Rapid-American Corporation et al v. St. Paul Fire and Marine Insurance Company et al

UNITED STATES BANKRUPTCY COURT 	-
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------X
In re: 	:
: 	Chapter 11
RAPID-AMERICAN CORPORATION, 	: 	Case No. 13-10687 (SMB)
:
Debtor. 	:
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RAPID-AMERICAN CORPORATION, THE 	:
OFFICIAL COMMITTEE OF UNSECURED 	:
CREDITORS, AND LAWRENCE 	:
FITZPATRICK, THE FUTURE CLAIMANTS’ 	:
REPRESENTATIVE, 	:
:
Plaintiffs, 	:
:
-against- 	: 	Adv. Proc. No. 15-01095 (SMB)
:
TRAVELERS CASUALTY AND SURETY 	:
COMPANY, ST. PAUL FIRE AND MARINE 	:
INSURANCE COMPANY, AND NATIONAL 	:
UNION FIRE INSURANCE COMPANY OF 	:
PITTSBURGH, PA, 	:
:
Defendants. 	:
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MEMORANDUM DECISION DENYING CROSS-MOTIONS FOR
PARTIAL SUMMARY JUDGMENT ON THE ISSUE OF LIMITS
A P P E A R A N C E S:
REED SMITH LLP
Attorneys for the Debtor and Debtor-in-
Possession
599 Lexington Avenue, 22nd Floor
New York NY 10022
Paul E. Breene, Esq.
Paul M. Singer, Esq.
Of Counsel
GILBERT LLP
Attorneys for the Official Committee
Of Unsecured Creditors and the Future
Claimants’ Representative
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1100 New York Avenue, NW Suite 700
Washington, DC 20005
Kami E. Quinn, Esq.
Of Counsel
MENDES & MOUNT, LLP
Attorneys for the Defendant National
Union Fire Insurance Company of Pittsburgh, PA
750 Seventh Avenue
New York, NY 10019
Eileen T. McCabe, Esq.
R. James Bradford, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”)
sold Rapid-American Corporation (“Rapid”) a fourteen month excess insurance policy
with an “aggregate” limit of liability of $7 million. Rapid, the Official Committee of
Unsecured Creditors, and the Future Claimants’ Representative (collectively,
“Plaintiffs”) commenced this adversary proceeding seeking, inter alia, a declaration that
the aggregate limit should be annualized such that the last two months of coverage
triggered an additional $7 million in coverage, or a total of $14 million in coverage.
Both sides have moved for partial summary judgment.1 For the reasons that follow, the
Court concludes that the National Union Policy is ambiguous, and summary judgment is
denied.
1 	Defendant St. Paul Fire and Marine Insurance Company and Travelers Casualty and Surety
Company, f/k/a The Aetna Casualty and Surety Company (“Travelers”) had sold a multi-year excess policy
with aggregate limits to Rapid that raised some of the same “limits” questions. Travelers and the
Plaintiffs moved for partial summary judgment, and the Court denied both motions from the bench.
(Order, dated Mar. 2, 2017 (ECF Doc. # 139).)
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BACKGROUND
Rapid is the successor to the liabilities of The Philip Carey Manufacturing
Company, a company that manufactured and distributed products containing asbestos.
(Second Amended Complaint, dated July 24, 2015 (“SAC”) at ¶ 1 (ECF Doc. # 26).)
Starting in 1974, claimants began suing Rapid in asbestos-related personal injury
actions. (Id. at ¶ 2.) While Rapid settled many claims, there were still approximately
275,000 outstanding asbestos-related personal injury claims against it when it
commenced this chapter 11 case on March 8, 2013. (Id. at ¶ 4.)
National Union issued policy number 122-93-43, covering the fourteen month
period from October 31, 1977 to January 1, 1979 (the “National Union Policy”). (See
Affirmation of R. James Bradford in Support of Defendant National Union’s Cross-
Motion for Partial Summary Judgment That National Union Policy No. 122-93-43 Has
a Total Aggregate Limit of Liability of $7 Million, dated Mar. 10, 2016 (“Bradford
Affirmation”), Ex. 1 (ECF Doc. # 54-1).) It provided excess coverage in the amount of
“$7,000,000 each occurrence and in the Aggregate part of $40,000,000 each
occurrence” during the policy period. (Id., Ex. 1 at 1.) The premium was “$7,000 -
Policy Period.” (Id.) The National Union Policy was part of a tower of $40 million in
excess coverage that covered the same fourteen month period. (See Affirmation of Paul
M. Singer in Support of Plaintiffs’ Motion for Partial Summary Judgment, dated Jan.
22, 2016, Ex. B (“Rapid Coverage Chart”) (ECF Doc. # 41-2); SAC at ¶ 24).) 2
2 	According to the Rapid Coverage Chart, several of Rapid’s insurance policies terminated on
October 31 while others terminated on January 1. It appears that the fourteen month period was designed
to put all of the policies on a calendar year.
