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Insurance Law

Issues Confronting Insureds and Excess Insurers in Large-Scale, Long-Tail Claims

A plenary session of the ICLC conference on March 5, 2010 was devoted to the increasingly complex set of issues confronting insureds and excess insurers in large-scale, long-tail claims. It was entitled, "Knockin' on Heaven's Door: Perspectives on Litigation and Negotiation of High-Damage Claims in 2010 and Beyond." The panel explored the issues of attachment, exhaustion, allocation, defense costs and other challenges that face coverage counsel attempting to reach excess insurance funds. The panel consisted of William B. Hedrick of Marsh USA Inc., Laura McKay of Hinkhouse Williams Walsh LLP, Gordon McKay of Arcina Risk Group, Scott Godes James R. Murray of Dickstein Shapiro LLP, and Jeffrey M. Posner of Much Shelist.

In a paper prepared for this session James R. Murray of Dickstein Shapiro addressed two of those issues: (1) allocation of responsibility for long-term liabilities for purposes of determining exhaustion and (2) the application and expansion of "all sums" responsibility where the loss is assigned to a single triggered policy year for policies with a non-cumulative provision. Here is a brief run-down of some of his major points.

In terms of allocation, the primary or any underlying insurer has the burden of proving that the policy or policies for which they are responsible have been fully exhausted before tapping into excess policies. For long-term liabilities, courts have held that each policy period limit for that policy period divided by the total limits in all implicated periods. Thus, long-tail liabilities are treated as consisting of an occurrence within each of the years of a liability policy. Thus, obligations cannot be shifted from one policy period to another to establish exhaustion. The policies implicated in a year are exhausted vertically, so that the primary insurer pays until its limits are reached and then the first excess layer kicks in, etc. This allocation pertains to payments as well as losses. This gives an insured the full value of its right to unlimited defense costs until its policies are validly exhausted.

In contrast, general liability policies have non-cumulative provisions that allows an insured to recover all of its defense costs and liabilities for any claim against it under any policy or policies it selects. Mr. Murray states that such non-cumulative provisions call for an "all sums" allocation even in states that would apply a "pro rata" allocation to long-term claims in the absence of such non-cumulative provisions.

A policy may have a prior insurance provision that applies when any loss covered in whole or part by an excess insurance policy issued to the insured before the inception of the policy. Under the prior insurance provision, the liability limit of the policy is reduced by any amount due the insured because of the loss under the prior insurance policy. Here too, an all sums rather than a pro rata allocation is called for to prevent an insured from "stacking" the limits of the consecutive, triggered policies to maximize recovery for the one loss, i.e., the one occurrence.  Mr. Murray gives the example of an insured who has a $500,000 limit per occurrence in each of two, one-year policies. The all sums allocation prevents the insured form collecting $1million for the one occurrence because the recovery under the second policy is reduced by the amount paid under the first policy. Clearly how a court defines an occurrence can be pivotal in determining the effect of non-cumulative or prior insurance provisions.

Ms. McKay addressed the limits of defense cost coverage in excess policies. She noted that unlike primary policies, excess policies generally don't include a duty to defend the insured. But in long-tail claims, excess policies generally do give the excess insurer the right, but not the duty, to associate in the defense of claims against the insured. The excess policies vary as to whether or not they cover defense costs and, if so, whether the costs will only be covered if they were incurred with the insured's consent. Where an excess policy provides coverage only for defense costs specified in an Ultimate Net Loss provision, courts have held that the excess policies provide only reimbursement for defense costs that are related to claims that are covered occurrences. Courts have refused tot rule that an excess insurance policy providing defense costs incurred with the insured's consent thereby contained an implied by law prohibition against an unreasonable refusal to defend. Ms. McKay surveyed excess policy provisions and pertinent recent case decisions and concluded that the narrower defense cost coverage provided by excess policy when compared to primary policies is supported by policy language, case law and the significantly lower premiums charged for excess policies.