The question whether a jurisdiction should adopt an all sums or pro rata allocation

Transcription

1 All Sums In Action Mary F. Licari Bates & Carey LLP 191 North Wacker Drive Suite 2400 Chicago, Illinois (312) (312) (Fax) This paper presents an overview and general discussion of the subject matter and arguments of both policyholders and insurers. It should not be considered representative of the particular views of Ms. Licari individually, her law firm or their clients.

2 I. ALL SUMS IN ACTION The question whether a jurisdiction should adopt an all sums or pro rata allocation approach has been an epic battle between policyholders and insurers virtually since the first asbestos bodily injury or pollution liability suit was tendered to an insurer. It was long thought once this seminal allocation issue was resolved - - all sums or pro rata - - allocation disputes ended. That view has proven largely correct because in most instances, cases settle after the court has ruled on allocation. This explains why we do not find reported cases explaining in details how an all sums ruling should be implemented. To be sure, there are cases deciding related issues such as stacking of per occurrence policy limits or drop down for an insurer s insolvency. But we do not find cases addressing what happens after a policyholder exhausts a tower of coverage in a particular policy period. Additionally, how should insolvent policies or self-insured retentions be treated in a selected coverage tower. Can a policyholder hopscotch or hip-hop - - skipping settled and insolvent policies; exhausting the first two layers of coverage in Year 1 and then selecting the first two layers of coverage in Year 2 for indemnity of a loss. How do we account for prior settlements. These are the kinds of practical issues that coverage counsel must consider after an all sums ruling has been entered. A typical all sums ruling holds that an insurer that issued a policy during a period when bodily injury or property damage took place is potentially obligated to indemnify the insured in whole for its loss subject to applicable limits of liability. The question then becomes how does the policyholder select the policy or policies from which it seeks indemnity. Some insurers believe the insured has selected applicable insurance if it has settled with certain insurers. Setting aside prior settlements, what factors should the policyholder consider in selecting the responsive policy period.

3 Generally, policyholders try to select a policy period or coverage tower that does not include insolvent policies, policies with significant SIRs or policies with impaired or exhausted limits. Additionally, a policyholder might consider whether the primary policies contain antistacking or non-cumulation provisions. If the policies in a single policy period or coverage tower do not fully indemnify the insured, the question then becomes - - can the insured seek coverage under policies in another policy period. Resolution of that question depends upon whether the court permits the stacking of policies and if so, vertical or horizontal exhaustion of other policies. The latter generally means: vertical exhaustion - - exhausting the per occurrence limits of liability of a single policy in a particular policy period before moving vertically to obtain indemnity from the next higher-layer policy in that policy period or coverage tower ; horizontal exhaustion - - exhausting all policies in a particular layer of coverage (e.g. all primary insurance must exhaust before impacting any excess coverage). The following lists potential impairment/exhaustion schemes a court may apply upon adopting an all sums allocation ruling: Vertical exhaustion without stacking; Vertical exhaustion with stacking; or Horizontal exhaustion with stacking. Key to each scheme is the concept of stacking - - whether an insured can obtain coverage under more than one policy period if a single policy period or coverage tower does not fully indemnify the insured. A. Stacking of Per Occurrence Limits of Liability The California Court of Appeal in State v. Continental Ins. Co., 88 Cal. Rptr.3d 288 (Cal. Ct. App. 2009) (review granted), gave a general definition of the term stacking, a frequently- 2

