Fifth Circuit Limits Excess Insurers Exposure Following Policyholder's Partial Allocation of Primary Limits

Posted on February 11, 2008 by Chris Martin

Several days ago, the Fifth Circuit Court of Appeals evaluated a primary liability carrier’s tender of its policy limits to its insured for covered claims and whether such a tender triggered an excess insurer's liability coverage when the insured allocated the primary limits across several years of losses.  In Service Corp. Int’l v. Great Am. Ins. Co. of New York, 2008 WL 280900 (5th Cir. February 1, 2008), a funeral services company (SCI), with cemeteries throughout the United States, was sued by individual and class action plaintiffs for grave desecrations and improper burials at two specific cemeteries.  Some, but not all, of the events giving rise to the lawsuits occurred between the policy period in question.  SCI was covered by a $25 million primary liability insurance policy and a $50 million excess liability policy.

As the lawsuits were pending against SCI, the primary carrier determined that its covered claims would likely exceed its policy limit for the policy period. The carrier then tendered $25 million to SCI in exchange for an indemnity and hold harmless agreement.  The lawsuits settled for $100 million, but only $13.75 million was allocated by the insured to claims arising during the policy period of the excess carrier in this suit.  The rest were allocated to other years of losses.  

SCI requested coverage from an excess liability carrier, but coverage was denied.  The excess carrier argued because only $13.75 million was allocated to the policy period (and not the complete $25 million limit which had been tendered), the excess layer of coverage had not been triggered.  In response, SCI filed suit against the excess carrier.  The federal district court granted summary judgment in favor of the excess carrier.

On appeal, the Fifth Circuit noted the excess policy incorporated the primary policy’s definition of “loss,” which was “those sums actually paid in the settlement or satisfaction of a claim which the insured is legally obligated to pay as damages of injuries or offense.”  The Fifth Circuit then concluded the parties intended any loss to be measured by the sums used for payment of covered claims during the policy period, not simply by the aggregate sums paid by the insureds.  As such, the insured’s own allocation was used by the Court to determine the excess liability policy had never been triggered.

This is a potentially significant decision particularly for claims in those jurisdictions governed by the Fifth Circuit including Texas, Louisiana and Mississippi.  Because policyholder allocations are common in coverage cases arising out of toxic tort cases and other mass torts, this holding gives excess liability carriers more protections than other courts have extended in recent years.  It remains to be seen how the judicial pronouncements in this case will apply to other efforts to artificially allocate prior primary settlements by policyholders, but it is certainly a step in the right direction.

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First Circuit Hears Oral Argument on Allocation Issues

Posted on December 7, 2007 by Mike Aylward

The First Circuit heard oral argument on Wednesday in the matter of Boston Gas v. Century Indemnity, a case that presents the first opportunity for this Circuit to weigh in on issues of allocation in long-tail coverage disputes.

 

In 2006, U.S. District Court Judge Rya Zobel (who some will recall as the author of the original “manifestation” trigger opinion in Eagle Picher) ruled that Century Indemnity could be liable for the insured’s entire cost of cleaning up a polluted MGP site near Boston Harbor despite the fact that its policies had only been in effect for a brief period of the overall time when pollution occurred. The crucial issue presented by the Boston Gas appeal is whether the First Circuit will take an independent view of “pro rata” versus “all sums” or will feel constrained to affirm Judge Zobel in light of rulings of the Massachusetts Appeal Court in Rubenstein v. Royal Ins. Co., 44 Mass. App. Ct. 842, 694 N.E.2d 381 (1998), review denied (Mass. 1999) and Chicago Bridge & Iron Co. v. Certain Underwriters at Lloyds, 59 Mass. App. Ct. 646, 797 N.E.2d 424 (2003), further appellate review denied (Mass. 2004) adopting a theory of “joint and several” liability.

Massachusetts is among those jurisdictions whose highest state court has never addressed the issue of allocation. This is not for lack of opportunity. In both Chicago Bridge and Rubenstein, the insurers sought further appellate review but their requests were denied by the Supreme Judicial Court.  The court’s inaction on issues of allocation may reflect the fact that it is perfectly content with the analysis adopted by the Appeals Court.   Alternatively, as insurers might prefer, it may reflect the court’s view that neither case presented an appropriate vehicle decide this momentous issue,  given the inadequate factual record in Rubenstein and the peculiar issues of Illinois law and London Market insurance wordings considered in Chicago Bridge.

The key question presented by Boston Gas will be whether the panel feels constrained to follow the rulings of the Appeals Court or is free to make its own determinations with respect to this issue. In the complex dance between state and federal courts considering insurance issues, federal courts are bound to follow state law but are not necessarily bound to adopt the rulings of intermediate appellate courts if there are sufficient Erie “data points” that suggest to the federal court’s satisfaction that the state’s highest court would take a different view. Thus it was that between 1985 and 1990, Massachusetts insurers suffered with the Appeals Court’s declaration in Shapiro v. Public Service Mutual that pollution exclusions were ambiguous, a situation that remained unrectified until the Supreme Judicial Court weighed in in 1990 with Hazen Paper and Belleville.

