Understanding How Courts Allocate Liability among Consecutive Insurers

Alan S. Rutkin, Robert Tugander and John W. Egan of Rivkin Radler LLP are the authors of Chapter 39, “Understanding Multiple Insurer Situations,” in the New Appleman Insurance Law Practice Guide. The chapter provides guidance in handling the complex situations that arise when two or more insurance policies potentially apply to a single loss. A frequent cause of contention arises in allocating responsibility for the loss among the different insurers that issued the involved policies. Application of “other insurance” clauses, trigger and allocation methodologies, as well as litigation and negotiation strategy are the most important factors affecting payment.
 
The chapter guides counsel to the parties in identifying and working through:
  • The circumstances under which multiple policies are available to cover a loss;
  • The differences in apportioning loss where coverage is concurrent and where it is consecutive;
  • The application of “other insurance” clauses in the involved policies;
  • Providing support for or opposition against the application of each commonly used method of allocation; and
  • Strategic considerations when litigating and settling cases involving multiple insurers.
 
In assessing whether more than one policy applies to the loss at issue the chapter advises counsel to the parties to consider the following factors--and then discusses the implications of each:
  • Are multiple policies issued to one entity?
  • Are there multiple layers of coverage?
  • Are there multiple types of coverage?
  • Are there multiple years of coverage?
  • Do corporate changes implicate multiple policies?
  • Are multiple policies implicated because different policies apply to the individual and the entity?
 
In determining whether the “other insurance” issue is applicable, and whether coverage is concurrent or consecutive, the chapter advises counsel to the parties to consider the following factors--and again the chapter discusses the implications of each:
  • Does more than one policy cover the same risk?
  • Does more than one policy cover the same time period?
  • Is the “other insurance” valid and collectible?
 
If the “other insurance” issue does exist, the chapter advises counsel to identify the type of “other insurance” provision or like provision contained in each policy. The chapter discusses their significance--specifically:
  • Is there a pro rata clause?
  • Is there an excess clause?
  • Is there an escape clause?
  • Was the policy written on an “ultimate net loss” basis?
  • Is there a non-cumulation clause?
 
A critical element in the resolution of disputes of this nature is how the applicable jurisdiction resolves conflicts and apportions liability if there is “other insurance”:
  • Does the jurisdiction apply the Contract Approach?
  • Does the jurisdiction apply the Lamb-Weston approach?
  • Does the jurisdiction apply the Minnesota approach?
  • How does the jurisdiction apportion the duty to defend among concurrent insurers?
 
The chapter also examines the various approaches taken in allocating liability among multiple insurers where the injury or loss occurs over multiple policy periods. If pro rata allocation applies then the chapter advises counsel to the parties to consider the pros and cons of various approaches to such allocation including:
  • The injury-in-fact approach;
  • The time-on-the risk approach;
  • The by-limits approach;
  • The time and limits approach;
  • The layers approach;
  • The equal shares approach; and
  • The “bathtub” approach.
 
The “all sums” approach stands in contrast to the pro rata allocation. The chapter discusses arguments in support and in opposition to “all sums” that can be raised.
 
In determining which policies are “triggered,” the chapter advises counsel to consider which “trigger theory” has the applicable jurisdiction adopted and which policies are on the risk.
 
The chapter further identifies and explores the issues that may arise when calculating allocated shares, specifically:
  • Do any policies have multi-year limits?
  • Do any policies have an annualization clause?
  • Do any policies have limits shorter than one year?
  • Do any policies have non-cumulation or deemer clauses that may reduce liability limits?
  • Do any policies have deductibles or self-insured retentions?
  • Are there any gap periods—whether via self-insurance; insufficient insurance; insolvent insurers; exclusions; lost or missing policies; impaired limits; or release?
  • How does the applicable jurisdiction apportion defense costs?
 
Lastly, the chapter imparts key concerns and steps to take when negotiating with multiple insurers:
  • Is negotiating a settlement being considered?
  • Identify all potentially applicable policies;
  • Obtain copies of all potentially applicable policies;
  • Consider all possible allocation theories and determine which are optimal and attainable from your client’s perspective;
  • Consider differences in circumstances that might affect allocation, such as differences in the policies, collectibility, and conduct;
  • Determine whether negotiation should be individual or global;
  • Is litigation being considered?
  • Consider the procedural implications; and
  • Consider the logistics involved.
 
In addition, the chapter provides sample pertinent forms:
  • A sample joint defense confidentiality agreement; and
  • A confidentiality, standstill and tolling agreement.
 
 
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