Companies facing lawsuits filed by plaintiffs claiming continuous or progressive injuries or property damage, such as environmental damage, construction defects, or asbestosis, often try to maximize their insurance coverage for such claims by looking to all policies in force during the multiple, successive years in which the alleged injuries or damage took place. A Delaware court recently made things a little easier for such companies in ruling that, under New York law, a policyholder need not exhaust all excess policies at one layer before accessing coverage provided by the excess policies at the layer above. Put simply, the court held that “horizontal exhaustion” does apply to excess policy layers.
Horizontal exhaustion is a legal doctrine providing that all primary coverage for a claim must be exhausted before any excess coverage is triggered. For example, if an insured has five primary policies covering five successive policy periods, and a repeated exposure claim (such as asbestos) is covered under all of the policy periods, the insured cannot recover from any excess insurer, for any policy period, until it has first exhausted the primary coverage for all five policy periods. The economic consequences of the doctrine are significant, not the least of which being the need to pay all deductibles for all policy periods.
Whether all primary, or “first layer,” insurance must be exhausted before any excess, or “second layer,” coverage is available has been litigated frequently, with courts in some states applying the horizontal exhaustion doctrine and courts in other states refusing to do so. Litigated far less frequently is whether to apply the doctrine as between excess layers of coverage.
One of the first decisions to directly confront this question was recently issued by a Delaware court in Viking Pump, Inc. v. Century Indemnity Co. In that case, the plaintiffs sought insurance coverage from a number of primary and excess insurers for thousands of asbestos claims brought against the companies. The policies at issue covered successive policy periods from 1972 to 1985.
The excess insurer defendants invoked the horizontal exhaustion doctrine, arguing that their coverage obligations were not triggered unless and until all underlying primary carriers and all lower level excess carriers, for all policy years, had exhausted their coverage. In a separate ruling, the court agreed that horizontal exhaustion applied with respect to exhaustion of all primary layer coverage. The court next tackled the question of whether it was also necessary that all lower layer excess carriers have exhausted their coverage to trigger the higher layer excess carriers’ obligation to provide coverage.
Acknowledging that this was a novel issue under New York law, which governed in the dispute, the Viking Pump court began by analyzing the only decision that had squarely addressed the issue – a California trial court opinion in Kaiser Aluminum and Chemical Corp. v. Certain Underwriters at Lloyds, London holding that horizontal exhaustion applied only to primary and umbrella policies, not to excess policies. The Delaware court also surveyed the caselaw throughout the country on horizontal exhaustion with respect to primary policies and predicted that New York’s high court would, like the California Kaiser Aluminum court, find that horizontal exhaustion does not apply to excess policies.
The court explained that “New York emphasizes the policies’ purposes as evidenced by their language, premium amount, and other indicators.” Reviewing these factors, and decisions from New York courts on related issues, the court concluded that New York law does not require that horizontal exhaustion be applied to excess policies. The court also emphasized that horizontal exhaustion is a “limitation that tends to deny coverage,” that it is a general tenet of New York law that policies be construed in favor of finding coverage, and that the insurers had not met their burden of showing how the excess policies required horizontal exhaustion and thus excluded coverage.
The court’s decision in Vikings Pump is important not only for New York policyholders – as the first decision applying New York law in deciding whether horizontal exhaustion applies to excess policies – but also for policyholders elsewhere seeking excess coverage in successive policy periods. The court’s recognition that horizontal exhaustion should not be applied so as to result in the policyholder “find[ing] itself with less coverage” than it purchased is a powerful public policy statement which should apply equally regardless of where the policy was issued.
Policyholders surely have not heard the last from excess carriers on the applicability of horizontal exhaustion to excess layers. But the Vikings Pump decision suggests that New York will end up in the “not applicable” column and recognizes that even in states that apply the doctrine as between primary layer and first-layer excess coverages, the doctrine has its limits.