United States District Court, S.D. New York
March 11, 2004.
PHILADELPHIA INDEMNITY INSURANCE COMPANY, Plaintiff -v- EMPLOYERS INSURANCE COMPANY OF WAUSAU, Defendant
The opinion of the court was delivered by: GERARD LYNCH, District Judge
OPINION AND ORDER
Children's Discovery Centers and Knowledge Universe ("Children's
Discovery") ran a daycare center at the World Trade Center in Manhattan,
which the September 11, 2001 terrorist attacks destroyed. On that date,
because of a transition in insurance coverage, both plaintiff
Philadelphia Indemnity Insurance Company ("Philadelphia") and defendant
Employers Insurance Company of Wausau ("Wausau") insured Children's
Discovery for property damage. The parties jointly paid Children's
Discovery's claim, without prejudice to their legal rights, and now
dispute the proper allocation of liability. Before the Court are
cross-motions for summary judgment. For the reasons that follow, Wausau's
motion will be granted and Philadelphia's motion denied.
On September 11, 2001, Children's Discovery operated a daycare center
at 5 World Trade Center in Manhattan. (D. Rule 56.1 Stmt. ¶ 1.) On
that date, it held two policies that insured the center for property
damage and associated losses.*fn1 Wausau's policy, which covered
Children's Discovery from September 15, 2000, until September 15, 2001,
limited Wausau's liability to $15 million per occurrence. (Id.
¶¶ 4, 7.) Philadelphia's policy, which covered Children's Discovery
from September 1, 2001, until September 1, 2002, limited Philadelphia's
liability to about $250 million per occurrence. (Id. ¶¶ 9,
Both policies included "other insurance" clauses, which made each
insurer's obligation to pay a claim contingent on the insured's
obligation to first exhaust other insurance that covered the same risk.
(Id. ¶ 8, 12-13; P. Br. 5-6.) Wausau's "other insurance"
clause provided, subject to exceptions not relevant here, that Wausau
would "not pay for covered loss to covered property unless the amount of
any other insurance [wa]s exhausted." (Finazzo Cert., Ex. C.)
Philadelphia's "other insurance" clause provided:
1. You may have other insurance subject to the
same plan, terms, conditions and provisions as the
insurance under this Coverage Part. If you do, we
will pay our share of the covered loss or damage.
Our share is the proportion that the applicable
Limit of Insurance under this Coverage Part bears
to the Limits of Insurance of all insurance
covering on the same basis.
2. If there is other insurance covering the same
loss or damage, other than that described in 1.
above, we will pay only for the amount of covered
loss or damage in excess of the amount due from
that other insurance, whether you can collect on
it or not. But we will not pay more than the
applicable Limit of Insurance.
(Id., Ex. F.)
After the September 11, 2001 terrorist attacks destroyed its daycare
center, Children's Discovery submitted claims to Philadelphia and Wausau.
(D. Rule 56.1 Stmt. ¶ 3.) The insurers each made an initial advance
payment of $250, 000 to Children's Discovery, without prejudice to their
legal positions in potential litigation. Philadelphia then brought this
action against Wausau, seeking a judgment declaring the appropriate
allocation of Children's Discovery's loss. Wausau named Children's
Discovery as a third-party defendant, but the insurers subsequently
settled with Children's Discovery for a total of $2, 790, 000; each paid
$1, 145, 000 in addition to the $250, 000 payment already made. (D. Br.
7.) The parties agree that the appropriate allocation of liability as
between them is a pure question of law and therefore cross-move for
I. Standard for Summary Judgment
Summary judgment must be granted where "there is no genuine issue as to
any material fact and . . . the moving party is entitled to a judgment as
a matter of law." Fed.R.Civ.P. 56(c). The parties do not dispute any
material facts, and the interpretation of unambiguous provisions in
insurance contracts is a pure question of law. Mazzuoccolo v.
Cinelli, 666 N.Y.S.2d 621, 622-23 (1st Dep't 1997).
II. Choice of Law
In this diversity action, the choice-of-law rules of New York, the
forum state, govern. Gasperini v. Center for Humanities, Inc.,
518 U.S. 415, 427 (1996); Klaxon Co. v. Stentor Elec. Mfg. Co.,
313 U.S. 487, 496 (1941). In the context of "that special subset of
contracts that involves insurance," New York law calls for application of
"`the local law of the state which the parties understood was to be the
principal location of the insured risk.'" Zurich Ins. Co. v.
