Court Upholds 100% Allocation Based on Insured’s “Best Efforts” and Insurer’s Failure to Meet “Relative Exposure” Burden

The United States District Court for the Southern District of New York, applying New York law, upheld an arbitration award allocating 100% of amounts incurred jointly by insured individuals and non-insured entities to covered loss and confirmed that the arbitration panel (1) properly determined that the insured satisfied the policy’s requirement that it use “best efforts” to negotiate an allocation with the insurer, and (2) properly applied New York’s “relative exposure” rule rather than the “larger settlement” rule. Flextronics Int’l, Ltd. v. Allianz Global Corp. & Spec. SE, 2025 WL 3168187 (S.D.N.Y. November 13, 2025).

The insured, a global supply chain and manufacturing company, was sued along with one of its subsidiaries and four company individuals by a competitor after one of the subsidiary’s officers left the competitor. The claim alleged that the defendants had conspired with the officer to breach his noncompete and nondisclosure requirements with the competitor when he left. The insured maintained a $130 million tower of directors and officers insurance policies (“D&O policies”). The D&O policies covered only the four individuals named in the litigation and not the two corporate entities, though the plaintiff alleged that the same amount of damages resulted from each claim and that all defendants were jointly and severally liable for all damages. The primary insurer settled with the insured while the action was pending, agreeing to cover 80% of the loss while the insured covered 20%. Ahead of the underlying mediation, the insured later offered allocations of 80%, 75%, and 65% to the excess insurers, which they declined.

The insured eventually initiated an arbitration against the excess insurers. The first two excess layers resolved, leaving only the third-layer excess insurer. The panel awarded the insured full recovery, a 100% allocation, finding that the insured met the policy’s “best efforts” requirement. The panel also applied New York’s “relative exposure” rule to the dispute, as opposed to the “larger settlement” rule for which the insured had advocated, but still found a 100% allocation to covered loss appropriate. The insurer moved the district court for vacatur and/or non-enforcement of the award.

First, the court agreed that the panel properly applied the “best efforts” requirement to determine a fair and proper allocation. The policy’s allocation provision specified that “[i]f either: (i) a claim (other than a securities claim) is made jointly against: (a) any insured person; and (b) any company or any other person or entity; or (ii) a claim involves both covered and uncovered matters or persons under this policy, then the insured and the insurer shall use their best efforts to determine a fair and proper allocation of loss covered under this policy.” Based on both sides’ expert testimony, the panel determined that “best efforts” was “a very subjective standard” that “depends on specific facts” and meant “doing a ‘reasonable job’ to accomplish an allocation.” While the court and panel agreed that best efforts required offering less than a 100% allocation—and the insured had at one point demanded a 100% allocation—the insured had also made various offers to settle for 80%, 75%, and 65% and had communicated with the insurer as to key developments during the action. The court also did not require the insured to make lockstep offers to both the primary and excess insurers. Based on the “overall sequence of proposed allocations,” the court concluded that the insured had acted reasonably and satisfied the “best efforts” standard.

The court also held that the panel properly applied the “relative exposure” rule, which required the court to apportion responsibility according to covered and uncovered loss, and required the insurer to bear the burden of proving the amount that should be allocated to non-covered loss. Applying this rule, the arbitration panel had concluded that the insurer should bear the entire loss as covered. In the panel’s view, the insurer had not met its burden of proving the amount of the settlement that should be excluded from coverage because the insurer relied solely on its own expert’s report and testimony, which the panel found unconvincing. The panel also rejected the insurer’s argument that the settlements with the underlying primary and excess insurers for less than 100% of their limits demonstrated that the proper allocation of loss could not be 100%. Although some language in the arbitration award used terminology associated with the “larger settlement” rule, the court held that the award, fairly read, reasonably applied the appropriate “relative exposure” rule.