4 used insurance term that can have different meanings in different contexts. The court explained: in its broadest sense, stacking means treating multiple policies that apply to a single loss as cumulative - as a stack of coverage - rather than as mutually exclusive. Id. at 302. In other words, can an insured obtain indemnity for a loss under more than one policy period if the loss exceeds the limits of liability of a single policy period. Resolution of that issue can have serious consequences where exhaustion of policies in a single policy period or coverage tower does not indemnify the insured in whole for a loss. Policyholders are generally pro-stacking in order to maximize the potential coverage available for a loss. Insurers oppose stacking because, in effect, stacking creates new super occurrence limits of liability, far greater than the per occurrence limit of liability in any single policy period. The Court of Appeals in Continental Ins. Co., which is presently on appeal to the California Supreme Court, allowed the insured to stack per occurrence limits of liability of policies based upon its interpretation of policy language and a consistent line of authority in California that allows stacking in other multiple coverage situations. 88 Cal. Rptr.3d at 313. One California appellate court, however, refused to allow stacking of polices, reasoning that [a]nti-stacking ensures that the insured does not obtain much more insurance than it paid for. FMC Corp. v. Plaisted & Companies, 72 Cal. Rptr.2d 467, 502 (Cal. Ct. App. 1998). The court cited in support of its holding the seminal all sums case, Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034, (D.C. Cir. 1981). In Keene, the court acknowledged that the insurers policies did not explicitly provide a means of applying the limits of liability to injuries that are covered by multiple policies. Id. at The court further acknowledged that the principle of indemnity implicit in the policies 3

5 requires that successive policies cover a single asbestos-related injuries but it refused to allow stacking based on that principle. Id. Instead, because it was attempting to construe the policies in such a way that the insurers contractual obligations for asbestos-related diseases are the same as their obligations for other injuries, the court held the insured could only select the policy under which it is to be indemnified. Id. at In other words, the court refused to create essentially new policies with a new super occurrence limit of liability. Other arguments policyholders and insurers have asserted regarding stacking of policy limits include: Policyholders: If the purpose of the all sums ruling is to make the insured whole, then, as the Ohio Supreme Court held in Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co. 769 N.E.2d 835, 841 (Ohio 2002): For each site, Goodyear [insured] should be permitted to choose, from the pool of triggered primary policies, a single primary policy against which it desires to make a claim. In the event that this policy does not cover Goodyear's entire claim, then Goodyear may pursue coverage under other primary or excess insurance policies. See also Allstate Ins. Co. v. Dana Corp. 759 N.E.2d 1049, (Ind. 2001) ( If contamination caused a covered occurrence in the 1978 policy period, and continued causing damage in the 1979 policy period, that contamination would trigger both policies.... We agree... that Dana [insured] may elect to seek indemnity from any or all of the policies at risk as to any single occurrence ). The absence of an anti-stacking or non-cumulation provision in a policy means, at a minimum, that no policy term expressly precludes the stacking of per occurrence limits of liability. The other insurance clause permits the insured to obtain coverage under each policy in excess of, or in addition to, coverage under other liability policies. States that require horizontal exhaustion necessarily permit stacking of policies. The insured should get the benefit of the coverage. It paid a premium each year for coverage and the insurer calculated the 4

6 policy premium based upon the risk it undertook each policy year. If property damage occurs each policy year, it must make good on each policy. Society Ins. v. Town of Franklin, 607 N.W.2d 342, (Wis. Ct. App. 2000). Anti-stacking is inconsistent with the equitable contribution rights of insurers. Insurers: A reasonable expectation argument - - American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842, (Tex. 1994) ( Simply because a Claim Occurrence extends throughout several policy periods does not raise the per-occurrence indemnity cap established in every policy. Even the jurisdiction embracing the broadest coverage trigger rule has held that multiple coverage does not permit an insured to stack the limits of multiple policies that do not overlap ); Sybron Transition Corp. v. Security Ins. of Hartford, 258 F.3d 595, 602 (7th Cir. 2001) ( [E]ven if knowledge of causation permits an insured to pick a policy, it may not pick more than one. Stacking is incompatible with confidence about causation. Security insured Sybron to a limit of $500,000 per occurrence, not $500,000 per occurrence per year. Suppose Press had not only inhaled asbestos but also developed mesothelioma in 1969 as a result. How much could Sybron have recovered? Surely the answer is $500,000 maximum. This would be clear enough for an auto accident that caused medical expenses and lost income not only in the year of the collision but also in future years; it is no less true of occupational diseases. There is only one occurrence no matter how many years the loss extends. ); Great Lakes Dredge & Dock Co. v. City of Chicago, 260 F.3d 789, 794 (7th Cir. 2001) ( There ain't no such thing as a free lunch, even in the insurance business. Great Lakes never carried more than $101 million of coverage at any moment, and in connection with the spinoff it cut that maximum to $51 million. Yet, if stacking is allowed, coverage went from $101 million on October 14 to $151 million on October 16, even though the premium reflected a reduction to $51 million. That is exceedingly unlikely. ). The policy language during the policy period precludes stacking and is in essence an anti-stacking provision. Stacking treats a single occurrence as multiple occurrences - - if the court holds that a loss constitutes a single occurrence then only one per occurrence limit of liability in a single policy period should apply. 5

