In the Matter of Viking Pump, Inc. and Warren Pumps, LLC, Insurance Appeals.
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Viking Pump, Inc. and Warren Pumps, LLC, Appellants, TIG Insurance Company, et al., Respondents.

Brief

N.Y.March 29, 2016

To be Argued by: ROBIN COHEN (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 WARREN PUMPS LLC ROBIN COHEN ELIZABETH A. SHERWIN KEITH MCKENNA KASOWITZ BENSON TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Tel.: (212) 506-1700 Fax: (212) 506-1800 Attorneys for Appellant Warren Pumps LLC Date Completed: October 22, 2015 CORPORATE DISCLOSURE STATEMENT Plaintiff-Appellant is a single-member limited liability company with IMO Industries Inc. as its only member. IMO Industries Inc., in turn, is a subsidiary of the Colfax Corporation, a publicly owned company. Plaintiff-Appellant has no subsidiaries. TABLE OF CONTENTS PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 6 I. THIS COURT’S DECISION IN CON EDISON DID NOT RESOLVE THE CERTIFIED QUESTION PRESENTED HERE ................................................ 6 II. THE VIKING COURT CORRECTLY DETERMINED HOW THE PROVISIONS WERE INTENDED TO OPERATE .......................................... 9 A. The Excess Insurers Ignore That, Consistent With The Case Law, Liberty Paid Warren On An All Sums Basis For More Than Twenty Years .............. 9 B. The New York Cases - Including Olin III - Do Not Support The Excess Insurers’ Call For Pro-Rata Allocation .......................................................... 12 C. The Excess Insurers Ignore The Unanimous Holdings Of Cases Outside This State Rejecting Pro-Rata Allocation For Policies Containing Non- Cumulation And Prior Insurance Provisions ................................................. 17 III. THE EXCESS INSURERS DO NOT ADDRESS THE FACT THAT THE CLEAR AND UNAMBIGUOUS LANGUAGE OF THE NON- CUMULATION AND PRIOR INSURANCE PROVISIONS IS IRRECONCILABLE WITH PRO-RATA ALLOCATION ......................... 21 IV. THE EXCESS INSURERS HAVE NOW CONFIRMED THAT THEIR LATEST ALLOCATION THEORY WOULD PROVIDE THEM WITH AN UNWARRANTED WINDFALL ........................................................... 28 V. THE EQUITIES FAVOR APPLYING THE POLICY LANGUAGE AS WRITTEN, AND REJECTING PRO-RATA ALLOCATION .................... 36 VI. THE DEFENSE COST ALLOCATION ISSUE IS PROPERLY BEFORE THIS COURT ................................................................................................ 39 CONCLUSION ........................................................................................................ 44 ii TABLE OF AUTHORITIES Page(s) Cases Allmerica Fin. Corp. v. Certain Underwriters at Lloyd’s, London, 871 N.E.2d 418 (Mass. 2007) ............................................................................. 11 Ambassador Assocs. v. Corcoran, 79 N.Y.2d 871 (1992), aff’g, 168 A.D.2d 281 (1st Dep’t 1990) ........................ 33 Bahar v. Allstate Ins. Co., No. 01 Civ. 8129, 2004 WL 1782552 (S.D.N.Y. Aug. 9, 2004), aff’d, 159 F. App’x 311 (2d Cir. 2005)......................................................... 16, 17 Bingham v. N.Y. Transit Auth., 99 N.Y.2d 355 (2003) ........................................................................................... 3 Boston Gas Co. v. Century Indem. Co., 910 N.E.2d 290 (Mass. 2009) ....................................................................... 17, 18 Boston Gas Co. v. Century Indem. Co., 529 F.3d 8 (1st Cir. 2008) ................................................................................... 17 Chicago Bridge & Iron Co. v. Certain Underwriters at Lloyd’s, London, 797 N.E.2d 434 (Mass. App. 2003) .............................................................. 19, 25 Consolidated Edison Co. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002) ..................................................................................passim Cont’l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640 (1993) ......................................................................................... 39 Dow Corning Corp. v. Cont’l Cas. Co., Nos. 200143-54, 1999 Mich. App. LEXIS 2920 (Mich. App. Oct. 12, 1999) ............................................................................................................. 19 Engel v. CBS, Inc., 182 F.3d 124 (2d Cir. 1999) ............................................................................... 42 Fed. Ins. Co. v. Ams. Ins. Co., 258 A.D.2d 39 (1st Dep’t 1999) ......................................................................... 11 iii FMC Corp. v. Plaisted & Cos., 72 Cal. Rptr. 2d 467 (Cal. Ct. App. 1998) .......................................................... 20 Forest Labs., Inc. v. Arch Ins. Co., 116 A.D.3d 628 (1st Dep’t 2014) ....................................................................... 32 Greenidge v. Allstate Ins. Co., 312 F. Supp. 2d 430 (S.D.N.Y. 2004), aff’d, 446 F.2d 356 (2d Cir. 2006) ................................................................................................................... 16 Hamilton v. Beretta U.S.A. Corp., 96 N.Y.2d 222 (2001) ......................................................................................... 42 Hanover Ins. Co. v. Vt. Mut. Ins. Co., 69 F. Supp. 3d 302 (N.D.N.Y. 2014) .................................................................. 16 Hercules, Inc. v. AIU Ins. Co., 784 A.2d 481 (Del. 2001) ..................................................................... 3, 9, 19, 20 Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508 (2005) ........................................................................................... 17 IBJ Schroder Bank & Trust Co. v. Resolution Trust Corp., 26 F.3d 370 (2d Cir. 1994) ................................................................................. 11 J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324 (2013) ................................................................................... 36, 37 Liberty Mut. Ins. Co. v. Those Certain Underwriters at Lloyd’s, 650 F. Supp. 1553 (W.D. Pa. 1987) .............................................................. 18, 19 M-B Co. of Wis. v. Parker Hannifin Corp., 151 Wis. 2d 784, 1989 WL 111968 (Wis. App. July 12, 1989) ................... 18, 19 Mt. McKinley Ins. Co. v. Corning Inc., 2012 N.Y. Slip Op. 33555(U), 2012 N.Y. Misc. LEXIS 6531 (Sup. Ct. N.Y. Cnty. Sept. 7, 2012) .......................................................................... 7, 21 Olin Corp. v. Am. Home Assurance Co., 704 F.3d 89 (2d Cir. 2012) ..........................................................................passim Outboard Marine Corp. v. Liberty Mut. Ins. Co., 670 N.E.2d 740 (Ill. App. 1996) ..................................................................passim iv Plastics Eng’g Co. v. Liberty Mut. Ins. Co., 759 N.W.2d 613 (Wis. 2009) ........................................................................ 10, 19 Price v. Price, 69 N.Y.2d 8 (1986) ............................................................................................. 41 Roman Catholic Diocese of Brooklyn v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 21 N.Y.3d 139 (2013) ........................................................................................... 7 Shantigar Found. v. Bear Mountain Builders, 804 N.E. 2d 324 (Mass. 2004) ............................................................................ 38 Spaulding Composites Co. v. Aetna Cas. & Surety Co., 819 A.2d 410 (N.J. 2003) ............................................................................passim State Farm Mut. Auto. Ins. Co. v. Mallela, 372 F.3d 500 (2d Cir. 2004) ............................................................................... 42 State v. Home Indem. Co., 66 N.Y.2d 669 (1985) ......................................................................................... 24 Tunick v. Safir, 94 N.Y.2d 709 (2000) ......................................................................................... 42 U.S. Fid & Guar. Co. v. Treadwell Corp., 58 F. Supp. 2d 77 (S.D.N.Y. 1999) .................................................................... 11 Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76 (Del. Ch. 2009) ...........................................................................passim Viking Pump, Inc. v. Century Indem. Co., No. 10C-06-141, 2013 WL 7098824 (Del. Super. Oct. 31, 2013) ......... 40, 41, 43 Viking Pump, Inc. v. Liberty Mut. Ins. Co., No. Civ. A-VCS-1465, 2007 WL 1207107 (Del. Ch. Apr. 13, 2007) ............... 10 Statutes N.Y. CPLR § 1601 ................................................................................................... 38 PRELIMINARY STATEMENT The responding brief filed by the Excess Insurers1 is more revealing for what it concedes and fails to address than for what it asserts. In particular, it concedes that pro-rata allocation is based on the premise that a policy pays only for injury or loss during the policy period. Yet it also concedes that, contrary to that basic premise, the Prior Insurance Provisions expressly provide that the policy will pay for injury or loss “continuing” after the policy period “without payment of additional premium,” and will cover loss that is “also covered in whole or part” under prior-issued policies. And it similarly concedes that the language in the Non-Cumulation Provisions, drafted by Liberty more than forty years ago and incorporated into two-thirds of the Excess Policies, provides for payment of “personal injury” which occurs partly within and partly outside the policy period. Finally, nowhere in their brief do the Excess Insurers dispute that Liberty, one of the world’s most sophisticated insurance companies, concluded for more than twenty years that the Non-Cumulation Provisions in its Policies required payment of the Asbestos Claims on an “all sums” basis - or that paying on that basis cost Liberty tens of millions of dollars in extra costs over a pro-rata payment allocation. See Warren Br. at 11-12. 