Written by David A. O’Neill, JD, Director of Investigations, PolicyFind


An opinion qualifying Maryland’s approach to applying what is known as the horizontal allocation rule in long-tail liability insurance claims cases was issued by U.S. District Court Judge Catherine C. Blake on January 2, 2014.  The U.S. District Court for the District of Maryland ruled in Porter Hayden et al. v. National Union Fire Insurance Co. et al. (as yet unreported) that bankrupt insulation producer Porter Hayden Co. may tap certain excess insurance policy limits for indemnity in asbestos injury suits without first exhausting all primary policy limits.

Excess insurers National Union Fire Insurance Co. of Pittsburgh Pa. and American Home Assurance had supported an interpretation of the rule that would require all available primary insurance policies to be exhausted before any excess carrier could be required to pay for the loss.  These insurers had each issued three excess insurance policies above their own primary policies in the 1970’s. They argued that Porter Hayden could not reach for limits from its upper tier policies until underlying policy limits from all insurers had been exhausted.

Horizontal allocation had been the rule applied by the Maryland Court of Appeals in the case styled Mayor and City Council of Baltimore v. Utica Mutual Ins. Co., 145 Md. App. 256 (2002). The appellate court had found in Utica Mutual that requiring the exhaustion of all policies in a tier of coverage was “a better fit” than vertical exhaustion in long-tail claims cases.  In Porter Hayden however, the District Court determined that because of certain features of the primary liability insurance policies involved, a pro rata allocation by time on the risk would work a more just result.

Whereas certain of Porter Hayden’s primary policies had no aggregate limits and others did, the strict application of horizontal allocation would have allowed aggregate limit policies to exhaust more quickly than those without.  Insurers which had issued primary policies without aggregate limits would continue to pay in lieu of excess insurance and therefore pay more than their pro rata share.

Judge Blake decided that “If the primary insurance as to a particular year on the risk has been exhausted, then an excess policy applicable to that year must pay its pro rata share.”  By this method excess coverage would be made available rather than tapping non-aggregate primary policies for more than their pro-rata share.