Allocation of Liability for Continuous Damage Losses: All Sums v. Pro Rata

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Allocation of Liability for Continuous Damage Losses: All Sums v. Pro Rata Best Practices for Policyholders and Insurers to Allocate Indemnity and Expenses WEDNESDAY, APRIL 18, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Laura A. Foggan, Partner, Wiley Rein, Washington, D.C. Robert M. Horkovich, Shareholder, Anderson Kill & Olick, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Strafford Litigation Teleconference Allocation of Liability for Continuous Damage Losses: All Sums v. Pro Rata: Best Practices for Policyholders and Insurers to Allocate Indemnity and Expenses Wednesday, April 18, :00 p.m. Eastern Time / 12:00 p.m. Central Time / 11:00 a.m. Mountain Time / 10:00 a.m. Pacific Time Laura A. Foggan, Esq. WILEY REIN LLP lfoggan@wileyrein.com (202) Robert M. Horkovich, Esq. ANDERSON KILL & OLICK PC rhorkovich@andersonkill.com (212)

6 ALLOCATION OF LIABILITY (Robert Horkovich) All sums rule 6

7 ALLOCATION OF LIABILITY Pro rata/time on the risk allocation 7

8 COURT TREATMENT Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, et al., Nos , , 2012 WL (4th Cir. Feb. 3, 2012). Coverage is limited to bodily injury occur[ing] during the policy period. To hold the insurer liable for any other period would upend insurance underwriting. 8

9 COURT TREATMENT Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, et al., Nos , , 2012 WL (4th Cir. Feb. 3, 2012). A teenager sued the policyholder, a realty company, that had managed her home from her birth in January 1991 until November 1993, when the company sold the property, alleging the policyholder s negligence caused her to suffer lead poisoning. The claimant had been diagnosed with the condition in September 1992 and continued to exhibit an elevated blood lead level until August The insurer had issued liability insurance policies covering the period from January 1992 to January

10 COURT TREATMENT Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, et al., Nos , , 2012 WL (4th Cir. Feb. 3, 2012). The insurer believed that it should be liable only for a 22- month portion of the period of the underlying plaintiff s exposure to the risk of lead poisoning: from January 1992, when the first policy period started, to November 1993, when the policyholder sold the property. The underlying plaintiff countered that the insurer should be liable for the entire judgment in light of the joint and several liability of [its] insured. 10

11 COURT TREATMENT Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, et al., Nos , , 2012 WL (4th Cir. Feb. 3, 2012). Adopting pro rata allocation, the court rejected the underlying plaintiff s effort to impute the policyholder s joint and several liability to the insurer. That position defied the contract, Maryland law, and fundamental insurance principles. The insurer had contracted to provide coverage only for damages to which this insurance applies. Because the policies covered only harm occur[ing] during the policy period, the insurer was not liable for harm sustained outside that period. In contrast to the policyholder s joint and several liability, the question of an insurer s liability can be answered only by reference to the insurance contract. 11

12 COURT TREATMENT Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, et al., Nos , , 2012 WL (4th Cir. Feb. 3, 2012). Holding the insurer liable for the entire judgment would upend insurance underwriting. [The underlying plaintiff s] approach would impose the same amount of liability on an insurance company whether it provided coverage for one month or for 10 years. Not only would such an approach yield higher costs and accompanying higher policyholder premiums, it also would disincentize tortfeasors from obtaining comprehensive insurance coverage. 12

13 COURT TREATMENT Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, et al., Nos , , 2012 WL (4th Cir. Feb. 3, 2012). The pro rata approach not only allocates liability across multiple insurers of a single tortfeasor, but also accommodates the need to hold liable those businesses that chose not to purchase insurance or coverage by allocating liability to them for periods which they were uninsured. 13

14 COURT TREATMENT Boston Gas Co. v. Century Indemnity Co., 910 N.E. 2d 290, (Mass. 2009). Direct liability should be prorated among all insurance companies on the risk. Where it is not feasible to make fact-based allocation of losses for each policy period, losses should be allocated using time-on-the-risk method. 14

15 COURT TREATMENT Policyholders are responsible under time-on-the-risk method for any periods that they went without insurance. But, policyholders are liable for only a prorated portion of the per occurrence self-insured retention for each triggered policy period, to be prorated on same basis as the insurance companies liability, unless policy language unambiguously provides otherwise. 15

