Spiked: Could the Viking Pump Decision By the New York Court of Appeals Signal a Broader Trend on Long Tail Coverage Issues Nationwide

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1 Spiked: Could the Viking Pump Decision By the New York Court of Appeals Signal a Broader Trend on Long Tail Coverage Issues Nationwide By: Lisa Campisi, Heather Simpson and Andrew Nadolna In the Matter of Viking Pump, Inc. and Warren Pumps, LLC Insurance Appeals, 52 N.E.3d 1144 (N.Y. 2016) ( Viking Pump ), is widely viewed as one of the most significant insurance coverage decisions of 2016, particularly the ruling that all sums allocation applied to the policies in dispute. Though Viking Pump is a New York decision, the question we explore here is whether the impact of Viking Pump will extend to not only New York, but will influence how other states choose between all sums and pro rata allocation. I. Summary of Viking Pump Viking Pump is one of the latest chapters in the 40-year story of coverage litigation over asbestos and other long tail liabilities. The core issues in dispute in Viking Pump were the applicable methods of allocation and exhaustion. First, with respect to the allocation question, the New York Court of Appeals was asked to resolve whether losses resulting from thousands of asbestos exposures should be subject to (i) the all sums methodology, which essentially allows the insured to spike losses in a policy year the insured selects; or (ii) the pro-rata methodology, which requires the spreading of the losses across multiple policy years, including years of insolvent or missing coverage. Second, upon resolution of the allocation question, the court in turn was asked to determine whether horizontal or vertical exhaustion of the underlying coverage would be required. The dispute came to the New York high court on two questions certified by the Delaware Supreme Court, which it described as follows: (1) whether all sums or pro rata allocation applies where the excess insurance policies at issue either follow form to a non-cumulation provision or contain a noncumulation and prior insurance provision, and (2) whether, in light of [the] answer to the allocation question, horizontal or vertical exhaustion is required before certain upper level excess policies attach. Viking Pump, 52 N.E.3d 1144, Based on the facts and policy language before it, the Viking Pump court applied all sums allocation and vertical exhaustion. The policyholder advocated all sums, given that the period of alleged exposure began as far back as the 1940 s, such that if pro rata were applied, the policyholder faced potential exposure for uninsured years before the policies incepted and after the expiration of the last policies (as well as considerable exposure for insolvent carrier years). By contrast, application of all sums

2 allowed the policyholder to spike vertically all remaining liabilities into a single year of excess coverage, thereby avoiding uninsured or insolvent years. The policyholders in Viking Pump had a multi-layer insurance coverage program responsive to asbestos exposure claims spanning from 1972 to Upon the exhaustion of all of the primary and first layer excess coverage, the policyholder s ability to access the excess coverage above the exhausted underlying coverage hinged in large part upon whether the rules of all sums or pro rata allocation, and in turn horizontal or vertical exhaustion, applied. In determining that the pro rata rule did not apply, the Viking Pump court distinguished its prior ruling in Consolidated Edison Co. v. Allstate Insurance Co., 98 N.Y.2d 208, 222 (2002), in which it applied pro rata allocation to losses on account of long tail environmental liabilities. In so doing, the Viking Pump court pointed out that it did not adopt a strict rule mandating either pro rata or all sums allocation because insurance contracts, like other agreements, should be enforced as written, and parties to an insurance arrangement may generally contract as they wish and the courts will enforce their agreements without passing on the substance of them. Viking Pump, 52 N.E.3d at All of the relevant policies in Viking Pump contained or followed form to language providing that the coverage would pay all sums for which the policyholder became legally liable on account of an occurrence (such as bodily injury or property damage) occurring during the policy period. The policies also contained or followed form to either a non-cumulation clause or a noncumulation and prior insurance provision, the latter of which contained continuation of coverage language. As noted by the Viking Pump court, such provisions [g]enerally prevent stacking, the situation in which an insured who has suffered a long term or continuous loss which has triggered coverage across more than one policy period... wishes to add together the maximum limits of all consecutive policies that have been in place during the period of the loss. Viking Pump, 52 N.E.3d at 1152 (quoting 12 Couch on Insurance 3d 169:5). The Viking Pump court found that the non-cumulation and prior insurance provisions in the policies before it were inconsistent with pro rata allocation, and distinct from the language of the policies at issue in Consolidated Edison: The policy language at issue here, by inclusion of the non-cumulation clauses and the two-part non-cumulation and prior insurance provisions, is substantively distinguishable from the language that we interpreted in Consolidated Edison, and the arguments that were made to us in that case were, likewise, different. Id. The relevant non-cumulation clause in the policies in Viking Pump provided as follows: If the same occurrence gives rise to personal injury, property damage or advertising injury or damage which occurs partly before and partly within any annual period of this policy, the each occurrence limit and the applicable aggregate limit or limits of this policy shall be reduced by the amount of each payment made by [the insurer] with respect to such occurrence, either under a previous policy or policies of which this is a replacement, or under this policy with respect to previous annual periods thereof.

