By Ellen J. Zabinski and Adam H. Fleischer
A. In NJ, A Guarantor Of Insolvent Insurers Need Not Participate In Allocation Until Solvent Insurers Pay Their Entire LimitsIn Farmers Mutual Fire Ins. Co. v. New Jersey Property-Liability Ins. Guaranty Assoc., 74 A.3d 860 (N.J. 2013) [enhanced version available to lexis.com subscribers], the New Jersey Supreme Court determined that a New Jersey statute creates an exception to long-established allocation law by requiring solvent insurers in long-tail environmental contamination cases to exhaust all of their own coverage before a state guaranty association for insolvent carriers is obligated to pay anything at all.In Farmers, the solvent insurer, Farmers Mutual Fire Insurance Company (Farmers), paid property damage claims in two cases resulting from soil and groundwater contamination caused by a fuel leak from an underground storage tank. Farmers then sought reimbursement from the New Jersey Property-Liability Insurance Guaranty Association (NJ Guaranty), who had taken over the administration of claims for an insolvent carrier pursuant to the New Jersey Property-Liability Insurance Guaranty Association Act (PLIGA). NJ Guaranty argued that, under the PLIGA, it was not responsible to make any contributions or payments until Farmers had fully exhausted its policies' limits.Farmers countered that, consistent with the allocation methodology in Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994) [enhanced version available to lexis.com subscribers], Sayre v. Insurance Co. of North America, 701 A.2d 1311 (N.J. App. 1997) [enhanced version available to lexis.com subscribers], and the PLIGA, NJ Guaranty was required to pay the insolvent carrier's share regardless of whether the Farmers' policies were exhausted. The trial court agreed with Farmers, but the appellate court reversed, holding that a 2004 amendment to the PLIGA expressly carved an exception under Owens-Illinois and overruled Sayre. Thus, the PLIGA now requires exhaustion of the solvent insurer's policies before NJ Guaranty is obligated to pay or contribute to the loss.The New Jersey Supreme Court affirmed the appellate court ruling and explained that, after Owens-Illinois and Sayre, the New Jersey Legislature amended the PLIGA (and the New Jersey Surplus Lines Insurance Guaranty Fund Act, which was at issue in Sayre) by adding a definition of "exhaust" in continuous-trigger cases involving progressive injury and property damage. This definition provided that, in those cases, "exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years, has been applied. . ." Farmers, 74 A.3d at 871 [enhanced version available to lexis.com subscribers]. The court in Farmers concluded that, pursuant to this new definition, the now-amended PLIGA essentially reversed Sayre:If the Legislature were content with the Sayre decision - a continuous trigger case - in which the [New Jersey Surplus Lines Insurance] Guaranty Fund was required to step into the shoes of the insolvent carrier for proration purposes, there would have been little point to adding the 2004 amendments. . .defining exhaustion in cases of "continuous indivisible injury or property damage occurring over a period of years as a result of exposure to injurious conditions." It is reasonable to conclude based on the statutory language that the Legislature intended to reverse the result in Sayre.Farmers, 74 A.3d at 872 [enhanced version available to lexis.com subscribers]. Thus, the court concluded that the definition of "exhaust" as applied to the PLIGA is "clearly intended" to make the NJ Guaranty "the insurer of last resort in triggered years in long-tail environmental contamination claims," Id. at 873 [enhanced version available to lexis.com subscribers], and the PLIGA "specifically exempts" the NJ Guaranty "from the Owens-Illinois allocation scheme until all solvent insurance companies' policy limits are exhausted." Id. at 863 [enhanced version available to lexis.com subscribers].It is not an uncommon issue in long-tail insurance disputes that there exist some years of insolvent coverage. Whether or not a state guaranty fund participates in an allocation, or whether that fund is a payor of last resort, is a frequent and unclear issue. Courts following the lead of the New Jersey legislature may bring clarity to this issue through statutory amendments, and such clarity may increase the coverage burden on those solvent insurers handling such a claim.B. In California, The Insured Can Stack Primary Limits, Unless The Primary Policies Prohibit It-Which Could Be Problematic For Excess InsurersIn 2013, appellate courts in Wisconsin and California addressed exhaustion and allocation issues. While both of these cases involved asbestos liabilities, these decisions may have ramifications in many types of long-tail environmental claims.In Kaiser Cement and Gypsum Corp. v. Ins. Co. of the State of Pennsylvania, 155 Cal. Rptr. 3d 283 (Cal. App. 2013) [enhanced version available to lexis.com