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The Allocation Saga: Which Team is Your State On?

Blogs, Insurance Coverage

Over the past thirty years, courts have been called upon to determine the best way to allocate available insurance coverage for long latency (i.e., long-tail) personal injury claims spanning multiple policies. As a result, two allocation methods have evolved and been used throughout the country: pro rata and all sums.

Generally, under the pro-rata approach, insurers that cover the loss are responsible for their respective portion of the loss. Often based on an insurer’s “time-on-the-risk,” the pro-rata approach allocates costs across applicable policies based on the time that insurance policies covered the risk.

Under the all sums approach (a.k.a., joint and several allocations), each insurer who issued a policy which covers a loss may bear full responsibility for the loss up to the monetary limit of each policy. Depending on policy limitations and the nature of the injury or injuries, the policyholder may recover the totality of its loss from one insurer whose policy was in effect at the time of, and covered, the loss. The insurer may then seek contribution from the other insurers who also covered the loss.

In Security Inc. Co. of Hartford v. Lumbermen’s Mut. Cas. Co., 264 Conn. 688 (2003), the Connecticut Supreme Court adopted the pro-rata time on the risk allocation method for defense and indemnity costs associated with long latency personal injury claims. The court held that the pro-rata method did not violate the reasonable expectations of the parties since “neither the insurers nor the insured could reasonably have expected that the insurers would be liable for losses occurring in periods outside of their respective policy coverage periods.” Id. at 710. 

In other states, however, the conversation on which method should be applied continues. Indeed, approximately thirty states, have not definitively selected one approach. Two recent state court decisions address the issue with varying outcomes. Mt. McKinley Ins. Co. v. Corning Inc., No. 602454/02 (N.Y. Sup. Ct. Sept. 7, 2012); State of California v. Continental Ins. Co., 55 Cal. 4th 186 (Cal. 2012).

Is New York “Team Pro-Rata”?

Though New York is widely referred to as a “pro-rata” state, the New York Court of Appeals has not definitively adopted the pro-rata approach over the all sums approach. Thus, raising the question – Is New York Team Pro-Rata?

Recently, a New York trial court rejected the all sums approach in favor of the pro-rata time-on-the-risk allocation for defense and indemnity costs arising from asbestos-related bodily injury claims. Mt. McKinley Ins. Co. v. Corning Inc., No. 602454/02 (N.Y. Sup. Ct. Sept. 7, 2012) (a copy of the decision can be found here). In Mt. McKinley, Plaintiffs Lumbermen’s Mutual Casualty Company (“Lumbermen’s”) and Century Indemnity Company (“Century”), primary insurers of defendant Corning Inc.’s former subsidiary, an asbestos manufacturer, brought suit seeking a declaration that the proper method of allocation is pro-rata across applicable policies based on the time that the insurance policies covered the risk (i.e., time on the risk). Lumbermen’s and Century ultimately moved for summary judgment arguing that the court should allocate indemnity and defense costs on a pro-rata basis.

Corning cross-moved for summary argument, arguing for all sums (i.e. joint and several) allocations. Specifically, Corning argued that the alleged “non-cumulation” or “non-stacking” provisions in various policies require all sums allocation.

The court disagreed with respect to indemnity costs, finding that the purpose of the “non-cumulation” or “non-stacking” provisions is to prevent the insured from recovering greater liability than that for which was contracted, and that these provisions do not require all sums allocation. Id. at 16. Indeed, the court found that adopting pro-rata allocation would not render the policy language “mere surplusage,” as argued by Corning, but would instead affect “the intent of the policy’s language of limiting multiple recoveries for the same injury in the same policy period.”

The court also applied pro-rata time on the risk allocation to defense costs, noting that, although the policies do not mandate either pro-rata or all sums allocation, “the issue is decided as per equity and the facts of the case.” The court found that equity required pro-rata allocation because the all sums approach would force an insurer to pay for that portion of the defense costs attributable to Corning (for periods when it chose to self-insure) and to an insolvent primary level insurer. That insurer would then be forced to litigate with Corning as to Corning’s own liability for defense costs, as well as those attributable to any insolvent insurers, resulting in a “needless waste of resources” that does not “comport with fairness . . . .” 

California Leaves No Doubt – “Team All Sums,” All the Way

Several months ago, the California Supreme Court left no doubt that California has adopted all sums allocation. State of California v. Continental Ins. Co., 55 Cal. 4th 186 (Cal. 2012)(a copy of the decision can be found here),

In-State of California, the California Supreme Court affirmed two of its previous decisions which applied a continuous trigger of coverage to long latency claims, and which adopted the all sums rule, respectively. See Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 655 (1995); Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal 4th 38, 55-57 (1997). 

Specifically, in State v. California, the court was called upon to determine how liability coverage for property damage that occurred at a state-owned environmental clean-up site over the course of many years should be allocated amongst its insurers. The court found that under the commercial general liability policies at issue, the plain “all sums” language of the agreements compel the insurers to pay “all sums which the insured shall become obligated to pay . . . for damages . . . because of injury to or destruction of property . . . ” and that “[t]his grant of coverage does not limit the policies’ promise to pay “all sums” of the policyholder’s liability solely to sums or damage during the policy period.” Id. at p. 13. 

The court also found that “stacking” was appropriate under the respective policies. As the court explains, stacking generally refers to the “stacking of policy limits across multiple policy periods that were on a particular risk” so that “when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy.” The court found that adopting the all sums with stacking approach “stacks the insurance coverage from different policy periods to form one giant uber-policy with a coverage limit equal to the sum of all purchased insurance policies.” Id. at 15. Thus, instead of creating a long latency injury as though it occurred in one policy period, it treats all triggered insurance as though it were purchased in one policy period, providing the insured access to “far more insurance” than it would ever be entitled to within any one policy period.” Id. The court reasoned that stacking fits with both an insured’s and an insurer’s reasonable expectations and that an insurer may avoid stacking by specifically including an “antistacking” provision in its policy. Id. at 16.