Excess Limit Follows Underlying Policy's Annualized Limit
In Union Carbide Corp. v. Affiliated FM Ins. Co., 2011 NY Slip Op 01317 (Feb. 22, 2011), New York’s Court of Appeals held that an excess insurer’s aggregate limit of liability should be annualized where the policy followed the form of an underlying policy that annualized limits. The court also held that issues of fact precluded summary judgment as to whether a two-month coverage extension triggered a new annual limit under the policy.
The dispute arose from Union Carbide Corp.’s claim for insurance for $1.5 billion allegedly paid in defense costs, settlements, and judgments for asbestos liabilities. In the mid-1970s, UCC was insured by Appalachian for $5 million in excess of a self-insured retention. The Appalachian policy was issued for a three-year period. It was undisputed that Appalachian’s policy limit was renewed annually; the limit was identified in the declarations as an “annual aggregate,” and the policy further provided that “[t]he limit of liability … set forth as ‘aggregate’ shall be the total limit of the company's liability under this policy for ultimate net loss … during each consecutive 12 months of the policy period.” Thus, the Appalchian policy afforded $15 million of coverage for the claims.
UCC’s fifth layer of excess coverage, which covered losses exceeding $70 million up to $100 million, was provided under a subscription form policy that incorporated the terms of the Appalachian policy pursuant to a follow form clause. The $30 million of coverage in this layer was divided among six insurers, each providing $5 million in limits. Despite agreement that the Appalachian policy limit was annualized, two of UCC’s insurers, Continental Casualty and Argonaut, argued that the limit under the subscription form policy was not annualized, so that the maximum share of the limit for each of the six insurers participating in this layer was only $5 million, not $15 million.
The court disagreed. While the follow form clause was “subject to the declarations,” and the declarations referred to an “aggregate,” not an “annual aggregate” limit of liability, the court concluded that the follow form clause nonetheless required annualization of excess limits. The court reasoned that “[s]uch clauses serve the important purpose of allowing an insured, like UCC, that deals with many insurers for the same risk to obtain uniform coverage, and to know, without a minute policy-by-policy analysis, the nature and extent of that coverage. It is implausible that an insured with as large and complicated an insurance program as UCC would have bargained for policies that differed, as between primary and excess layers, in the time over which policy limits were spread.” This conclusion was reinforced, opined the Court, by reference in the subscription form to a $30 million “each occurrence” limit, which would not have been necessary had the parties contemplated that $30 million was the most that could be paid on the entire policy, and by expert testimony that annualization of limits was the universal custom of the industry.
The court also considered whether a two-month extension of Continental Casualty's coverage created an extra year of policy limits. The record included evidence that in late 1976 Continental wanted to discontinue insuring UCC, but was persuaded to remain on the risk for two more months as an accommodation. The record also included evidence that UCC’s broker had tried to negotiate an “extension period to be treated as a separate annual period for aggregate reckoning purposes,” and that he was optimistic about succeeding; however, the record did not show whether he did succeed. The extension endorsement that ultimately was issued merely stated “that the policy period is hereby extended” without reference to limits. The court concluded that on this record UCC failed to meet its burden of proof for summary judgment and that the issue remained open to be determined in a subsequent motion or at trial.