7 Permitting stacking in effect rewards the insured for failing to mitigate or intervene and remedy property damage or bodily injury at an earlier date. Horizontal exhaustion in pro rata jurisdictions requiring that all primary insurance must exhaust prior to impacting excess coverage is a wholly different issue than whether, in the first instance, stacking of per occurrence limits of liability is permissible in an all sums jurisdiction. Anti-stacking has nothing to do with contribution. The selected insurers in a selected policy period may have equitable contribution rights against other insurers because a policy provides coverage only for bodily injury or property damage that takes place in a policy period. Another factor to be considered is the effect of prior settlements. If an insured has previously settled with an insurer in a particular policy period, has the insured in effect selected a policy period for coverage of its claim. Insurers have argued that by virtue of settling with a prior insurer, the insured selected a particular policy period or in the case of settlements with all primary insurers, selected horizontal exhaustion of primary insurance. 1 B. How Stacking Affects Vertical and Horizontal Exhaustion When a court permits stacking, questions abound as to what exactly this means. If vertical exhaustion is adopted, must the insured exhaust policies in an entire policy period or tower of coverage before selecting another policy period to obtain coverage for a loss. Can the insured hopscotch over an insolvent policy and obtain coverage from an above-attaching 1 See, e.g., GenCorp, Inc. v. AIU Ins. Co., 297 F. Supp. 2d 995, (N.D. Ohio 2003). ( GenCorp has already made its allocation of liability among its primary insurers. GenCorp made that allocation when it settled with its primary insurers. GenCorp could have settled with just one or two of its primary insurers or sought a partial settlement with any of those insurers. GenCorp did not do this. It exhausted that coverage as to all primary insurers, as to all primary insurance policies, and as to all policy years. It is not possible for GenCorp now to decide to allocate its liability to one policy or to one policy year because this would be contrary to the settlements it has reached. ), aff d, 138 Fed. Appx. 732 (6th Cir. 2005), compare, Goodrich Corp. v. Commercial Union Ins. Co., 2008 WL at*8 (Ohio App. Ct. June 30, 2008) ( insurers failed to demonstrate that Goodrich [insured] would receive a double recovery for the same damages; therefore, the trial court properly denied any credit against the judgment for settlements beyond [what was] received from the primary insurer. ). 6

8 excess liability policy. Does the insured have to settle multiple SIRs if it seeks coverage under multiple policy periods. There is no appellate guidance on these issues in this particular factual scenario - - post- all sums ruling with bodily injury or property damage in multiple policy periods. If horizontal exhaustion of primary insurance is required, does that mean a layer-bylayer, horizontal exhaustion approach applies to excess layers of coverage as well as the primary layer. Horizontal exhaustion might be advocated if an insured has sufficient per occurrence limits of liability of primary insurance such that the excess insurers would not be impacted. In a case adopting pro rata allocation, U.S. Gypsum Co. v. Admiral Ins. Co., 643 N.E.2d 1226, 1262 (Ill. App. Ct. 1994), the court held that an insured must horizontally exhaust all primary insurance issued during the period bodily injury took place before it could obtain coverage under any excess liability policies. The insured, U.S. Gypsum Company ( USG ), opposed horizontal exhaustion because USG was in fact, the primary insurer, having purchased fronting policies for most of the primary insurance layer. USG argued that because each excess insurer had an independent obligation to provide coverage under its policy, it must provide coverage once the underlying primary policy particular to the excess policy in question is exhausted regardless of whether the insurer has concurrent primary or excess insurance obligations. Id. at The court disagreed, citing the other insurance provision in an excess policy, which unequivocally sets forth that the excess insurer will not contribute if other valid and collectible insurance with any other insurer is available to the insured. Id. This provision, the court reasoned, supports an interpretation that this policy serves as an excess policy to all triggered primary policies, regardless of whether they extend over multiple policy periods or only one. Id. 7