1 Unless otherwise stated, all capitalized terms have the same meaning as that identified in the Brief for Appellant Warren Pumps LLC, filed August 24, 2015 (“Warren Br.”). 2 In the face of these concessions, the Excess Insurers are forced to argue that, like Plaintiffs, Liberty must simply have “misunderst[ood]” the intent, import and effect of its own policy language. EI Br.2 at 22. Yet, incredibly, in 42 pages of briefing on the allocation issue, the Excess Insurers fail to cite to a single case addressing a Liberty non-cumulation provision, let alone one interpreting the provision’s scope or impact any differently than that reflected in Liberty’s consistent course of conduct for more than two decades. Instead, in an effort simply to avoid the issue, the Excess Insurers cite to this Court’s decision in Consolidated Edison Co. v. Allstate Insurance Co., 98 N.Y.2d 208 (2002) (“Con Edison”), to assert that the question certified by the Delaware Supreme Court is a matter of “settled law” in New York. EI Br. at 1. In supposed support of that argument, they offer their “epiphany” that certain policies in Con Edison contained prior insurance provisions “materially identical” to those at issue here, and posit that “[p]resumably” the Court did not address those provisions in its actual decision because it realized that “they are irrelevant” to allocation. Id. at 2, 13-14 n.5. That contention is baseless, and certainly does not warrant acceptance of an allocation method that contradicts the plain language of the Excess Policies. Liberty was not a party in Con Edison, and therefore, no Liberty non-cumulation 2 “EI Br.” refers to Brief for Respondents, filed October 8, 2015. 3 provision was at issue. Further, no non-cumulation or prior insurance provision of any kind was considered by the Court for the simple reason that no party ever even raised the existence of such provisions, let alone offered any argument as to their effect on allocation. Most importantly, in seven years of litigation the Excess Insurers never before mentioned this argument.3 The reason for that omission is simple: this Court did not, as the Excess Insurers now claim, implicitly or explicitly hold that non-cumulation and prior insurance provisions have no effect on the issue of allocation. To the contrary, the Con Edison Court expressly distinguished the “all sums” authorities cited by the policyholder, including Hercules, Inc. v. AIU Insurance Co., 784 A.2d 481 (Del. 2001), on the ground that those authorities construed policies containing “different policy language” - citing for that proposition to the portion of Hercules discussing prior insurance provisions virtually identical to those at issue here. Con Edison, 98 N.Y.2d at 223. The Excess Insurers also place heavy reliance on Olin Corp. v. American Home Assurance Co., 704 F.3d 89 (2d Cir. 2012) (“Olin III”), to support their claim that non-cumulation and prior insurance provisions can be applied in a pro- rata allocation. Yet even the insurer in Olin III recognized the court’s decision 3 By failing to present this argument in the Delaware court proceedings, the Excess Insurers have waived the right to raise it in this Court. See Bingham v. N.Y. Transit Auth., 99 N.Y.2d 355, 359 (2003). See also Appellant Viking Pump, Inc.’s Reply Brief, dated October 22, 2015, at 5-6. 4 allocating decades of losses and injuries to a single policy period for what it was - an all sums allocation. Further, if Liberty and Plaintiffs “completely misunderstand” whether the Non-Cumulation and Prior Insurance Provisions can be “fully operative” under a pro-rata allocation (EI Br. at 22, 3), they are not alone in that misunderstanding. Not only was that “misunderstanding” shared by Vice-Chancellor Strine (now Chief Justice of the Delaware Supreme Court), and by every single court that has squarely addressed this issue, it also was shared and advanced by the Excess Insurers themselves for more than seven years. The Excess Insurers offer no explanation for the fact that they represented to the Delaware Chancery Court for years that the Non-Cumulation and Prior Insurance Provisions could not be applied in the context of a pro-rata allocation - or that their own expert so testified at trial. Nor do they distinguish the significant case law holding that the application of pro- rata allocation renders non-cumulation and prior insurance provisions without meaning and effect because the prerequisites to their application - a loss falling partly within and partly without the policy period - cannot exist in a pro-rata allocation. Rather, seeing an advantage in a change of position, the Excess Insurers ignore their past admissions and instead “double-down” on an allocation theory that combines two concepts that cannot exist in the same “coverage world”: a pro- 5 rata allocation treating a continuous claim as a series of one-year losses and non- cumulation and prior insurance provisions which view it as part of a continuing whole. In doing so, they craft an allocation methodology that no court ever has adopted, and that the Delaware Chancery Court correctly recognized would lead to “bizarre and inequitable results.” Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76, 124 (Del. Ch. 2009) (“Viking”). In fact, the hypothetical scenario set forth in the Excess Insurers’ brief to “explain” their new allocation paradigm shows that it would impose the very ”double credit” to the insurers that the Chancery Court predicted. Id. at 124. The Excess Insurers’ position that the simultaneous application of pro-rata allocation and the Non-Cumulation and Prior Insurance Provisions is somehow necessary to reach an equitable result also is without merit. This Court has recognized that there is nothing inequitable in holding parties to the bargains that they have made. That includes enforcing policy language that was specifically crafted to allow a policyholder to recover for loss or injury that occurs partially within and partially outside the policy period - the antithesis of pro-rata allocation - and, in exchange, capping that recovery to a single policy’s limit. Finally, the Excess Insurers’ suggestion that the Court lacks jurisdiction to address the allocation of defense costs as part of its consideration of the certified question will not bear the slightest scrutiny. The question of defense cost 6 allocation was raised and litigated at length in the Chancery Court and Delaware Supreme Court. It is necessarily part and parcel of the question certified to this Court. Accordingly, the Court has jurisdiction to address and resolve that issue. ARGUMENT I. THIS COURT’S DECISION IN CON EDISON DID NOT RESOLVE THE CERTIFIED QUESTION PRESENTED HERE In an effort to avoid an analysis of the irremediable conflict between the Non-Cumulation and Prior Insurance Provisions and pro-rata allocation, the Excess Insurers claim that Con Edison set a bright line standard requiring that pro-rata allocation must be applied to all policies containing the four-word phrase “during the policy period.” EI Br. at 17-20. That argument is belied by the Delaware Supreme Court’s decision to certify the question as an “unsettled” issue of New York law. A1343. It also reflects a fundamental misapprehension of New York law; as noted in Warren’s opening brief, even in the wake of Con Edison, New York courts consistently allocate defense costs on a joint and several basis. Warren Br. at 46-47. More importantly, the Excess Insurers’ position is not an accurate depiction of Con Edison with respect to indemnity payments. Con Edison did not hold that the words “during the policy period” “compel[]” the application of pro-rata allocation. EI Br. at 20. To the contrary, as the cases upon which the Excess Insurers rely concede, it expressly held that the allocation issue, like any other 7 issue of policy interpretation under New York law, depends on a plain reading of the policy language as a whole, giving effect to all provisions. 98 N.Y.2d at 221- 22; see also Mt. McKinley Ins. Co. v. Corning Inc., 2012 N.Y. Slip Op. 33555(U), 2012 N.Y. Misc. LEXIS 6531, at *12 (Sup. Ct. N.Y. Cnty. Sept. 7, 2012) (noting that this Court “has not adopted a definite position” on the choice between pro-rata and all sums allocation). Applying those rules of policy construction - rules never mentioned, much less disputed by the Excess Insurers - this Court held that pro- rata allocation is “not explicitly mandated by the policies” but merely “consistent” with the “during the policy period” language. Con Edison, 98 N.Y.2d at 224 (emphasis added).4 And importantly, despite the Excess Insurers’ sudden “epiphany” to the contrary - after years of briefing and litigation regarding the scope of the Con Edison holding - the policy language that this Court considered in its allocation analysis did not include non-cumulation or prior insurance provisions. EI Br. at 2- 3, 13 n.5. Con Edison involved more than 60 insurance policies sold by over two dozen insurers over a fifty-year period. Liberty was not a party, nor did any of the 4 Similarly, while the Excess Insurers cite Roman Catholic Diocese of Brooklyn v. National Union Fire Insurance Co. of Pittsburgh, Pa., 21 N.Y.3d 139 (2013) (“Diocese”), as reaffirming “Con Ed’s straightforward pro-rata allocation rule” (EI Br. at 18-19), they omit any mention of the fact that Diocese applied pro-rata allocation because “[t]here [was] no indication that the parties intended that the Diocese’s total liability for bodily injuries sustained from 1996 to 2002 would be assumed by a single insurer.” Id. at 154 (emphasis added). The Non-Cumulation and Prior Insurance Provisions at issue here provide precisely that “indication.” 