3 Viking Pump 52 N.E.3d at Meanwhile, the remaining policies similarly provided the following prior insurance provision: It is agreed that if any loss covered hereunder is also covered in whole or in part under any other excess Policy issued to the [insured] prior to the inception date hereof, the limit of liability hereon.shall be reduced by any amounts due to the [insured] on account of such loss under such prior insurance. Subject to the foregoing paragraph and to all the other terms and conditions of this Policy in the event that personal injury or property damage arising out of an occurrence covered hereunder is continuing at the time of termination of this Policy the Company will continue to protect the Insured for liability in respect of such personal injury or property damage without payment of additional premium. Viking Pump 52 N.E.3d at Surveying decisions from other jurisdictions addressing non-cumulation provisions, the Viking Pump court found that in policies containing non-cumulation clauses or non-cumulation and prior insurance provisions, such as the excess policies before us, all sums is the appropriate allocation method. Viking Pump 52 N.E.3d at In doing so, the court noted that it would be inconsistent with the language of the non-cumulation clauses to use pro rata allocation here. Such policy provisions plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence. Id. The court in turn noted that [b]y contrast, the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period meaning that no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence. Id. On the issue of exhaustion, the Viking Pump court reviewed the policy language and concluded that vertical exhaustion is more consistent than horizontal exhaustion with [such] language tying attachment of the excess policies specifically to identified policies that span the same policy period and conceptually consistent with an all sums allocation. Viking Pump 52 N.E.3d at II. The Potential Impact of Viking Pump Given New York s seemingly firm footing in the pro rata camp as articulated in Consolidated Edison, Viking Pump came as somewhat of a surprise to the insurer bar. Yet, as the Viking Pump court pointed out, it did not view its reasoning to be inconsistent with that of the Consolidated Edison court, which itself acknowledged that whether to apply all sums or pro rata would depend on the policy language at issue.

