Complexities in assigning insurance responsibility 409, continuing - - PowerPoint PPT Presentation

Reprinted with permission from the February 24, 2003 issue of the New Jersey Lawyer.

Complexities in assigning insurance responsibility

By Lynda A. Bennett After nearly 20 years of hard- fought litigation, New Jersey law is now well-settled on the dispositive issues associated with the typical environmental insurance coverage claim. In- surers no longer attempt to avoid coverage based on late notice, pollution exclusion,

• wned property, statute of limi-

tation,

• r

expected/intended grounds. Instead, New Jersey courts are now presented with issues

• ver how much coverage is

available for a particular envi- ronmental claim and how that coverage should be allocated be- tween the policyholder and its various insurers. Although the New Jersey Supreme Court has provided some guidance for these trigger and allocation is- sues in such leading cases as Owens-Illinois, Inc. v. United Insurance Company, 138 N.J. 437, Carter-Wallace v. Admiral Insurance Co., 154 N.J. 312, and Quincy Mut. Fire Ins. Co. v. Borough of Bellmawr, 172 N.J. 409, continuing efforts to re- solve environmental liabilities reveal that many questions re-

• main. This article discusses the

Supreme Court decisions and highlights issues currently fuel- ing insurance coverage litigation in New Jersey. Trigger In order to obtain coverage for an environmental claim un- der a comprehensive general li- ability policy, a policyholder must prove an “occurrence” took place during the insurance company’s policy period. Of course, one of the most difficult questions presented by an envi- ronmental claim is pinpointing when the alleged damage took

• place. The state Supreme Court

has resolved this dilemma by adopting in Owens-Illinois and Carter-Wallace a “continuous trigger” theory of coverage. Let’s assume, for instance, a policyholder owned a parcel of property for 25 years and it had an underground storage tank. Assume further that the policy- holder can show through expert testimony that the tank had been leaking, undetected, under- ground for 12 years. Under a continuous-trigger theory of coverage, the policy- holder may obtain coverage for the claim under all 12 policies in effect while the tank was leak-

• ing. The court held in Owens-

Illinois, “When progressive in- divisible injury or damage re- sults from exposure to injurious conditions for which civil liabil- ity may be imposed, courts may reasonably treat the progressive injury or damage as an occur- rence within each of the years of a CGL policy.” Because the very nature of environmental contamination is amorphous, it is sometimes dif- ficult for policyholders to dem-

• nstrate exactly when the injury
• r damage began. The state Su-

preme Court recently provided policyholders with significant assistance in this regard by adopting in Quincy a “bright line rule triggering coverage when toxic waste is first depos- ited in a landfill” as opposed to requiring scientific proof regarding the date contaminants were most likely to have leached into the groundwater. The court explained, “From a theoretical point of view, when toxic material deposited in or on property creates a condition that is dangerous to life or health, the deposit itself affects the util- ity of the property, and the property is thereby damaged.” Allocation Once a policyholder has es- tablished it is entitled to cover- age for an environmental claim that has occurred over multiple policy periods, the debate be- gins over who must pay, how much must be paid, in what or- der payment must be made, and whether defense costs should be apportioned based on covered versus non-covered claims, etc. In other words, how should the claim be allocated? There generally are two schools of thought in the insur- ance-coverage community re- garding the answer to this ques-

Reprinted with permission from the February 24, 2003 issue of the New Jersey Lawyer.

tion: Policyholders generally take the position that each and every insurance company on the risk during the trigger period is responsible for “all sums” the policyholder becomes legally

• bligated to pay.