Shearson Lehman Button, Inc., 84 N.Y.2d 309, 318 (1994), quoting
Restatement (Second) of Conflict of Laws § 6 (1971); O'Neil v.
Yield House Inc., 964 F. Supp. 806, 809 (S.D.N.Y. 1997). Where, as
here, the insurance policies at issue cover risks in more than one state,
the Restatement suggests that a more complicated analysis may apply.
See In re Payroll Express Corp., 921 F. Supp. 1121, 1125 n.6
(S.D.N.Y. 1996). The Court need not, however, decide whether New York
would follow the Restatement or engage in that analysis because both
"parties' briefs assume that New York law controls, and such implied
consent . . . is sufficient to establish choice of law." Krumme v.
WestPoint Stevens Inc., 238 F.3d 133, 138 (2d Cir. 2000) (internal
quotation marks omitted).
III. Analysis Under New York Insurance Law
Both the Wausau and Philadelphia policies conditioned the insurer's
obligation to satisfy claims on the insured's obligation first to exhaust
any other insurance that covered the same risk, and both covered the loss
sustained by Children's Discovery. This naturally raises the question how
to reconcile those policies. New York law provides a clear answer:
"[W]here there are multiple policies covering the same risk, and each
generally purports to be in excess to the other, the excess coverage
clauses are held to cancel out each other and each insurer contributes in
proportion to its limit amount of insurance." Lumbermens Mut.
Cas. Co. v. Allstate Ins. Co., 51 N.Y.2d 651, 655 (1980); see,
e.g., Macari v. Nationwide Mut. Ins. Co., 745 N.Y.S.2d 191, 193 (2d
Dep't 2002); Gen. Accident Ins. Co. v. Gobetz, 651 N.Y.S.2d 623,
624-25 (2d Dep't 1996); Allstate Ins. Co. v. Bieder,
622 N.Y.S.2d 814, 814-15 (2d Dep't 1995); Tarolli v. Cont'l Cas. Ins.
Co., 581 N.Y.S.2d 510, 511 (4th Dep't 1992): Hosp. Underwriters Mut.
Ins. Co. v. Nat'l Cas. Co., 541 N.Y.S.2d 512, 513 (2d Dep't 1989);
Aetna Cas. & Sur. Co. v. Liberty Mut. Ins. Co.,
459 N.Y.S.2d 158, 163 (4th Dep't 1983) (all applying the general rule stated
in Lumbermens). By contrast, where one policy "expressly
negates contribution with other carriers, or otherwise manifests that it
is intended to be excess over other excess policies," State Farm
Fire and Cas. Co. v. LiMauro, 65 N.Y.2d 369, 374 (1985), other
policies that cover the same risk, including those with merely "general"
excess insurance clauses-that is, excess insurance clauses that do not
purport to be excess in relation to other excess policies-must be
exhausted before the former policy becomes obliged to pay.
Wausau and Philadelphia agree that neither policy's excess clause
expressly negates the other. Neither, that is, purports to be excess not
only in relation to other primary insurance, but also in relation to
other excess insurance.*fn2 See United Nat'l Ins. Co. v. Lumbermens
Mut. Cas. Co., No. 89 Civ. 3869, 1994 WL 259820, at *5 (S.D.N.Y.
June 8, 1994). The parties also agree that because their respective
excess insurance clauses stand in a mutually repugnant relationship, each
cancels the other out. (D. Br. 1, 8; P. Br. 12, 16; P. Opp. Br. 2)
See Great N. Ins. Co. v.
Mount Vernon Fire Ins. Co., 92 N.Y.2d 682, 687 (1999);
Lumbermens, 51 N.Y.2d at 655. The sole issue is therefore
whether, as Wausau contends, the general rule articulated in
Lumbermens, that "each insurer contributes in proportion to its
limit amount of insurance," applies, or whether, as Philadelphia
contends, some exception to that rule applies on the facts presented
The general rule, sometimes referred to in the case law as the rule of
ratable contribution, applies unless "its use would effectively deny and
clearly distort the plain meaning of the terms of the policies of
insurance." Lumbermens, 51 N.Y.2d at 655. The New York Court of
Appeals has said that "[w]hether there will be such distortion turns on
consideration of the purpose each policy was intended to serve as
evidenced by both its stated coverage and the premium paid for it, as
well as upon the wording of its provision concerning excess insurance."