4 As the Viking Pump court noted, a key distinction between its reasoning and that of the Consolidated Edison court was the Viking Pump court s consideration of the non-cumulation clauses in the policies at issue. Viking Pump, 52 N.E.3d at 1152 (given inclusion of the noncumulation clauses and the two-part non-cumulation and prior insurance provisions, language of policies in Viking Pump is substantively distinguishable from the language that we interpreted in Consolidated Edison, and the arguments that were made to us in that case were, likewise, different ). 1 The importance of Viking Pump is not limited to it being one of the latest decisions in the long debate of whether to apply pro rata or all sums allocation. Because the court found a way to reconcile an allocation methodology with these additional provisions regarding non-cumulation and continuation of coverage, Viking Pump should be taken seriously by any court confronting policy interpretation issues, and especially those involving questions of allocation and noncumulation provisions. It is within this context that the Viking Pump court may be most influential. While the earliest and seminal allocation decisions all considered the same basic all sums insuring agreement language along with the phrase requiring bodily injury or property damage to occur during the policy period, none of them considered non-cumulation clauses, or any other policy language, in determining which allocation rule to apply. First, the court in Ins. Co. of North America v. 48 Insulations, 633 F.2d 1212 (6th Cir. 1980), aff d on rehearing, 657 F.2d 814 (6th Cir. 1981), relied on the same all sums and during the policy period language to adopt pro rata and reject all sums/spiking. 48 Insulations, 633 F.2d 1216, By contrast, within only a year of 48 Insulations, the court in Keene Corp. v. Ins. Co. of North America, 667 F.2d 1034 (D.C. Cir. 1981), relied on the same all sums language as in 48 Insulations to reject pro rata and apply all sums. Nonetheless, the Keene court found that only one policy limit applies to each injury, and that the spiked year had a right of contribution against other insurers. Keene, 667 F. 2d Notably, though it cited no particular policy language or case law, the Keene court s one policy conclusion laid the groundwork for later anti-stacking decisions. A few years later, the Supreme Court of New Jersey likewise relied on the insuring agreement language, but applied neither all sums nor straight pro rata based on time on the risk, and instead crafted a pro rata by limits and years methodology. See Owens-Illinois v. United Insurance, 650 A.2d 974 (N.J. 1994) (asbestos BI and PD). In doing so, the New Jersey Supreme Court recognized that neither policy language nor rules of contract interpretation led to an obvious outcome, and instead was guided by public interest factors such as maximizing resources available to address environmental damage. Owens-Illinois 650 A.2d at The Viking Pump court acknowledged that non-cumulation clauses were present in some of the policies in Consolidated Edison, but noted that those clauses were not addressed in that decision. Viking Pump, 52 N.E.3d at 1152 n.5.

5 The current landscape has since evolved to where the high courts of 13 states have adopted some form of pro rata (including 3 states that use pro rata by limits). 2 Meanwhile, the high courts of 7 states, and the state of Oregon by statute for environmental matters, have adopted all sums. 3 Nonetheless, when viewed through the prism of more recent allocation cases that account for some form of non-cumulation or continuation of coverage provision, including Viking Pump, whether pro rata will remain the more favored rule appears less certain. Hercules Inc. v. AIU Ins. Co., 784 A.2d 481 (Del. 2001), was the first decision of a state high court to consider allocation in light of non-cumulation and/or continuation of coverage provisions. In Hercules, the court was called upon to determine whether pro rata or all sums allocation would apply with respect to a coverage block spanning from 1964 to Each of the relevant policies in Hercules contained the familiar all sums and injury/damage during the 2 Colorado, Connecticut, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Nebraska, New York and South Carolina. Public Serv. Co v. Wallis & Cos., 986 P.2d 924, 939 (Colo.1999) (environmental property damage indemnity); Sec. Ins. Co. of Hartford v. Lumbermen s Mut. Cas. Co., 826 A.2d 107 (Conn. 2003) (pro rata for asbestos bodily injury and property damage); Atchison, Topeka & Santa Fe Ry Co v. Stonewall Ins. Co., 71 P.3d 1097 (Kan. 2003) (bodily injury from