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The National Union Policy consisted of a one page declaration and a one page
endorsement, and did not contain an Insuring Agreement or any of the terms that
usually govern the insurer-insured relationship. Instead, it included a follow-the form
provision3 stating that it was “subject to all the terms and conditions set forth below
[and] shall follow all the terms and conditions of Policy Number to be Advised issued by
Northbrook Insurance Co. including any renewals or rewrites thereof.” It did not
identify the Northbrook Insurance Company (“Northbrook”) policy that it incorporated,
and during the period of coverage, there were two. The parties agree that the
declaration incorporated Northbrook policy number 63-002-477 (the “Northbrook 1977
Policy”), which ran for one year from January 1, 1977 to January 1, 1978, 4 but they
disagree as to whether it also incorporated Northbrook policy number 6-300-3826 (the
“Northbrook 1978 Policy,” 5 and collectively with the Northbrook 1977 Policy, the
“Northbrook Policies”), which covered the next calendar year. The Northbrook 1977 and
1978 Policies provided, respectively, $15 million and $20 million in coverage per
occurrence and “in the aggregate for each annual period where applicable.” (Breene
Affirmation, Exs. B, at p. 2 of 21 & Ex. C, at p. 11 of 31.) 6
3 	A follow-the-form excess policy like the National Union Policy incorporates the terms and
conditions of an underlying policy, but in the event of a conflict and unless the excess policy states
otherwise, the terms of the excess policy control. 2 B ARRY R. OSTRAGER & THOMAS R. NEWMAN, HANDBOOK
ON INSURANCE COVERAGE DISPUTES § 13.01[a], at 1182-83 (18th ed. 2017).
4 	A copy of the Northbrook 1977 Policy is annexed as Exhibit B to the Affirmation of Paul E. Breene
in Opposition to National Union’s Cross-Motion for Partial Summary Judgment and in Support of
Plaintiffs’ Cross-Motion for Partial Summary Judgment on Limits, dated Mar. 30, 2016 (“Breene
Affirmation”) (ECF Doc. # 72).)
5 	A copy of the Northbrook 1978 Policy is annexed as Exhibit C to the Breene Affirmation.
6 	Page references such as “p. 11 of 31” refer to the pagination imprinted at the top of each page on
the Court’s CM/ECF filing system.
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The Northbrook 1977 Policy attached to the parties’ pleadings consisted of a one
page declaration and twenty pages of schedules and endorsements. (See id., Ex. B;
Affirmation of R. James Bradford in Support of National Union’s Cross-Motion for
Summary Judgment That the Coverage Obligations of National Union’s Excess Policies
Do Not Attach Until All Underlying Coverage Is Exhausted By Actual Payment of
Claims or Losses, dated Mar. 10, 2016, Ex. C (ECF Doc. # 60-3).) The attachment did
not include the Insuring Agreement or any of the terms or definitions relevant to the
dispute, and was obviously incomplete. At oral argument, counsel for the Plaintiffs
supplied what he represented to be a complete copy of the Northbrook 1977 Policy,
(Transcript of 2/16/17 Hearing, at 34:17-18 (ECF Doc. # 137)), but the Insuring
Agreement was illegible. (Id. at 41:4-6.) Counsel implied that the Insuring Agreement
was the same as the more legible Northbrook 1978 Policy discussed in the next
paragraph, (see id. at 40:5-9), and National Union did not dispute this assertion. Thus,
it appears that the Northbrook Policies included the same Insuring Agreement with the
same terms and definitions, and the dispute regarding the incorporation of the
Northbrook 1978 Policy is immaterial to the current dispute.
