Multi-Year Excess Policies' Aggregate Limit Found Not to be Annualized

Union Carbide Corp. v. Affiliated FM Ins. Co.
68 A.D.3d 534, 891 N.Y.S.2d 347
N.Y.A.D. 1 Dept.,2009.

This high profile case determined whether the aggregate limits of multi-year excess policies applied on an annual basis or applied over the three year term. This question involved no small amount of money. The policies had aggregate limits of $30,000,000. Union Carbide argued that the $30,000,000 aggegrate applied annually for an apparent total of $90,000,000 over the three year course of the policy.

The excess policies indicated that they followed form to the underlying insurance and “shall follow all the terms, insuring agreements, definitions, conditions and exclusions” of the applicable underlying insurance policy. The underlying policies each contained an “annual aggregate” limit of liability. Union Carbide argued that the excess policies thus were required to apply the annual aggregate provision set forth in the primary policies, since the excess policies did not expressly state the aggregate was for the life of the policy.

The majority however, adopted the analysis in an unreported federal case Maryland Cas. Co. v. W.R. Grace & Co., 1996 WL 169326, 1996 U.S. Dist. LEXIS 4500 [S.D.N.Y. 1996]. The majority found that the language in the excess policies in both cases were indistinguishable. The majority found no ambiguity and noted that Union Carbide was seeking “to alter the plain terms of the contract by adding the word ‘annual’ where it simply does not otherwise exist” (id. WL at *5, LEXIS at *15; see also Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475, 775 N.Y.S.2d 765, 807 N.E.2d 876 [2004] [“courts may not by construction add or excise terms”] [internal quotation marks omitted] ).

In view of what it found to be unambiguous language, the court was not bothered by the absence of any language that indicated the aggregate was not to be applied annually, citing Nissho Iwai Europe v. Korea First Bank, 99 N.Y.2d 115, 121-122, 752 N.Y.S.2d 259, 782 N.E.2d 55 [2002] [“ambiguity does not arise from silence, but from what was written so blindly and imperfectly that its meaning is doubtful”] [internal quotation marks omitted]).

Justice Tom filed a notable partial dissent. He pointed out some disenguity in the majorities' opinion. While the majority stated that the excess policy in W.R. Grace was indistinguishable, in fact those policies provided that they would follow form "except for limits". Thus, in W.R. Grace the argument the aggregate was annualized was much less cogent since following form with respect to limits was explictly excepted. Indeed, the fact the Union Carbide excess policies did not contain similar language, if anything, was evidence in favor of Union Carbide's position.

To the majority's credit, it did address this argument, but its answer was far from satisfactory. It noted that while the subject excess policy did not contain the phrase "except for limits", it did contain the phrase “subject to the declarations set forth below” of which one was the $30,000,000 aggregate limit. While the majority was right that "except for" and "subject to" are somewhat equivalent, its argument was nevertheless circular, since the meaning of aggregate limit language was what the case was about in the first place.

Justice Tom found the facts in Uion Carbide were more "consonant with those of Travelers Cas. & Sur. Co. v. ACE Am. Reins. Co., 392 F.Supp.2d 659 [S.D.N.Y.2005], affd. 201 Fed.Appx. 40 [2d Cir.2006], in which the court noted that the inclusion of a follow the form clause in a three-year reinsurance certificate creates a presumption of concurrency with the terms of the underlying policy that can only be overcome “through the placement of explicit liability limitations in the certificate itself” ( id. at 665). Thus, the court annualized the aggregate limit of liability, holding that because, as here, “the certificates do not clearly or explicitly limit the coverage terms of the underlying policy, the presumption of concurrency between the excess policy and the Three-Year Certificates is not overridden” ( id.).