On the other hand, recent coverage history is replete with cases in which state and federal courts took contradictory views of the same issues. Illinois, in particular, has been a problem in this regard as the Illinois Supreme Court and the Seventh Circuit took opposite views of the trigger of coverage in the Eljer sequence of cases. More recently, the Illinois Supreme Court concluded that TCPA claims trigger Coverage B under the CGL policy a few months after the Seventh Circuit declared that they obviously did not.

Although the First Circuit and Massachusetts courts have enjoyed a more cordial relationship over the years than other state and federal courts, it remains to be seen whether the First Circuit, even if it decides to ignore Rubenstein and Chicago Bridge, would adopt the insurer’s position in this case. Much may depend on which Judge writes the opinion. The senior jurist on the panel, Leonard Boudin, described the policyholder’s “joint and several” position as “crazy” although it also appeared that he had not yet read Chicago Bridge or Rubenstein. On the other hand, Judge Selya seemed entirely comfortable with adopting a theory of “joint and several” liability insofar as the insurer could not show that the injury occurring during its policy was somehow divisible from the overall environmental loss giving rise to the claims against Boston Gas. The third jurist, Judge Gelpi, who was only appointed to the U.S. District Court in Puerto Rico in 2006 and manifested a clear lack of understanding concerning Erie principles, gave no indication as to his views on the substantive coverage issues.

Apart from allocation, Boston Gas may also yield an interesting ruling concerning the effect of “owned property” exclusions in such cases. Massachusetts courts, like many states, ignore the owned property exclusion insofar as work is undertaken on the insured’s property to prevent or remediate off-site contamination. In this case, the U.S. District Court essentially gave an “all or nothing” instruction to the jury with the result that, having found that some of the work was necessary to remediate off-site property, the jury refused to limit the insured’s award in any respect for certain tasks that solely concerned property damage on the insured’s property. The issue on appeal, therefore, is whether even in cases where there is off-site damage, some portion of indemnity should be subject to the exclusion for tasks that are solely attributable to on-site contamination and in no way related to the prevention or remediation of off-site pollution.

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New Hampshire Supreme Court Adopts Pro Rata Allocation For Long Tail Claims

Posted on October 18, 2007 by Mike Aylward

Score it Insurers 8-Policyholders 6 as casualty insurers won a round today in the on-going battle over whether insureds must allocate long-tail losses in accordance with the duration of the loss or can "spike" their claims to a single year of coverage to trigger higher layer policies and avoid those nasty orphan shares and gaps in coverage.

The insurers' latest win came this morning in the New Hampshire Supreme Court.  On a certified question from the U.S. District Court, the court held in EnergyNorth Natural Gas, Inc. v. Certain Underwriters that indemnity claims arising out of the clean up of the insured's former gas site cannot be spiked in a single year to trigger a third layer excess policy issued by American Re in 1972.  Having adopted a "continuous trigger" 3 years ago in another EnergyNorth MGP case, the court this time held that the insured must bear the consequences of this extended period of property damage, as insurers are only responsible for that portion of the loss corresponding to the duration of their coverage. 

In a lengthy (for this court) opinion, the court concluded that pro rata allocation was (1) more consistent with its trigger of coverage analysis than "joint and several" liability; (2) gives insured's incentives to buy insurance and avoid environmental carelessness and (3) that joint and several is based on an untenable assumption, namely that at every point in a progressive, developing loss, the injury will be substantially the same.  Further, the court found that joint and several didn't resolve the issue of allocation, it merely postponed it by spawning another round of contribution litigation between the spiked carrier and other potentially triggered insurers that had avoided the insured's initial embrace.  

As any means of allocation spread the risk too thinly to reach AmRe's layer, the New Hampshire court (much like the NY Court of Appeals in ConEd) chose not to be much more specific about the details of allocation, although it expressed a strong preference for the "years times limit" approach pioneered by the New Jersey Supreme Court in Owens-Illinois.  Should that approach prove unfeasible, however, the court opined that lower courts should feel free to pro rate by years.

Owing to the fact that three justices were conflicted, only Justices Dalianis and Duggan (who wrote the opinion) sat, with the assistance of retired Justice Sherman Horton.  Fans of NHSC history will recall that it was Sherm Horton who, shortly before retiring, handed gas utilities their first appellate defeat by ruling in Concord Gas that the intentional discharge of tar waste into a body of water could not be an "occurrence."   How the wheel turns...

As is the case with many similar opinions, there are a host of details that remain to be worked out.  Notably, the court did not specify what denominator should be used.  Insofar as the court sought to align its trigger and allocation analyses, it would seem that this period should run from the date that the site was placed in operation (1852--which was the year that Franklin Pierce--New Hampshire's native son--became President of the United States).  The court's reference to OI suggests, however, that this period must take into account the amount of insurance a reasonable business would have bought and thus the question of whether insurance could have been purchased for casualty risks for some of that time.

While the court's statement that loss continued through manifestation implied that the denominator should extend until 2000, when this pollution was first documented, the Court's reference to OI again raises the possibility that later years containing pollution exclusions should be cut off, as policyholders in Minnesota have argument since Wooddale.
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