A federal judge in Virginia held the New York Court of Appeals decision in In re Viking Pump, Inc., 27 N.Y.3d 244 (N.Y. 2016) allowed for an insurer to apply an “all sums” allocation and seek the full limits of excess insurance policies — that formed part of a multi-year “quota share” layer — in a single year, without first establishing that the claims constituted a single loss or occurrence that is covered in whole or in part under another excess policy, and that the insured was not barred from seeking an “all sums” allocation to the insurers’ limits, even when it applied a modified “pro-rata” allocation to the underlying layers as well as to another part of the same “quota share” layer.
In Hopeman Brothers Inc. v. Continental Casualty Co., __ F.Supp.3d __, 2018 WL 1726272 (April 2, 2018), Hopeman Brothers carried both primary and excess liability insurance that covered losses from numerous asbestos exposure claims brought against it. From 1971 to 1977, the plaintiff purchased a third layer of additional excess coverage in the form of a single “quota share” layer of $10 million in annual limits (totaling $60 million). This “quota share” layer was comprised of three carriers who underwrote to cover varying shares of the layer: Lexington Insurance (50 percent share), Continental Casualty Co. (20 percent share), and North Star Reinsurance Corp. (30 percent share).
In exhausting its underlying coverage, Hopeman Brothers agreed to a modified “pro-rata” allocation of the primary and underlying excess layers. In 2013, Hopeman Brothers notified the “quota share” layer that the underlying coverage was nearing exhaustion and sought to negotiate a settlement with the quote share layer to facilitate payment of future asbestos claims. Subsequently, North Star (through its successor General Reinsurance) settled with Hopeman Brothers on a modified “pro-rata” allocation. Hopeman Brothers was not able to reach any type of agreement on allocation with the two remaining contributors to the “quota share” layer, Lexington and Continental (defendants), and filed a declaratory judgment regarding whether the defendants should be required to pay an “all sums” share of losses incurred under Viking Pump.
The court dismissed the defendants’ arguments that the insured must first establish that there is a loss which is covered in whole or in part under another excess policy before “all sums” allocation can attached to their policies, stating that “this goes beyond what is necessary under Viking Pump.” The court also found that nothing in Viking Pump or any other authority mandates that the insured would have to allege that the claims for which it seeks coverage all constitute a single loss or occurrence as a condition precedent to the application of the non-cumulation clause.
The district court was also not persuaded that because of Hopeman Brothers’ willingness to apply a “pro-rata” allocation with all of its other carriers, it was barred from seeking “all sums” in this case. The court took issue with the credibility of the single Ohio case the carriers cited to support this position and found that the carriers “have not successfully asserted any theory under which [the insured’s] prior course of conduct should bind it in this litigation….”
Additionally, the district court also held that “vertical exhaustion” would apply to the case and will dictate when the company can tap into the defendants’ excess layers. The court wrote that “[a]s in Viking Pump, the instant policies hinge attachment on the exhaustion of specific underlying policies…. The court has also found that an all sums allocation method applies to the policies, and the Viking Pump court stated that vertical exhaustion is more appropriate than horizontal exhaustion in such circumstances.” However, the court left open the question of whether the lower-level policies have been exhausted.
In another important ruling, the court granted summary judgment for the Hopeman Brothers on the issue of whether the non-cumulation clauses in the defendants’ policies should only reduce their limits insofar as the insured had already recovered for the same loss from another insurer providing the same layer of coverage. As the court noted, “This means, at most, the insurers can argue only that the payment of $7 million within limits will eliminate their remaining $35 million in limits without further payment.”