State Farm, 65 N.Y.2d at 374 (internal citations omitted). But
the cases that recognize an exception to the rule of ratable
contribution, as did Lumbermens itself, concern how to
effectuate excess clauses that disclose an intent to trump other, merely
general, excess clauses.*fn3 Philadelphia cites no New York case in
which the "distortion" exception articulated in Lumbermens, 51
N.Y.2d at 655, and further elaborated in State Farm, 65 N.Y.2d
at 374-76, has been applied to modify the rule of
ratable contribution in the context of two insurers who concede
that neither is excess in relation to the other.
Philadelphia nonetheless argues that the rule of ratable contribution
should not be applied here because (1) the "parity of premiums" under its
policy and the Wausau policy manifests "a clear intent by the parties to
provide the same layer of coverage" to Children's Discovery (P. Br. 18.);
and (2) most of the New York cases where the general rule has been
applied arose out of motor vehicle accidents, where the various insurers
had insured different insureds against similar risks, whereas here, "both
insurers were protecting the same insured against the same risk."
(Id. 21 (emphasis in original): see also P. Opp. Br.
New York law does not support either of these arguments. Philadelphia
cites two cases, Castricone v. Riggi, 686 N.Y.S.2d 175 (3d
Dep't 1999), and Allstate Insurance Co. v. Insurance Co. of North
America, 628 N.Y.S.2d 137 (2d Dep't 1995), for the proposition that
courts depart from the general rule where necessary to effectuate the
intent of the policies. (P. Br. 17.) Both of those cases, however,
involved the construction of competing "other insurance" clauses. In
each, the Appellate Division simply applied the rule in State
Farm, 65 N.Y.2d at 375-76, under which, as explained above, "[a]
policy specifically shown to be excess to other excess policies creates a
higher level of coverage and is not required to contribute ratably with
mere excess policies." Allstate Ins. Co., 628 N.Y.S.2d at 138;
see Id. (finding the rule of ratable contribution inapplicable
where one of the two insurers' policies "clearly show[ed] that [its]
policy [wa]s excess to the excess liability policy of [the other]");
Castricone, 686 N.Y.S.2d at 177-78 (finding the rule of ratable
contribution inapplicable where one policy manifested a clear intent to
apply only "after the exhaustion of other excess policies," while the
other "expressly contemplated
contribution with other excess policies"). These cases therefore
support only the narrow proposition, which Wausau does not dispute, that
where two policies cover the same risk, one with a general excess clause,
the other with an excess clause that specifically negates other excess
clauses, the rule of ratable contribution does not apply; rather, the
policy with the merely general clause is deemed primary and must be
exhausted before the other becomes obliged to contribute at all
It is in this context that the size of premiums may become relevant,
for in some cases a lower premium may reflect the comparatively lower
risk that an excess insurer bears relative to a primary insurer. See
Lumbermens, 51 N.Y.2d at 656 ("Presumably the premiums for this
policy reflected the rarity of Lumbermens' ultimate requirement to
contribute to a settlement."); U.S. Fire Ins. Co. v. Fed. Ins.
Co., 858 F.2d 882, 885 (2d Cir. 1988) ("[P]remium size may be an
important factor in determining priority of coverage."). At the same
time, as the Second Circuit noted, any such "analysis must consider
whether premium disparity instead reflects disparities in the degree of
risk covered." Id. Here, neither the Philadelphia nor the
Wausau policy includes an excess clause that manifests a clear intent to
trump other excess clauses. Neither is an excess insurer relative to the
other. Philadelphia's reliance on the parity between its premium and that
of Wausau is therefore misplaced. Unlike in the excess insurance cases
cited by Philadelphia, a comparison of the premiums in this case casts no
light on whether one insurer should be deemed an excess insurer relative
to the other. And without, to borrow a phrase from Wausau's expert,
"immersing [itself] as a `super-underwriter'" in this dispute (Priest
Rep. ¶ 29), the Court remains ill equipped to determine the "real"
reason for the parity in premiums, even assuming arguendo that New York
law authorizes courts to engage in this exercise. Cf. Cont'l Cas.
