The Long Tail Wagging the Dog – The Non-Cumulation Clause Dictating Allocation
Last week, the New York Court of Appeals issued an opinion in In re Viking Pump, 2016 N.Y. Slip Op. 03413, 2016 WL 1735790. The Viking Pump-related litigation has meandered through the Delaware courts for more than a decade. It has addressed multiple coverage issues in that time, but ultimately certified the question of allocation to the New York Court of Appeals.
The Court of Appeals held that when an insurance policy contains a non-cumulation provision, this mandates an “all sums” allocation. The Viking Pump opinion lays the groundwork for allocation quagmires in courts applying New York law and potentially those jurisdictions that have previously adopted pro rata allocation methodologies.
Historically, courts have adopted an “all sums” or “pro rata” allocation method based on adopting as controlling one of two phrases common to all commercial general liability (“CGL”) policies. Those courts adopting “all sums” rely on the insuring agreement which states, generally, that the insurer agrees to pay “all sums” for which the insured becomes liable. Courts adopting “pro rata” rely on the limitation that the insurer will only pay for damages that are the result of property damage or an occurrence “during the policy period,” which has appeared in various places in policies over the years.
The Court of Appeals acknowledged these two lines of thought, including the fact that when previously presented with the allocation issue in Consol. Edison Co. of N.Y v. Allstate Ins. Co., 774 N.E.2d 687 (N.Y. 2002), the court adopted the “pro rata” method. However, because the policies at issue in Viking Pump contained “non-cumulation” and “Prior Insurance and Non-Cumulation of Liability” provisions, the Court of Appeals determined that these provisions mandated an “all sums” allocation method.
Non-cumulation provisions are common, but not universal, in historic and more recent CGL policies. They are intended to prevent an insured from stacking the limits of separate policies issued by the same insurer across multiple successive years. The language before the Viking Pump court is generally representative (the language is not universal and this note is not meant address the nuances of the provision) of these provisions:
If the same occurrence gives rise to personal injury, property damage or advertising injury or damage which occurs partly before and partly within any annual period of this policy, then each occurrence limit and the applicable aggregate limit or limits of this policy shall be reduced by the amount of each payment made by [the Insurer] with respect to such occurrence, either under a previous policy or policies of which this is a replacement, or under this policy with respect to previous annual periods thereof.
The Court of Appeals determined that when a policy contains a non-cumulation provision, “all sums” is mandated because “pro rata” allocation and non-cumulation provisions are mutually exclusive:
Pro rata allocation is a legal fiction designed to treat continuous and indivisible injuries as distinct in each policy period as a result of the “during the policy period” limitation, despite the fact that the injuries may not actually be capable of being confined to specific time periods. The non-cumulation clause negates that premise by presupposing that two policies may be called upon to indemnify the insured for the same loss or occurrence. Indeed, even commentators who have advocated for pro rata allocation and propounded the complications that can be caused by all sums allocation have recognized that non-cumulation clauses cannot logically be applied in a pro rata allocation. In a pro rata allocation, the non-cumulation clauses would, therefore be rendered surplusage—a construction that cannot be countenanced under our principles of contract interpretation, and a result that would conflict with our previous recognition that such clauses are enforceable. (Internal citations omitted).
This holding is problematic in a number of respects, both conceptually and practically.
This analysis ignores Consolidated Edison, paying it only lip service. The court repeatedly states that Consolidated Edison was limited to the language before the court in that case, that Consolidated Edison did not adopt a blanket rule, and that the court reserved the right to readdress the issue if presented with different policy language in the future, e.g. the non-cumulation provision here. This “new” policy language argument, however, does not hold water. Some, but not all, of the policies in Consolidated Edison contained non-cumulation provisions. The court sidesteps this issue simply by stating that there was no reference in the Consolidated Edison decision to non-cumulation clauses and that was not the argument before the court. What implications does that have? Is the court saying that Consolidated Edison was wrongly decided? Is it implicitly overruling Consolidated Edison? Because policies in Consolidated Edison and Viking Pump contained non-cumulation provisions, the two decisions cannot be squared.
The Viking Pump court is the first court that I am aware of that has addressed allocation from the perspective of the non-cumulation provision. Purportedly, the court did so in order to satisfy the rule of contract interpretation that all provisions in a policy must have some meaning and not be mere surplusage. To be sure, this is a maxim across all jurisdictions. However, this justification is misplaced for two reasons.
First, the court’s reasoning conflated the terms property damage (presumably bodily injury as well) and occurrence. Property damage, caused by the same occurrence, may take place in multiple separate policy periods. In instances where an insured is unable to prove that specific property damage occurred during a specific policy period, “pro rata” allocation apportions property damage proportionately over all triggered policy periods in order to provide coverage to the insured in an instance where the insured would otherwise be unable to prove coverage. This does not in turn lead to the conclusion that the insurance policy at issue cannot prevent stacking limits for the same occurrence, not property damage, that spans multiple policy periods.
Second, the court broke ranks with other “pro rata” jurisdictions by making the non-cumulation clause control its allocation decision. The court noted that in some jurisdictions which have adopted “pro rata,” the courts find that non-cumulation clauses drop out of the policies. As explained above, a non-cumulation provision is not per se mutually exclusive with a “pro rata” allocation. In some instances, based on the policy’s wording, the two may apply at the same time. In others, by its own terms, the non-cumulation provision may just not apply (as opposed to drop out). Simply because a provision does not apply to a certain set of facts does not render the provision surplusage.
Practically speaking, Viking Pump creates an allocation nightmare for those instances where an insured’s coverage block is comprised of policies with and without non-cumulation clauses, which are not uncommon. As it stands, “all sums” applies to those policies that contain non-cumulation clauses. However, Consolidated Edison still appears to apply to those policies which do not contain non-cumulation clauses. Thus, both insureds and insurers are stuck with the uncertainty in trying to figure out how to apply “all sums” and “pro rata” at the same time.
This uncertainty may not be limited to New York as the Viking Pump decision will likely lead to an increase in litigation and attempts to sway “pro rata” jurisdictions to “all sums.”