8 policies contain a Liberty non-cumulation provision. Instead, the Excess Insurers now cite to the Con Edison appendix to argue that six of the upper-layer excess policies originally in the case contained a form of a prior insurance provision.5 Id. at 13 n.5. Notably, the Excess Insurers are reduced to citing to the appendix because those provisions are not cited in the policyholder’s briefs, or in the brief of any of the insurer defendants. They do not appear in the Appellate Division decision, and they are neither discussed nor mentioned in any way in this Court’s opinion in Con Edison.6 Undeterred, the Excess Insurers invent from whole cloth a purported reason why the provisions are not mentioned in the Court’s analysis: “Presumably, this Court did not address these provisions in its opinion because they are irrelevant to the question of whether indemnity should be allocated on a pro rata or joint and several basis.” EI Br. at 13-14 n 5; see also id. at 2-3. There is not the slightest basis for that assumption; to the contrary, just the reverse is true. The Court in Con Edison was not “silent” as to the basis for its decision - 5 In contrast, of course, the entire insurance program at issue here is crafted around the Non- Cumulation and Prior Insurance Provisions, with every Excess Policy either following form to the Liberty Non-Cumulation Provision or adopting its own Prior Insurance Provision. See Warren Br. at 10-11, 13-14; EI Br. at 7-10. 6 For that reason, the Excess Insurers’ statement that “[t]he Con Ed court recognized that the allocation issue ‘centers on two policy terms: ‘all sums’ and ‘during the policy period’” (EI Br. at 17), is of no import. To the extent that the allocation determination came down to those two terms in Con Edison, it was because those were the two provisions on which the parties focused their arguments. See Con Edison, 98 N.Y.2d at 222 (noting the policyholder’s “singular” focus on the “all sums” language). 9 and that basis in no way involved an analysis or consideration of any non- cumulation or prior insurance provision in the Policies at issue there. Indeed, the Court expressly distinguished its holding from the Delaware Supreme Court’s decision in Hercules on the basis of “different policy language” - with a specific citation to the Hercules Court’s discussion of prior insurance provisions that were virtually identical to those at issue here. Con Edison, 98 N.Y.2d at 223. The fact that the Court distinguished Hercules on that basis belies the Excess Insurers’ unsupported assertion that this Court held that such provisions have no effect on the choice of allocation method.7 II. THE VIKING COURT CORRECTLY DETERMINED HOW THE PROVISIONS WERE INTENDED TO OPERATE A. The Excess Insurers Ignore That, Consistent With The Case Law, Liberty Paid Warren On An All Sums Basis For More Than Twenty Years Unable to offer any meaningful rebuttal to Warren’s position on Con Edison, the Excess Insurers compound their error by suggesting that, since Con Edison, there is an unbroken body of case law in New York for more than a decade which compels a “straightforward pro-rata allocation.” EI Br. at 19. The Excess Insurers’ position is fatally flawed for two essential reasons. First, despite the fact 7 In addition, the Excess Insurers’ suggestion that pro-rata allocation must be applied in any case where the amount of damage in any given year is uncertain (EI Br. at 18-19) constitutes circular reasoning. The need to estimate “how much” of the continuing damage took place in any one year only arises if the policy coverage is limited to that portion of the damage that takes place during the policy period. It is a result of the application of pro-rata allocation, not a reason to apply such an allocation. 10 that most of the Excess Policies indisputably follow form to the Liberty Non- Cumulation Provision, the Excess Insurers fail to cite to a single case that involves a Liberty non-cumulation provision, much less one that employs a pro-rata allocation in the face of such a provision. Second, they fail to distinguish those cases cited by Warren that squarely interpret Liberty’s non-cumulation provision and compel an all sums allocation.8 Instead, understandably eager to avoid consideration of Liberty’s decades- long practical application of the policy language it drafted, the Excess Insurers state only that they are not “bound” by Liberty’s “voluntary settlement[s]” or “compromises.” EI Br. at 38. That characterization does not accurately reflect the record, as Liberty’s payments were not the result of any settlement or compromise, but of Liberty’s consistent interpretation of its own policy language in handling and paying the Asbestos Claims for more than two decades.9 In any event, the Excess Insurers’ discussion of Liberty’s conduct misses the 8 See Plastics Eng’g Co. v. Liberty Mut. Ins. Co., 759 N.W.2d 613 (Wis. 2009); see also, e.g., Spaulding Composites Co. v. Aetna Cas. & Surety Co., 819 A.2d 410 (N.J. 2003) (holding that Liberty non-cumulation provisions are inconsistent with pro-rata allocation). 9 Liberty began paying Asbestos Claims for Warren in 1987, but did not enter into any settlement with Warren until 2008. A23-24; A95 n.30; A122 ¶ 4 - A125 ¶ 15. The settlement resolved disputes that did not even arise until 2005, when Viking filed this lawsuit. See Viking Pump, Inc. v. Liberty Mut. Ins. Co., No. Civ. A-VCS-1465, 2007 WL 1207107 (Del. Ch. Apr. 13, 2007). Over the intervening twenty-year period, Liberty consistently paid 100% of Warren’s asbestos- related defense and indemnity costs (subject only to some contribution that it received from one other insurer) regardless of whether an Asbestos Claim involved injuries that occurred largely outside of Liberty’s policy period. Warren Br. at 11-12; A93-95; A122 ¶ 4 - A125 ¶ 15. 11 point. The question is not whether the Excess Insurers are “bound” by Liberty’s contemporaneous interpretation and application of the policy language, but whether that two-decade long practical application sheds light on the Excess Insurers’ claim that Plaintiffs’ interpretation and the Chancery Court’s holding reflect a “misunderstand[ing]” of how the Liberty policy language was intended to operate. EI Br. at 22. Under New York law, the parties’ course of performance under the contract is considered “the most persuasive evidence of the agreed intention of the parties.” Fed. Ins. Co. v. Ams. Ins. Co., 258 A.D.2d 39, 44 (1st Dep’t 1999) (internal quotation marks omitted). Indeed, the “practical interpretation of a contract by the parties to it for any considerable period of time before it comes to be the subject of controversy is deemed of great, if not controlling, influence.” IBJ Schroder Bank & Trust Co. v. Resolution Trust Corp., 26 F.3d 370, 374 (2d Cir. 1994) (citation omitted).10 Finally, neither Plaintiffs nor the Chancery Court contend that Liberty’s consistent interpretation and application of its own policy language “overturn Con Ed.” EI Br. at 38. To the contrary, those payments reflect a policy interpretation 10 None of the cases cited on this point by the Excess Insurers holds that a court is precluded from considering the primary insurer’s policy interpretation in a follow form program. See EI Br. at 38 (citing U.S. Fid & Guar. Co. v. Treadwell Corp., 58 F. Supp. 2d 77 (S.D.N.Y. 1999) (absent bad faith or collusion, excess insurer cannot challenge primary insurer’s allocation of claim payments or exhaustion of limits) and Allmerica Fin. Corp. v. Certain Underwriters at Lloyd’s, London, 871 N.E.2d 418 (Mass. 2007) (settlement between primary insurer and policyholder not binding on excess insurer)). 12 that is perfectly in line with New York law before and after Con Edison. Warren Br. at 11-12, 32-39. B. The New York Cases - Including Olin III - Do Not Support The Excess Insurers’ Call For Pro-Rata Allocation None of the New York cases upon which the Excess Insurers rely as support for applying a “straightforward” pro-rata allocation, including Diocese, addressed policies that contained any form of non-cumulation or prior insurance provision, let alone the Liberty Non-Cumulation Provision. See EI Br. at 19 n.7 & 8. For this reason alone, the cases are inapplicable and have no bearing on the allocation issue certified to the Court. More importantly, the Excess Insurers’ citation of these cases does not prove that allocation is “settled” and that pro-rata is compelled. EI Br. at 2. Rather, it underscores that both before and in the wake of Con Edison, every court that has considered the issue has recognized that non-cumulation and prior insurance provisions permit the aggregation of bodily injury taking place outside the policy period into a single policy period. That is the very antithesis of pro-rata allocation. See Warren Br. at 29-32, 36-37; see also Point II(C), infra. That is true even of Olin III, the only case the Excess Insurers cite as applying a prior insurance provision in a pro-rata allocation. It cannot be disputed that the outcome in Olin III - collapsing and aggregating more than three decades of post-policy period damage into a single policy period containing a prior insurance provision - both arises directly from the application of the prior 13 insurance provision in that case and bears absolutely no resemblance to a pro-rata allocation. See Warren Br. at 35-38. As such, Olin III establishes that the presence of a prior insurance provision fundamentally alters the allocation of loss in a manner consistent with an all sums allocation. This fact alone belies the Excess Insurers’ assertion that the Non-Cumulation and Prior Insurance Provisions here are “not relevant” to the allocation analysis. EI Br. at 21. That assertion is belied, as well, by the court’s express