Co. v. Aetna
Gas, and Sur. Co., 823 F.2d 708, 712 (2d Cir. 1987)
(observing, in applying Connecticut's comparable rule of ratable
contribution, that "[b]ecause insurance policies cover different types of
risk as well as different amounts, premium charges cannot rationally be
compared") (emphasis in original). Philadelphia cites no case in which a
New York court has departed from the rule of ratable contribution based
solely on the parity or disparity in premiums. Nor has any New York court
used such a comparison, as Philadelphia would have the Court do, to
discern the purported intent of two insurers as to how they would share a
loss for which both concededly bear primary liability. While this case
may well present "unique facts" (P. Opp. Br. 3), New York law does not
authorize departure from the rule of ratable construction on that basis.
Philadelphia cites no authority in support of its other objection to
the rule of ratable contribution. It is true that the rule most often
applies in the context of motor vehicle accidents (P. Br. 20-21; P. Opp.
Br. 3-4 & n.3), but no case or other authority suggests that it is
limited to that context. Indeed, Philadelphia acknowledges that the rule
of ratable contribution has also been applied in the context of claims
based on environmental damage, see, e.g., Avondale Indus., Inc. v.
Travelers Indem. Co., 774 F. Supp. 1416, 1436 (S.D.N.Y. 1991), and
at least one New York case, Lumber Mutual Insurance Co. v.
Lumberman's Mutual Casualty Co., 588 N.Y.S.2d 630 (2d Dep't 1992),
applied it to facts relevantly similar to those presented here. In
Lumber Mutual plaintiff and defendant insured "the same
premises, a shopping center, for overlapping periods of time," during
which the roof of those premises sustained damage from a hurricane.
Id. at 631. The plaintiff paid the insured's claim and then
sought contribution from the defendant, which had initially disavowed
coverage based on the insured's alleged violation of a provision of its
policy. After affirming the trial court's holding that the defendant
coverage on that basis, the Appellate Division proceeded to apply
the general rule of ratable contribution to allocate the loss among the
two insurers. Id. This decision, while brief, affirms that New
York's rule of ratable contribution applies to situations like the
present one, that is, where two primary insurers have insured the same
premises for the same risk during the same period of time.
Finally, Philadelphia objects that applying the rule of ratable
contribution will be unfair in this case. Were the Court writing on a
blank slate or resolving this case as a matter of equity, it might agree.
But as the Second Circuit recognized in a comparable context, while "no
method of apportioning liability is entirely satisfactory," "because we
must apply the law of Connecticut, we do not write on a blank slate."
Cont'l Cas. Co., 823 F.2d at 712. Equally, the Court cannot
disregard New York law and depart from the rule of ratable contribution
because, in this case, it arguably produces an unfair result. New York
law provides a clear, manageable, and predictable rule that resolves the
dispute presented here. While this rule may not always produce equitable
results, the costs of administering a more complex rule that would compel
the Court to engage in the kind of equitable analysis urged by
Philadelphia would be prohibitive, and the consequences unpredictable,
for any such rule would effectively leave insurers and their
risk-analyzers to guess at courts' potential ad hoc judgments of fairness
in a theoretically unlimited variety of factual scenarios.
Moreover, while the unequal division of liability prescribed by New
York law may seem unfair from a perspective internal to this dispute,
from an external perspective, it can hardly be so characterized. If the
terrorist attacks that destroyed Children's Discovery's premises occurred
on August 31, 2001, Wausau would have been obliged to pay 100% of
Children's Discovery's loss.
If those attacks took place on September 16, 2001, Philadelphia would
have been obliged to pay 100% of the loss. That the attacks fortuitously
happened during the brief period of overlapping coverage relieves both
Philadelphia and Wausau from full liability; each, in some sense, will
thus receive a "windfall" by virtue of the dual coverage. Under New York
law, Wausau's Windfall" will be far greater, but that does not make
Philadelphia's exemption from paying the full amount of the claim any
less real. The result of applying New York's rule of ratable contribution
can therefore hardly be characterized as "grossly unfair." (P. Br. 19.)
Because New York law clearly establishes that in these circumstances,
the insurers must pay the claim on a pro rata basis in proportion to
their respective liability limits, Wausau's motion for summary judgment
is granted and Philadelphia's denied. Judgment shall be entered in
accordance with Wausau's proposed order.