16 COURT TREATMENT No reasonable policyholder could have expected that a single one-year policy would cover all losses caused by toxic industrial wastes released into the environment over the course of several decades. Any reasonable insured purchasing a series of occurrence-based policies would have understood that each policy covered it only for property damage occurring during the policy year. Boston Gas, 910 N.E.2d at

17 COURT TREATMENT In sum, the pro rata allocation method promotes judicial efficiency, engenders stability and predictability in the insurance market, provides incentive for responsible commercial behavior, and produces an equitable result. Boston Gas, 910 N.E.2d at

18 COURT TREATMENT [T]he joint and several allocation method is improvident. It does not solve the Allocation problem; it merely postpones it. Boston Gas, 910 N.E.2d at 311 (quoting EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd s, 934 A.2d 517, 527 (N.H. 2007). 18

19 COURT TREATMENT (Robert Horkovich) State of California v. Continental Ins. Co., 88 Cal. Rptr. 3d 288 (2009), review pending, Cal. Sup. Court No. S

20 ALL-SUMS RULE (Robert Horkovich) In its all-sums ruling, the trial court had ruled in favor of the State: [O]nce coverage for continuous damage is triggered under a liability policy, the insurer is required to pay for all sums (up to the policy limits) of the insured s liability not just liability specifically allocable to damage during the policy period. 20

21 ALL-SUMS RULE (Robert Horkovich) Insuring Agreement: To pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law for damages because of injury to or destruction of property, including loss of use thereof. 21

22 ALL-SUMS RULE (Robert Horkovich) It is a settled rule that an insurer on the risk when continuous or progressively deteriorating damage or injury first manifests itself remains obligated to indemnify the insured for the entirety of the ensuing damage or injury. Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 686 (1995) (emphasis added). 22

23 ALL-SUMS RULE (Robert Horkovich) Every insurer that issued a liability policy for any period during which a continuous loss occurred was liable for the full extent of the loss up to the policy s limits. Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 49 (1996). 23

24 ALL-SUMS RULE (Robert Horkovich) The duty to indemnify is triggered if specified harm is caused by an included occurrence, so long as at least some such harm results within the policy period. It extends to all specified harm caused by an included occurrence, even if some such harm results beyond the policy period. Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, (1997) (emphasis added). 24

25 ALL-SUMS RULE (Robert Horkovich) The all-sums approach, however, is not literally joint and several liability. The insurers are not jointly liable on each other s policies; rather, each insurer is severally liable on its own policy. 88 Cal. Rptr. 3d at 301 (emphasis in original). 25

26 ALL-SUMS RULE (Robert Horkovich) To summarize, then, in California, when there is a continuous loss spanning multiple policy periods, any insurer that covered any policy period is liable for the entire loss, up to the limits of its policy. 88 Cal. Rptr. 3d at 301 (emphasis in original). 26

27 ALL-SUMS RULE (Robert Horkovich) Implications of the ruling Each insurance company is wholly responsible for the whole loss imposed upon the policyholder up to its policy limits. The exposure of each insurance company is not limited to just the dollar liability presented only by that amount of property damage taking place during the policy period. 27

28 ALL-SUMS RULE Insurance Industry View: The California Supreme Court has not decided how indemnity should be allocated in a continuing loss context. Armstrong and Aerojet addressed the duty to defend, and statements in those opinions regarding the duty to indemnify were dicta. Later California appellate decisions addressing the duty to defend extended all sums to indemnity, in reliance on Montrose and Aerojet, although the indemnity issue was not presented or decided in those cases. 28

29 ALL-SUMS RULE Insurance Industry View: All-sums in the indemnity context is inconsistent with the policy language. Occurrence Definition: Occurrence means an accident or a continuous or repeated exposure to conditions which result in injury to persons or damage to property during the policy period. Policy Period Territory: This policy applies only to occurrences which take place during the policy period commencing and ending. 29

30 ALL-SUMS RULE Insurance Industry View: The all-sums approach is contrary to the California rules of contract interpretation. The all sums approach rewrites the insurance contracts replacing policy terms limiting coverage to property damage during the policy period with property damage during and before and after the policy period. The all sums approach deprives policy terms of meaning, contrary to the rule that each term in a contrary to the rule that each term in a contract must be given independent meaning and effect. (Civil Code 1641.) 30

