• United States District Court Finds That Maryland Recognizes Horizontal Exhaustion Rule, Which Must Be Applied To Pro Rata Loss Allocation In Insurance Coverage Cases.
  • January 17, 2014
  • Law Firm: Semmes Bowen Semmes A Professional Corporation - Baltimore Office
  • Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Porter Hayden Co., Nos.: 03-3414, 03-3408 (D. Md. Jan. 2, 2013)

    In National Union Fire Insurance Company of Pittsburgh, PA v. Porter Hayden Company, the United States District Court for the District of Maryland held that excess insurance coverage is available for operations and completed operations claims arising out of asbestos-related injury claims for years in which the underlying policy had been exhausted. Writing for the Court, Judge Catherine C. Blake rejected the reasoning promulgated by primary and excess insurers that no excess coverage existed for operations claims not subject to an aggregate limit of coverage. The Court ultimately adopted the rule of "horizontal exhaustion" as it applied to pro rata loss allocation for "long-tail claims," but rejected the insurers' operation of that rule.

    This case arose from a decade old dispute over whether National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union") and American Home Assurance Company ("American Home") failed to indemnify Porter Hayden Company ("Porter Hayden") for asbestos-related liability claims. National Union issued Porter Hayden two (2) primary policies in 1984 and 1986, and two (2) excess insurance policies in 1976 and 1978. Under National Union's primary policies, completed operations claims were subject to an aggregate limit, while certain operations claims were not subject to such a limit. American Home also issued excess policies to Porter Hayden in 1975 and 1976. Porter Hayden was eventually named as a defendant in a host of asbestos-related injury lawsuits, which constituted both operations claims and completed operations claims under Porter Hayden's various insurance policies. These types of claims are sometimes referred to as "long-tail claims," because of the long period for which coverage may be triggered after the expiration of the policy. Coverage for losses arising out of the underlying suits in this case has been at issue for the past ten (10) years.

    Moving for Summary Judgment, National Union and American Home (collectively, "the Insurers") advocated that the "horizontal exhaustion" rule, according to which underlying policies must be exhausted before any excess policy coverage is triggered, had been adopted in the state of Maryland, and must be subject to the state's pro rata allocation rule. In particular, the Insurers argued that, because some operations claims were not subject to an aggregate limit, certain primary insurance policies were not exhausted; and therefore, no excess insurance may be triggered.

    The Court granted the Insurers' Motions for Summary Judgment, insofar as the Motion moved the Court to apply the horizontal exhaustion to the concept of pro rata allocation, but denied the Insurers' request to find that excess coverage had not been triggered in this case. The Court noted that, under the "continuous trigger theory," insurance coverage for asbestos-related bodily injury claims is between the date of initial exposure and the date symptoms manifest. Observing that Maryland follows a theory of pro rata allocation for an insurer's liability, under which each insurer is liable only for its proportionate share of the total liability, the Court found that questions of exhaustion complicated the task of pro rata allocation. Citing the Maryland Court of Special Appeals' decision in Mayor and City Council of Baltimore v. Utica Mut. Ins. Co., 145 Md. App. 256, 313, 802 A.2d 1070 (2002), the Court held that Maryland has adopted the "horizontal exhaustion" rule. The Court agreed with Porter Hayden that the two (2) concepts - pro rata allocation and horizontal exhaustion - must be applied together. The Court rejected, however, the Insurers' argument that no excess insurance has been triggered in this case. The Court held:

    In the course of allocating damages pursuant to the pro rata allocation method, certain years of primary insurance coverage may prove to be exhausted, while other years of primary insurance coverage may not be. But this does not necessarily mean excess insurance is not available. If the primary insurance as to a particular year on the risk has been exhausted, then an excess policy applicable to that year must pay its pro rata share.

    Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Porter Hayden Co., Nos.: 03-3414, 03-3408, slip op. at 5 (D. Md. Jan. 2, 2013). The Court explained that, with respect to operations claims not subject to an aggregate limit, excess insurance may not be available for a certain time period due to lack of exhaustion; where primary coverage has been exhausted, excess insurance may be required to pay for those losses. The Court held that its interpretation avoided any issues of requiring an insurer to pay more than its pro rata share.