recognition in Olin III that its two prior decisions on allocation in Olin “simply provide[d] that when insurance contracts do not adequately define how progressive environmental damage is to be apportioned across multiple triggered policies, and the evidence cannot make that distinction, New York requires damage to be allocated pro rata.” 704 F.3d at 102 (emphasis added). Rather, as the Second Circuit found, the presence of a prior insurance provision reflected a different bargain reached by the parties, and that New York law “does not preclude parties from contracting to indemnify the insured for damage” that occurred in other policy years. Id. In large measure, the Excess Insurers ignore the Olin III court’s analysis and focus solely on one sentence in the decision stating that a prior insurance provision did not “mandate” an all sums allocation because it was “silent” on the question of whether a policyholder can aggregate pre-policy period damage, as opposed to post-policy period damage, into a single policy period (which it was not). EI Br. at 14 21, 32 (quoting Olin III, 704 F.3d at 103). This reliance is misplaced because it ignores both the procedural posture of Olin III and the nature of the insurance program at issue. It is undisputed that the policyholder in Olin III obtained precisely the relief that it requested. It sought only to enforce paragraph 2 of the prior insurance provision in the excess insurer’s policies and require the excess insurer to pay for the damage that occurred both during and after the policy period so that it could reach the excess insurance. 704 F.3d at 95, 99. The policyholder in Olin III had no reason to argue for the additional aggregation of pre-policy period losses because the losses attributable to later years were more than sufficient to reach and exhaust the excess insurer’s policies at issue. See id. at 95, 102, 104-05. Further, because the court had twice rejected the policyholder’s argument for all sums allocation, and because the policyholder was facing an argument by the insurers that the Second Circuit’s prior allocation rulings were the “law of the case” (id. at 97-98), the policyholder requested only that which was required to obtain full coverage from the excess insurer. See id. at 95, 102, 104-05. In light of that fact, unlike here, no party in Olin III ever briefed the issue of aggregating pre- policy period, as opposed to post-policy period, losses.11 Nevertheless, the excess 11 In this case, of course, the parties not only engaged in extensive briefing on the subject, but after hearing oral argument, the Chancery Court directed the parties to submit supplemental briefing on how the Non-Cumulation and Prior Insurance Provisions would operate under all sums and pro-rata allocation scenarios with respect to a hypothetical posited by the court involving a claim by a sailor exposed to asbestos on a Navy ship. See Warren Br. at 15-18. Only after that second briefing was completed did the court issue its 88-page opinion, which 15 insurer whose policies were at issue in Olin III argued forcefully that, whatever label the court applied, the aggregation of multiple years of damage into a single policy period constituted an all sums allocation12 - and it was right. In any event, even if Olin III could be read as predicting that this Court would or should apply pro-rata allocation to policies containing prior insurance provisions, that prediction should be rejected for at least two reasons. First, the Olin III court failed to recognize that, once it gave effect to any policy provision holding the insurer liable for injuries outside the policy period, the entire rationale for pro-rata allocation no longer existed. Second, the court mistakenly believed that the prior insurance provision “is silent regarding damages occurring before the policy period” (704 F.3d at 103 (emphasis in original)); in fact, like the Prior Insurance Provisions here, it expressly contemplated that the policy containing Condition C will pay “loss” both within and without the policy period. See Warren Br. at 27-28; see also Viking, 2 A.3d at 122; see also Outboard Marine Corp. v. Liberty Mut. Ins. Co., 670 N.E.2d 740, 746, 750 (Ill. App. 1996). The Excess Insurers’ efforts to distinguish the remaining New York cases addressed, among much else, the positions that the parties had asserted in the supplemental briefing. See Viking, 2 A.3d 76, 124-25. 12 See, e.g., Brief for Defendant-Appellee American Home Assurance Company, No. 11-4055, 2012 WL 902214, at *19-20 (Mar. 13, 2012) (arguing that the policyholder’s position was “perfectly akin to its prior ‘joint and several’ allocation positions” and “the antithesis of pro rata allocation”). 16 that have applied various forms of non-cumulation provisions on the ground that “[n]one of the cases authorize[d] the insured to aggregate out-of-period claims into a single period” (EI Br. at 26-27) also fail. Like Olin III, the cases did exactly that. For example, the precise question presented in Hanover Insurance Co. v. Vermont Mutual Insurance Co., 69 F. Supp. 3d 302 (N.D.N.Y. 2014), was whether three years of losses could be allocated to only one of the three triggered policy periods. If they could, the total would exceed the primary limit, and the excess insurer would have to pay a share of the loss. If they could not, none of the three primary policies would be exhausted, and the excess insurer would have no payment obligation. The court held that the non-cumulation provisions in the primary policies supported allocating the entire judgment amount to just one policy period, triggering the excess insurer’s payment obligation. Id. at 309-10.13 Similarly, in Bahar v. Allstate Insurance Co., No. 01 Civ. 8129, 2004 WL 1782552 (S.D.N.Y. Aug. 9, 2004), aff’d, 159 F. App’x 311 (2d Cir. 2005), the court described the issue before it as “whether the infant Plaintiff’s injuries are covered by three of the policies or only one.” Id. at *1. Based on the non- cumulation provisions in the policies, the court ultimately held that injuries 13 See also Greenidge v. Allstate Ins. Co., 312 F. Supp. 2d 430, 434, 440 (S.D.N.Y. 2004) (insurer’s position that non-cumulation provisions provided for allocation of a multi-year claim to “a single policy” was “reasonable”), aff’d, 446 F.2d 356 (2d Cir. 2006). 17 incurred through 1996 were all covered under a 1994 policy. Id. at *3-4.14 C. The Excess Insurers Ignore The Unanimous Holdings Of Cases Outside This State Rejecting Pro-Rata Allocation For Policies Containing Non-Cumulation And Prior Insurance Provisions Finally, the Excess Insurers cannot avoid the fact that every single case from courts outside New York - including decisions from the highest courts of no fewer than four states - has concluded that non-cumulation and prior insurance provisions cannot be reconciled with pro-rata allocation. Indeed, even the sole non-New York case on which the Excess Insurers themselves rely makes this point. In Boston Gas Co. v. Century Indemnity Co., 529 F.3d 8 (1st Cir. 2008) (EI Br. at 17), the First Circuit certified the allocation question to the Massachusetts Supreme Judicial Court. Although it adopted a pro-rata allocation standard for the policies before it, the court specifically noted that it would have applied an all sums allocation if those policies had contained non-cumulation clauses: To the extent that the analysis of the policy language in Chicago Bridge was not unique to Illinois law, two key differences in the language cause us to reach a different result here. First, unlike the Century policies, the policy in Chicago Bridge contained a “noncumulation clause” that expressly provided for coverage, in certain circumstances, for property damage continuing after the policy period ended. . . . 14 Finally, the Excess Insurers cannot avoid this Court’s rejection of pro-ration in Hiraldo v. Allstate Insurance Co., 5 N.Y.3d 508 (2005), by suggesting that Allstate did not argue in that case that “the non-cumulation clause ‘require[d] that the policy respond to injuries that occurred outside, as well as within, its policy period.’” EI Br. at 27 n.12 (quoting Warren Br. at 33). In fact, Allstate did exactly that. See, e.g., Allstate Br. at 24 (“repeated exposure” language that was “virtually identical to the language in the Allstate policies . . . was clearly intended to limit the liability of an insurer to one policy” in a “continuous exposure” case). 18 * * * * Courts have recognized that such a provision is inconsistent with pro- rata allocation because it expressly provides for coverage outside the policy period. See, e.g., id.; Hercules, Inc. v. AIU Ins. Co., supra; Liberty Mut. Ins. Co. v. Those Certain Underwriters at Lloyds, supra at 1559-1560. Boston Gas Co. v. Century Indem. Co., 910 N.E.2d 290, 310, 309 (Mass. 2009) (emphasis added). Nor can the Excess Insurers dismiss those holdings by the simple expedient of claiming that they “largely rest” on the “all sums” language in the policies (EI Br. at 35) - an assertion belied by even a cursory review of those cases. While there may be a split of authority as to whether the “all sums” or “during the policy period” language controls the allocation choice, there is no such split with respect to the effect of non-cumulation and prior insurance provisions. Where they exist in the policy, courts uniformly hold that non-cumulation and prior insurance provisions preclude the application of pro-rata allocation. See Warren Br. at 29-32. Indeed, the phrase “all sums” does not appear in the opinion in M-B Co. of Wisconsin v. Parker Hannifin Corp., 151 Wis. 2d 784, 1989 WL 111968 (Wis. App. July 12, 1989). Rather, like the court in Liberty Mutual Insurance Co. v. Those Certain Underwriters at Lloyd’s, 650 F. Supp. 1553 (W.D. Pa. 1987), the M-B court based its ruling solely on the prior insurance provisions that appeared in 19 the relevant policies.15 In Dow Corning Corp. v. Continental Casualty Co., Nos. 200143-54, 1999 Mich. App. LEXIS 2920, at *23-24 (Mich. App. Oct. 12, 1999), moreover, the court acknowledged that it had followed a pro-rata approach in an earlier case, but concluded that the prior insurance provisions in the policies before it mandated adoption of joint and several allocation. Similarly, in Plastics Engineering, the Wisconsin Supreme Court cited the Liberty non-cumulation language in the policies as the only direct, affirmative support for its all sums ruling. 