The Northbrook 1978 Policy, in this regard, included language that supports the
Plaintiffs. It states that the “aggregate limit of liability applies separately to each
consecutive annual period . . ., or if the last consecutive period is less than 12 months, to
such period of less than 12 months.” (Breene Affirmation, Ex. C, at p. 3 of 31). In
addition, it defined “annual period” to mean “the twelve-month period following the
policy effective date or following any anniversary date thereof falling within the policy
period, or if the policy period between the policy effective date or any anniversary date
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and the termination of this policy is less than twelve months, such lesser period.” (Id.,
Ex. C, at p. 6 of 31.) Thus, under the Northbrook 1978 Policy, the aggregate limit
applied separately to an additional consecutive period of less than one year.
As aptly stated by the Plaintiffs, ‘[t]he issue before this Court . . . is whether the
fourteen month excess insurance policy sold to Rapid by National Union provides for
two annual aggregate limits, or a single aggregate limit spread over the fourteen month
policy period.” (Plaintiffs’ Memorandum of Law in Opposition to National Union’s
Cross-Motion for Partial Summary Judgment and in Support of Their Cross-Motion
for Partial Summary Judgment on Limits, dated Mar. 30, 2016 (“Plaintiffs’ Memo”), at
1 (ECF Doc. # 73).) National Union argues that the National Union Policy
unambiguously provided only $7 million in coverage for the fourteen months.
(Memorandum of Law in Support of National Union’s Cross-Motion for Partial
Summary Judgment that National Union Policy No. 122-93-43 Has a Total Aggregate
Limit of Liability of $7 Million, dated Mar. 10, 2016 (“National Union Memo”), at 3-6
(ECF Doc. # 56).) Furthermore, any conflicts between the National Union Policy and
the Northbrook Policies relating to the limit of liability must be resolved in favor of the
National Union Policy. (Id. at 7-9.) In addition, the Plaintiffs represented that the
National Union Policy was part of a $40 million tower, but their position would result in
$47 million (or possibly $80 million) in excess coverage for the fourteen months. (Id. at
9-10.)
The Plaintiffs counter that the National Union Policy follow-the-form language is
“subject to” the underlying Northbrook Policies, including their language that
annualizes the applicable aggregate limits. (Plaintiffs’ Memo at 5-6.) The Plaintiffs also
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argue that the term “subject to” means that the relevant documents (i.e. the National
Union Policy and the Northbrook Policies) must be read together, rather than reading
the National Union Policy’s declaration as overriding the Northbrook Policies’ language.
(Id. at 6-7.) Additionally, the Plaintiffs argue that the Rapid Coverage Chart is a
demonstrative aid that cannot be used to override the terms of the National Union
Policy. (Id. at 13.)
DISCUSSION
A. 	Standard Governing Summary Judgment
The parties’ motion and cross-motion concern an insurance coverage dispute,
and the insured bears the burden of proving coverage. 7 Union Carbide Corp. v.
Affiliated FM Ins. Co., 947 N.E.2d 111, 115 (N.Y. 2011) (“Union Carbide II”); see
Consolidated Edison Co. of New York, Inc. v. Allstate Ins. Co., 774 N.E.2d 687, 690
(N.Y. 2002). As is usual in such disputes, the outcome depends on the terms of the
insuring agreement, and in Morgan Stanley Group, Inc. v. New England Ins. Co., 225
F.3d 270 (2d Cir. 2000), the Second Circuit outlined the rules that govern the
interpretation of an insurance contract. “Under New York law, ‘an insurance contract is
interpreted to give effect to the intent of the parties as expressed in the clear language of
the contract.’” Id. at 275 (quoting Village of Sylvan Beach v. Travelers Indem. Co., 55
F.3d 114, 115 (2d Cir. 1995). The threshold question of law is whether the terms of the
insurance contract are ambiguous. Id. As with other contracts, an insurance contract is
7 	Both sides rely on New York decisional law, and accordingly, New York law governs the
interpretation of the National Union and Northbrook Policies. See Motorola Credit Corp. v. Uzan, 388
F.3d 39, 61 (2d Cir. 2004) (“[T]he parties’ briefs assume that New York law controls this issue, and such
‘implied consent . . . is sufficient to establish choice of law.’”) (citing Krumme v. WestPoint Stevens, Inc.,
238 F.3d 133, 138 (2d Cir. 2000).
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ambiguous where its terms suggest “‘more than one meaning when viewed objectively
by a reasonably intelligent person who has examined the context of the entire integrated
agreement and who is cognizant of the customs, practices, usages and terminology as
generally understood in the particular trade or business.’” Id. (quoting Lightfoot v.
Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997). If the insurance contract is
ambiguous, “‘the court may accept any available extrinsic evidence to ascertain the
meaning intended by the parties during the formation of the contract.’” Id. at 275-76
(quoting Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd’s,
136 F.3d 82, 86 (2d Cir. 1998)). “‘If the extrinsic evidence does not yield a conclusive
answer as to the parties’ intent,’ a court may apply other rules of contract construction,
including the rule of contra proferentem, which generally provides that where an insurer
drafts a policy ‘any ambiguity in [the] . . . policy should be resolved in favor of the
insured.’” Id. at 276 (quoting McCostis v. Home Ins. Co., 31 F.3d 110, 113 (2d Cir.
1994)).
The rationale for construing an insurance contract against the insurer is that
“[t]he terms of an insurance policy are usually what the insurance company chooses to
make them.” Union Ins. Soc. Of Canton, Ltd. v. William Gluckin & Co., 353 F.2d 946,
951 (2d Cir. 1965). This does not mean that a court should invoke the doctrine in the
first instance to resolve a motion for summary judgment dealing with an ambiguous
insurance contract. “[C]ontra proferentem is used only as a matter of last resort, after
all aids to construction have been employed but have failed to resolve the ambiguities in
the written instrument.” Schering Corp. v. Home Ins. Co., 712 F.2d 4, 10 n.2 (2d Cir.
1983); accord William Gluckin, 353 F.2d at 951; Uniroyal, Inc. v. Home Ins. Co., 707 F.
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Supp. 1368, 1373 (E.D.N.Y. 1988) (Weinstein, J.) (“[T]he proper resolution under
federal procedure and New York law is that summary judgment is proper on an
ambiguous insurance policy when, after having allowed full discovery and found no
valuable extrinsic evidence of the parties’ intent, the court applies as a last resort the
state law presumption construing the policy against the insurer.”); Hartford Acc. &
Indem. Co. v. Wesolowski, 305 N.E.2d 907, 909 (N.Y. 1973) (“If there is ambiguity in
the terminology used, however, and determination of the intent of the parties depends
on the credibility of extrinsic evidence or on a choice among reasonable inferences to be
drawn from extrinsic evidence, then such determination is to be made by the jury.”). If
the insurance contract is ambiguous and the motion papers do not resolve the
ambiguity, the Court should deny the motion for summary judgment even where it is
unlikely that the parties will be able to adduce additional evidence of their intent.
William Gluckin, 353 F.2d at 951-52.
B. 	The Policies
The National Union Policy plainly states that the policy period runs for fourteen
months and $7 million is the aggregate limit of liability. “Aggregate” is synonymous
with “total” or “whole.” See B LACK ’S L AW D ICTIONARY 79 (10th ed. 2014) (“aggregate”
means “[f]ormed by combining into a single whole or total”); M ERRIAM -WEBSTER T HIRD
NEW INTERNATIONAL D ICTIONARY UNABRIDGED, http://unabridged.merriam-
webster.com/unabridged/aggregate (last visited May 11, 2017) (“aggregate” means
“taking all units as a whole”). It seems a contradiction to interpret National Union’s
“aggregate” liability of $7 million to consist of two separate components of $7 million,
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totaling $14 million. Accordingly, National Union’s interpretation of its policy is
reasonable.
The next question is whether the Plaintiffs’ interpretation is also reasonable. The
National Union Policy does not exclude annualization language, and as Union Carbide
II shows, the aggregate limits in a multi-year excess policy may nonetheless be read as
annual limits in light of annualization language in the incorporated, underlying policy.
In Union Carbide, Appalachian Insurance Company (“Appalachian”), the bottom layer
insurer, issued a three year policy stating that the “aggregate” limit of liability was the
“total limit . . . under this policy . . . during each consecutive twelve months of the policy
period.” In other words, the aggregate limit was actually three separate annual limits.
Six other excess insurers, including Continental Casualty Company (“Continental”) and
Argonaut Insurance Company (“Argonaut”), issued three year “subscription form
policies” that covered losses exceeding $70 million up to $100 million. They explicitly
followed form to the Appalachian policy “subject to the declarations” in the excess
policies. The declarations in those policies included the following: “LIMIT OF
LIABILITY: $30,000,000, each occurrence and in the aggregate excess of $70,000,000.
Umbrella Liability.” The $30 million limit was to be divided equally—$5 million each—
among the six insurers. Union Carbide II, 947 N.E.2d at 112-13.
