Allocation 201: Who Pays Insolvent Shares?
While more and more jurisdictions have rejected policyholder "all sums" claims in long-tail suits, there is still a striking lack of uniformity in the approach that these courts are taking to individual allocation issues. In particular, there is a major division as to whether allocation applies to the entire period of injury or just those years for which insurance is "available." This division reflects the thinking of some courts, led by the New Jersey Supreme Court's original Owens-Illinois opinion, that allocation is not necessarily a function of policy wordings but, rather, a public policy tool that should be applied to encourage policyholders to transfer risk by purchasing insurance and to punish them for failing to do so.
Five years ago, the Minnesota Supreme Court adopted the "unavailability" exception to pro rata allocatio in a construction defect case. In Wooddale Builders, Inc. v. Maryland Cas. Co.,, 722 N.W.2d 283 (Minn. 2006), the Court declined to allocate loss to the years after 2002 because the insured had allegedly been unable to buy coverage for water intrusion losses after that date.
In light of Wooddale, questions remain with respect to what it means for insurance to be "unavailable." In particular, is insurance "unavailable" because of an insurer's insolvency?
There are a legion of cases in which courts have held that insolvent insurance is "unavailable" to a policyholder. However, these are all "other insurance" cases in the context of an excess carrier's claimed drop down duties. Should the same logic apply to allocation?
In H.B. Fuller Co. v. U.S. Fire Ins. Co., No. 09-02827 (D. Minn. July 18, 2011), Judge Tunheim ruled yesterday that Wooddale does not apply to carrier insolvency. The District Court ruled that the Supreme Court's discussion of "availability" was only meant to apply in the context of when insurance was generally unavailable in the marketplace. Further, citing case law from other jurisdictions, Judge Tunheim declared that it made sense to place this burden on the insured, who was the party that had chosen to buy insurance from the company that later went insolvent, rather than other insurers, who had been strangers to the transaction.
