Which Insurer Responds—and Must It Defend? Two Liability Cases

THE ALGORITHMIC LAWYER · KNOW YOUR POLICY

Viking Pump: Years of Cover, Multiple Layers—Which Responded First?

New York Court of Appeals · 3 May 2016

a) The Facts: Asbestos Claims Reached Across Years of Insurance

• Viking Pump and Warren Pumps acquired pump businesses and later faced asbestos-related claims. The earlier owner, Houdaille, had liability insurance across several years, from 1972 to 1985, with layers of cover above the first policies.
• The New York Court of Appeals answered two legal questions sent by Delaware’s Supreme Court: how to allocate the covered loss between years and which lower insurance must be used before higher layers respond.¹

b) Both Sides’ Arguments: Share Across Years or Use One Year’s Layers?

• The insured companies: they sought “all sums” allocation and access upwards through the layers for a selected policy year.
• The excess insurers: they sought a pro-rata split between policy years. If all-sums allocation applied, they argued that relevant lower-level insurance across years had to be used first.
• The disagreement turned on the actual clauses: promises to pay, limits on repeated recovery, prior insurance, listed underlying cover and other insurance.²

c) The Court’s Reasons: The Wording Decided the Years and Layers

• Which policy years could answer the claim? And which limits had to be used before the upper layers became available?
• The main reason for the decision (ratio decidendi): the policies’ non-cumulation and prior-insurance terms supported all-sums allocation. Their references to scheduled underlying policies supported moving upwards through the cover for the relevant year.
• The result followed the words of these contracts. It was not a rule that every excess policy must always respond this way.
• Wider observations (obiter dictum): no clearly separate passage is identified here. The discussion of other approaches explains why the wording before the Court produced this result.³

d) The Parties’ Earlier Cases: Why Consolidated Edison Did Not Control

• The insurers relied on Consolidated Edison to support spreading liability across years. The insureds pointed to the different non-cumulation and prior-insurance clauses in their own policies.
• The Court treated the earlier decision as an interpretation of its particular wording, rather than a command to use pro rata in every case.⁴

f) The Rules: Which Year Pays, and Which Layer Comes Next?

• Allocation: deciding how a loss is assigned between policy years. “All sums” can allow recovery of covered liability from a responding policy, within its limits and terms. “Pro rata” divides the loss under the applicable sharing method.
• Exhaustion: deciding which lower limits must be used before higher cover responds. “Vertical” means moving upwards through a year’s layers. “Horizontal” means first using relevant lower cover across years.
• Non-cumulation: wording that limits repeated recovery for the same loss across policies. It matters both to the available recovery and to how the policy’s promise is understood.⁵

g) The Evidence: The Clauses Behind the Headline Limits

• The important evidence was the issued insurance wording: the payment promise, non-cumulation and prior-insurance provisions, the schedules identifying lower policies and the other-insurance clauses.
• The Court read those terms together. A large total of headline limits could not answer either question on its own.⁶

h) Earlier Judgments: Why Different Wording Can Change the Answer

• Consolidated Edison was distinguished because the wording differed. Roman Catholic Diocese of Brooklyn reinforced that policy language governs allocation.
• Hiraldo and Nesmith concerned giving effect to non-cumulation clauses. They helped explain why those clauses could not simply be ignored.
• Westport and Cadet Manufacturing featured in the reasoning about moving upwards through insurance layers. The Court assessed their reasoning against the policies before it.⁷

i) The Decision: All-Sums Allocation and Vertical Exhaustion Applied

• The Court answered the referred questions in favour of all-sums allocation and vertical exhaustion under the policies examined.
• It did not make one immediate payment award to all asbestos claimants.⁸

j) The Lesson: A Total Insurance Limit Does Not Explain Access

• There were two separate questions: which year’s cover could respond, and which layer came next. The Court answered both by reading the contracts closely.
• The lesson from this decision is specific: the clauses controlling years, layers and repeated recovery can change how the cover works.⁹

Progressive Homes: Could the Insurer Walk Away from the Defence?

Supreme Court of Canada · 23 September 2010

a) The Facts: Four Water-Damage Lawsuits and a Withdrawn Defence

• BC Housing brought four lawsuits alleging water-related damage at housing complexes built by Progressive Homes. Lombard had issued successive commercial general liability policies and withdrew its defence of the claims.
• Progressive asked the court to require Lombard to defend it. The Supreme Court of Canada was not deciding whether every alleged defect was real or what the final repair bill should be.¹⁰

b) Both Sides’ Arguments: Could Faulty Building Work Fall Within Cover?

• Progressive: the claims included damage that could fall within the policies, including allegations involving subcontractors, so Lombard had to provide a defence.
• Lombard: damage to the contractor’s own work was not covered “property damage,” and faulty workmanship was not an “accident.” It also relied on exclusions for work performed and disputed the effect of subcontractor wording.
• Lombard mentioned contract and product exclusions without developing those arguments. The Court considered three different versions of the policy wording.¹¹

c) The Court’s Reasons: A Possibility of Cover Required a Defence

• Did the allegations show a possibility of cover? Had Lombard shown that the exclusions clearly removed every potentially covered claim?
• The main reason for the decision (ratio decidendi): the alleged facts could fall within the policies. Faulty work was not automatically outside the meaning of an accident, and the policies did not automatically limit property damage to someone else’s property. Lombard had not shown that every potentially covered claim was excluded.
• That possibility was enough to require a defence. Final responsibility for paying damages remained a separate question.
• Wider observations (obiter dictum): no clearly separate passage is identified here. Discussion of what later payment might depend on should not be mistaken for a final payment ruling.¹²

d) The Parties’ Earlier Cases: Why Negligence Categories Did Not Replace Policy Words

