Written by David A. O’Neill, JD, Director of Investigations, PolicyFind
The Delaware Superior Court for Newcastle County recently addressed the issue of whether horizontal exhaustion should apply in determining when successive excess liability insurance policies may be triggered. Attempting to apply New York law in Viking Pump, Inc. v. Century Indemnity, the Delaware court found that New York courts had yet to decide the issue. It found that New York policy considerations and California case law were compatible in making its ruling.
The Delaware court was presented with this issue following its employment of horizontal exhaustion to determine when the New York manufacturer’s primary and umbrella policies would respond to asbestos related personal injury claims. While the insurers urged that horizontal exhaustion should apply to the second layer of coverage, the policyholder sought a ruling that vertical exhaustion would be the correct decision.
In its opinion, the court stated:
“Horizontal exhaustion reflects the idea that all triggered primary policies must be exhausted before any excess policy will be triggered. Vertical exhaustion on the other hand, means that, based on the policy language, an excess policy is considered excess only to the primary policy directly below it. Different jurisdictions however apply these concepts differently.”
In order to determine how New York courts would rule on this issue were it before them, the Viking Pump court looked for New York cases on-point but could find none. It then considered other state court decisions and ultimately rested on the California Superior Court’s ruling in Kaiser Aluminum and Chemical Corp. v. Certain Underwriters at Lloyds which applied horizontal exhaustion to Kaiser’s primary layer but vertical exhaustion to its excess policies. It predicted that New York courts would reason in a similar fashion.
“Horizontal exhaustion is a limitation tending to deny coverage,” the court observed. While that limitation had been proper in determining when primary and umbrella policies would respond to the claim, it was not proper later in determining when the excess policies would be triggered. That is, the court explained, because under New York law, policies are construed in favor of finding coverage. To apply horizontal exhaustion in this case would arguably have the effect of “leaving the policyholder with less coverage than it purchased.” Further, the court reasoned, in New York, once the insured proves coverage, the insurer must carry its burden to prove exclusions or limitations. Here, where the insurer had not met its burden of showing how the excess policies required horizontal exhaustion to exclude coverage, the decision would be made in the policyholder’s favor.
As the initial court decision applying New York law to determine the priority for excess policies, the Viking Pump decision will be a consideration for those future New York courts encountering this issue. Of considerable concern to insurers will be the possibility that Viking Pump’s interpretation that vertical exhaustion is the means of ensuring that “the policyholder is not left with less coverage than it purchased” may be persuasive in other states which have yet to come to grips with this issue. A progeny of pro-policyholder decisions may find their basis in this public policy rationale.