(Article from Insurance Law Alert, May 2015)
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In a decade-long and highly contentious battle over millions of dollars in excess insurance coverage for asbestos injuries, the Delaware Supreme Court has certified to the New York Court of Appeals two important questions of law relating to allocation and exhaustion. Century Indem. Co. v. Viking Pump, Inc., Nos. 518/523/525/528 (Del. May 28, 2015).
The litigation began in 2005, when Viking Pump sued approximately twenty excess insurers seeking coverage for tens of thousands of asbestos-related injury claims. In 2009, a Delaware Court of Chancery ruled on several issues of law, including allocation. Departing from well-established New York insurance law, the court held that coverage for injuries spanning multiple years should be allocated on an “all sums” basis, under which the policyholder can designate a single policy year to bear the responsibility for a covered loss that spans multiple policy periods. Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76 (Del. Ch. Ct. 2009) (discussed in our December 2009 Alert). The court reasoned that New York had not adopted a definitive rule of law in favor of pro rata allocation and that applicable policy language, rules of contract interpretation and extrinsic evidence all favored application of “all sums” allocation. In particular, the court held that excess policy provisions relating to “non-cumulation” and “prior insurance” could not be reconciled with pro-rata allocation. Following the ruling, the case went to trial in Delaware Superior Court, and a jury ruled “substantially” in Viking Pump’s favor. Viking Pump, Inc. v. Century Indem. Co., 2013 WL 7098824 (Del. Super. Ct. Oct. 31, 2103). Ruling on post-trial motions, the court addressed the issue of exhaustion. The court ruled that under New York law, horizontal exhaustion applies, such that all policies of a layer of coverage must be exhausted before policies of a higher layer of coverage are triggered. In a subsequent post-trial decision, the court clarified the exhaustion ruling – one of first impression under New York law. Relying on a California decision, the Delaware court predicted that New York’s highest court would rule that in continuous injury cases, horizontal exhaustion applies only to the primary and umbrella layers, but does not govern the timing of payment among excess tiers of coverage. Viking Pump, Inc. v. Century Indem. Co., 2014 WL 1305003 (Del. Super. Ct. Feb. 28, 2014) (discussed in our April 2014 Alert).
This month, after hearing appellate arguments relating to the allocation and exhaustion issues, the Delaware Supreme Court certified the following questions to the New York Court of Appeals:
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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?
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Given the Court’s answer to Question #1, under New York law, when the underlying primary and umbrella insurance in the same policy period has been exhausted, what rule determines when a policyholder may access its excess insurance: vertical or horizontal?
Because a ruling by New York’s highest court on these issues may affect other continuous injury and property damage coverage disputes involving multiple insurers, we will keep you posted on developments in this matter.