759 N.W.2d at 626; see also Chicago Bridge & Iron Co. v. Certain Underwriters at Lloyd’s, London, 797 N.E.2d 434, 441 (Mass. App. 2003) (quoting prior insurance provision in its entirety as part of its allocation determination). Despite the Excess Insurers’ strained efforts to minimize its significance (EI Br. at 35-36), the Delaware Supreme Court’s decision in Hercules also leaves no doubt as to that court’s conclusion that the prior insurance provision independently compels adoption of the all sums allocation method. See 784 A.2d at 493-94. The Hercules Court not only stated that the prior insurance provision “undercuts the 15 Contrary to the Excess Insurers’ assertion, the decisions in Liberty Mutual and M-B both directly “address[] allocation methodology.” EI Br. at 36 n.16. See Liberty Mutual, 650 F. Supp. at 1558-60 (policies’ prior insurance provisions constituted a clear “indication that these policies were intended to provide coverage for all damages regardless of when they occurred, provided that they are derived from the ‘occurrence’”) (emphasis in original); M-B, 1989 WL111968 at *2 (prior insurance provisions “extend[] [the insurer’s] liability beyond the manifest limits of the policy” to cover all costs arising from post-policy period damage). 20 rationale for pro rata allocation because it provides continuing insurance for post- [policy period] damage,” it specifically noted that a lower court decision that had adopted a pro-rata approach “did not take into account any type of non-cumulation clause similar to the one present in this case.” Id. at 494. See also FMC Corp. v. Plaisted & Cos., 72 Cal. Rptr. 2d 467, 499 (Cal. Ct. App. 1998) (quoting prior insurance provision as support for the court’s conclusion that “[o]nce coverage has attached - i.e., once it has been triggered - it will extend to all of the insured’s liability for damages attributable to the same occurrence in and after the policy period”). Perhaps the most glaring omission from the Excess Insurers’ discussion of this issue is their failure to distinguish or even cite the decisions in Spaulding Composites Co. v. Aetna Casualty & Surety Co. and Outboard Marine v. Liberty Mutual Insurance Co. Those cases adopted pro-rata allocation as a matter of public policy - not policy language. Accordingly, the “all sums” language played no role in their allocation analysis. Nonetheless, both courts concluded that the non-cumulation and prior insurance provisions were so wholly inconsistent and irreconcilable with the application of pro-rata allocation that they had no choice but to write them out of the policies in order to apply pro-rata allocation. See Spaulding, 819 A.2d at 422; Outboard Marine, 670 N.E.2d at 750. Seen in the context of this unbroken line of authority, and Liberty’s own 21 prior recognition of how its Non-Cumulation Provisions operate, the Excess Insurers’ suggestion that the Delaware Chancery Court’s allocation decision is an “outlier” (EI Br. at 19-20) is wrong. Just the opposite is true, as that decision is but the latest in a consistent line of decisions recognizing that pro-rata allocation is irreconcilably incompatible with non-cumulation and prior insurance provisions.16 The Delaware Chancery Court in Viking followed this Court’s clear mandate in Con Edison to construe an insurance policy in the only way that “affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.” Con Edison, 98 N.Y.2d at 221-22. III. THE EXCESS INSURERS DO NOT ADDRESS THE FACT THAT THE CLEAR AND UNAMBIGUOUS LANGUAGE OF THE NON- CUMULATION AND PRIOR INSURANCE PROVISIONS IS IRRECONCILABLE WITH PRO-RATA ALLOCATION Faced with the indisputable fact that courts have uniformly altered the allocation method to account for non-cumulation clauses, the Excess Insurers’ assertion that such provisions have no impact on the allocation issue, and are 16 The only support that the Excess Insurers cite for their contention that the Delaware Chancery Court’s allocation decision has been “roundly rejected as an extreme outlier” is the unpublished trial court decision in Mt. McKinley. EI Br. at 20. But in fact, while it (unfairly) criticized the tone of the Viking opinion, Mt. McKinley ultimately did not take issue with the Chancery Court’s overall holding; to the contrary, it distinguished Viking on the ground that, in contrast to the provisions in Viking, the policies before it did not indicate that they would respond to losses both within and without the policy period. 2012 N.Y. Slip Op. 33555(U), 2012 N.Y. Misc. LEXIS 6531, at *19-20 (“the [clauses] the Delaware court reviewed in Viking Pump expressly considered an injury occurring outside of the time limitations of each policy”) (emphasis added). 22 therefore consistent with pro-rata allocation, borders on the absurd. EI Br. at 21.17 The judicial consensus that non-cumulation clauses and pro-rata allocation are inconsistent rests on the clear and unambiguous language of the provisions, which require that the policy pay for injuries that occur partially outside the policy period. Even the Excess Insurers concede that the Prior Insurance Provision expressly provides that, for “no additional premium,” the Excess Insurer will pay for injuries “continuing after the termination of the policy.” EI Br. at 10 (emphasis added). That is directly contrary to the bedrock assumption of pro-rata allocation that the policy coverage extends only to injury “during the policy period.” The Excess Insurers offer no explanation for their decision to simply ignore that basic conflict. Instead, they mistakenly urge that no post-period damage or injury exists in this case. EI Br. at 31-32. As an initial matter, that is factually incorrect. Although the Excess Insurers have argued to the Delaware Supreme Court that the Final Judgment provides that only those policies on the risk during the time of external exposure to asbestos are triggered by the loss, Warren disputes that the Judgment does, or as a matter of New York law could, so limit the trigger period. See Warren Pumps LLC’s 17 The Excess Insurers erroneously contend that the Provisions were designed to prevent a “double recovery,” thus suggesting that Plaintiffs would obtain an unwarranted profit from the application of an all sums allocation. EI Br. at 24-25. This is wrong. With or without the Provisions, an all sums allocation does not result in the policyholder receiving a double recovery for the loss - for $1 of loss, it still receives $1 in insurance. 23 Opening Brief Filed with the Delaware Supreme Court (Nov. 6, 2014) (Trans. ID 56295627) (“Warren Del. Opening Br.”) at 1-9, 32-43. But that is a moot point for these purposes because, even under the Excess Insurers’ view of the Judgment, the Asbestos Claims involving multi-year asbestos exposures would involve injuries that continued after the periods of the Excess Policies, and therefore, would trigger the Excess Policies’ Prior Insurance Provisions. See “Warren Pumps Indemnity Payments” Spreadsheet (Trans. ID 56295627) (“Payments Spreadsheet”) at WA204-258 (setting forth dates of multi-year asbestos exposures and diagnoses of asbestos-related diseases for asbestos plaintiffs). Moreover, the Excess Insurers have not offered any plausible interpretation as to how the Liberty Non-Cumulation Provision, which expressly applies when an “occurrence” gives rise to “personal injury . . . which occurs partly before and partly within” the policy period (A518), can be reconciled with a pro-rata allocation. New York law requires that all terms of an insurance policy must be considered and harmonized when interpreting policy intent. Con Edison, 98 N.Y. 2d at 221-22; Viking, 2 A.3d at 126. Here, the Policies define “personal injury” to include “bodily injury which occurs during the policy period sustained by a natural person.” A519. This defined term is incorporated into the Non-Cumulation Provision, which means that the Non-Cumulation Provisions apply where: 24 [bodily injury which occurs during the policy period sustained by a natural person] . . . occurs partly before and partly within the policy period . . . . A518 (emphasis added). The interpretation of the policy language adopted by the Chancery Court harmonizes these provisions; that proffered by the Excess Insurers does not. If, as the Excess Insurers contend, the definition of “personal injury” covers only bodily injury that occurs solely during the policy period, then such injury, by definition, can never occur “partly before and partly within” the policy period, and the Non- Cumulation Provision would be rendered nonsensical. If, on the other hand, the definition of “personal injury” is read to require only that some portion of the bodily injury occur during the policy period to trigger the insurer’s coverage obligation, then, as the Viking court and courts throughout the country have held, the Non-Cumulation Provision can be given effect.18 See Warren Br. at 16-17; Viking, 2 A.3d at 121-23.19 18 Other language in the Liberty Umbrella Policies reinforces that conclusion, including the definitions of (1) “bodily injury” to include “sickness or disease and death resulting at any time therefrom” and (2) “property damage” to include “physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom. . . .” A518, A519 (emphasis added). 