16 N.Y.3d 420 (2011)

When an excess insurance policy incorporates an underlying policy’s terms through a “follow-the-form” clause, those terms, including annual aggregate limits, apply unless the excess policy’s declarations explicitly and unambiguously state otherwise.

Summary

Union Carbide (UCC) sought coverage for asbestos claims under a layered insurance program. The dispute centered on a fifth-layer excess policy and whether its aggregate limit of $30 million was renewed annually or applied to the entire three-year policy period. The policy contained a “follow-the-form” clause incorporating the terms of an underlying policy with an annual aggregate limit. UCC argued for annual renewal, while the insurers claimed a single aggregate limit. The court held that the “follow-the-form” clause meant the limit was renewed annually. The court also considered whether a two-month policy extension triggered a new limit but determined UCC hadn’t proven it was entitled to summary judgement on this issue. The court emphasized the importance of uniform coverage in complex insurance programs.

Facts

UCC purchased multiple layers of liability insurance, including a fifth excess layer covering losses between $70 million and $100 million. This layer was subscribed to by several insurers, including Continental Casualty Company and Argonaut Insurance Company. The fifth-layer policy incorporated the terms of an underlying Appalachian Insurance Company policy through a “follow-the-form” clause. The Appalachian policy had an “annual aggregate” limit. UCC faced substantial asbestos claims and sought coverage under the excess policies, arguing that the $30 million limit should be applied annually. Continental extended its policy for two months and UCC argued that this created an additional year of coverage.

Procedural History

UCC moved for partial summary judgment, arguing that the aggregate limit in the fifth-layer excess policy was renewed annually and that the Continental extension triggered a new limit. The Supreme Court granted UCC’s motions. The Appellate Division reversed. The Court of Appeals modified the Appellate Division’s order, granting UCC’s motion on the annualization issue but affirming the denial on the extension issue.

Issue(s)

1. Whether the aggregate limit in the fifth-layer excess insurance policy was renewed annually, given the “follow-the-form” clause incorporating the underlying policy’s annual aggregate limit.
2. Whether the two-month extension of the Continental policy created a new “year” for policy limit purposes, entitling UCC to an additional $5 million in coverage.

Holding

1. Yes, because the “follow-the-form” clause incorporated the underlying Appalachian policy’s annual aggregate limit, and the excess policy’s declarations did not unambiguously negate this annualization.
2. No, because UCC failed to meet its burden on summary judgment to demonstrate that the policy extension created a new “year” with a new policy limit. The record was unclear on whether the parties intended the extension to provide a fresh set of policy limits.

Court’s Reasoning

Regarding the annualization issue, the court reasoned that “follow-the-form” clauses are intended to provide insureds with uniform coverage across multiple layers of insurance. It would be illogical for a sophisticated insured like UCC to bargain for differing coverage periods between its primary and excess layers. The court noted that the policy language included both a per occurrence and aggregate limit of the same amount ($30 million), suggesting that there was an intent for the limit to be applied for each occurrence, annually. While the court acknowledged the general principle that extrinsic evidence is unnecessary when a writing is clear, it noted that even considering UCC’s extrinsic evidence showing the universal custom of annualization, UCC’s position was overwhelmingly supported. Regarding the policy extension, the court noted the conflicting arguments and the lack of clear evidence showing a mutual intent to create a new policy limit. The court stated, “We conclude, as the Appellate Division majority did, that UCC has not met its burden on summary judgment of establishing coverage for an additional year’s policy limits”.