Allocation of Coverage - New Appleman on Insurance Law Library Edition, Chapter 22

Allocation of Coverage - New Appleman on Insurance Law Library Edition, Chapter 22

 By Laura A. Foggan, Partner, Wiley Rein LLP

This chapter opens with a discussion of how to determine whether allocation is required and an explanation of key circumstances where concurrent or successive insurance policies may be implicated by insurance claims.  These circumstances present issues of allocation among multiple polices, and may also implicate uninsured periods.  Allocation issues are of increasing importance in complex insurance matters because modern claims often present long-tail or delayed-manifestation claims, where injury or damage is found to take place over a long period of time. Section 22.01 reviews the widely used policy language that is the center of policy interpretation issues when allocation questions are presented.  Because courts are divided on whether and how allocation of loss is to be achieved among policies and among insured and uninsured periods, understanding the basis for each viewpoint in the policy language is important.  Also, as shown in the chapter, allocation issues can arise in situations where there is a single insurer that issued consecutive policies of different types or successive polices over many years of a long-term insurance relationship with the policyholder, as well as in situations where different insurers' policies may be implicated by a claim.  The chapter reviews the many different approaches to allocation in these settings, the important legal issues presented, and the conflicting interests and policy considerations at stake.

Section 22.02 addresses the interplay between "other insurance" clauses in multiple policies that respond to a single loss.  Originating in first-party property policies as anti-fraud devices, "other insurance" clauses became widely used in liability policies, predominantly in automobile liability policies.  In recent years, "other insurance" issues have arisen in a broad range of liability contexts outside of the automobile arena.  Courts' treatment of competing "other insurance" clauses has evolved, ranging from a rejection by certain courts of "other insurance" clauses that would relieve an insurer from all or part of coverage to more recent attempts to reconcile "other insurance" in multiple policies.  The doctrine of "mutually repugnancy" also arises in certain circumstances where "other insurance" clauses would effectively cancel each other out.  Section 22.02 reviews courts' approaches to interpretation of competing "other insurance" clauses and discusses varying scenarios where pro rata, excess and escape clauses come into play.

As will be explained in Section 22.01, many courts have chosen to allocate costs among insurers and insureds.  When courts have chosen to do so, they have adopted a number of different methods.  In Section 22.03, the most prominent of these methods are discussed.  This includes: the "equal shares" method, which is most commonly used in allocating defense costs; the pro rata by years method in which liability is spread equally across all triggered years; and the pro rata by years and limits method in which liability is spread across all triggered years with more liability attributed to years in which the insured purchased coverage with higher limits of liability.  In addition to these methods, Section 22.03 discusses some of the other methods that some courts have used to allocate liability, and then addresses additional issues that arise when courts allocate liability.  These other issues include the way in which allocation methods can interact with other preexisting law, such as horizontal exhaustion doctrines, as well as additional issues in applying the allocation method, such as identifying the triggered period over which liability will be spread.  There is little law on these latter issues and they are identified more as a warning of the types of issues for which to expect further litigation and development as more and more courts apply allocation.

Section 22.04 addresses the effect of gaps in coverage on allocation.  As an increasing number of courts have required allocation of damages to all policies or periods implicated by injury or damage at issue in a claim, a growing set of issues has sprung up concerning how to address uninsured periods in an allocation.  There are, of course, a variety of reasons why there may be a gap in coverage and one of the key questions is whether these reasons for the absence of coverage support different treatment of the coverage gap.  For instance, coverage may be unavailable because the policyholder chose by design to self-insure its exposure for a given period, or because an insurer from whom coverage was purchased unexpectedly became insolvent before a claim was presented.  There may be a gap in coverage due to lost or unproven policies or because the terms of a known policy explicitly excluded coverage for the type of claim at issue.  Generally, courts have not differentiated how to treat uninsured periods depending on the reason for a coverage gap.  As shown in more detail in the section that follows, under the majority rule, the tortfeasor must take responsibility for any periods for which it does not have applicable insurance. This straightforward rule has been challenged in many cases, however, and recent decisions have grappled in particular with the question of whether the alleged unavailability of coverage for a risk in the marketplace can justify a departure from the general rule.

