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 Apr. 2, 2007 (unpublished opinion).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.