19 Even if the Excess Insurers’ interpretation were reasonable, which it is not, that would only mean that there are two reasonable ways in which to interpret the policy language, showing the existence of an ambiguity that should be resolved in favor of an all sums allocation. State v. Home Indem. Co., 66 N.Y.2d 669, 671 (1985); see also Viking, 2 A.3d at 119 (“even if the language of the policies were ambiguous, the only substantial extrinsic evidence offered by the parties weighs in favor of the use of the all sums method”). 25 That conflict is not addressed, much less resolved, by the Excess Insurers’ repeated mantra that the Provisions merely “adjust[] the policy’s limit.” EI Br. at 22. As an initial matter, that is not what the Provisions say. If the Excess Insurers wanted the Non-Cumulation or Prior Insurance Provisions to solely adjust total limits, they could have drafted language that expressed such an intention - although they would likely have encountered great difficulties in selling such a restrictive insurance product. Instead of taking that risk, the Excess Insurers ask this Court to rewrite the Provisions under the guise of an untenable interpretation by excising those portions of the Provisions that no longer suit their purposes. Nor do the Excess Insurers’ arguments overcome the fact that the application of pro-rata allocation would render the Non-Cumulation and Prior Insurance Provisions superfluous. See EI Br. at 24-29. Courts addressing the issue have consistently recognized this fact. See, e.g., Chicago Bridge, 797 N.E.2d at 441 (prior insurance provision “would be superfluous had the drafter intended that damages would be allocated among insurers based on their respective time on the risk”); Spaulding, 819 A.2d at 421-22 (non-cumulation provisions are “facially inapplicable” under a pro rata allocation); Viking, 2 A.3d at 123. Indeed, as the court held in Outboard Marine: [I]t would be illogical to enforce one insurer’s [non-cumulation or other insurance] clause in a situation involving a ‘continuous occurrence’ which theoretically could be looked at as a separate occurrence for the purpose of each policy which has been assessed a 26 pro rata damage allocation . . . . [E]nforcement of the clauses would be inequitable because no insurer is concurrently liable with any other and application of the clauses would make the other insurers liable for damages occurring outside of their policy periods. 670 N.E.2d at 750. Further, contrary to the Excess Insurers’ suggestion, pro-rata allocation does not render the Provisions superfluous simply because it would result in two separate policy provisions affecting the same claim. Rather, the application of pro- rata allocation renders those Provisions superfluous because the prerequisites to the Provisions cannot exist in the context of a pro-rata allocation. Pro-rata allocation assumes that each policy only pays for “personal injury” or “loss” that occurs solely “during the policy period.” It thus precludes the possibility that the policy could ever apply to injury or loss also “covered by” another policy period or which is “continuing” after the policy period. Accordingly, in a pro-rata scenario, the event necessary to trigger the Non-Cumulation and Prior Insurance Provisions - the existence of “personal injury” or “loss” that is covered both by the policy with the Provision and by policies covering other policy periods - cannot ever happen. See Warren Br. at 42. In short, pro-rata allocation and application of the Provisions cannot simultaneously take place in the same “coverage world.” Indeed, Excess Insurer Travelers made this very point to the Delaware Chancery Court in response to the hypothetical claim posited by the court: 27 The Prior Insurance Provision would not be triggered in a pro-rata jurisdiction under the facts of Your Honor’s hypothetical[20] because once you allocate the entire loss across the relevant period under a pro rata allocation each insurer is obligated only to pay for the loss allocated to each of their respective policy periods. Accordingly, under a pro rata allocation, Your Honor’s hypothetical does not trigger the Prior Insurance Provision at issue in this case. A282-83 (emphasis added). In light of this fact, the Excess Insurers’ repeated assertion that Plaintiffs are arguing that the Non-Cumulation and Prior Insurance Provisions “expand” coverage rather than limit it (EI Br. at 23) is similarly misplaced. No one disputes that those Provisions operate to reduce coverage where they apply - but they cannot apply in a “pro-rata world.”21 The Excess Insurers want to have their cake and eat it too. They want to divorce the Provisions’ express assumption that each triggered policy will be fully responsible to pay for injuries both during and outside the policy period from the limitation on the policyholder’s recovery to a single policy period limit. As set forth below, however, applying one aspect of the Provisions without the other not only fails to give effect to the full policy language, it artificially reduces the policyholder’s recovery by providing an inequitable 20 As set forth in Warren’s opening brief, the Chancery Court asked the parties to explain how the claim of a sailor who was exposed to an asbestos-containing Warren or Viking product from 1966 to 1982 would be allocated if the sailor recovered a 15 million dollar judgment. See Warren Br. at 17; A168-171; A173-179; A274-278. 21 That is further exemplified by the fact that all of the cases upon which the Excess Insurers rely for the proposition that non-cumulation and prior insurance provisions act to limit coverage involved the application of the provisions in the context of an all sums allocation. See EI Br. at 23-24 and the cases cited therein. 28 double credit to the Excess Insurers. IV. THE EXCESS INSURERS HAVE NOW CONFIRMED THAT THEIR LATEST ALLOCATION THEORY WOULD PROVIDE THEM WITH AN UNWARRANTED WINDFALL The hypothetical allocation posited in the Excess Insurers’ brief clearly demonstrates the windfall their new allocation theory affords them. In fact, the Excess Insurers’ hypothetical confirms one thing: the application of a pro-rata allocation to policies containing non-cumulation and prior insurance provisions results in precisely the inequitable “double credit” that every court addressing the issue, including the Viking court, has predicted. Viking, 2 A.3d at 124; Warren Br. at 40-42. The following three charts depict the results of the various allocation scenarios to the hypothetical posited by the Excess Insurers, which posits a $5 million claim, triggering ten policy years, each covered by a $2 million primary policy with a non-cumulation provision, and excess coverage above. Chart 1 shows the coverage resulting from an all sums allocation and enforcement of the Non-Cumulation Provision, limiting the policyholder to a single policy year but allowing it to recover its full loss, $2 million, from the primary insurer and $3 million from the excess insurer. 29 Chart 2 shows the coverage resulting from the application of a pro-rata allocation to the hypothetical claim, with the policyholder again recovering in full. 30 Chart 3 depicts the Excess Insurers’ new allocation theory as described in their brief, where non-cumulation provisions are enforced in a pro-rata allocation context. Under this theory, the policyholder recovers only $2 million of its otherwise fully-covered $5 million loss. First, the amount of the judgment is prorated in equal shares to the ten triggered policies, resulting in a $500,000 allocation to each policy. EI Br. at 27- 28. From there, the non-cumulation provisions reduce the $2 million “each occurrence” limit in later-issued policies by amounts allocated to and paid under earlier policies. Id. More particularly, the insurer will pay $500,000 each under four policies but will owe nothing under the six remaining policies, leaving the 31 policyholder to recover the unpaid $3 million balance, if possible, from overlying excess policies. Id. Moreover, the simultaneous application of a pro-rata allocation and the non- cumulation and prior insurance provisions in the hypothetical would ensure that no insurer covering years five through ten will pay even that portion of the loss relating to injury “during the policy period” - i.e., the amounts the Excess Insurers consistently have admitted insurers must pay. Under their own hypothetical, it is undisputed that injury occurred during the policy periods of years one through ten. EI Br. at 27-28. Yet, no primary or excess insurer would pay a dime under six of the ten policies, and no excess insurer would pay any amount under any of the policies. In short, the hypothetical confirms that the Excess Insurers’ proposed interpretation of the policy language would result in precisely the “double credit” and windfall that has led courts to uniformly reject the simultaneous application of non-cumulation and prior insurance provisions and pro-rata allocation. See, e.g., Outboard Marine, 670 N.E.2d at 750 (“To apply the ‘prior insurance’ and ‘non cumulation of liability’ clauses would give the insurers a double credit and would deprive the insured of the full value of its premium.”). As the New Jersey Supreme Court observed in Spaulding, the operation of non-cumulation provisions in this manner undermines the claimed “equitable” rationale for pro-rata allocation 32 by “insulat[ing]” “insurers who were actually ‘on the risk’ . . . from their fair share of liability” for injuries that occurred during their policy periods. 