Keep Viking Pump in Your Long-Tail Claim Toolbox “Long-tail” claims involve personal injury or property damage from alleged exposure to injury-causing products, such as asbestos or PFCs, over a number of years and multiple policy periods. Courts in various jurisdictions use different methods to identify the insurance policies applicable to these long-tail claims. One of the most important coverage cases of 2016 demonstrates that policyholders engaged in allocation disputes with insurers may succeed in securing “all sums” allocation even in so-called pro rata states.

The “all sums” method of allocation permits recovery of up to the limits of liability under any policy in effect during the periods when personal injury or property damage occurred. (The all sums method derives its name from the standard insuring clause promising to pay all sums above the self-insured retention “the insured shall become legally obligated to pay …”)

The “pro rata” method of allocation, on the other hand, limits each insurer’s liability to its pro rata share of the total loss incurred. Jurisdictions differ as to allocation for years with missing policies or policies issued by insolvent insurers. Certain jurisdictions allocate these years to the policyholder; others do not.

In the Matter of Viking Pump, Inc., 52 N.E. 3d 1144 (N.Y. 2016), New York’s highest court held that the policy language rather than a blanket rule determines whether the all sums or pro rata method of allocation is appropriate. This ruling sent shockwaves through the insurance industry because in 2002 the court had applied (and appeared to have adopted) the pro rata method.

The court held that the all sums method applied to allocate the excess insurers’ liability for asbestos-related losses in Viking Pump because the “non-cumulation” clause and “continuing coverage” clause in the followed primary policy was inconsistent with the pro rata method.

The non-cumulation clause in the policy (also known as a “prior insurance” clause) was substantially identical to the clause that first appeared in the London Market in 1960 to prevent policyholders from recovering under both a then-standard “accident-based” liability policy, as well as a subsequent now-standard “occurrence-based” policy. (Ironically, according to law professor Christopher French in an article cited by the court, some insurers have over the years attempted to expand non-cumulation clauses to eliminate their liability for long-tail claims altogether.) The continuing coverage clause extends coverage for continuing injuries after the policy period ends.

The Viking Pump court observed that pro rata allocation is based on policy language limiting liability to only those losses occurring during a particular policy period. In other words, “no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence.” The presence of the non-cumulation and continuing coverage provisions, the court said, does not square with that principle. Those provisions “plainly contemplate that multiple successive insurance policies can indemnify insureds for the same loss or occurrence by acknowledging that a covered loss or occurrence may also be covered in whole or in part under any other excess policy.”

The court also held that “vertical exhaustion” is appropriate when an all sums allocation is applicable. This permits the policyholder to exhaust the layers of coverage in a specific policy year. (“Horizontal exhaustion” requires all applicable primary and umbrella excess layers to be exhausted before triggering any additional excess insurance.)

This week in Olin Corporation v. OneBeacon American Insurance Co., the Second Circuit extended Viking Pump, holding that once a layer is exhausted, the presence of a prior insurance clause reduces the limits of any applicable prior policies, whether or not the same insurers issued the prior policies.

The likely influence of Viking Pump cannot be overstated. This seminal case will be considered by courts around the country when called upon to decide allocation issues and should be included in the policyholder’s long-tail claim toolbox.

More States Applying “No-Prejudice Rule” on Notice to Claims-Made PoliciesIn a majority of states, an insurer cannot deny coverage based on a policyholder’s late notice of a claim without showing that the delay prejudiced the insurer. This “notice-prejudice rule” is an advance over the traditional “no-prejudice” rule that allows insurers to deny claims based on late notice regardless of the circumstances leading to the delay. The Wyoming Supreme Court, the most recent court to adopt the notice-prejudice rule, described the rationale for the rule in Century Surety Company v. Jim Hipner, LLC: most policyholders lack the leverage to negotiate for better policy terms; forfeiture of coverage on a mere technicality gives an unwarranted windfall to the insurer; and states have an interest in ensuring that accident victims are compensated. The court also held that a policy provision attempting to “contract around” the notice-prejudice rule violated public policy.

Nevertheless, more states are limiting the notice-prejudice rule to occurrence policies and applying the no-prejudice rule to claims-made policies. The New Jersey Supreme Court  applied the no-prejudice rule to a claims-made policy that required written notice of a claim “as soon as practicable” in Templo Fuente De Vida Corp. v. National Union Fire Insurance Co.  The court agreed with National Union’s contention that the policyholder’s notice of a D&O claim more than six months after service of the lawsuit violated the notice provision. Despite longstanding precedent in New Jersey following the notice-prejudice rule, the New Jersey Supreme Court refused to apply the notice-prejudice rule to claims-made policies with clear and unambiguous terms. The court discounted the equitable concerns behind the notice-prejudice rule because purchasers of claims-made policies are “knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers.”

Despite this court’s application of the no-prejudice rule to a claims-made policy, policyholders should not presume this is a blanket rule, even in New Jersey. In Templo Fuente, the policyholder gave no reason for its delay in providing notice. An explanation could have dissuaded the court from denying coverage. In addition, not all purchasers of claims-made policies are “sophisticated.” Finally, the goal of avoiding an unwarranted windfall to the insurer appears to equally apply to a claims-made policy. Unlike an occurrence policy, which can be triggered years after the policy period expires, coverage under a claims-made policy is limited. In order for coverage to apply, the policyholder must give notice of the claim within the policy period or any applicable extended period, as did the policyholder in Templo Fuente.

To avoid a forfeiture of coverage, policyholders should establish a protocol for giving notice of claims and potential claims under all potentially applicable insurance policies, including umbrella and excess policies. In Century Surety, the policyholder had notified the primary insurer but not the umbrella insurer, perhaps believing that the claim would not exceed the primary policy’s limits. The policyholder’s failure to notify the umbrella insurer did not forfeit coverage in that case, but would have under the no-prejudice rule.