Muzak Corp. v. Hotel Taft
Corp., 1 N.Y.2d 42, 46 (1956) (“The rules of construction of contracts require us to
adopt an interpretation which gives meaning to every provision of a contract or, in
the negative, no provision of a contract should be left without force and effect.”).15
15 The Excess Insurers’ suggestion that their reading of the Excess Policies’ “other insurance”
provisions “is consistent” with the laws of New York and other jurisdictions is not borne out
by the cases they cite. The Bovis Lend Lease decision, for instance, was a contribution
dispute between insurers that had issued policies in the same policy period, in which none of
the insurers relied on the “other insurance” provision to deny coverage to the policyholder, as
the Excess Insurers are attempting to do here. See generally Bovis Lend Lease LMB, Inc. v.
Great Am. Ins. Co., 53 A.D.3d 140 (1st Dep’t 2008). The Commissioners of State Insurance
Fund decision involved an insuring agreement that, unlike the Excess Policies, expressly
included “[a]ny other insurance available to the insured” in its definition of “underlying
insurance.” See Comm’rs of State Ins. Fund v. Aetna Cas. & Sur. Co., 283 A.D.2d 335, 335-
36 (1st Dep’t 2001) (internal quotations omitted). Similarly, both the Borg-Warner and
Kaiser Cement decisions involved policies where, unlike Excess Policies, the insuring
agreement itself required exhaustion of any other insurance available to the insured before
the excess policy would attach. See Borg-Warner Corp. v. Liberty Mut. Ins. Co., 1990 N.Y.
Misc. LEXIS 771, at *4-6 (Sup. Ct., Tompkins Cty. June 15, 1990); Kaiser Cement &
Gypsum Corp. v. Ins. Co. of PA, 126 Cal. Rptr. 3d 602, 614-15 (Ct. App. 2011). In addition,
the U.S. Gypsum opinion by an Illinois intermediate appellate court is plainly inconsistent
23
IV. ANY AMBIGUITY CONCERNING APPLICATION OF VERTICAL
OR HORIZONTAL EXHAUSTION MUST BE RESOLVED IN
FAVOR OF THE POLICYHOLDERS
The Delaware trial court found that “there is policy language supporting
Plaintiffs’ argument for vertical exhaustion” and “[b]ut for New York’s law, the
court could reject horizontal exhaustion.” A1784. The trial court’s findings
demonstrate that the Excess Insurers cannot satisfy the heavy burden they bear in
trying to impose horizontal exhaustion, because New York follows the well-
established rule that “[a] construction favorable to the insurer will only be
sustained where it is the sole construction which can fairly be placed upon the
words employed.” Cantanucci v. Reliance Ins. Co., 43 A.D.2d 622, 623 (3d Dep’t
1973) (emphasis added). It is no surprise, then, that the Excess Insurers’
answering brief devotes significant space to arguing that Viking and Warren
cannot invoke the contra proferentem rule. EI Br. at 53-55. The Excess Insurers’
attempts to avoid the impact of this settled law should be rejected.
First, the Excess Insurers’ suggestion that Viking and Warren cannot invoke
the contra proferentem rule because Houdaille “was a large, sophisticated business
with significant bargaining power” finds no support in New York law. EI Br. at
55. As an initial matter, “there is no general rule in New York denying
sophisticated businesses the benefit of contra proferentem.” Morgan Stanley Grp.
with this Court’s ruling in Con Ed, that “other insurance” provisions only apply to policies
providing coverage “during the same period.” Con Ed, 98 N.Y.2d at 223.
24
Inc. v. New England Ins. Co., 225 F.3d 270, 279-80 (2d Cir. 2000). In addition,
courts have made clear that to deny a business the benefit of contra proferentem,
an insurer must at the very least show that the business negotiated the ambiguous
coverage terms. See id. at 280 (rejecting insurers’ attempt to bar policyholder’s
reliance on contra proferentem, stating that it “need not decide the issue because
Morgan Stanley (although sophisticated) did not negotiate its coverage terms.”);
see also Ogden Corp. v. Travelers Indem. Co., 681 F. Supp. 169, 174 (S.D.N.Y.
1988) (“Although Ogden did in fact negotiate with Travelers, it cannot be said that
Ogden completely drafted the provisions in question so as to cause the Court to
apply a limited exception to the general rule by construing ambiguities in favor of
the insurer. Thus, ambiguities, if any, are to be construed in favor of Ogden.”).
The Excess Insurers have made no attempt, here or in the Delaware proceedings, to
show that Houdaille was able to actually negotiate any of the Excess Policies’
terms relevant to whether vertical or horizontal exhaustion should apply.
Second, the Excess Insurers’ suggestion that the matter should be referred
back to the Delaware courts to resolve any ambiguity “using other tools of
construction that have priority over contra proferentum [sic]” is a red herring. EI
Br. at 54. This litigation is now in its eleventh year. The parties have briefed the
issue of horizontal versus vertical exhaustion on three separate occasions, both
here and in the Delaware courts. In all that time, the Excess Insurers have never
25
come forward with any extrinsic evidence supporting their claim that the policies
require horizontal exhaustion. Viking, on the other hand, developed and presented
evidence during trial and in subsequent trial court and appellate proceedings
showing that the lead underwriter for one of the lower-level Excess Insurers clearly
contemplated that the Excess Policies could be exhausted vertically. Viking Op.
Br. at 28-29. When Viking argued to the Delaware courts that any ambiguity must
be resolved in favor of Viking in light of this testimony and the contra proferentem
rule (A1871 & n.12), the Excess Insurers, despite having the opportunity,
presented no extrinsic evidence to the contrary.
At bottom, the Excess Insurers sought certification to this Court to resolve a
supposed issue of law governing the appropriate exhaustion methodology. It is
now apparent that no such issue of law exists. And it is equally apparent that the
contract language fully supports vertical exhaustion under the Excess Policies.
The Excess Insurers should not now be allowed to prolong this litigation further by
a referral back to the Delaware courts to resolve an alleged disputed issue of fact
on which they have never identified any evidence contradicting the testimony of
International’s underwriter.
CONCLUSION
For the reasons explained above, in addition to those in Viking’s opening
brief, Viking respectfully requests that the Court decline to address the second
26
certified question and return that issue to the Delaware Supreme Court.
Alternatively, Viking requests that this 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: October 22, 2015
Respectfully submitted,
KIRKLAND & ELLIS LLP
By: :Td.~
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 Avenue
New York, New York 10022
Tel.: (212) 446-4800
Fax: (212) 446-4900
pbellacosa@kirkland.com
Attorneys for Appellant Viking Pump, Inc.