noise induced hearing loss); Aetna Cas. & Sur. Co. v. Commonwealth, 179 S.W.3d 830 (Ky. 2005) (environmental property damage); S. Silica of Louisiana, Inc. v. La. Ins. Guar. Ass n, 979 So.2d 460 (La. 2008) (environmental property damage); Arceneaux v. Amstar, So.3d (La. 2016) (environmental defense costs); Boston Gas Co. v. Century Indemnity Co., 910 N.E.2d 290, 306 (Mass. 2009) (adopting pro rata based on policy language); Northern States Power Co. v. Fid. & Cas. Co. of NY, 523 N.W.2d 657 (Minn. 1994); Dutton- Lainson Co. v. Continental Ins., 778 N.W.2d 433 (Neb. 2010); Consolidated Edison Co. of NY v. Allstate Ins. Co., 774 N.E.2d 687 (N.Y. 2002); Crossman Communities of NC v. Harleysville Mut. Ins. Co., 717 S.E.2d 589 (S.C. 2011); Towns v. N. Sec. Ins. Co., 964 A.2d 1150 (Vt. 2008). In addition to New Jersey, New Hampshire and Utah have adopted pro rata by limits. EnergyNorth Natural Gas v. Certain Underwriters at Lloyds, 934 A.2d 518 (N.H. 2007) (noting that that all sums does not solve the allocation problem, it merely postpones it for a later contribution action, court found that pro rata ensures that all insurers pay their fair share and provides incentives to policyholders to make sure they are appropriately insured in all years); Ohio Cas. Ins. Co. v. Unigard Ins. Co., 268 P.2d 180 (Utah 2012) (pro rata for environmental defense costs, but no apportionment to insured for uninsured periods and pro rata by limits and years for property damage). 3 California, Illinois (only for asbestos bodily injury), Indiana, Ohio, Pennsylvania, Washington and, arguably Texas, have adopted all sums. Aerojet-Gen l Corp. v. Transport Indemnity Co., 948 P.2d 909. (Cal 1998) (environmental defense costs); State of California v. Continental Ins. Co., 281 P.2d 1000 (Cal 2012) (environmental indemnity costs and adding in stacking of limits); Zurich Ins. Co v. Raymark, 514 N.E.2d 150 (Ill. 1987)(asbestos bodily injury only); but see Mo. Pac. R.R. Co. v. Int l Ins. Co., 679 N.E.2d 801 (Ill. App. Ct. 1997) (pro rata for noise induced hearing loss claims) and Outboard Marine Corp. v. Lib. Mut. Ins. Co., 670 N.E.2d 740 (Ill. App. Ct. 1996)(pro rata for environmental property damage); Allstate Ins. Co v. Dana Corp., 759 N.E.2d 1049 (Ind. 2001); Goodyear Tire & Rubber Co. v. Aetna Cas & Surety Co., 769 N.E.2d 835 (Ohio 2002); J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993)(asbestos bodily injury defense and indemnity); Am. Nat l Fire Ins. Co v. B&L Trucking & Constr. Co., 951 P.2d 250 (Wash. 1998); Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750, 759 (Tex. 2013) (finding insurer on risk during a period when all homes had EIFS liable up to its limits for all damages and specifically disagreeing with courts following a pro rata approach). Oregon may also be included in this camp, at least for environmental damages, by virtue of a statute mandating joint and several allocation. Or. Rev. Stat. Sect (3)(a) (2013).

6 policy period language. Each also contained or followed form to a non-cumulation and continuation of coverage clause. The Supreme Court of the State of Delaware (the same state where Viking Pump would later arise) refused to apply pro rata allocation, finding that the noncumulation clause undercuts the rationale for pro rata allocation. Hercules Inc. 784 A.2d at 494. Delaware continues to enforce non-cumulation provisions. Stonewall Ins. Co. v. E.I. DuPont de Nemours & Co., 996 A.2d 1254, 1259 (Del. 2010). Since Hercules, several other courts have relied on the presence or absence of non-cumulation provisions in determining whether to apply pro rata allocation. For example, in adopting pro-rata allocation in Boston Gas Co. v. Century Indemnity Co., 910 N.E.2d 290, 306 (Mass. 2009), the Massachusetts Supreme Court specifically distinguished cases where the policies contained non-cumulation provisions. Among such cases was Chicago Bridge & Iron Co. v. Certain Underwriters at Lloyds, London, 59 Mass. App. Ct. 646 (2003), in which a Massachusetts intermediate appellate court applied all sums because it found that it was the approach most consistent with the non-cumulation clause before it. The Wisconsin Supreme Court likewise relied on the presence of a continuation of coverage clause in the relevant policies to apply all sums in Plastics Eng g Co. v. Liberty Mut. Ins. Co., 759 N.W.2d 613, 626 (Wisc. 2009). A Michigan appellate court found the same in Dow Corning Corp. v. Cont. Cas. Co., 1999 WL (Mich. App. 1999). Meanwhile, applying Michigan law, the Sixth Circuit expressly distinguished Dow Corning to apply pro rata, noting that unlike the policies in Dow Corning, the policies before it did not