A few years back, we wrote about the New Jersey Supreme Court’s decision in Farmers Mutual Ins. Co. v. New Jersey Property-Liability Guarantee Assn.  In Farmers, the Court held that, in the context of long-tail claims, any damages or defense costs allocated to insolvent policies could not be assigned to the policyholder.

When dealing with disputed claims in the long-tail area (and aren’t they all still disputed?), I always get a chuckle at the late (and great) Justice O’Hern’s pronouncement in the seminal New Jersey Supreme Court case on allocating loss among insurance policies in long-tail claims, Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994): “We can…narrow the range of disputes and provide procedures better to resolve the disputes that remain. If we can accomplish that much, we can better channel the available resources into remediation of environmental harms.”

Justice O’Hern was the consummate gentleman, and we could use more judges like him, but his hope that the disputes in allocation cases could be “narrowed” and resolved consensually hasn’t quite come true.  There are still too many unanswered questions.  Last week (as I write this), the Appellate Division issued an unreported decision in which it held that costs allocated to insolvent policies could be allocated to the policyholder, under certain circumstances.  The case is Ward Sand and Materials Co. v. Transamerica.

Ward Sand involved a garden-variety long-tail environmental case.  The policyholder operated a landfill at which it accepted Pennsauken Township’s municipal waste. In 1978 it sold the property to the Township. Later, the Township and the Pennsauken Solid Waste Management Authority, having entered into an Administrative Consent Order with NJDEP relating to remediation, sued numerous parties, including Ward, for contribution under the Spill Act. Ward notified its primary and excess carriers. Unfortunately, Ward had hit the jackpot when it came to carriers with shaky finances. Five of its carriers – Reliance, Home, Mission National, Integrity, and Western Employers – had become insolvent. Important factor in the Court’s decision: all of the carriers had gone belly up before December 2004.

The Court noted that the Farmers decision had been based upon the PLIGA Act, N.J.S.A. 17:30A-1, et seq., which established and governs the New Jersey Property-Liability Insurance Guaranty Association.  PLIGA provides protection to policyholders in the event of carrier insolvency, generally up to $300,000 “per claimant.”  The Act requires exhaustion of all solvent triggered coverage before PLIGA has to contribute anything, though.  In December 2004, the Legislature amended the PLIGA Act to provide that “in any case in which continuous indivisible injury or property damage occurs over a period of years… exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess…issued in all other years has been applied.”  Ward Sand argued, quite reasonably, that given the protective purposes of the PLIGA Act, and the public policy relating to the 2004 Amendment, the policyholder should not have to bear any losses assigned to insolvent policies in long-tail claims.

But the Ward Sand Court held that, unless the triggered carrier’s insolvency happened after December 2004 (when the Act was amended), the policyholder gets tagged with any allocation to the insolvent carrier’s policy (to the extent that PLIGA doesn’t pay).  That’s because the Amendment specifically stated that it applied “to covered claims resulting from insolvencies occurring on or after [December 22, 2004].”   The Court also engaged in a bit of “moral equivalency,” writing: “We are not insensitive to the unfairness that results when a responsible business has purchased insurance to cover its business risks and the insurer becomes insolvent. Yet, insolvent insurers might argue it is equally unfair to require them to pay claims on risks they have not insured.”

That last bit is where, from the policyholder perspective, the analysis breaks down. First, the analysis assumes that we’re dealing with an “equal” playing field between carriers and policyholders. In reality, that’s seldom the case. Most insurance is sold on preprinted forms that are subject to only limited negotiation, and the insurance companies have access to gigabytes of data to help them rate their risks.  Many older policies were sold during a period of time when “pick-and-choose” was still the law in New Jersey, meaning that a policyholder was free to decide which triggered policies should apply to a loss (leaving the chosen carrier a right over against other triggered carriers). Presumably, each carrier, when setting its rates, took into consideration the possibility that it could be primarily responsible for a long-tail claim. Second, the legislature established PLIGA to resolve the very “unfairness” noted by the Court. Why should the policyholder get “whacked” as the result of the Court’s interpretation of a statute designed to help policyholders? Third, the suggestion that policyholders seek to require carriers “to pay claims on risks they have not insured” is a straw man. If a carrier is in the triggered coverage period, it has, by definition, insured the risk.

The Court also left a key question unanswered:  What if a carrier with, say, a $1 million limit goes bankrupt, and PLIGA contributes only the $300,000 statutory limit?  Does the “gap” get assessed to the policyholder for purposes of an Owens-Illinois allocation?  Given the statutory scheme and purpose of the PLIGA Act, shouldn’t the limit be deemed “collapsed” to $300,000 for purposes of the allocation? The Court only noted, without analysis, that the trial court had decided the issue against the policyholder. Too bad, since we could use some appellate-level clarity on that question.

One last important point about this decision. I wonder whether brokers will face increased liability for recommending carriers that later go bankrupt. If you’re a broker and you’re recommending that coverage be placed with a carrier that isn’t top-rated by Best, you probably want to make sure that you’ve disclosed the publicly known relevant facts about the insurance company’s financial picture to the client, in writing, before the coverage gets placed.