Determining precisely when property damage or personal injury occurred in a case involving exposure to chemicals or other toxic substances over a period of many years can be extremely difficult, if not impossible. Equally difficult is determining how to allocate such losses among the insurance policies that were in place during the time that the damage occurred.
In Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994), the New Jersey Supreme Court adopted the continuous trigger theory for determining which policies of insurance provide coverage for such claims. Trigger is “a shorthand expression for identifying the events that must occur during the policy period to require coverage for losses sustained by the policyholder.” Id. at 441. Under the continuous trigger theory, all policies that were in effect from the date of initial exposure to the injury-producing substance through the manifestation of injury provide coverage.
An issue not addressed by the Court in Owens-Illinois was how to allocate the loss among the various primary and excess policies that were triggered. That issue was addressed several years later in Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998). The Carter-Wallace court adopted an allocation method based on the amount of insurance purchased or risk retained in any given year.
In 2014, the Owens-Illinois/Carter-Wallace allocation method was revisited by the New Jersey Appellate Division in IMO Indus. Inc. v. Transamerica Corp., 437 N.J. Super. 577 (App. Div. 2014). That case is discussed at length in a prior blog post.
The Owens-Illinois/Carter-Wallace allocation method did not address what happens when one or more of the insurers that provided coverage is insolvent. In Spaulding Composites Company v. Caldwell Trucking PRP Group, 176 N.J. 25, 36 (2003), the New Jersey Supreme Court held that “the insured is required to pay its ‘aliquot’ share of both defense and indemnification on account of years in which it was uninsured, self-insured, or its coverage was exhausted or bankrupt.” One year later, in Benjamin Moore & Company v. Aetna Casualty & Surety Company, 179 N.J. 87, 100 (2004), the Court likewise held that “policyholders are required to underwrite the risk of insurer insolvency or bankruptcy.”
However, almost a decade later, in Farmers Mutual Fire Insurance Company v. New Jersey Property-Liability Insurance Guaranty Association, 215 N.J. 522 (2013), the Court held that coverage provided by solvent insurers must first be exhausted before recovery may be obtained from the New Jersey Property–Liability Insurance Guaranty Association (“PLIGA”). In other words, the sums allocated to insolvent insurers must be reallocated among solvent primary and excess insurers. It is only after all such coverage has been exhausted that PLIGA and/or the insured becomes responsible for any remaining sums allocated to the insolvent insurers.
PLIGA was created pursuant to the New Jersey Property-Liability Insurance Guaranty Association Act, N.J.S.A. 17:30A-1 to -20. (“the Act”). Under the Act, an insured may make a claim with PLIGA, subject to a statutory maximum limit of $300,000, if its insurer becomes insolvent. The Act provides that when the insured is covered under more than one policy, it must first exhaust the coverage provided by the solvent insurers.
The word “exhaust” was not defined in the Act and it was not clear how it should be interpreted in a case involving application of the continuous trigger theory. In December 2004, however, the Act was amended to define “exhaust” as follows:
“Exhaust” means with respect to other insurance, the application of a credit for the maximum limit under the policy, except that in any case in which continuous indivisible injury or property damage occurs over a period of years as a result of exposure to injurious conditions, 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 . . . .
See N.J.S.A. 17:30A-5. The amendment expressly applies only to covered claims resulting from insolvencies occurring on or after December 2004.
The insurer at issue in Farmers was placed into insolvency in August 2007. Thus, the 2004 amendment applied. According to the Court, “[t]he 2004 amendment left no doubt that [PLIGA] was the insurer of last resort in long-tail cases.” Farmers, 215 N.J. at 522. In a footnote, the court distinguished its holdings in Benjamin Moore and Spaulding Composites on the basis that neither case involved the Act.
In Ward Sand and Materials Co. v. The Transamerica Insurance Company, No. A-1479-13T1, 2015 WL 9694044 (App. Div. Jan. 13, 2015), the Appellate Division was asked to determine who was on the hook for sums allocated to several insurers that became insolvent prior to December 2004. The court observed:
The primary question we must decide is whether the trial court erred by concluding [the insured] is responsible for the sums allocated to insolvent insurers or whether, as [the insured] argues, the sums allocated to insolvent insurers should be reallocated among solvent primary and excess insurers.
2015 WL 9694044 at 1-2. The court affirmed the trial court’s decision, concluding that the insured was responsible for the sums allocated to the insolvent insurers in excess of any amounts paid by PLIGA. Unlike the Farmers court, the Appellate Division was concerned with the pre-December 2004 version of the Act because the insolvent insurers at issue had become insolvent prior to that date.
The insured argued, among other things, that the amendments should be applied retroactively. The Appellate Division rejected that argument, noting that the New Jersey Supreme Court previously held that the amendments apply only prospectively.
Thus, the date on which an insurer becomes insolvent can have a significant impact on the allocation of losses. If an insurer became insolvent prior to December 2004, the insured is responsible for the sums allocated to the insolvent insurers in excess of any amounts recoverable from PLIGA. On the other hand, if an insurer became insolvent on or after December 2004, the other insurers are responsible for the sums allocated to the insolvent insurer and PLIGA and/or the insured are not liable unless the coverage provided by the solvent insurers is exhausted. Acknowledging this anomaly, the Ward could observed:
We are not insensitive to the unfairness that results when a responsible business has purchased insurance to cover its business risks and the insurer becomes insolvent. Yet, solvent insurers might argue it is equally unfair to require them to pay claims on risks they have not insured. The myriad of policy considerations implicated by these considerations, particularly in the context of cleanup costs for environmental contamination, have been carefully considered and weighed by both the Supreme Court and the Legislature.
Id. at 9.
The method adopted by the New Jersey Supreme Court in Owens-Illinois and Carter-Wallace was far from perfect and has left courts and the legislature grappling with allocation issues for approximately two decades. Unfortunately, as the Ward decision makes clear, not only is the allocation method complex, its application also is not always fair.
A copy of the decision is available here: a1479-13
© William D. Wilson and NJInsuranceBlog.com, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.