Long-tail or delayed manifestation claims typically arise from losses that occur over an extended period of time, such as exposure to pollution, asbestos, silica or lead paint. Generally, these long tail insurance claims are reported to insurance companies many years after a person is first exposed to the substance and often, the identity of the insurance companies on the risk at the time of exposure through time of injury is lost. Additionally, even if a policy can be identified, it may have asbestos or silica exclusions. A common threshold question therefore arises as to how the losses will be apportioned between the insurance companies and the policyholders who may be standing in for the insurance companies for the uninsured years.
While the concept of allocation is a central component of both coverage litigation and general claims handling, there is no universal method of application, and the respective apportionment of defense and indemnification can vary state by state. This blog post provides analysis of the two leading allocation methods of long-tail insurance and how they are applied in New Jersey and Pennsylvania.
Of course, before a loss can be apportioned to a specific insurance policy, a determination must be made as to whether the terms of that policy were in fact triggered. After identifying the policies triggered by a particular loss, it is necessary then to determine how the loss will be shared among and between the insurance company/companies and the policyholder.
Types of Allocation Methods
The Pro Rata Allocation Method
Insurance companies typically advocate for pro rata allocation or “horizontal exhaustion”, which focuses on the time on the risk and frequently apportions the loss equally with its insured. Courts employing this method will apportion sums to the policyholder for triggered periods in which there is no insurance or where there exist insufficient limits of insurance. Sums assigned to the policyholder in such situations are referred to as “orphan shares.” Notably, defense costs and indemnification are treated differently with respect to these types of shares. Generally, the defense of the policyholder is the sole responsibility of the insurance companies. On the other hand, the responsibility for indemnity is laid upon the specific insurance carrier or policyholder on the risk.
The Joint and Several Liability Approach
The joint and several liability approach (also referred to as the “all sums” or “vertical spike” methods) permits the policyholder to essentially pick and choose the insurance policy to which the loss will be allocated. Generally, the policyholder is shielded from assuming any portion of the loss unless deductibles or self-insured retentions are involved. Needless to say, this is the preferred allocation method of policyholders.
How the Allocation Methods are Applied
Courts in New Jersey have adopted the pro rata allocation method in long tail cases and have continued to reject the joint and several liability approach. The seminal case in New Jersey is Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116 (N.J. 1998), where the policyholder experienced an environmental property damage claim arising from its disposal of waste. The Court in Carter-Wallace specifically outlined the manner in which the pro rata allocation method is to be applied. First, the limits for an individual policy period (including both primary and excess) are divided by the total coverage limits under the triggered policies for all years on the risk (including both primary and excess). Thereafter, the percentage of the loss for each year is allocated to the applicable insurance policies, self-insured retentions or to the policyholder. New Jersey Courts have routinely applied the pro rata allocation method.
Pennsylvania courts have routinely upheld the joint and several liability approach and have avoided allocation to the policyholder. In J.H. France Refractories Co. v. Allstate Ins. Co., 534 Pa. 29, 626 A.2d 502 (Pa. 1993), the policyholder was sued for asbestos bodily injury claims. The Court ultimately permitted the policyholder to seek recovery of indemnity costs from any triggered insurer without exposing itself to any risk. The chosen insurers would thereafter seek contribution from those insurers not selected by the policyholder.
Use of an Insurance Archeologist
No matter what allocation method is utilized by your state, the simple fact is that the more insurance companies/policies that you can get involved in your loss, the better. In the event you suffer a long tail claim, you should consider the assistance of an insurance archaeologist, who will help identify and locate insurance policies dating back to the inception of a claim. This type of assistance is especially necessary in cases where the policyholder may not have adequately maintained records or retained copies of the operative insurance policies.
Regardless of the complexity of the claim, policyholders should understand the governing allocation method in their jurisdiction in the event such a claim arises. Working with an experienced insurance broker in Pennsylvania, New Jersey, or your state will reduce your risk when it comes to long-tail insurance claims.
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