9 The court reasoned further that to require instead vertical exhaustion would permit the insured to effectively manipulate the source of its recovery, avoiding difficulties encountered as the result of its purchase of fronting insurance and the liquidation of some of its insurers. Id. at The court remarked: Such a practice would blur the distinction between primary and excess insurance, and would allow certain primary insurers to escape unscathed when they would otherwise bear the initial burden of providing indemnification. Id. (citations omitted.) See also Padilla Constr. Co., Inc. v. Transportation Ins. Co., 58 Cal. Rptr. 3d 807, 809 (Cal. Ct. App. 2007) (citations omitted) ( California's rule of horizontal exhaustion in liability insurance law requires all primary insurance to be exhausted before an excess insurer must drop down to defend an insured, including in cases of continuing loss. Unless there is excess insurance that describes underlying insurance and promises to cover a claim when that specific underlying insurance is exhausted ( vertical exhaustion ), the rule of horizontal exhaustion applies to cases of alleged continuing property damage-as often happens when the insured is sued for construction defects. ). Another argument policyholders have made opposing horizontal exhaustion is that it is inconsistent with a finding that each insurer has an independent obligation to cover all sums the insured is legally obligated to pay. But it is stacking that insurers contend is inconsistent with all sums, because it creates new sums or super occurrence limits far in excess of a single per occurrence limit of liability. Policyholders further argue that horizontal exhaustion provides a windfall to excess insurers because in effect, it increases the underlying attachment point of a particular excess policy, an argument rejected by the U.S. Gypsum court. 8

10 C. Anti-Stacking and Non-Cumulation Provisions Certain policy provisions such as anti-stacking and non-cumulation provisions may prevent stacking of per occurrence limits of liability. 2 The following is one example of an anti-stacking non-cumulation provision the New York Court of Appeals construed in Hiraldo ex rel. Hiraldo v. Allstate Ins. Co., 840 N.E.2d 563, 564 (N.Y. 2005): Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under Business Liability Protection coverage for damages resulting from one loss will not exceed the limit of liability for Coverage X shown on the declarations page. All bodily injury, personal injury and property damage resulting from one accident or from continuous or repeated exposure to the same general conditions is considered the result of one loss. In Hiraldo, Allstate Insurance Company ( Allstate ) issued a $300,000 liability policy for a one-year term that was renewed for two more years. The insured was exposed to lead paint continuously during the terms of all three policies. The question the New York Court of Appeals addressed was whether Allstate was obligated to pay the insured $300,000 or $900,000. The court remarked at the outset: But for the noncumulation clause in the policies, this would be a difficult case. Id. at 564. Finding the provision clear and unambiguous, the court applied the clause as written: The noncumulation clause says that [r]egardless of the number of... policies involved, [Allstate's] total liability under Business Liability Protection coverage for damages resulting from one loss will not exceed the limit of liability... shown on the declarations page. That limit is $300,000, and thus Allstate is liable for no more. Id. at Swainston v. American Family Mut. Ins. Co., 2009 WL at *3 (Iowa July 17, 2009) (citations omitted) (describing the difference between stacking and other insurance clauses, the Iowa Supreme Court quoted Couch on Insurance: other insurance clauses address rules for determining responsibility if more than one coverage is considered to apply, while stacking addresses whether more than one coverage which would otherwise be applicable should, in fact, be applied at all. As such, the other insurance clauses should only come into play after the determination of whether the insured has the right to stack coverages at all. ) 9