Several courts throughout the country have adopted this “joint and several” method of alloca-

• tion. See Keene Corp. v. Insur-

ance Co. of North America, 667 F.2d 1034, J.H. France Refrac- tories Co. v. Allstate Insurance Co., 626 A.2d 502, American National Fire Insurance Co. v. B&L Trucking and Construction Co., Inc., 951 P.2d 250. New Jersey, however, has not adopted the joint-and-several- allocation method. Rather, in Owens-Illinois, the Supreme Court adopted the other leading allocation method known as “pro rata” allocation. Under this method, long-term progressive damages must be allocated among all parties, including the policyholder, in certain circum- stances, based on a risk-transfer analysis. Under the Supreme Court’s holding in Owens-Illinois, each party’s pro rata share is deter- mined by evaluating the trigger period and total damages in relation to each party’s “time on the risk” (number of years and sometimes days on the risk) and “degree of risk assumed” (the amount of coverage limits pro- vided by the insurer in propor- tion to total available limits). The court also held that a policyholder may be allocated a share of the loss but only if a pe- riod of “no insurance” reflects “a decision (by the policy- holder) to assume or retain a risk, as opposed to periods when coverage for a risk is not avail- able …” While the Owens-Illinois court was optimistic that the parties to a coverage dispute could fairly and promptly re- solve environmental claims us- ing its time-on-risk in relation to degree-of-risk-assumed method

• f allocation, policyholders and

insurers continued to argue over how much coverage was avail- able and insurers even argued among themselves over the cor- rect priority for paying claims under a pro rata allocation method. Thus, less than five years af- ter deciding Owens-Illinois, the New Jersey Supreme Court again was called on to resolve a sticky allocation question be- tween primary and excess insur-

• ers. In Carter-Wallace, the Su-

preme Court established that New Jersey’s pro rata method

• f

allocation rejects both straight horizontal exhaustion (when all primary coverage must be exhausted before any excess carrier pays) and linear exhaustion (when the insurers in year two of the trigger period pay nothing until all the insurers

• n the risk in year one pay in

full). Instead, damages are allo- cated to each policy year based

• n the total available limits in

that policy year in relation to the total available limits over the entire trigger period. Once a portion of the damages is allo- cated to a particular policy year, the primary carriers must pay their limit in full before the first- layer excess carrier must pay anything and so on. Reduced recovery In addition to encouraging in- surer infighting, New Jersey’s pro rata allocation method has the potential to drastically re- duce a policyholder’s recovery if it has large deductibles or self-insured retentions. For example, assume a loss of $1 million occurs over 10 years. Further assume the policyholder has $100 million of coverage per year with an annual deducti- ble of $100,000. Insurers rou- tinely argue that 10 full deducti- bles must be allocated to the policyholder such that the de- ductibles devour coverage, leav- ing the policyholder to pay the full amount of the loss. New Jersey insurance law does not support such an inter- pretation because it would effec- tively negate bargained-for cov- erage and frustrate the policyholder’s reasonable ex- pectation it had externalized its risk of loss. See Werner Indus- tries, Inc. v. First State Ins. Co., 112 N.J. 30, holding that “[t]he fundamental principle of insur- ance law is to fulfill the objec- tively reasonable expectations

• f the parties.”

Moreover, Owens-Illinois un- derscored the importance of the

Reprinted with permission from the February 24, 2003 issue of the New Jersey Lawyer.

intent to externalize risk as a ba- sis for determining issues of al- location between and among in- surance companies and their

• policyholders. Objectively, a

reasonable policyholder entering into these insurance policies would have expected and in- tended that it had externalized all risk for a single occurrence in excess of one deductible or self-insured retention. Neither the New Jersey Su- preme Court nor the Appellate Division has addressed the issue

• f how to apply retained limits
• r deductibles under the Owens-

Illinois/Carter-Wallace alloca- tion method. However, a special discovery master presiding over a New Jersey insurance coverage ac- tion found in favor of insurers

• n the deductible issue. In

Pfizer, Inc. v. Employers Ins.

• Co. of Wausau, MID-C-108-92,

the special master held that mul- tiple deductibles could be charged against a policyholder when a continuous trigger the-

