Delaware Chancery Court Opens the Door to "All Sums" Allocation in New York

On October 14th, Vice Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery blew some much needed fresh air into New York allocation jurisprudence. The Viking Pump consolidated cases, C.A. 1465-VCS, have already yielded very interesting and thoughtful rulings on the transfer of insurance in connection with complicated corporate transactions. Viking Pump, Inc. v. Liberty Mutual Insurance Company and Warren Pumps LLC, 2007 WL 2752912 (Del. Ch. Apr. 2, 2007 (unpublished opinion).

The latest decision, the first nearly fifty pages of which is also devoted to corporate transaction issues, then spends the next 40 pages [yes, it is 88 pages long] delving into the arcana of allocation law. 

 

Viking Pump and another formerly related entity, Warren Pumps, are on the receiving end of asbestos personal injury claims. The policies that cover these entities were issued to their former parent, Houdaille Industries, formerly headquartered in New York. The primary and first layer umbrella policies, sold by Liberty Mutual were exhausted, thus, the issue before the court was allocation of liability for the asbestos claims among the excess insurance companies. The excess argued that under controlling New York precedent – Con Edison v. Allstate Ins. Co., 774 N.E.2d 208 (NY 2002) – there must be a pro rata allocation. 

After pointing out that New York had not taken a public policy position on allocation (unlike, for example, New Jersey) but instead looks to the policy language, the court nodded to the Court of Appeals reliance on the “during the policy period” phrase in its Con Ed decision and took a swipe at the Second Circuit’s approach in Olin. Because of New York’s policy language-centered approach to allocation, Vice Chancellor Strine wrote: “the fact that one decision held that a particular policy embraced the pro rata approach does not make New York a ‘pro rata state.’” [p. 68]

The court then turned to the impact of non-cumulation and prior insurance clauses that appear in many excess policies. The non-cumulation clauses appeared in the Houdaille excess program courtesy of follow-form endorsements; the excess policies following to Liberty Mutual forms. Liberty Mutual, thanks to Gilbert Bean, was the only insurance company to come to grips with the consequences of gradual injury claims under the new “occurrence” form in 1966-67. Liberty incorporated either “deemer” or “non-cumulation” clauses into nearly all of its policies in order to prevent “stacking of limits.  

The court found that these non-cumulation and prior insurance clauses “unambiguously provide for all sums allocation.” [p. 68] and “cannot sensibly be applied within a pro rata allocation scheme.” [p. 71]. In this, the court was not breaking new ground. See Spaulding Composites (NJ), Outboard Marine (IL), Dow Corning (MI), Liberty Mutual (PA), and Hercules (DE).

Helpfully, the insurance companies could not agree amongst themselves how to sensibly marry pro rata allocation relying on “during the policy period” with their non-cumulation and prior insurance clauses (footnote 170 is illuminating). Vice Chancellor Strine concludes with brio:

It is a fundamental New York rule of contract interpretation that a court should read a contract in order to give full effect to every term therein.  The Excess Insurers would have me interpret the Houdaille Policies as embracing the pro rata method of allocation by having me jettison explicitly bargained-for provisions of those Policies that benefit them, and therefore reconciling the evident conflict between explicit provisions of the Policies and the pro rata method the Excess Insurers say is implicitly called for by the Policies. In other words, the Excess Insurers would have me elevate their self-interested policy preference over the only method of allocation that permits the sensible operation of all of the Houdaille Policies’ material terms. New York law does not permit such a result but instead requires giving effect to the parties’ contractual choice.

            ***

Most important, the contractual language only works if all sums is the approach. The Excess Insurers bargained for an all sums method of allocation greatly tempered by exposure-reducing Non-Cumulation and Prior Insurance Provisions. They cannot now prospect for more by having a court substitute a different allocation method for that which best fits with all of the terms of the relevant Policies.

Id. at 80-81.

Stay tuned for the New York courts’ reaction to Vice Chancellor Strine.

Travelers v. Bailey

Yesterday, the United States Supreme Court handed a win to Travelers (and indirectly to chapter 11 debtors using insurance proceeds to fund bodily injury trusts), getting Travelers out of further liability arising from its actions “related to” its role as the primary insurer of Johns-Manville. These were not suits seeking proceeds of the insurance policies issued by Travelers to Johns-Manville, but suits alleging that Travelers had an independent duty to claimants arising from its knowledge of the dangers of asbestos. 