contain continuation of coverage provisions. Cont. Ins. Co. v. Indian Head Industries, 2016 WL (6th Cir. Dec. 16, 2016). Courts that have adhered to pro rata despite the presence of non-cumulation clauses have done so by declaring the clauses unenforceable. For example, in Spaulding Composites Co. v. Aetna Cas. & Sur. Co., 819 A.2d 410, 422 (N.J. 2003), the New Jersey Supreme Court held that once the court turns to pro rata allocation, it makes sense that the non-cumulation clause, which would allow the insurer to avoid its fair share of responsibility, drops out of the policy. Spaulding, 819 A.2d at 422. In so holding, the New Jersey Supreme Court expressly followed the reasoning of Outboard Marine Corp. v. Liberty Mut. Ins. Co., 670 N.E.2d 740 (Ill. App. Ct. 1996), which likewise found that enforcement of the non-cumulation clause would thwart the pro-rata methodology, would give the insurers a double credit and would deprive the insured of the full value of its premium. Spaulding, 819 A.2d at 422 (citing Outboard Marine, 670 N.E.2d at 750). As these authorities illustrate, to date no court has both enforced a non-cumulation clause and applied pro rata allocation. Indeed, as the Viking Pump court noted, the Excess Insurers have cited to no authorities satisfactorily reconciling non-cumulation clauses with pro rata allocation. Viking Pump 52 N.E.3d at It is not unlikely then that more litigation will ensue over the reconciliation of pro rata and non-cumulation provisions, and Viking Pump will undoubtedly be a roadmap for the respective litigants and courts in those future cases. III. The Future in the Wake of Viking Pump

7 Depending on one s perspective, Viking Pump left open a number of questions, including: What allocation model applies when some, but not all, of the policies at issue in a multi-year coverage block contain non-cumulation or continuing coverage provisions? What allocation model applies when the primary policies do not contain noncumulation/prior insurance provisions but the umbrella/excess policies do? Is it practicable to apply pro rata allocation among the primary layer and then all sums for the excess? Do non-cumulation provisions serve to reduce limits by amounts due under any prior insurer s policies or exclusively policies issued by the same insurer? In addition, do these provisions reduce both per occurrence and aggregate limits? Does all sums (based on the non-cumulation provisions) apply to defense costs? Several of these issues already have been briefed and/or argued before federal courts in New York since the issuance of Viking Pump. For example, in Liberty Mutual Insurance Co. v. The Fairbanks Co., 2016 U.S. Dist. LEXIS (S.D.N.Y. Aug. 5, 2016), the parties agreed that Viking Pump mandated all sums allocation under the relevant umbrella policies but disagreed as to the impact of the non-cumulation clauses in the insurer s policies. The insurer asserted that the non-cumulation provision operated so that payments made under its first policy in time served to reduce the limits of all its subsequent policies to zero. The insured argued that the non-cumulation provision reduced limits only with respect to a particular occurrence, but not for any and all future occurrences. The Southern District of New York found summary judgment to be premature prior to a determination of the relevant number of occurrences at issue. In addition, the Second Circuit recently received briefing and heard oral argument in the latest appeal in Olin Corp. v. OneBeacon Insurance Co., (L). Among the disputed issues was whether a non-cumulation provision in the excess insurer s policy applies to reduce the policy limits by amounts due under prior policies issued by any insurer or solely those issued by the same insurer. A decision on the appeal remains pending. Notably, in a case decided by a federal court in Connecticut applying California law, the court found that only those policies issued by the same insurer would serve to reduce the policy limits. See New England Reinsurance Corporation, v. Ferguson Enterprises, Inc., --- F.Supp.3d ----, 2016 WL at *4 (D. Conn. 2016) (entering summary judgment in favor of insured and holding that the prior insurance clause is enforceable as ensuring coverage if the phrase any other excess policy is construed to include only other prior excess policies issued by the same insurer. ). Undoubtedly, allocation-related issues have been raised in other state and federal insurance coverage cases in New York since the Viking Pump decision, which will become a valuable part of the developing body of law on allocation and the application of non-cumulation provisions.