Union Carbide posed two questions relevant to the current dispute. The first was
whether the Continental and Argonaut limits of liability were aggregate or annual limits.
The insurers argued that the $30 million limit in the declaration trumped the follow-
the-form clause and the annualized limits in the Appalachian policy because the follow-
the-form clause was explicitly “subject to the declarations” in the excess policies which
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spoke of aggregate, not annual limits. In addition, Continental and Argonaut argued
that the limit of “$30,000,000 . . . in the aggregate” meant that the six insurers could
only be responsible, at most, for a collective $30 million during the three year policy
period, and each excess insurer could only be liable for $5 million. Id. at 113. Union
Carbide, like the Plaintiffs in this case, argued that the follow-the-form clause in the
excess policies imported the language that annualized the aggregate limit. Id. The New
York Supreme Court granted partial summary judgment to Union Carbide on the
aggregate limits issue, but the Appellate Division reversed in a split decision, the
majority concluding that the declarations prevailed over the terms of the underlying
policies. Union Carbide Corp. v. Affiliated FM Ins. Co., 891 N.Y.S.2d 347, 349-50 (N.Y.
App. Div. 2009) (“Union Carbide I”).
The Court of Appeals reversed the Appellate Division in Union Carbide II
primarily for two reasons. First, the follow-the-form clause prevailed over the arguably
inconsistent declaration language because follow-the-form clauses are intended to
harmonize coverage and ensure that “large and complicated” insurance programs (such
as Union Carbide’s) did not differ in how they spread out policy limits over time. Union
Carbide II, 947 N.E.2d at 113. The parties would not have intended that result. Second,
it would be illogical to specify a limit of $30 million for “each occurrence” if the parties
intended a $30 million limit for the entire life of the policy; an “each occurrence” limit
would have been superfluous. Id. at 113-14.
In reaching this conclusion, the Court declined to analyze extrinsic evidence
because the lower courts and the parties had endorsed or adopted that approach and the
meaning of the policies was clear. Id. at 114. It acknowledged that “there inevitably will
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be cases in which the parties have not expressed themselves clearly in writing, and in
which resort to extrinsic evidence will be necessary.” Id. But even assuming that the
Continental and Argonaut policies were ambiguous, all of the extrinsic evidence
overwhelmingly supported Union Carbide’s interpretation. Id. This included expert
testimony that annualization was the universal custom of the industry, other evidence
showing the existence of that custom, and evidence showing that some of the
participants assumed that the limits would be annualized. Id.
The second relevant issue in Union Carbide concerned a two month extension of
the three year excess policy issued by Continental. Continental argued that the one year
limit of $5 million applied to the final fourteen months of the policy while Union
Carbide contended that the two month extension (the “stub period”) triggered a new
annual limit so that it had $10 million of coverage for the final fourteen months. Id.
The New York Supreme Court granted summary judgment to Union Carbide on the stub
period issue, but the Appellate Division reversed concluding that the policy was
ambiguous. Union Carbide I, 891 N.Y.S.2d at 350-51. On further appeal, the Court of
Appeals described the question as “vexing” and neither result “wholly fair,” Union
Carbide II, 947 N.E.2d at 114, noted that a number of the courts that have considered
the issue had “unsurprisingly” reached divergent results, id. at 114-15 (collecting cases),
and affirmed the Appellate Decision’s order speculating that extrinsic evidence might
shed light on the facts and circumstances surrounding the parties’ intentions and the
negotiations leading to the extension. Id. at 115.
Union Carbide II illustrates that the “aggregate” limit of liability in an excess
policy that follows-the-form does not automatically preclude the annualization of the
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“aggregate” limit if the underlying policy annualizes aggregate limits. Accord Travelers
Cas. & Sur. Co. v. ACE Am. Reinsurance Co., 201 F. App’x 40, 41 (2d Cir. 2006) (“ACE
contends that the plain meaning of ‘aggregate’ is a single aggregate limit. We
disagree.”). Moreover, many of the factors that Union Carbide II relied on to conclude
that “aggregate” meant “annual” are present in this case. The National Union Policy was
“subject to” the declarations in that policy but otherwise followed-the-form of the
Northbrook 1977 Policy and possibly, the Northbrook 1978 Policy. In addition, Rapid
had a large and complicated insurance program involving primary insurance and
multiple levels of excess coverage that, in this case, did not match the periods of the
underlying coverage. In addition, the Rapid Coverage Chart indicates that between
January 1, 1975 and January 1, 1979, Rapid maintained $80 million in coverage during
every calendar year. Thus, any interpretation that diluted the annual coverage by
adding two more months to the limit seems contrary to the insurance program that
Rapid put into place. 8 In addition, the National Union Policy had the same “per
occurrence” and aggregate limits of liability. As Union Carbide II asked somewhat
rhetorically, “[i]f $[7] million was the most that could be paid on the entire policy
why . . . did the parties bother to specify a per occurrence limit in an equal amount?”
