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Court sides with policyholders in complex litigation over asbestos claims

Court sides with policyholders in complex litigation over asbestos claims

Policyholders scored a victory from New York's highest court, which has ruled in an asbestos case that the “all sums” method should be used to determine how much insurers owe them for their coverage.

The unanimous Monday ruling also holds that policyholders can access their excess coverage after exhausting their underlying coverage by a method they favor.

The Delaware Supreme Court asked the New York Court of Appeals to address the issue in the complex insurance dispute.

The case stemmed from Cedar Falls, Iowa-based Viking Pump Inc. and Warren, Michigan-based Warren Pumps L.L.C. acquiring pump manufacturing businesses from Northbrook, Illinois-based Houdaille Industries Inc. in the 1980s, according to In the Matter of Viking Pump Inc. and Warren Pumps L.L.C. Insurance Appeals.

The acquisitions later subjected Viking and Warren to significant potential liability in connection with asbestos exposure claims, according to the ruling.

Houdaille had extensive multilayer insurance coverage from 1972 to 1985 that included coverage for these claims, according to the ruling.

This included primary coverage totaling about $17.5 million with Boston-based Liberty Mutual Insurance Co. through successive annual polices, as well as additional layers of excess insurance through annual policies issued by various insurers totaling more than $400 million, including defendant insurers in the case.

As the Liberty Mutual coverage neared exhaustion, litigation arose as to whether Viking and Warren were entitled to coverage under the additional excess policies that were issued by other insurers, according to the ruling.

Eventually, the case reached the Delaware Supreme Court, which asked the New York court in 2015 to determine which allocation method should be used under New York law.

Allocation methods

Two basic types of allocation approaches are used in long-tail claims, including those in asbestos cases: the “all sums” and the “pro rata” methods.

Under the all-sums approach, favored by policyholders, they can collect under any policy that is in effect during the period that the damage occurred up to the limits of that policy, according to the ruling.

Experts say the all-sums approach means policyholders are not limited to a single year to claim coverage.

Under the pro-rata allocation that the excess insurers proposed, an insurer's liability would be limited to the amounts incurred by the insured during the policy period.

Experts say the pro-rata approach limits insurers' payments to the fraction of property damage that occurred only during their policy period.

Courts have ruled both ways on this issue, the New York Court of Appeals said in its ruling. The court concluded that based on policy language the “all sums allocation is appropriate” in this case.

The court also ruled the “vertical exhaustion” of the insurance coverage is appropriate in this case rather than “horizontal exhaustion.”

Under horizontal exhaustion, all triggered primary and umbrella excess layers must be exhausted before tapping excess insurance.

Under vertical exhaustion, the policyholders can access each excess policy immediately once the underlying policies' limits are depleted, even if other lower-level policies during different policy periods remain unexhausted.

“In our view, vertical exhaustion is more consistent than horizontal exhaustion” under the policy language, the court ruled in siding with policyholders.

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