• Lombard relied on reasoning from Winnipeg Condominium and Bird Construction to support its argument about damage to a contractor’s own work.
• The Court rejected importing general categories from negligence law in place of the policy’s own definitions. The insurance wording had to be read on its terms.¹³

f) The Rules: Defending a Lawsuit Is Different from Paying Final Damages

• A duty to defend: the insurer must respond to a lawsuit that could fall within the cover. The court looks at the claims made against the insured and the policy.
• A duty to indemnify: paying liability actually covered by the policy. That depends on what is ultimately established. A defence does not guarantee payment of every eventual award.
• Cover, exclusions and exceptions: first identify possible cover; next consider wording that removes it; then consider wording that restores it. The policies differed: an endorsement changed the first form, the second referred to a particular part of the work, and the third expressly addressed subcontractor work.¹⁴

g) The Evidence: The Allegations and Three Versions of Policy Wording

• The Court considered the four lawsuits’ written allegations, including water damage and subcontractor work, together with the successive policies and endorsements.
• Those allegations mattered because this was a defence dispute. They were not findings that all the alleged building defects had been proved.¹⁵

h) Earlier Judgments: How Courts Test the Possibility of Cover

• Nichols, Monenco and Jesuit Fathers explained the possibility-of-cover test for a defence.
• Walkem Machinery supported the conclusion that negligent work is not automatically incapable of being an accident.
• Gibbens and Consolidated-Bathurst informed the interpretation of insurance language. The Court used those principles when reading the different forms and exclusions.¹⁶

i) The Decision: Lombard Had to Defend the Four Lawsuits

• The Court allowed Progressive’s appeal, with costs in the Supreme Court and the courts below. Lombard owed a defence in the four lawsuits.
• The Court did not decide all the construction facts or the final amount Lombard would have to pay under the policies.¹⁷

j) The Lesson: Ask About the Defence Before the Final Payout

• “Must the insurer help defend this lawsuit?” comes before “Must it pay the final damages?” The evidence and the legal tests are different.
• Here, potentially covered allegations and the actual policy wording were enough to require the defence.¹⁸

Resources and footnotes

1. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), § I. Official judgment. ↩
2. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), §§ II–III. Official judgment. ↩
3. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), §§ II–III. Official judgment. ↩
4. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), § II(A). Official judgment. ↩
5. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), §§ II–III. Official judgment. ↩
6. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), §§ II–III. Official judgment. ↩
7. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), §§ II–III. Authorities discussed there: Consol. Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002); Roman Cath. Diocese of Brooklyn v. Nat’l Union Fire Ins. Co., 21 N.Y.3d 139 (2013); Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508 (2005); Nesmith v. Allstate Ins. Co., 24 N.Y.3d 520 (2014); Westport Ins. Corp. v. Appleton Papers Inc., 327 Wis. 2d 120 (2010); Cadet Mfg. Co. v. Am. Ins. Co., 391 F. Supp. 2d 884 (W.D. Wash. 2005).. Official judgment. ↩
8. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), § III & decretal paragraph. Official judgment. ↩
9. In re Viking Pump, Inc., 27 N.Y.3d 244 (2016), §§ II–III. Official judgment. ↩
10. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 2–12 (Can.). Official judgment. ↩
11. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 30–49, 51–73 (Can.). Official judgment. ↩
12. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 18–24, 30–73 (Can.). Official judgment. ↩
13. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 31–40 (Can.). Official judgment. ↩
14. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 18–28, 51–73 (Can.). Official judgment. ↩
15. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 2–12, 61–73 (Can.). Official judgment. ↩
16. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 19–24, 30–49 (Can.). Authorities discussed there: Nichols v. Am. Home Assurance Co., [1990] 1 S.C.R. 801 (Can.); Monenco Ltd. v. Commonwealth Ins. Co., 2001 SCC 49 (Can.); Jesuit Fathers of Upper Can. v. Guardian Ins. Co. of Can., 2006 SCC 21 (Can.); Canadian Indem. Co. v. Walkem Mach. & Equip. Ltd., [1976] 1 S.C.R. 309 (Can.); Co-operators Life Ins. Co. v. Gibbens, 2009 SCC 59 (Can.); Consol.-Bathurst Export Ltd. v. Mut. Boiler & Mach. Ins. Co., [1980] 1 S.C.R. 888 (Can.). The parties’ own-work arguments also discussed Winnipeg Condominium Corp. No. 36 v. Bird Constr. Co., [1995] 1 S.C.R. 85 (Can.), and Bird Constr. Co. v. Allstate Ins. Co. of Can., [1996] 7 W.W.R. 609.. Official judgment. ↩
17. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶ 73 (Can.). Official judgment. ↩
18. Progressive Homes Ltd. v. Lombard Gen. Ins. Co. of Can., 2010 SCC 33, [2010] 2 S.C.R. 245, ¶¶ 19–24, 73 (Can.). Official judgment. ↩

Credits: source courts and judicial authors are credited in the notes. GravityWrite assisted with article drafting and heading suggestions, and generated the conceptual illustrations; the text was edited and checked against the cited records. Earlier cases are described as discussed in those judgments; independent full-text checks of every earlier authority are not claimed. Illustrations are not photographs of the events, court documents or evidence. By The Algorithmic Lawyer.