Union Carbide II, 947 N.E.2d at 114.
8 	For this reason, I question National Union’s argument that the Plaintiffs’ interpretation would
grant it $47 million in tower coverage rather than $40 million in tower coverage. Union Carbide II
illustrates that the extent of the tower coverage granted under the National Union Policy must be
considered in light of Rapid’s overall insurance program. If Rapid had exhausted the $7 million in
coverage during the first twelve months, National Union’s interpretation would compel the conclusion
that during the last two months (October 31, 1978-January 1, 1979), Rapid had only $73 million in total
coverage rather than the $80 million it may have thought it had.
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While Union Carbide II supports the reasonableness of the Plaintiffs’
interpretation of “aggregate,” it does not entitle them to partial summary judgment. The
Court of Appeals denied summary judgment on the “vexing” stub period issue, and here,
the annualization and stub period issues are intertwined; the stub period is the
additional annual period urged by the Plaintiffs. The terms of the Northbrook Policies
do support the Plaintiffs’ interpretation, but the ambiguities noted nonetheless persist,
and the ultimate issue is the intent of the parties. 9 Accordingly, both interpretations are
reasonable, the National Union Policy is ambiguous and neither side has supplied
extrinsic evidence beyond the insurance policies themselves that might shed light on
their intent.
Finally, National Union’s opposition to the reasonableness of the Plaintiffs’
interpretation is unpersuasive. It cites two unreported New York Supreme Court
decisions, Central Park Studios, Inc. v. Slosberg, Index No. 110490/08, 2014 N.Y. Misc.
Lexis 199 (N.Y. Sup. Ct. Jan. 13, 2014) and 200 Fifth Ave. Owner, LLC v. New
Hampshire Ins. Co., Index No. 104141/11, 2012 N.Y. Misc. Lexis 2731 (N.Y. Sup. Ct.
June 5, 2012), in support of its argument that the terms of the follow-the-form excess
policy control over inconsistent provisions in the underlying policy. (National Union
Memo at 7; National Union’s Reply Memorandum of Law in Further Support of
National Union’s Cross-Motion for Partial Summary Judgment that National Union
Policy No. 122-93-43 Has a Total Aggregate Limit of Liability of $7 Million and in
9 	The Plaintiffs attempt to distinguish Union Carbide II noting that it involved an extension of
coverage while the National Union Policy was always a fourteen month policy. (Plaintiffs’ Memo at 10.)
This is certainly true but does not change the inquiry into the parties’ intent. It merely refocuses the
inquiry from the intent at the time the extension was granted in Union Carbide to the time the parties
entered into the National Union Policy.
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Opposition to Plaintiffs’ Cross-Motion for Partial Summary Judgment on Limits, dated
Apr. 13, 2016 (“National Union Reply Memo”), at 3-4 (ECF Doc. # 85).) These cases are
distinguishable. Both concluded, inter alia, that a follow-the-form provision in an
excess policy could not convert an excess policy into a primary policy or affect the
relative priorities between insurers. See Central Park Studios, 2014 N.Y. Misc. Lexis
199, at *12 (“The follow-form provision in the second Delos policy does not convert that
excess policy into a primary policy [and] only applies where there is no inconsistency
between the two policies, and there is clearly an inconsistency as to their priority, as one
is a primary policy and the other is excess.”); 200 Fifth Ave. Owner, LLC v. New
Hampshire Ins. Co., 2012 N.Y. Misc. Lexis 2731, at *15-16 (“[D]efendant’s follow form
provision [does not] state that it will become a primary insurer or that its coverage
comes into play prior to AIG’s. As stated above, the terms of the insurance policy that
has a follow form provision prevails over the terms of the policy whose form it follows.”)
