I was lucky enough to be invited to speak at a CLE conference in New York last week on the subject of mass torts.  (Full disclosure:  I was on the wedding “B list.”  My good friend Jeff Pollock, a fantastic policyholder-side lawyer, had to cancel at the last minute because of professional commitments, and I got parachuted in.  That’s OK, I have no pride…)

Our panel dealt with insurance coverage issues (naturally), and I was joined by Judge Victor Ashrafi, an excellent judge who previously served on the trial bench and the Appellate Division here in New Jersey, and who now has an ADR practice; Cheryl Vollweiler, a top-flight coverage lawyer who represents insurance companies and who was nice to me despite the fact that I represent policyholders and am therefore obviously misguided; and Chris Placitella, one of the best plaintiffs’ lawyers around.

One of the questions posed by the program organizers to our panel was: “Does coverage necessarily mean payment?”   Everyone’s a comedian these days.

Let’s recap one part of my discussion, about allocation (a/k/a where valid claims go to die).  After the lawyers have their fun, most complex insurance disputes come down to the issue of how losses will be allocated across triggered policies.

Here in New Jersey, before the Supreme Court got involved in 1994, allocation was pretty simple. If you had a bunch of triggered policies, the policyholder simply picked one as the primary source of recovery, and then that carrier worked out allocation with the other carriers — only after the policyholder was protected. Naturally, the insurance industry didn’t like that very much, because it made life too easy for policyholders. So they battled to change it, and, in 1993, the New Jersey Supreme Court handed down the landmark allocation decision in Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994), which, in a laudable effort to make things “simple” and “just,” created a panoply of issues that didn’t exist under the old “pick and choose” method. Basically, under Owens-Illinois, you add up all of the limits of the triggered policies, which become the denominator in a fraction. To figure out how much loss gets allocated to a particular policy year, you add up the policy limits for that year, and make it the numerator in the equation. That fraction is the answer to your question. Simple, right?

Except it’s not. For one thing, what happens if an insurance company says “no pay,” forces you to fight a protracted battle on coverage issues, and then, only after coverage is established, tries to create an allocation that’s unfavorable to you? Let’s say, for example, that the carrier takes an expansive view of policy years that have been “triggered,” in an effort to pass as much of the loss onto you as possible. Owens-Illinois says that for triggered years in which you can’t find your old policies, or made a conscious decision to self-insure, you get stuck with the liability allocated to that year. (It also says that the triggered period ends when no coverage is reasonably available for a particular type of loss. For asbestos, that would be in the mid-1980s when asbestos exclusions started to appear.)

Owens-Illinois specifically says: “Insurers whose policies are triggered by an injury during a policy period must respond to any claims presented to them and, if they deny full coverage, must initiate proceedings to determine the portion allocable for defense and indemnity costs.”  To me, that means that if the insurance company denies outright, and does not commence the required allocation proceeding, then that insurance company should be liable for the entire loss if coverage is proven. That’s precisely the argument I made years ago in Universal-Rundle Corp. v. Commercial Union Ins. Co., 319 N.J. Super. 223 (App. Div. 1999), an environmental coverage case in which I also managed to destroy bad faith law in New Jersey (but that’s another story).  The trial court agreed with me. After all, Owens-Illinois says what it says. But the appeals court essentially said: “Yeah, it says that, but it can’t possibly mean that.” In other words, insurance companies can deny coverage, and then, only after being proven wrong, substantially limit their liability through allocation proceedings. And now, thanks to the recent decision in Honeywell, which I previously discussed here, you may not even be able to get your attorneys’ fees back.  Ugh.

Of course, the problem doesn’t end there.  Owens was later supplemented by the decision in Carter-Wallace v. Admiral Ins. Co., 154 N.J. 312 (1998), which involved the allocation of loss to excess policies. In fact, the Carter-Wallace decision was a fight between excess carriers, and the New Jersey Supreme Court said on the first page of the opinion: “This appeal…requires us to determine how the responsibility of an excess insurer is measured in the context of environmental damage with a continuous trigger of liability over many years.”

What happens, though, in a case in which excess layers won’t be reached? I have an asbestos coverage case in the office right now involving precisely that issue. Our client, a manufacturing company, suffered the unfortunate fate of somehow winding up on a plaintiffs’ lawyers list, even though there’s never been any proof that any plaintiff was exposed to asbestos-containing products having anything to do with the company. Defense costs have been incurred, primarily in connection with filing successful motions to dismiss. There have been no judgments against the client, and only a few small settlements (done for business reasons). The primary insurance company’s corporate designee admitted under oath that there was no possibility that excess coverage would ever be reached. But the insurance company nevertheless insisted that all policies, no matter how high up, had to be included in the insurance allocation. The purpose, of course, was to drop the insurance company’s exposure to the bare minimum, because in later years, my client bought substantial excess coverage, as did many companies.

I told the court, that can’t be right. Look at the specific language of Carter-Wallace. It says that it only applies in cases where excess policies are triggered.

Yeah…nah, said the judge, making me feel like My Cousin Vinny in this scene.  So, all of the policies, no matter how high up, got thrown into the allocation, and my client, to use sophisticated legal terminology, got the short end of the stick.

Why am I giving you all these negative waves (to quote Oddball in “Kelly’s Heroes”)? Just keeping it real. Insurance companies have unlimited resources, and at the end of the day, when you win on liability (and you probably will), the little gremlins like allocation are likely to make you wonder why you ever went through the exercise in the first place. My advice is to redouble your efforts on loss control before problems happen. If you find yourself in a dispute with your insurance company, try to get to an allocation settlement table as soon as possible. Be proactive by hiring someone experienced in the economics of insurance (Justice O’Hern’s words in Owens-Illinois) to prepare proposed allocations for your carrier. Remember, as far as your bottom line goes, a less-than-optimal settlement usually is far better than fighting a two-front war, one against underlying plaintiffs’ counsel, and one against your insurance company’s (anti) coverage litigators.