subscribers], rehearing denied (May 1, 2013), review denied and ordered not to be officially published (Jul. 17, 2013), the California appellate court found that: a) while an insured could conceivably "stack" multiple years of primary coverage in California, such "stacking" was not allowed where the primary policies had "anti-stacking language"; and, b) an excess insurer's requirement that it pays only once "all other collectible" insurance is exhausted could find itself robbed of the benefit of horizontal exhaustion if the primary policies contain "anti-stacking" language.Truck Insurance Exchange (Truck) issued primary coverage to Kaiser Cement and Gypsum Corporation (Kaiser) from 1964 to 1983. Many claimants who alleged exposure to asbestos had 1974 as the common year of exposure, so Kaiser initially selected 1974 as the policy to respond to any claimant because there was $500,000 in coverage per claimant, with no aggregate. Once Truck paid $500,000 for a claimant who was injured/exposed in 1974, it was unclear which insurer was then responsible for the next dollar paid to that claimant: Insurance Company of the State of Pennsylvania (ICSOP), the excess insurer in 1974, or Truck for remaining primary limits existing in years other than 1974?The appellate court found that the Truck primary policies did have anti-stacking language, because each Truck policy promised to pay only $500,000 per occurrence - not per year or per policy. The Truck policies also stated that the Truck limits "as respects any one occurrence involving one or any combinations of the hazards or perils insured against shall not exceed the per occurrence limit." The appellate court found that, because of this "anti-stacking language," although many years of Truck primary insurance were triggered by a particular claimant, Truck need only pay one policy's per occurrence limit, which in this case was the selected 1974 year.The next issue in Kaiser Cement was the extent to which the 1974 ICSOP excess policy is impacted by the fact that Kaiser Cement could not stack the available Truck limits for a particular claimant. The ISCOP excess policy stated that it is triggered upon exhaustion of the "retained limit." The "retained limit" includes: a) the limit of the underlying insurance; b) plus any other underlying collectible insurance. This language, coupled with precedent in Community Redevelopment v. Aetna, 57 Cal. Rptr. 2d 755 (Cal. App. 1996) [enhanced version available to lexis.com subscribers], led the court to initially conclude that an excess insurer in California is not triggered until all collectible triggered primary coverage is exhausted (i.e. horizontal exhaustion), which is a positive result for excess insurers in California, although not for primary insurers.The problem that "horizontal exhaustion" created in Kaiser was that, when the court examined what other "collectible" insurance existed on the primary level, it seemed that the "anti-stacking" language in the Truck policies made only one single Truck policy truly "collectible." Therefore, the court found that, for any individual claimant, the ICSOP excess policy was required to indemnify once the Truck primary policy in 1974 paid $500,000, because there simply was no other "valid and collectible" insurance available from the other triggered policy years.While this decision was "de-published" and can no longer be cited as California precedent, this decision demonstrates a problem for excess insurers because an excess insurer's horizontal exhaustion language (i.e. "over all other valid and collectible insurance") can effectively become negated by the anti-stacking language of the underlying primary insurer (i.e. "any of our coverage for this occurrence in other years doesn't count as valid or collectible").See also Cleaver-Brooks, Inc. v. AIU Ins. Co., No. 2013AP203, [enhanced version available to lexis.com subscribers] (Wis. App. Oct. 29, 2013) (under "joint and several" liability and Wisconsin law, insured may choose coverage from multiple insurers "simultaneously" for all triggered coverage for asbestos liabilities, rather than separately, or "sequentially," from each insurer, to maximize coverage for defense and indemnity costs from excess insurers).C. Allocation: Missouri Leans "All-Sums" In 2013, While Massachusetts Reaffirms "Pro Rata"On April 16, 2013, the Missouri Court of Appeals in Doe Run Resources Corp. v. Certain Underwriters at Lloyd's, London, 400 S.W.3d 463 (Mo. App. 2013) [enhanced version available to lexis.com subscribers], applied Missouri law in concluding that an "all sums" allocation method would apply to environmental claims arising out of the insured's mining, milling and smelting operations at six sites located in and around Missouri. The insured's operations, which started in the late 1800s at one site and early- to mid-1900s at the other sites, generated lead-containing wastes called "chat piles" and "tailings ponds" on each site. Wind and water erosion caused lead and other materials