The National Union and Northbrook policies concern aggregate limits, not
priorities. And notwithstanding identical “subject to” language, Union Carbide II
concluded that the aggregate limits in multi-year excess policies had to be interpreted in
harmony with the follow-the-form provision and the annualization language in the
primary policy. Thus, the two New York cases cited by National Union are
distinguishable, but to the extent National Union insists they are not, their reasoning
does not survive Union Carbide II.
Finally, National Union places substantial reliance on Maryland Cas. Co. v. W.R.
Grace & Co., No. 88 CIV. 2613 (JSM), 1996 WL 169326 (S.D.N.Y. Apr. 11, 1996).
(National Union Memo at 7-9; National Union Reply Memo at 6, 8.) In Maryland
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Casualty, Fireman’s Fund Insurance Company (“Fireman’s”) had issued a multi-year
excess policy (the 1966 policy) with a limit of liability of $5 million per occurrence and
$5 million “aggregate.” Maryland Casualty, 1996 WL 169326, at *3. The Fireman’s
policy included a follow-the-form provision incorporating the terms of the underlying
policy “except for limits of liability.” (Id.) The insured (Grace) asserted that the
aggregate limit should be read as an annual limit. It noted that the underlying policy
annualized the aggregate limits, Grace had paid the same premium for the Fireman’s
policy and the underlying policy which also provided $5 million in coverage annually,
and the excess policies above the Fireman’s policy specifically referred to the underlying
policies as containing aggregate annual limits. Id. at *5.
The Maryland Casualty Court rejected Grace’s position, and concluded that the
1966 policy contained an aggregate limit of $5 million. Finding the language of the 1966
policy plain and clear, it declined to consider extrinsic evidence to contradict it.
Moreover, Grace had purchased other insurance policies that contained the word
“annual,” and was clearly able to negotiate such a term in the 1966 policy had the parties
agreed to it. Id. The Appellate Division in Union Carbide I relied on Maryland
Casualty in rejecting Union Carbide’s contention that the aggregate limits of the multi-
year excess policies should be interpreted as annual limits. Union Carbide I, 891
N.Y.S.2d at 349 (“We agree with Judge Martin’s analysis in [Maryland Casualty], as the
relevant terms of the multi-year excess policies are indistinguishable from those in W.R.
Grace.”)
But the Court of Appeals in Union Carbide II reversed the Appellate Division. It
cited Maryland Casualty as an example of a decision that construed similar language
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and rejected annualization, Union Carbide II, 947 N.E.2d at 113, but concluded that
Union Carbide “has the better argument.” Id. Moreover, the excess policy in Maryland
Casualty expressly excluded the limits of liability in the underlying policy, a distinction
emphasized by Justice Tom in his dissent in Union Carbide I. See Union Carbide I, 891
N.Y.S.2d at 352 (Tom, J, dissenting). 10 The National Union Policy does not contain a
similar, express exclusion.
Returning to the Plaintiffs’ formulization of the issue, the Court cannot determine
as a matter of law “whether the fourteen month excess insurance policy sold to Rapid by
National Union provides for two annual aggregate limits, or a single aggregate limit
spread over the fourteen month policy period.” The National Union Policy is
ambiguous, additional extrinsic evidence may shed light on what the parties intended,
and as far as I can tell, they have not engaged in discovery on this issue. The motions for
partial summary judgment are therefore denied. The Court has considered the parties’
remaining arguments, and concludes that they lack merit.
10 	National Union also quoted from Uniroyal, Inc. v. Am. Re-Insurance Co., Dkt. No. A-6718-02T1,
2005 WL 4934215, at *16 (N.J. App. Div. Sept. 13, 2005) which stated that courts applying New York law
have “held that generalized ‘follow form’ language is incapable of increasing an insurer’s unambiguous,
bargained-for limits of liability respecting annualized limits.” (National Union Memo at 8.) That
conclusion is questionable after Union Carbide II. In addition, Uniroyal concluded after trial that a thirty
day extension of one of the policies involved in that case did not create a new annual period. Id. at *19-21.
Union Carbide II cited Uniroyal as an example of a decision that held that the stub period did not create a
new annual period, but concluded that it was not bound by Uniroyal or the other decisions cited by the
parties, and ultimately decided that the question could not be resolved on a motion for summary
judgment. Union Carbide II, 947 N.E.2d at 114-15.
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The parties are directed to contact chambers to schedule a conference for the
purpose of discussing the trial or other disposition of the adversary proceeding. Settle
order on notice.
Dated: New York, New York
May 15, 2017
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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