Decision Adopts Vertical Exhaustion Theory, Clarifies Plastics Engineering

Early this month, the Wisconsin Court of Appeals District 1 affirmed a trial court’s ruling that vertical exhaustion was the appropriate theory to apply in progressive injury cases and elaborated upon the Wisconsin Supreme Court’s 2009 holding in Plastics Engineering Co. V. Liberty Mutual Insurance Co.[ii] that Wisconsin is an “all sums” allocation state.

What does that mean and what impact does it have on insureds faced with environmental claims? Simply, where an insured has several different insurers and levels of coverage (such as primary general commercial liability and “umbrella” or excess coverage) over a period of years, the insured can pick which policy year during a coverage period and, “work its way up the coverage ‚Äòtower’ for that year before moving to another year.[iii]” In comparison to horizontal exhaustion, in which all affected primary policies have to be exhausted before excess policies are triggered, the Westport[iv] court’s adoption of vertical exhaustion will allow insureds who have had property damage during multiple policy years the ability to avoid insolvent primary policy period carriers and ensure attachment of the excess carriers.

In addition to adopting the vertical exhaustion method, the Westport decision restated, in very clear terms, that the Plastics Engineering[v] ruling had made Wisconsin an “all sums” state and, “that there can be pro rata approach to the duty to defend.[vi]” The Plastics Engineering ruling and subsequent reiteration in Westport requires an insurer to pay for all sums that result from an injury that triggered the policy even though the injury occurred “partly before and partly within the policy period,” instead of allocating those damages relative to the years that the policy was in effect versus the years that it was not (a pro rata allocation). The language in Westport is clear in its interpretation of the Plastics Engineering holding: Wisconsin is an “all sums” state and the “all sums” approach used in Plastics Engineering was not a one-off, fact-specific ruling but rather a specific rejection of proration among policies by the Wisconsin Supreme Court and controlling law in the state.[vii]

Following Westport and Plastics Engineering, Wisconsin is now a state in which “all sums” allocation and the vertical exhaustion theory are the law. The impact of these rulings, particularly in allowing policy holders to select in which order policies are triggered in response to long-tailed claims such as asbestos exposure and environmental damage, is unknown but certain to be significant on both Wisconsin’s insurers and insureds.

[i] 2010 WL 2265638 (Wis. App. 2010)

[ii] 2009 WI 13 (2009)

[iii] Supra FN 1 at 71

[iv] Supra FN 1

[v] Supra FN 2

[vi] Supra FN 1 at 74

[vii] Id. at 75