New Hampshire Supreme Court Embraces Pro Rata Allocation for Long-Tail Claims
December 2007
On certified questions from a federal district
court, the New Hampshire Supreme Court in EnergyNorth
Natural Gas, Inc. v. Certain Underwriters at Lloyd's (N.H. Oct. 18, 2007),
considered how continuous environmental contamination claims should be allocated
among successive policies applicable to the loss. The court held that the claims
would be allocated on a pro-rata basis, and, though it did not reach the issue,
expressed approval of proration by years and limits.
by Kevin
Merriman
Ward Norris Heller
& Reidy LLP
The case arose from pollution damage emanating from a manufactured gas plant
that had operated at a site from 1852 to 1952. The insured was notified of the
damage in 2000, and was required to investigate and remediate the site.
The parties agreed that the damage was caused by inadvertent leaks and spills
from gasholders and associated piping during all years of plant operation, and
that tar was discharged and continuously migrated through soil and groundwater,
causing continuous property damage as it moved. Thus, the parties agreed that
the property damage was continuous, beginning with commencement of operations
at the site, and that it could not be determined when any specific property
damage took place.
The insured sought coverage from its various insurers to recover past and
future costs associated with its remedial action at the site, and settled with
all of its insurers except American Re, which provided third-level excess coverage
from 1972 to 1973.
The Questions before the Court
The court had previously determined that "injury-in-fact" was the appropriate
trigger of coverage for the insured's occurrence-based policies, and that multiple
policies could be triggered where the contamination and property damage was
continuous. The court had also held that an exposure trigger applied to the
insured's accident-based policies, and that multiple policies could be triggered
under an exposure theory where the migration of pollutants is continuous. SeeEnergyNorth Natural
Gas v. Underwriters at Lloyd's, 150 N.H. 828 (2004).
In this case, the court was asked to decide the next question—the appropriate
method of allocating the damages among the multiple triggered policies. The
federal district court certified four questions to the New Hampshire Supreme
Court:
-
When an insurance policy is triggered by the continuous migration of
toxic waste that began before coverage commenced and continued after coverage
ended, and the evidence will not permit a determination as to when specific
property damage occurred, is the insurer jointly and severally liable for
all of the resulting property damage up to the limits of the policy?
-
If the answer to question 1 is "No," how should the insurer's share of
any liability be determined?
-
If the answer to question 1 is "Yes," what is the effect of prior settlements
with other insurers?
-
Does a policyholder become immediately entitled to an award of costs
and reasonable attorney fees under RSA [ ]491:22-b by obtaining rulings
against an excess insurer that will require the insurer to indemnify the
policy holder if it incurs enough recoverable costs in the future to reach
the coverage provided by the excess insurer?
The Trigger Ruling
The court answered the first question in the negative, determining that continuous
losses triggering multiple policies will be allocated on a pro-rata basis. The
court rejected joint and several or "all sums" allocation, which allows the
insured to select the policies that will respond to the loss, as inconsistent
with the court's trigger model under which continuous environmental injury is
"treated as one occurrence per year triggering all applicable policies" (EnergyNorth
I).
The court reasoned that pro-rata allocation guarantees that all insurers
on the risk respond to the loss, and that it forces insureds to assume part
of the cost of long-tail liability for uninsured periods, creating incentives
for insureds to minimize environmental carelessness.
Other Jurisdictions
The court reviewed a number of key decisions from other jurisdictions that
have considered joint and several allocation, citing various reasons that the
court perceived the method as untenable, among them being that joint and several
allocation:
-
assumes that provable damages at each point in the progression from exposure
to manifestation will be the same;
-
treats insureds who have purchased coverage continuously for many years
equivalent to insureds who purchased only one year of coverage;
-
is inconsistent with reasonable expectations in that policyholders could
not expect that each policy would indemnify it for liability related to
property damage for events taking place years before and after the term
of each policy; or that they would be exempt from liability for injuries
that occurred during uninsured periods;
-
is inconsistent with the cumulative nature of progressive environmental
injuries; and,
-
ultimately does not solve the allocation problem, but merely postpones
it.
Having determined that the losses should be allocated on a pro-rata basis,
the court declined to specify whether the claims should be prorated by years
or by years and limits because the claims were insufficient to exhaust underlying
limits and therefore would not reach American Re's policy under any pro-rata
formula. Even so, the court expressed approval of the New Jersey Supreme Court's
decision in Owens-Illinois, Inc. v. United Ins. Co.,
650 A.2d 974 (N.J. 1994), stating that in future cases courts in New Hampshire
should apply proration by years and limits.
Concerning the policyholder's right to recover reasonable attorney fees and
costs under RSA 491:22–b (1997), the court concluded that if the insured has
obtained rulings that require the excess insurer to indemnify it, the insured
has prevailed within the meaning of RSA 491:22–b, and is immediately entitled
to recover its reasonable attorney fees and costs. The court explained that
recovery does not depend on whether the excess insurer actually has to pay;
the insured becomes entitled to fees and costs once it obtains rulings that
demonstrate that there is coverage under the excess policy.
The court did not address whether, under any method of proration, vertical
or horizontal exhaustion would be required before excess policies were required
to pay, as that issue was not briefed or encompassed within the certified question.
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