11 Non-cumulation provisions are designed to ensure that only one per occurrence limit of liability is available for a single occurrence. The following are two examples of non-cumulation provisions construed by courts: Example One at issue in Treesdale, infra: Non-Cumulation of Liability - Same Occurrence - If the same occurrence gives rise to personal injury, property damage or advertising injury or damage which occurs partly before and partly within any annual period of this policy, each occurrence limit and the applicable aggregate limit or limits of the policy shall be reduced by the amount of each payment made by the company with respect to each occurrence, either under a previous policy or policies of which this policy is a replacement, or under this policy with respect to previous annual periods thereof. Example Two at issue in Greene, infra: It is agreed, that if any loss is also covered in whole or in part under any other excess policy issued to the insured prior to the inception date hereof, the company's limit of liability as stated in Item 3 of the Declarations shall be reduced by any amounts due the insured on account of any such loss under such prior insurance. Policyholders sometimes argue that non-cumulation provisions unfairly reduce coverage available for a loss. But a true non-cumulation provision simply allocates a single occurrence first to earlier insurance and reduces the amount to be allocated to subsequent policies. The Court of Appeals for the Third Circuit, in Liberty Mut. Ins. Co. v. Treesdale, Inc., 418 F.3d 330 (3d Cir. 2005), determined the scope and effect of a non-cumulation provision in primary liability policies issued by Liberty Mutual Insurance Company ( Liberty ). Liberty argued that the non-cumulation provision ensures that if an occurrence has been covered by one policy in a line of successive policies issued by Liberty Mutual, then only one occurrence limit will apply. Thus, claims paid by Liberty Mutual for one occurrence under the UEL policy would correspondingly reduce the occurrence limit of the successive policies. Id. at 339. Liberty argued that it previously paid the highest limit of liability under any of the Liberty 10

12 policies in prior asbestos settlements and judgments and as a result, it owed no further coverage to the insured. The Court of Appeals agreed, rejecting each of the policyholder s arguments against enforcement of the non-cumulation provision. First, the policyholder argued that the provision should not apply because Pennsylvania law permits it to select Liberty s UEL policies in reverse chronological order, which means there can never be a payment made... under a previous policy. Id. at 340. Calling the argument creative but not very meritorious, the court refused to inject ambiguity in the clear and unambiguous terms of the non-cumulation provision. Id. at The court reasoned: Id. at it is simply not reasonable to think that the Non-Cumulation provision would allow recovery under all of the UEL policies for the same occurrence simply by allowing an insured to engage in an alchemistic manipulation of the relevant chronology. Such an interpretation violates the provision's very purpose and allows it to be read entirely out of the policy by an illogical and tortured reading of the policy's provisions. We are hard-pressed to think that an insurance company would issue a policy with an anti-stacking provision, but intentionally include a provision that would void that anti-stacking provision by allowing the insured to invoke coverage in reverse chronological order. It is clear from the way the provision is written, that it applies without regard to the order in which the policies are chosen. The policyholder argued further that because the Liberty policies were not annual policies, but instead multi-year renewal policies, any payment made under any UEL policy that came before a given UEL policy is not a payment under the policy with respect to previous annual period. Id. at 343. The court rejected the insured s argument finding more persuasive Liberty s argument that in common sense parlance, renewal and replacement mean essentially the same thing. Id. 11

13 The court also rejected the policyholder s argument that it was entitled to coverage up to the combined maximum limits of all of the Liberty policies and that it could select policies in reverse chronological order to avoid operation of the non-cumulation provision. The Third Circuit found it simply not reasonable to permit the insured to maximize coverage by engaging in an alchemistic manipulation of the relevant chronology. Id. at Finally, the court rejected any notion that the non-cumulation provision was unenforceable because it was, in effect, an escape clause and inconsistent with the insured s reasonable expectation of coverage. The court held the reasonable expectations doctrine was inapplicable because the insured did not argue that the non-cumulation provision was ambiguous. Id. at Further, the court noted that the provision did not eliminate coverage but instead, simply provides that if a single occurrence gives rise to an injury during more than one policy period, only one occurrence limit will apply. Id. at 344. The court in Greene, Tweed & Co., Inc. v. Hartford Acc. & Indem. Co WL (E.D. Pa. April 21, 2006), reached a different result, refusing to enforce a noncumulation provision. The policyholder argued that Treesdale was inapposite because the noncumulation provision in that case differed from the provision at issue in a policy issued by American Home Assurance Company ( American Home ). The operative word in the American Home non-cumulation provision, according to the insured, was loss, a term not defined in the policy. Id. at *12. The policyholder argued that loss did not mean occurrence but rather, the amount an insured has paid to a particular claimant. Id. Citing prior decisions on point, the court rejected the policyholder s interpretation of loss, holding that: the only reasonable interpretation of loss as used in the American Home Non-Cumulation Clause is that the term means the gross amount Greene Tweed [insured] is seeking in its claim under the American Home Policy. Thus, to the extent the prior Hartford excess insurance policies provide 12