Section 22.05 discusses some special issues in allocation, including allocation among insurers that issued different types of insurance coverage and allocation where one or more insurers have previously settled all coverage obligations with the insured.  As to the first, there are a variety of circumstances where a single claim may trigger different types of coverage purchased by the insured.  For instance, an environmental liability claim may trigger certain general liability policies as well as more recent environmental impairment liability policies.  In these circumstances, courts have struggled with whether to force certain types of coverage to be exhausted before reaching the rest of the insured's coverage.  If a court chooses to prioritize one type of coverage over another in such a circumstance, courts have generally focused on the type of coverage closest to the risk.  But, many courts have rejected these types of distinctions and have lumped all responsive coverage together for allocation purposes and, in the context of concurrent policies, have simply applied the other insurance clauses addressed in Section 22.02.  Aside from those types of issues, courts have also struggled with how to account for an insured's prior settlements with some of its insurers, when those settling insurers had issued insurance policies that otherwise would have been included in the allocation for a given claim.  In these circumstances, some courts have discussed and applied so-called settlement credits, whereby the rest of the insurers have their liability reduced by the settled limits of liability.  Courts considering this issue have also addressed whether coverage has been "exhausted" by these prior settlements, an issue which can prevent an insured that settled for less than the settling insurer's limits from pursuing excess insurance coverage for that claim if the court holds that the insured has not exhausted the primary coverage.  Other courts have focused on whether an insured has received a "double recovery" and have developed theories by which the policyholder is prevented from recovering more than it has actually lost.

The potential impacts of allocation upon excess and umbrella insurance are discussed in Section 22.06.  In long-tail claims, issues of when excess and umbrella coverage attaches raises complex issues.  For example, a question arises of whether all triggered primary insurance must be exhausted before an excess policy or policies is triggered, or horizontal exhaustion, or whether an insured can reach an excess policy by exhausting only the single underlying policy, or vertical exhaustion.  In addition, an issue that is receiving attention is "stacking," under which an insured may seek to combine the limits of multiple policies for a single loss.  Another issue is whether an excess insurer must "drop down" to fill a gap in coverage resulting from an insolvent underlying insurer.  While this "drop down" issue may arise for a loss involving a single point in time, it also arises in long-tail claims, especially where the loss potentially triggers coverage in effect years or decades in the past.  Courts have taken varying approaches to these issues, and the outcome often turns on the specific policy language at issue.

Finally, Section 22.07 addresses the rights of insurers to re-allocate, obtain contribution, or pursue subrogation as against other insurers.  Many of these thorny issues arise because of a state's rejection of allocation.  In those circumstances, those courts hold that the insured may obtain a full recovery from one triggered insurer and that it is then that insurer's obligation, if it chooses, to pursue the other triggered insurers.  But, this has resulted in significant secondary litigation concerning contribution and subrogation rights.  For instance, some states have significant limitations on the rights of insurers to pursue contribution or subrogation, and individual state law must be examined to determine which theory is viable.  Other courts are coming to grips with the impact of their rejection of allocation with the promise that targeted insurers should be permitted to pursue other triggered insurers.  Particularly difficult issues arise when a targeted insurer identifies other insurance policies only to realize that the insured, in seeking coverage from only the targeted insurer, has breached certain terms and conditions under those policies, such as the promise of timely notice.  Additionally, difficult issues arise where a targeted insurer is attempting to shift some liability to insurers that had previously settled all liability under insurance policies that would otherwise be responsive.  As discussed in Section 22.05, in these circumstances some courts have created judicial doctrines to prevent double recovery in the first instance, where others have permitted the targeted insurer to pursue contribution against the settled insurer.  It should be noted that most, if not all, of these issues could be avoided if a court were to adopt one of the allocation methods discussed in Section 22.03.

Laura A. Foggan is a partner of the Washington, D.C. law firm Wiley Rein LLP.  She concentrates her practice on trial and appellate work in insurance litigation.  Ms. Foggan is co-chair of the ABA Section of Litigation's Insurance Coverage Litigation Committee and a co-author of the chapter, Post-Judgment Motions and Deciding Whether to Appeal in the New Appleman Insurance Law Practice Guide. Dale E. Hausman, a partner at Wiley Rein LLP, and Benjamin J. Theisman, an associate at Wiley Rein LLP, contributed to this chapter.  The views expressed in this chapter are those of the authors only and do not necessarily represent the views of their firm or clients.

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