819 A.2d at 422. In contrast, the Excess Insurers cite to no case holding that the gaps in coverage and the “free ride” given to insurers who never have to pay even their pro-rated share of the loss are either an equitable or acceptable outcome - because there is no such case. The Excess Insurers attempt to obscure the inequity of these results by claiming that the excess insurers in their hypothetical might “respond to the excess loss” if “the excess policies’ specific policy language” provided for such a result. EI Br. at 28-29. What they neglect to mention, however, is that they have persistently and actively maintained that the Excess Policies in this case contain no such language and that their policies may not be called upon to “drop down” to cover gaps in the underlying coverage. See Excess Insurers’ Opening Brief Submitted to Delaware Supreme Court (Nov. 6, 2014) (A1953-1955) (“EI Del. Opening Br.”) (citing Forest Labs., Inc. v. Arch Ins. Co., 116 A.D.3d 628 (1st Dep’t 2014)) for rule that excess coverage requires underlying policy’s limit be exhausted prior to excess insurer payment). In fact, excess insurers in this state and across the country invariably argue that their policies cannot be triggered until the stated limits of the directly underlying policy have been fully paid by the applicable underlying insurer. Those arguments frequently have been successful. 33 See, e.g., Ambassador Assocs. v. Corcoran, 79 N.Y.2d 871 (1992), aff’g, 168 A.D.2d 281 (1st Dep’t 1990). Indeed, for years in this case, the Excess Insurers have argued that they have no payment obligation for the Asbestos Claims precisely on the ground that the Liberty policies were not “exhausted,” or not “properly exhausted.” They continued to make that claim through the jury trial in 2012, even after Liberty paid more than $180 million toward those Claims and provided the Excess Insurers with extensive documentation of exhaustion. See EI Del. Opening Br. (A1944-57). Since trial, despite the fact that the policyholders here purchased more than $400 million in applicable excess coverage, none of the Excess Insurers has paid anything toward Warren’s more than $40 million in unreimbursed defense and settlement costs. Warren Br. at 9. This is true even though the Final Judgment Order in this case requires certain Excess Insurers to pay those costs (A436 ¶ 19 - A437-38 ¶ 22), and the Excess Insurers’ request for a stay of that Judgment pending the appeal was denied. See Warren Del. Opening Br. at 31-32; August 20, 2014 Final Order of Delaware Superior Court (Trans. ID 55917447) at 2 (denying Excess Insurers’ motion to stay enforcement of Final Judgment). Thus, it is already clear that Plaintiffs will not be the beneficiaries of a benevolent Excess 34 Insurer’s decision to “drop down” here.22 In this case, Plaintiffs would fare even worse under the Excess Insurers’ allocation theory than their hypothetical policyholder, who would recover only forty percent of its $5 million claim, despite having paid premiums for more than $50 million in coverage. By positing a claim that triggers only ten policy years - all covered by insurance - the Excess Insurers’ hypothetical depicts a far larger recovery than the actual facts of the Asbestos Claims. The underlying plaintiffs in those cases (typically, sailors exposed to asbestos on naval vessels) commonly claim for injuries that occurred over periods spanning forty years or more. See Warren Br. at 8; Payments Spreadsheet at WA204-258. In light of this fact, the Excess Insurers’ interpretation would result in an insurance recovery of significantly less than forty percent. In fact, in their analysis of the hypothetical posited by the Delaware Chancery Court, which assumes a more realistic scenario where the underlying plaintiff was exposed to the product for at least fifteen years, Warren and Viking could recover as little as 15% of the hypothetical judgment if the Non-Cumulation and Prior Insurance Provisions were applied in the context of a pro-rata allocation. A1470-71; Warren Br. at 17-18. 22 Two of the Excess Insurers, National Union and Lexington, submitted a brief in Spaulding stating that their policies would not “drop down” to fill gaps in coverage caused by application of the Liberty non-cumulation provisions at issue in that case. Brief of Defendants-Respondents National Union Fire Insurance Company of Pittsburgh, Pa. and Lexington Insurance Company in Response to Plaintiffs-Appellants’ Motion for Leave to Appeal, No. 52,473, 2002 WL 33984899, at *6-8 (Feb. 26, 2002). 35 For this reason, the Excess Insurers spent years representing to the Delaware Chancery Court that the Non-Cumulation and Prior Insurance Provisions could not and should not be applied in the context of a pro-rata allocation. Indeed, when Warren explained to the Delaware court the inequities and gaps in coverage that would result from the application of the Provisions in a pro-rata allocation, the Excess Insurers castigated Warren for suggesting that they would argue that the Provisions could be applied in such an allocation. See Warren Br. at 17-18. The Excess Insurers do not dispute that record, nor that the “solution” they posited for that conflict was that the Chancery Court should simply refuse to enforce the Provisions, which is contrary to the underlying principles of Con Edison requiring that all parts of the policy be given meaning and effect. See id.; A1480; A1496; see also Viking, 2 A.3d at 124-25. Finally, they do not deny that, as recently as the 2012 trial in this action, their own expert testified under oath that he agreed with the conclusion of the Chancery Court that non-cumulation and prior insurance provisions are incompatible with pro-rata allocation. See Warren Br. at 22. Those prior assertions fatally undermine the Excess Insurers’ current claim that their newly-minted allocation paradigm is a matter of straightforward application of supposedly “unambiguous” policy language. To deflect from their direct reversal of the position they have taken for years in this litigation, the Excess Insurers create a straw man by suggesting that, unlike 36 the Non-Cumulation and Prior Insurance Provisions, pro-rata methods of allocation do not “reduce the policies’ per occurrence limits” or that the two types of limitations cannot be applied to a claim. EI Br. at 29-30. That is a false issue. Warren has never contended that the pro-rata method reduces the actual limits of the policies, nor has it argued that two limiting provisions can never be applied to a claim. Rather, as the case law demonstrates, Warren simply contends that these Provisions were meant to apply only in an all sums context, because only in an all sums context do the conditions necessary to their application exist. When, instead, they are superimposed on a pro-rata allocation scheme that proceeds from a diametrically opposed set of assumptions, it results in an unfair windfall to both primary and excess insurers which would have coverage obligations under either the Provisions or the pro-rata allocation seeing those obligations vanish under the application of both. V. THE EQUITIES FAVOR APPLYING THE POLICY LANGUAGE AS WRITTEN, AND REJECTING PRO-RATA ALLOCATION Despite the fact that it would afford them with an inequitable double credit, the Excess Insurers nonetheless posit that the simultaneous application of pro-rata allocation with the Non-Cumulation and Prior Insurance Provisions is necessary to reach a “fair and efficient” allocation of the Asbestos Claims. EI Br. at 36-38. As an initial matter, courts in this State have long recognized that true equity lies in holding the contracting parties to the bargains they made. See J.P. Morgan Sec. 37 Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324, 334 (2013) (the strong public policy favoring freedom of contract supports enforcing insurance policies as written). The Excess Insurers struck a different bargain than the insurers in Con Edison - one that caps the policyholder’s recovery at the highest available single year limit in exchange for each policy paying for injuries both during and beyond its policy period. See Warren Br. at 26-29. There is nothing “equitable” in allowing the Excess Insurers to graft onto that choice wholly inconsistent reductions in coverage that would result from the spreading of losses under a pro- rata allocation. Indeed, the equity of enforcing that choice is highlighted by the fact that the all sums allocation approach simply takes into account the joint and several liability that Warren and Viking face in the underlying cases. In other words, the policyholder may collect against any insurer whose policy has been triggered up to the policy’s limit in the same way that the underlying plaintiffs, who are exposed to two defendants’ asbestos-containing products, may collect the entire judgment from one of them. See Viking, 2 A.3d at 118. Indeed, as the Delaware Chancery Court noted: “Just like the defendant itself, so long as the exposure during the insurer's policy period was found to have caused the plaintiff's indivisible harm, it is not clear why the insurer gets to escape paying the policy 38 limits so long as the plaintiff's damage is equal to or greater than those limits.”23 Id. Further, neither of the two purported “equitable” issues that the Excess Insurers raise warrants abandoning that policy language. The Excess Insurers’ suggestion that pro-rata allocation is necessary to prevent the Plaintiffs from avoiding liability for periods covered by insolvent insurers and “saddl[ing]” the Excess Insurers with those gaps (EI Br. at 37) is a non sequitur. Under the allocation method adopted by the Delaware Chancery Court, no Excess Insurer can be asked or forced to pay more than its agreed-to policy limit, no matter how much loss is allocated to its policy year. The Excess Insurers’ additional suggestion that their new allocation method will avoid the need for further proceedings to deal with intra-insurer contribution claims also fails. See EI Br. at 37-38. Even under the Excess Insurers’ allocation, the second paragraph of the Prior Insurance Provision, which the Excess Insurers concede provides coverage at no extra cost for injuries continuing after the policy 23 In the Delaware Supreme Court, the Excess Insurers contended that, under an amendment to CPLR § 1601, Plaintiffs no longer face joint and several liability in New York, and that the Chancery Court’s conclusions regarding the equities was in error. A1940. That argument fails on at least three grounds. First, the policies cover liabilities nationwide, including many states which still impose unqualified joint and several liability on tort defendants. See, e.g., Shantigar Found. v. Bear Mountain Builders, 804 N.E. 2d 324, 332 (Mass. 2004). Second, that amendment was adopted in 1986, before Excess Policies were sold, and therefore has no bearing on what the policyholders considered in protecting themselves against joint and several liability when it purchased them. Finally, even § 1601 provides only limited exceptions to the ban on joint and several liability, and does not apply to a plaintiff’s medical expenses, lost future earnings, or to non-economic damages if the defendant is found to be more than 50% at fault or to have acted with a reckless disregard for the safety of others. 