When I started in this business (yikes, a long time ago), we used to argue with insurance companies a lot about scintillating issues like whether environmental cleanup costs constituted “damages” under CGL policies, and whether “sudden” meant “abrupt” for purposes of the pollution exclusion. In fact, many coverage lawyers have sent their kids to college based primarily on those two questions alone.
With most of those issues resolved by the New Jersey Supreme Court, nowadays we fight mostly about allocation of loss across policy periods. That’s because, in long-tail claims, insurance companies generally propose allocation schemes that tend to be fairly generous to their side. In environmental cases, for example, if a factory started operating in 1850, the carriers will try to run the allocation beginning in 1850 – with no consideration of when contamination actually occurred. Not fair! We as policyholder counsel then have to go out and hire hydrogeologists to figure out when the actual beginning point should be, on a factual basis.
Along these lines, the New Jersey Supreme Court resolved an interesting allocation issue this week that affects several of my firm’s clients. (The case is Farmers Mut. Ins. Co. v. N.J. Property-Liability Guarantee Assn.)
If you’ve handled, or been a party to, complex delayed-manifestation insurance claims in New Jersey (like asbestos or environmental claims), then you know that loss is allocated among policy years using the “pro-rata by limits” method set forth in Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994) and Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998). (Life was a lot easier when we used the joint-and-several, or “pick-and-choose” method, but who am I to question the wise rulings of the New Jersey Supreme Court?)
The New Jersey Property-Liability Insurance Guarantee Association, or “PLIGA” for short, is a statutorily-created entity that stands in the shoes of insolvent carriers when certain requirements are met. So, if you’re a policyholder and have a claim against a carrier that goes belly-up, you can submit the claim to PLIGA, which then stands in the shoes of the insolvent carrier up to a limit of $300,000.
What happens, though, to PLIGA’s policy years when a Carter-Wallace allocation needs to be done? By statute, PLIGA’s benefits cannot be tapped until the policy limits of all solvent carriers are first exhausted. Insurance companies have taken the position that, regardless of (or maybe because of) the statute, the insolvent policy years must be allocated to the policyholder.
No, say the Supremes. The Court first discussed the reasons why PLIGA exists: “Among the reasons that individuals and entities purchase insurance is protection from risks that might cause financial loss – even catastrophic loss. When insurance companies are rendered insolvent, insureds no longer have the protection for which they contracted and claimants no longer have a source from which to be made whole for their losses. [PLIGA exists] to mitigate the financial distress to insureds and claimants caused by an insurance company’s insolvency.”
With respect to insurance companies’ efforts to allocate insolvent policy years to the policyholder, the court wrote: “The PLIGA Act created the Guarantee Association as a means of providing benefits to insureds who, through no fault of their own, have lost coverage due to the insolvency of their carriers. N.J.S.A. 17:30A-4 directs us to liberally construe the Act to achieve its purposes. One of those purposes is to minimize financial loss to claimants or policyholders because of the insolvency of an insurer. That aim would be defeated by making the insured bear the loss for the carrier’s insolvency before the insured received any statutory benefits from the Guarantee Association.”
As an added bonus, the Court cited Thomas Jefferson for the proposition that a court of equity “cannot interpose in any case against the express letter and intention of the legislature.”
Because insurance company arguments are like Rasputin – you can’t kill them – I’ll be interested to see what strategies the defense bar comes up with for the proposition that the Farmers Mutual case does not apply to certain types of long-tail claims. Or, maybe, carriers will just pay up from now on. After all, the Unfair Claims Settlement Practices Act, at N.J.S.A. §17:29-B(4)(9)(n), makes it illegal for insurance companies to fail “to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.”
But if insurance companies paid up, I’d be out of a job.
The case is Farmers Mut. Ins. Co. v. N.J. Property-Liability Guarantee Assn., and you can read the full decision here.