31 ALL-SUMS RULE Insurance Industry View: The all-sums approach is objectively unreasonable. All sums unreasonably requires an insurer to pay all damage occurring over time (subject to other policy terms and Insurance Code 533), despite policy language limiting coverage to risk of harm during the policy period. All sums unreasonably requires insurers to pay for damage that took place in periods in which the insured did not buy insurance or its policies exclude coverage. 31

32 COURT TREATMENT Court treatment in other jurisdictions 32

33 ALL-SUMS RULE (Robert Horkovich) Other Jurisdictions That Have Adopted All-Sums : Washington: American Nat l Fire Ins. Co. v. B & L Trucking & Constr. Co., 951 P.2d 250, (Wash. 1998). See also Gruol Constr. Co. v. Ins. Co. of North America, 524 P.2d 427 (Wash. Ct. App. 1974). Oregon: Cascade Corp. v. American Home Assurance Co., 135 P.3d 450, (Or. Ct. App. 2006). Pennsylvania: J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502, (Pa. 1993). 33

34 ALL-SUMS RULE (Robert Horkovich) Other Jurisdictions That Have Adopted All-Sums : Delaware: Monsanto Co. v. C.E. Heath Compensation and Liab. Ins. Co., 652 A.2d 30, 35 (Del. 1994); Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76 (Del. Ch. 2009) (applying New York law). Ohio: Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 769 N.E.2d 835, 841 (Ohio 2002); Pennsylvania General Ins. Co. v. Park-Ohio Indus., 930 N.E.2d 800 (Ohio 2010). 34

35 ALL-SUMS RULE (Robert Horkovich) Other Jurisdictions That Have Adopted All-Sums : Illinois: Zurich Ins. Co. v. Raymark Indus., Inc., 514 N.E.2d 150, 165 (Ill. 1987); Caterpillar, Inc. v. Century Indem. Co., No , 2011 WL (Ill. App. Ct. Feb. 1, 2011) (defense). Massachusetts: Rubenstein v. Royal Ins. Co. of Am., 694 N.E.2d 381 (Mass. App. Ct. 1998), aff d, 708 N.E.2d 639 (Mass. 1999). Wisconsin: Plastics Engineering Co. v. Liberty Mut. Ins. Co., 759 N.W. 2d 613 (Wis. 2009). 35

36 ALL-SUMS RULE (Robert Horkovich) Other Jurisdictions That Have Adopted All-Sums : Texas: Union Pac. Res. Co. v. Continental Ins. Co. (Tex. Dist. Ct. Dec. 17, 1998), No , reprinted in 13 Mealey s Litig. Rep. Ins. No. 11, Section A (Jan. 19, 1999). Arkansas: Murphy Oil USA, Inc. v. United States Fid. & Guar. Co. (Ark. Cir. Ct. Feb. 21, 1995) No , reprinted in 9 Mealey s Litig. Rep. Ins. No. 19, Section I (Mar. 21, 1995). 36

37 ALL-SUMS RULE (Robert Horkovich) Memorandum of Meeting of Discussion Group Asbestosis April 21, 1977 The majority also contended that each carrier on risk during any part of that period could be fully responsible for the cost of defense and loss. 37

38 ALLOCATION RULE Insurance Industry View: Numerous courts across the country have endorsed allocation of loss during the policy period. We do not believe that these policy provisions can reasonably be read to mean that one single-year policy out of dozens of triggered policies must indemnify the insured s liability for the total amount of pollution caused by events over a period of decades, including events that happened both before and after the policy period. (Public Serv. Co. of Colorado v. Wallis & Cos., 986 P.2d 924, 939 (Colo. 1999).) 38

39 ALLOCATION RULE Other Jurisdictions Adopting Allocation: Nebraska: Dutton-Lainson Co. v. Continental Ins. Co., 778 N.W.2d 433 (Neb. 2010). Vermont: Towns v. Northern Security Ins. Co., 964 A. 2d 1150 (Vt. 2008). Colorado: Public Serv. Co. of Colorado v. Wallis & Cos., 986 P.2d 924 (Colo. 1999). 39

40 ALLOCATION RULE Other Jurisdictions Adopting Allocation: New York: Consolidated Edison Co. of New York v. Allstate Ins. Co., 774 N.E.2d 687 (N.Y. 2002). Connecticut: Security Ins. Co. of Hartford v. Lumbermens Mut. Cas. Co., 826 A.2d 107 (Conn. 2003). New Jersey: Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116 (N.J. 1998). 40