39 period, would still operate to assign to a given policy losses beyond its policy period. EI Br. at 32-34. That insurer would still have cause to seek contribution from other insurers whose policies would or should have paid those amounts. In addition, this Court previously has held that there is nothing wrong or inequitable in applying an allocation method that provides for a later contribution claim by an insurer. See Cont’l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640, 655-56 (1993) (there is “no error or unfairness in declining to order” a pro-rata sharing of defense costs “with the understanding that the insurer may later obtain contribution from other applicable policies”). Finally, the need for contribution does not necessarily mean that there will be a need for a contribution action. To the extent that the Excess Insurers believe that their new allocation method imposes the proper share to be contributed by each insurer, they should be able to agree on the amounts owed among them without litigation. But to the extent that they cannot agree, and must litigate the issue, there is no equitable reason to withhold from the policyholder payments to which it is contractually entitled while that intra-insurer dispute is addressed. VI. THE DEFENSE COST ALLOCATION ISSUE IS PROPERLY BEFORE THIS COURT Finally, the Excess Insurers argue that this Court should refuse to consider Warren’s argument that all sums allocation applies to the payment of defense costs - but not because Warren’s position is wrong. Rather, they assert that the 40 allocation of defense costs supposedly “was not considered by either the Chancery Court or the Delaware Supreme Court,” and is not included in the question certified to this Court. EI Br. at 40. Neither of these assertions has any merit. First, the allocation of defense costs was squarely at issue below. In the Delaware Chancery Court, Plaintiffs consistently argued that the Liberty Umbrella Policies, to which the Excess Policies follow form, required an all sums allocation of indemnity and defense payments for the Asbestos Claims in the same manner that Liberty had provided for over twenty years. A82; A93-95; A114 n.45; A1416- 1417 n.20. In response, certain Excess Insurers specifically argued that the Non- Cumulation and Prior Insurance Provisions had no effect on their defense cost obligations, and that their Excess Policies “explicitly provide that defense costs for covered amounts are reimbursed on a pro-rata basis.” A1450-51. The Chancery Court agreed with Plaintiffs, and, based on that decision, certain Excess Insurers subsequently paid Warren’s indemnity and defense costs for the Asbestos Claims on an all sums basis. Viking, 2 A.3d at 121; see, e.g., A1521-24. Before, during and after the ensuing trial, the Delaware court repeatedly refused to entertain Excess Insurers’ arguments regarding the payment of indemnity and defense costs that it deemed to be in conflict with the prior all sums ruling, holding that the ruling constituted the law of the case. See Viking Pump, Inc. v. Century Indem. Co., No. 10C-06-141, 2013 WL 7098824, at *6, 12, 16-17 41 (Del. Super. Oct. 31, 2013). The Final Judgment Order, which was drafted and agreed to by all parties, explicitly requires that all sums allocation be applied to the payment of both indemnity and defense costs. A431 ¶ 8. Moreover, the defense cost issue is part and parcel of the certified question: “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?” A1343. The question itself - which the Excess Insurers assisted in drafting - contains no language limiting review solely to allocation for indemnity payments under New York law. Indeed, the Excess Insurers contend that “the ‘Phase II’ allocation issue [is] the subject of this appeal” (EI Br. at 40 [parenthesis omitted]), and, by their own admission, they were ordered to pay defense costs on an all sums basis “[f]or the reasons set forth in the Phase 2 Opinion.” A431 ¶ 8. The proper method of allocation of defense costs under New York law is thus properly before this Court on certification. See, e.g., Price v. Price, 69 N.Y.2d 8, 13 n.1 (1986) (Court’s scope of review is “the certified question as it reads or is reasonably interpretable”) (emphasis added). However, even if the certified question were ambiguous or read not to encompass allocation of defense costs, this Court still may properly address whether an Excess Insurer may be required to pay all defense costs regardless of 42 the existence of Non-Cumulation and Prior Insurance Provisions.24 See, e.g., Hamilton v. Beretta U.S.A. Corp., 96 N.Y.2d 222, 240 (2001) (question rendered moot by first portion of ruling nonetheless answered “because of its particularly significant role in this case”); Engel v. CBS, Inc., 182 F.3d 124, 125-26 (2d Cir. 1999) (Court of Appeals’ decision going beyond certified question as phrased was proper where it was sufficiently familiar with the facts to rule as a matter of law). The parties have been litigating allocation in this matter for more than seven years, in myriad different ways, across four different courts. The “great value” in New York’s certification procedure is that it provides “timely, authoritative answers to open questions of New York law, facilitating the orderly development and fair application of the law and preventing the need for speculation.” Tunick v. Safir, 94 N.Y.2d 709, 711-12 (2000); see also State Farm Mut. Auto. Ins. Co. v. Mallela, 372 F.3d 500, 505 (2d Cir. 2004) (certification appropriate where “the question is likely to recur” or “may significantly impact a highly regulated industry”). To the extent that the Excess Insurers’ desire is, as they claim, to seek a stabilized New York insurance market on the issue of allocation (EI Br. at 3-4), rather than to avoid a ruling on the defense cost issue, that interest is directly 24 As noted in Warren’s opening brief, Warren also specifically raised the argument before the Chancery Court that New York law allowed for all sums allocation of defense costs irrespective of the presence of Non-Cumulation and/or Prior Insurance Provisions. A114 n.45. 43 fostered by determining the defense cost allocation issue now. 25 See Warren Br. at 44-48. Lastly, nothing in the pending appeal to the Delaware Supreme Court would render a ruling by this Court on defense cost allocation under New York law “premature.” EI. Br. at 41 n.17. First, both the Superior Court and the jury found that all of the Excess Policies except one had a defense obligation. A421-23; Viking, 2013 WL 7098824 at *22-29; A433 ¶ 10 - A436 ¶ 17. In fact, the Excess Insurers concede that eight Excess Policies have a defense cost obligation, and thus, at a minimum, those Policies are affected regardless of the appeal. Viking, 2013 WL 7098824 at *25-26. Second, under the Excess Insurers’ faulty logic, the Delaware Supreme Court never should have certified the question of allocation in the first place, since the Excess Insurers also are appealing the Chancery Court’s decision that Plaintiffs are “insureds” under the Excess Policies. A1979-80; A1993-2011; A2214-26. 25 In addition, the Excess Insurers’ request for leave to address the merits of the argument in additional briefing should be denied. Given that allocation of defense costs has been an issue in this case for the last seven years, and that the Excess Insurers had forty-eight days to respond to the arguments in Warren’s brief, with no page limitation, the Excess Insurers could and should have addressed the merits of this argument even while asserting that the Court should not consider the issue. CONCLUSION For the foregoing reasons, the Court should confirm the conclusion of the Delaware Chancery Court that the presence of Non-Cumulation and Prior Insurance Provisions in the Excess Policies mandates application of an all sums allocation of indemnity costs and reinforces the propriety of an all sums allocation to defense costs in this case. Date Completed: October 22, 2015 44 By:U~~ Robin L. Cohen Elizabeth A. Sherwin Keith McKenna KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 163 3 Broadway New York, NY 10019 Telephone: (212) 506-1700 Fax: (212) 506-1800 Attorneys for Appellant Warren PumpsLLC

In the Matter of Viking Pump, Inc. and Warren Pumps, LLC, Insurance Appeals. <br />--------------------------------<br /> Viking Pump, Inc. and Warren Pumps, LLC, Appellants, TIG Insurance Company, et al., Respondents.