to migrate from these sites onto neighboring properties. The United States Environmental Protection Agency held the insured liable for the waste and required it to investigate and remediate those areas and ultimately prevent further offsite migration.The insured sought coverage from London Market Insurers (LMI), who had issued seven excess insurance policies covering the period from 1952 through 1961. When LMI did not respond to the insured's request for coverage, the insured sued LMI in Missouri state court. Prior to trial, the court held that New York law would apply, which utilizes a pro rata allocation method. This allocation method would apply to this case over the entire period during active pollution and passive migration occurred. At trial, the jury determined that the period of contamination took place from the time of operation (between 1894 and 1936, depending on the site) through 2011 (time of trial). The jury awarded the insured over $62 million in environmental damages. Pursuant to the pro rata allocation method, LMI's share of the insured's costs totaled just over $5 million, less than ten percent of the total damages.One issue on appeal was whether the trial court was correct in ruling that "pro rata" allocation would apply to the insured's environmental response costs. While not citing one allocation decision in rendering its ruling, the Missouri Court of Appeals opined that, under Missouri law, "the plain language of the applicable insurance policies require the adoption of the 'all sums' allocation scheme in this case." Doe Run, 400 S.W.3d at 474 [enhanced version available to lexis.com subscribers]. The Doe Run court focused on the "ultimate net loss" and "occurrence" definitions and the term "all sums" in reaching its decision. Some policies at issue defined "ultimate net loss" as "the total sum which the assured. . .becomes obligated to pay by reason of personal injury or property damage claims. . .as a consequence of any occurrence covered hereunder." Id. at 474 (emphasis in original). Other policies stated that LMI agreed "to indemnify the insured for all sums which the Assured shall be obligated to pay by reason of the liability. . .for damages. . .on account of property damage, caused by or arising out of an occurrence happening during the policy period." Id. at 475 (emphasis in original) [enhanced version available to lexis.com subscribers]. "Occurrence" was defined as "one happening or series of happenings, arising out of, or due to one event taking place during the term of this policy." Id. The court therefore concluded, "This definition does not limit the policies' promise to pay all sums of the policy holder's liability solely to damage during the policy period. We must construe the policy as written and cannot rewrite the policy for the parties." Id. at 475.In other allocation and exhaustion decisions from 2013, two courts applied the Massachusetts Supreme Court's pro rata allocation ruling in Boston Gas Co. v. Century Indem. Co., 910 N.E.2d 290 (Mass. 2009) [enhanced version available to lexis.com subscribers] to reaffirm the state's application of pro rata allocation to environmental claims. In Boston Gas Co. v. Century Indem. Co., 708 F.3d 254 (1st Cir. Jan. 18, 2013) [enhanced version available to lexis.com subscribers] (Massachusetts law) the First Circuit Court of Appeals applied the Boston Gas ruling to an underlying trial involving manufactured gas plant sites. The appellate court affirmed the district court's determination that property damage was continuous from the beginning of operations through the date of remediation (1886 through 2007), and thus, pursuant to the pro rata allocation ruling in Boston Gas, the court would allocate damages evenly over those years. In Graphic Arts Mut. Ins. Co. v. D.N. Lukens, Inc., No. 11-cv-10460-TSH, [enhanced version available to lexis.com subscribers] (D. Mass. May 29, 2013) (Massachusetts law), the court also held that the pro-rata allocation ruling from Boston Gas would apply to underlying toxic tort claims against the insured (asbestos and chemical/toxic metal exposure cases), and that a "continuous trigger" would apply to determine when the injuries occurred, "thereby obligating Lukens to pay its proportionate share of any judgment entered." D.N. Lukens, [enhanced version available to lexis.com subscribers] at *5.
Ellen J. Zabinski is a partner of Bates Carey Nicolaides LLP who focuses her practice on insurance coverage matters. She has defended numerous insurers involved in complex insurance coverage litigation pending throughout the country in both state and federal courts. Adam H. Fleischer is a partner of Bates Carey Nicolaides LLP with a national reputation for innovative advocacy in complex insurance and reinsurance coverage issues with respect to the pre-litigation, litigation and appellate stages. Copyright (c) 2013 by Ellen J. Zabinski and Adam H. Fleischer. Responses are welcome.
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