41 ALLOCATION RULE Other Jurisdictions Adopting Allocation: Minnesota: Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724 (Minn. 1997); Cargill, Inc. v. Ace American Ins. Co., 784 N.W.2d 341 (Minn. 2010) (defense). Utah: Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 931 P.2d 127 (Utah 1997). 41

42 ALLOCATION RULE Other Jurisdictions Adopting Allocation: Idaho: Empire Fire & Marine Ins. Co. v. North Pacific Ins. Co., 905 P.2d 1025 (Idaho 1995). Louisiana: Southern Silica of Louisiana, Inc. v. Louisiana Insurance Guar. Ass n, 979 So. 2d 460 (La. 2008). New Hampshire: Energy North Natural Gas, Inc. v. Certain Underwriters at Lloyds, 934 A.2d 517 (N.H. 2007). 42

43 COURT TREATMENT (Robert Horkovich/Laura Foggan) Comparison of these rulings -- and a debate about what s next where courts apply an all sums rule 43

44 COURT TREATMENT Leading Case Example: What s Next After All Sums Defense Costs Cargill, Inc. v. ACE American Insurance Co., No. A (Minn. June 30, 2010). The Minnesota Supreme Court held that the primary insurer could seek equitable contribution for defense costs from any other insurer that also has a duty to defend the same risk. Defense costs would be allocated equally amongst all the primary insurers on the risk. 44

45 COURT TREATMENT Leading Case Example: What s Next After All Sums: Indemnity Costs Pennsylvania General Insurance Co. v. Park-Ohio Industries, Inc., 126 Ohio St.3d 98, 930 N.E.2d 800 (Ohio 2010). The Ohio Supreme Court reaffirmed all-sums but found a contribution right against other insurers. It held that it would be inequitable to deny contribution from nontargeted insurers based solely on the policyholder s failure to give them prompt notice. Contribution would be allowed unless the non-targeted insurers could show prejudice. 45

46 Insurer Perspective Re Set-Off Where the policyholder has compromised a coverage dispute with another insurer, the remaining insurers should be allowed to set off the share of the carrier with whom the policyholder settled. Through a set off, the policyholder is held to the agreement it made in compromising its coverage claim against another party and the remaining insurer s share of responsibility is not somehow expanded by the policyholder s actions. Each insurer should face liability no greater than for the time its policy was in force. Further, under no circumstances should a double recovery be allowed. 46

47 Insurer Perspective Re Contribution Contribution is far from a panacea for the unlucky insurer that is targeted under all sums to respond in full for damage spanning multiple policies. Allowing all sums liability and forcing a targeted insurer to seek contribution or subrogation impermissibly foists the evidentiary burden of proving coverage under other policies on the insurer, not the policyholder. This approach is neither fair nor efficient. 47

48 Policyholder Perspective Re Set-Off (Robert Horkovich) [T]he insured must first be fully compensated for its loss before any set-off is ever allowed. [The insurance company] bears the burden of establishing a double recovery. Were we to hold that the insured bears the burden of proving it had not received a double recovery, such a rule would encourage litigation and reward the non-settling insurer for refusing to settle. Weyerhaeuser Co. v. Commercial Union Ins. Co., 15 P.3d 115, (Wn. 2001) 48

49 Policyholder Perspective Re Contribution (Robert Horkovich) Equitable right. Difficult for a breaching insurance company to seek equity. E.R. Squibb & Sons, Inc. v. Acc. & Cas. Ins. Co., No. 82 Civ. 7327, 1997 WL , at *3 (SDNY May 13, 1997) The non-settling insurers ask the Court to reward them for not settling the case and give them the benefit of monies paid by the settling defendants. A rule allocating such a windfall to non-settling insurers would encourage insurers to refuse to settle and force the case to trial, knowing that they will never be required to pay more than what they are legally obligated to pay and hoping that they can reap a windfall if settlements by other insurers prove to be in excess of their legal obligation. The courts should not encourage that type of dog in the manger approach to litigation. No rights vest in an insurance company to seek contribution or subrogation if at all at least until after the breaching insurance company pays full judgment. Policyholder must be made whole. Policyholder does not have to pay self-insured or vertical gap allocations or even insolvent insurance company shares. 49