• ry of liability applied because,

“[w]henever a policy is trig- gered, all of its terms and condi- tions are activated.” While there are several bases upon which to challenge the special master’s finding, it nonetheless demonstrates that policyholders may not obtain complete recovery from their in- surers even after establishing a claim is covered. Gaps Similar unsettled and poten- tially significant allocation is- sues are presented when a poli- cyholder cannot locate its historic insurance policies or when the historic insurers are now insolvent. The Owens- Illinois decision seems to make clear that policyholders should not be saddled with allocated shares for missing policies and/or insolvent insurers be- cause the policyholder made a conscious decision to transfer risk. Nevertheless, insurers gener- ally will not accept responsibil- ity for these shares because, they argue, it is the policy- holder’s fault that the gaps exist. For example, one such argument would be the policyholder should have kept better insur- ance records and should have been more careful to select a fi- nancially sound insurance com- pany to underwrite its risk. The missing policy issue is particularly problematic because it impacts the entire allocation construct. As noted above, Owens-Illinois establishes a policyholder’s total costs must be allocated over the entire trig- ger period based on a formula directly tied to the total avail- able coverage limits. What happens when a trigger period begins in 1952 and the policyholder only has policy in- formation beginning in 1960? Obviously, the parties either must stipulate or provide expert testimony concerning a reason- able amount of insurance that would have been placed by a similarly situated policyholder during the missing policy pe- riod. This flags yet another alloca- tion issue that insurers some- times raise — periods of policy- holder under-insurance. For example, assume an average widget company with annual sales of $50 million in 1965 car- ried $25 million of primary and excess insurance. Assume fur- ther that ABC Widget Company carried only $10 million of total insurance coverage in 1965. Now, in 2001, ABC Widget Company’s insurers on the risk in later years are likely to argue that $25 million of insurance should be assumed for the 1965 policy year because ABC was underinsured. Adding a further wrinkle, the insurers also may argue that ABC was underinsured if it failed to purchase environ- mental impairment liability in-

• surance. This argument is really

geared toward establishing the appropriate end date for the a l- location period. Policyholders generally take the position that the onset of the “absolute” pol- lution exclusion (1985-86 in most policies) should be the cut-

• ff period because insurance

was no longer available to cover long-term environmental claims. Insurers sometimes counter that the trigger period should continue to run for allocation purposes until the policyholder in fact learned of the liability and/or for as long as the damage continues to run (thus, theoreti- cally through 2003) and that the

Reprinted with permission from the February 24, 2003 issue of the New Jersey Lawyer.

policyholder is responsible for any allocated share following the onset of the “absolute” pol- lution exclusion. Recently, the Appellate Divi- sion confirmed insurers cannot limit their liability by artificially expanding the allocation period to years in which the policy- holder was unable to obtain en- vironmental insurance. In Champion Dyeing & Fin- ishing Co., Inc. v. Centennial Insurance Company, 355 N.J., the policyholder was seeking coverage for response costs in- curred to remediate leaking un- derground fuel-oil storage tanks. The tanks were installed in the early 1960s and began leaking in 1980. The policyholder first became aware of the leakage in

• 1997. The insurers attempted to

limit their relative shares of re- sponsibility by arguing that the loss should be allocated over the period 1980 through 1997. The Appellate Division re- jected the insurers’ argument because they “failed to prove the availability and affordability

• f EIL coverage for the risk of

leakage from more-than-twenty- year-old underground storage tanks during the relevant time period.” In particular, the court relied on expert testimony from both sides that confirmed that no insurance company was will- ing to write an environmental insurance policy in 1997 that would have provided coverage for the risks associated with 20- year-old underground storage tanks. Moreover, the court held that even if the insurers had been able to demonstrate coverage was available to the policy- holder for that precise type of risk, a fair and reasonable allo- cation scheme would not allow the insurers to spread costs over a 17-year period because, after 1986, environmental impair- ment liability coverage was available only on a claims-made

• basis. As such, the court held

the policyholder could be allo- cated, at most, only one year of responsibility upon a proper showing by the insurers. Conclusion Battles over allocation are likely to remain at the forefront

• f New Jersey’s insurance cov-

erage litigation. Although Owens-Illinois and Carter- Wallace will certainly serve as the primary guideposts for es- tablishing allocation models in coverage disputes, insurers and policyholders will continue to employ creative arguments to limit their respective exposure for environmental liabilities. And New Jersey courts will continue to address the multi- tude of arguments surrounding allocation well into this century. Lynda A. Bennett is a member

• f Lowenstein Sandler’s Insur-

ance Law Practice Group and a frequent author and lecturer on insurance law.