The Delaware Supreme Court certified an allocation question to the New York Court of Appeals that could have a major impact on policyholders’ recoveries for multi-year claims. A multi-year claim is one where the damages extend over a number of policy years, such as environmental claims or asbestos claims.
The certified question is:
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?
Policyholders whose policies are governed by New York law should closely follow this case because it could drastically impact the amount they can recover.
All Sums Versus Pro Rata Allocation
Any time there is an insurance recovery for injuries that span multiple policy periods, allocation is an issue because that determines who will pay and how much. “All sums” allocation is the method of allocation preferred by policyholders. An all sums allocation allows a policyholder to seek coverage for the full amount of a loss implicating numerous policy periods from any policy year of its choosing in which injury or damage has taken place up to policy limits. An insurer who believes it has overpaid because its policy was selected, can then seek equitable contribution from other insurers. In contrast, insurers often argue for pro rata allocation. A “pro rata” allocation requires loss to be spread across all policy years in which some injury or damage took place. Pro rata allocation can be unfavorable to policyholders because the pro rata period could include years that may have high deductibles or policies that were sold by insurance companies that subsequently went insolvent. If the amounts allocated fall within those years with deductibles or insolvent insurers, the policyholder is often responsible for paying those amounts.
The certified question before the New York Court of Appeals comes from a case in Delaware in which Viking Pump, Inc. commenced an insurance coverage action against a number of insurance companies in Delaware State Court to recover costs incurred in connection with asbestos claims against it. See Viking Pump, Inc. v. Century Indemnity Co., C.A. No. 1465, Court of Chancery of Delaware, New Castle. In the trial court, Viking Pump prevailed on the allocation issue, among others, where Vice Chancellor Leo Strine, now Chief Justice of the Delaware Supreme Court, entered summary judgment for Viking Pump and its co-plaintiff, finding that under the terms of Viking Pump’s insurance policies and New York law, Viking Pump was entitled to apply an all sums allocation methodology, rather than the pro rata allocation methodology that the insurers were advocating. Justice Strine based his allocation ruling, in large part, on the presence of so-called “non-cumulation” and “prior insurance” provisions in the policies at issue. These provisions purport to limit the stacking or accumulation of insurance policy limits over time to one policy limit. Justice Strine found that these clauses are incompatible with pro rata allocation.
The New York Court of Appeals had previously held, in Consolidated Edison Co. of New York v. Allstate Insurance Co., 98 N.Y.2d 208 (2002) (“Con Edison”), that pro rata allocation applied to those insurance policies before it. However, the policies in Con Edison did not contain non-cumulation language. In fact, the Court of Appeals in Con Edison cited the policies in Hercules, Inc. v. AIU Insurance Co., 784 A.2d 481 (Del. 2001) (“Hercules”), which contained non-cumulation policy language, as an example of policy language that was “different” and “distinguishable” from the language in the Con Edison policies and that would support all sums allocation. 98 N.Y.2d at 233. In Hercules, the Supreme Court of Delaware ordered an all sums allocation of indemnity costs because pro rata allocation was inappropriate when policies promised to indemnify the policyholder for all sums for which the policyholder was liable and further prohibited pro rata allocation through non-cumulation language. 784 A.2d at 489-94.
Thus, the issue of the appropriate allocation methodology for claims involving multiple policy years has not been fully determined in New York. In the Viking Pump action, all of the excess policies at issue have or incorporate by reference a form of non-cumulation of liability provision, which effectively caps the amount a policyholder can recover for an injury spanning multiple policy periods to one policy limit.
The New York Court of Appeals has exercised its discretion to accept the Delaware Supreme Court’s certification and decide the issues certified. The decision could have significant implications for policyholders in New York that have non-cumulation provisions in their insurance policies and face claims involving bodily injury or property damage occurring over more than one policy period.
If Viking Pump prevails on the issue, policyholders with non-cumulation provisions in their policies will be able to allocate all loss for injuries or damage that span multiple policy periods into one policy period using an all sums allocation methodology. This would allow the policyholder, for example, to avoid policy years that contain policies with high deductibles or that were sold by now insolvent insurers.
If the position Viking Pump’s insurers have taken is successful, policyholders with non-cumulation provisions in their policies could be severely prejudiced. Viking Pump’s insurers have argued on appeal that Viking Pump’s recovery should be both capped by application of the non-cumulation provision and spread evenly among policy years using a pro rata allocation.
Here’s an example to demonstrate the importance of this distinction. Assume that a policyholder has a $1 million loss that implicates ten insurance policies over ten years, each with a $200,000 limit, and each containing a non-cumulation provision limiting recovery to that limit. Under a pro rata allocation methodology, each of the ten policies would be responsible for paying $100,000 (1/10th of $1 million). Thus, the policyholder would potentially recover the full $1 million (assuming none of the policies were issued by now insolvent insurers). However, if the $200,000 policy limit of each of the policies is applied as a cap because of the non-cumulation provision, and also, the loss is spread on a pro rata basis, each policy would be responsible for paying only $20,000 or 1/5 of what otherwise would be its pro rata share. In this scenario, the policyholder would recover $200,000 of its loss.
This is an important issue for any policyholder with claims that involve injury or damage over a number of policy years. Although New York law is at issue, if Viking Pump’s position is adopted, other states that apply a form of pro rata allocation may heed the decision of the New York Court of Appeals involving policies with non-cumulation provisions and apply all sums allocation to those policies.