Resting on res judicata and the finality of settlements and judgments, the Court refused to address whether the Bankruptcy Court’s 1986 Orders had exceeded its authority. That time, according to the Court, had long passed:

Almost a quarter-century after the 1986 Orders were entered, the time to prune them is over.

The Court reserved for another day (never?) the question of the proper scope of Bankruptcy Court authority in these matters: 

Our holding is narrow. We do not resolve whether a bankruptcy court, in 1986 or today, could properly enjoin claims against nondebtor insurers that are not derivative of the debtor’s wrongdoing.

Of interest to me is the Court’s commentary on the wording of the Insurance Settlement Order, which will be familiar to anyone who is a student of insurance policy exclusions and insurance company releases. As described by the Court: 

The December 18, 1986, order of the Bankruptcy Court approving the insurance settlement agreements (Insurance Settlement Order) provides that, upon the insurers’ payment of the settlement funds to the Trust, “all Persons are permanently restrained and enjoined from commencing and/or continuing any suit, arbitration or other proceeding of any type or nature for Policy Claims against any or all members of the Settling Insurer Group.” The Insurance Settlement Order goes on to provide that the insurers are “released from any and all Policy Claims,” which are to be channeled to the Trust. The order defines “Policy Claims” as “any and all claims, demands, allegations, duties, liabilities and obligations (whether or not presently known) which have been, or could have been, or might be, asserted by any Person against … any or all members of the Settling Insurer Group based upon, arising out of or relating to any or all of the Policies.”

Citations omitted, emphasis added. The Respondents had argued that the scope of these orders was limited to “actions against insurers seeking to recover derivatively for Manville’s wrongdoing.” Not so, said the Court, even if that was the intent of some of the parties to the settlement on which these orders were based. 

The Court addressed the phrase that strikes fear in the heart of every contract and insurance recovery lawyer: “based upon, arising out of or relating to.” In the apt words of one former client: “What the hell does that mean? What doesn’t it include?” The Court, with a slight nod to its absurdity, ducked the question: 

These actions so clearly involve “claims” (and, all the more so, “allegations”) “based upon, arising out of or relating to” Travelers’ insurance coverage of Manville, that we have no need here to stake out the ultimate bounds of the injunction. There is, of course, a cutoff at some point, where the connection between the insurer’s action complained of and the insurance coverage would be thin to the point of absurd. See California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 335 (1997) (Scalia, J., concurring) (“[A]pplying the ‘relate to’ provision according to its terms was a project doomed to failure, since, as many a curbstone philosopher has observed, everything is related to everything else”); New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995). But the detailed findings of the Bankruptcy Court place the Direct Actions within the terms of the 1986 Orders without pushing the limits.

I, for one am interested in those “ultimate bounds” and how “thin” the “point of absurd” actually is. 

Latching on to this point, Justice Stevens in dissent argued (in a passage that will warm the heart of many a policyholder lawyer) that the term “Policy Claims” is “not amenable to a purely literal construction [so] the Court must look beyond the four corners of the Insurance Settlement Order to ascertain its meaning.” The dissent looked to then-existing and subsequent bankruptcy law, as well as to Travelers’ subsequent behavior, for a better understanding of what the 1986 Orders meant. In a particularly trenchant passage, Justice Stevens wrote: 

… it is worth asking why Travelers paid more than $400 million in 2004 to three new settlement funds in exchange for the Bankruptcy Court’s order “clarifying” that the independent actions “are—and always have been—permanently barred” by the 1986 injunction. If the 1986 injunction were as clear as the Court assumes, surely Travelers would not have paid $445 million—more than five times the amount of its initial contribution to the Manville Trust—to obtain a redundant piece of paper.

Citations omitted. 

Finally, the Court remanded to the Second Circuit the very interesting Due Process question of who is bound by these broad Bankruptcy Court orders:

Chubb … has maintained that it was not given constitutionally sufficient notice of the 1986 Orders, so that due process absolves it from following them, whatever their scope. The District Court rejected this argument, but the Court of Appeals did not reach it. On remand, the Court of Appeals can take up this objection and any others that respondents have preserved.

Citations omitted. Thus, the semi-amusing grudge match between lawyers for Travelers and Chubb can continue.