14 payment for the asbestos claims against Greene Tweed, that also are covered by the American Home Policy, the Non-Cumulation Clause would apply to reduce the American Home Policy s limits by the total amounts paid, or due, to the insured from the prior excess insurers. Id. at *13. The court, however, refused to follow Treesdale, in light of other precedent construing non-cumulation provisions in other contexts and finding them, in effect, unenforceable escape clauses. Applying the clause to the instant claim, the court reasoned, while the terms of the non-cumulation provision were plain and unambiguous, if enforced as written, American Home would provide no coverage. Id. at *16. It was this result - - no coverage- - that persuaded the court to hold: Greene Tweed urges that because it is faced with over 60,000 lawsuits alleging personal injury from asbestos exposure and because its primary coverages are nearly exhausted, it surely will exhaust all the Hartford excess policies issued prior to December 31, 1973, when the American Home Policy became effective. At the time when the pre-1974 Hartford excess coverages are exhausted, American Home will be asked to indemnify the remaining asbestos-related claims against Greene Tweed. At that point, should American Home be permitted to invoke its Non- Cumulation Clause, the effect will be to allow American Home to provide no coverage at all to Greene Tweed, because its $10 million limit of liability does not exceed the limits of liability of the prior Hartford excess policies, including the $10 million Hartford excess policy that the American Home Policy immediately replaced. [E]ven though the language of the American Home Non-Cumulation Clause does not purport to eliminate coverage, but only reduce coverage, and that in a hypothetical situation, there may be circumstances where the American Home's Non-Cumulation Clause would not bar coverage. Id. In sum, the court held that an anti-stacking provision is valid so long as the insurer invoking the provision will be required to indemnify the insured pursuant to either the policy containing the provision or other policies it issued to the insured. Id. at *19. If a non-cumulation provision means that a particular insurer pays nothing, at least the Greene court believed, it is unenforceable despite its plain meaning and clear intent. 13

15 Sometimes full limits of liability in prior years of coverage might not be available because the insured has settled with those insurers. In this instance, because the decision to settle rests with the insured, the prior settlements should not preclude application of a non-cumulation provision that is plain and unambiguous. 3 A few words of caution, however, when considering the application of anti-stacking or non-cumulation provisions. Carefully consider the context in which the court construed an antistacking provision. Courts often construe these provisions in the underinsured/uninsured motorists context, which implicates public policy considerations and statutes that frequently affect the court s interpretation and enforcement of anti-stacking provisions. See, e.g., Wagner v. Yates, 912 N.E.2d 805, 812 (Ind. 2009) (citations omitted) ( it is of course true that an insurance company is not required to draft an anti-stacking clause that tracks the language of I.C But to avoid a claim of ambiguity and thus unenforceability, an insurance company would be well advised to apprise itself of anti-stacking clauses that Indiana's appellate courts have found effective in the past. ). II. CONCLUSION All sums in action is moving but not sprinting. This is no doubt because of the myriad of issues associated with the application of an all sums ruling. The policyholder s entire insurance program must be considered before advocating any post- all sums coverage positions. Policies with anti-stacking provisions, impaired or exhausted limits, and insolvent or 3 Danbeck v. American Family Mut. Ins. Co., 629 N.W.2d 150, (Wis. 2001) ( It is unquestionably true that partial settlements serve the interests of the parties and promote judicial economy and therefore have been approved by the courts.... However, this public policy, as important as it is, cannot supersede unambiguous policy language or impose obligations under the contract which otherwise do not exist. The generalized public policy favoring settlements is insufficient to justify voiding or refusing to enforce the clear language of the policy in this case. ). 14

16 underinsured limits all need to be identified. The effect of prior settlements must be considered, as well as a potentially dispositive issue, stacking of liability limits. Prior court decisions need to be considered in the context in which stacking or other coverage issues were resolved. The rationale behind the court s adoption of all sums in the first instance should be considered and could influence post- all sums rulings. For while all sums bestows certain discretion on policyholders, that discretion is not an unfettered right to obtain coverage with no limitations _1.DOC 15