“All Sums” And “Vertical Exhaustion” Apply to Policies Containing Non-Cumulation/Prior Insurance Provisions.

A New York Supreme Court, applying New York law, held that the Liquidator for Midland Insurance Company must apply all sums and vertical exhaustion to Midland policies that follow form to policies containing non-cumulation/prior insurance provisions.

ASARCO was engaged in the milling and selling of asbestos products.  As a result of asbestos and other liabilities, ASARCO ultimately sought Chapter 11 bankruptcy protection.  As part of the reorganization, a trust was created to process, liquidate, and pay asbestos claims (“Trust”).  According to the Trust, $1 billion of ASARCO’s current and future asbestos-related claims were allowed.

Midland Insurance Company (“Midland”) issued excess policies to ASARCO in the mid-1970s with aggregate limits of $55 million.  In 1986, Midland was placed into insolvency proceedings and a Liquidator was appointed as the statutory receiver.  The Trust pursued a claim for coverage in the Midland liquidation proceedings.

The Liquidator took the position that, under New York law, pro rata allocation and horizontal exhaustion applied (as compared to all sums allocation and vertical exhaustion), thereby resulting in the Midland excess policies not being triggered.  Under a pro rata allocation, the liability for a long-tail claim is spread over the entire period triggered by the loss, and each insurer’s liability is limited to its pro rata share based on its time on the risk; under an all sums allocation, the policyholder can collect its total liability under any policy that is triggered by the long-tail loss.  Horizontal exhaustion requires the insured to exhaust all triggered primary and umbrella policies before accessing an excess policy, whereas vertical exhaustion requires that the insured only exhaust the immediately underlying primary and umbrella policies issued for the same policy period as the excess policy.

Based on its application of a pro rata allocation with horizontal exhaustion, in January 2014, the Liquidator issued a Notice of Recommendation of Disallowance (“NOD”), entirely disallowing the Trust’s claims.  The Trust appealed to the referee, claiming that an all sums allocation with vertical exhaustion applied to the Midland policies.

In March 2016, the referee issued a report upholding the Liquidator’s position based on Consolidated Edison of N.Y. v. Allstate Ins. Co., 98 NY2d 208 (2002), a New York Court of Appeals decision applying pro rata allocation and horizontal exhaustion in the context of long-tail claims.  The Consolidated Edison court adopted pro rata based on the “during the policy period” language in the policies, which the insurers had argued only required them to pay for the fractional amount of the ongoing injury that occurred during their respective policy periods.

In May 2016, however, the New York Court of Appeals issued its decision in Matter of Viking Pump, Inc., 27 NY3d 244 (2016), where it held that “during the policy period” policies that also contain non-cumulation/prior insurance provisions require an all sums allocation with vertical exhaustion.  According to the court, these types of provisions contemplate a continuing injury triggering multiple policy periods and, therefore, override the insurers’ “during the policy period” argument.

In July 2016, in light of Viking Pump and due to the presence of non-cumulation/prior insurance provisions in the Midland policies issued to ASARCO, the referee revised his report and held that the Liquidator must apply an all sums allocation with vertical exhaustion.  The Liquidator appealed the referee’s decision to the New York Supreme Court.

On appeal, the Liquidator claimed the language of the Midland policies differed in material respects to the language at issue in Viking Pump.  For example, the policies at issue in Viking Pump included “all sums” language, whereby the insurer agreed to pay all sums the insured became legally obligated to pay as damages.  In contrast, the ASARCO policies contained “ultimate net loss” language, whereby the insurer agreed to pay “the total sum which the Insured … become[s] legally obligated to pay.”  The Supreme Court agreed with the referee that the meaning of “all sums” and “ultimate net loss” is essentially the same, “because the key issue is not the specific words used but rather the intent of the policy, and that the intent of “all sums” and “ultimate net loss” is indistinguishable.  The Supreme Court rejected the Liquidator’s other attempts to distinguish Viking Pump, and upheld the referee’s decision applying all sums with vertical exhaustion.  In re Midland Ins. Co., No. 041294/1986 (N.Y. Sup. Ct. Aug. 10, 2018).