Today's long-tail pollution liability claims tend to involve instances of
environmental contamination that began before 1980. Consequently, the 1973 edition
of the standard Insurance Services Office, Inc. (ISO), comprehensive general
liability (CGL) insurance policy usually plays a central role in determining
the extent of insurance coverage available.
Four Allocation Theories
As many courts have recognized, the "occurrence" trigger of the 1973 CGL
policy activates all successive policies on the risk during a long-tail loss.
To determine how much each successively triggered policy will pay, there are
four theories for allocating long-tail losses.
- Contractual "all sums" allocation
- "Pick and choose" version of "all sums" allocation
- Time-on-the-risk allocation
- Time-plus-limits allocation
Contractual "All Sums" Allocation
Properly read, the text of the 1973 edition CGL policy provides a contractual
solution to the allocation problem. The policy language requires that loss be
allocated on an "all sums" basis, meaning that no portion of the insured loss
can be validly allocated to uninsured periods of time, and the insured may not
legitimately be forced to assume a pro rata share of the damages.
Where there is only one insurer that has issued one 1973 CGL policy covering
only one policy year, the clear implication of the policy language is that 100
percent of the total damages must be allocated to that policy. For example,
assume the following facts in a hypothetical claim scenario.
- Progressive environmental contamination started in 1975.
- Contamination was discovered in 1985.
- ABC insurer issued one CGL policy covering 1978 to 1979.
- The ABC policy is triggered.
- No exclusions apply.
- Per-occurrence limit is $100,000.
- Total cleanup cost is $2.8 million.
Under these facts, the text of the 1973 CGL policy requires the entire $2.8
million loss be allocated to the 1978-1979 CGL policy, even though the damages
progressed over the entire 11-year period from 1975 to 1985. This will, of course,
exhaust the $100,000 primary limit, thereby unlocking the insured's access to
the umbrella coverage applicable to that year. Sometimes insurers argue that
this result is "unfair," but notions of fairness really have nothing to do with
contract analysis. The policy language says what it says.
The text of the 1973 CGL demands a different result where there are two or
more successively triggered policies available to cover the same long-tail loss.
In this situation, each insurer's contractual obligation to cover "all sums"
is modified by the terms of the 1973 "other insurance" provision, which clearly
states that no insurer shall be liable for more than its share of the loss as
calculated under the "contribution by equal shares" or "contribution by limits"
method. For example, assume the facts of the hypothetical claim scenario have
changed as follows.
- Progressive environmental contamination started in 1975.
- Contamination was discovered in 1985.
- Policyholder cannot prove that it was insured for 1975, 1976, or 1977.
- ABC insurer issued three successive policies covering 1978 to 1980.
- XYZ insurer issued five successive policies covering 1981 to 1985.
- All ABC and XYZ policies are triggered.
- No exclusions remove any policy from the mix.
- Each policy has an identical 1973 "other insurance" clause.
- All policies are "collectible."
- Total of all per-occurrence limits is $3.8 million in the primary layer.
- Total cleanup cost is $2.8 million.
The 1973 "other insurance" provision requires this loss to be allocated under
an "all sums" basis according to the "contribution by equal shares" method as
shown in Table 1 (click on the link below).
The insured has no say in how the loss is divvied up. The "other insurance"
clauses automatically allocate the loss among the triggered policies. Under
the automatic contractual allocation, the total obligation of ABC insurer under
its policies would be $500,000, and the total obligation of XYZ insurer under
its policies would be $2.3 million. These obligations are several, not joint.
Each insurer owes its own amount. Neither insurer is responsible for the amount
owed by the other.
Since the combined primary limits of all triggered policies are sufficient
to cover the entire $2.8 million loss, no umbrella policy over any CGL would
be required to contribute. Excess coverage applies only where the amount of
the loss exceeds the total amount of coverage available in the primary layer.
If one CGL policy in the mix does not have a standard "other insurance" clause,
the text of the 1973 policy requires that the loss be allocated under the "contribution
by limits" method.
Unfortunately, only a handful of cases recognize that allocating a long-tail
liability loss among successive CGL policies should be treated as an ordinary
"other insurance" issue. One explanation of this phenomena may be that courts
may think that successive CGL policies covering different periods of time do
not cover the same "risk," and therefore no "other insurance" issue arises.
However, this "identity of risk" rule, which was developed in the context of
first-party property claims, has no application to third-party liability insurance.
"Pick and Choose" Version of "All-Sums" Allocation
A modified version of the contractual "all sums" method was introduced in Keene Corp. v. Insurance Co. of N. Am., 667 F.2d
1034 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007, 102 S. Ct. 1644, 71 L. Ed.
2d 875 (1982). In that case the D.C. Circuit reached several correct conclusions,
including that the "all sums" language in the 1973 insuring agreement means
that 100 percent of losses can be allocated to a single triggered policy, and
that portions of the indemnity or defense costs cannot be allocated to uninsured
periods of time during which the policyholder had no insurance (or because of
lost policies cannot prove insurance).
The Keene court failed to recognize that the
basic "all sums" analysis for situations where one insurer is left to pay the
entire loss must be modified to accommodate the operation of the "other insurance"
provisions in multiple insurer situations. Instead of following the terms of
the policies, the Keene court invented two common
law allocation rules, one preventing the insured from "stacking" multiple limits
of several successive policies issued by the same insurer, and the other allowing
the policyholder to "pick and choose" which insurer among multiple insurers
issuing triggered policies would cover the entire loss. Under this method, the
insurer to which the insured has assigned the entire loss is required to file
a subsequent action against the other insurers for contribution. The Keene court's "anti-stacking" and "pick and choose"
holdings do not comport with the standard 1973 "other insurance" clause.
Time-on-the-Risk Allocation
The second major allocation theory is a judicially created system of "time-on-the-risk"
allocation first introduced in Insurance Co. of N. Am.
v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified,
657 F.2d 814, cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L. Ed. 2d 650
(1981). Under this theory, the same fraction of the indemnity and defense cost
is assigned to each affected period. An insurer will only be liable for those
portions of the costs assigned to the years during which it was "on the risk,"
i.e., when its policies issued to the insured were in effect. This coverage
theory is also called "pro rata" because some of the costs may be assigned to
years when the insured did not have insurance (or because of lost policies could
not prove insurance), making the policyholder liable for a share of the indemnity
and defense cost.
Time-on-the-risk allocation has the advantage of being the easiest method
for a court to understand and apply. But it was invented out of whole cloth
by the federal courts as a mere judicial convenience that has utterly no support
in the actual text of the 1973 CGL policy.
Time-Plus-Limits Allocation
The third major allocation theory employed in the United States is the New
Jersey "time-plus-limits" allocation method under Owens-Illinois,
Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994). This is a
hybrid approach under which damages could be allocated to uninsured periods
depending on whether the policyholder intended to self-insure the risk of loss
during those years. Additionally, the New Jersey courts add an extra layer of
complexity to the allocation analysis by varying the amount of damages assigned
to a given year in proportion to the limits provided by that year's policy to
the total available limits provided by all policies.
Sometimes referred to as "time-plus-limits" allocation, this theory is more
complicated mathematically than the other allocation theories. Yet, its end
results approximate the contribution by limits method under the 1973 "other
insurance" clause with an adjustment to take into account the number of days
on the risk. Like the Forty-Eight Insulations allocation method, New Jersey's rule is not derived from the actual policy language
but has been designed and adapted to accommodate fundamental notions of "fairness."
Bottom Lines Differ
How much each insurer (and the insured) ends up paying under the same loss
scenario varies depending on the allocation theory used. The following table
(click on the Table 2 link below) summarizes the mathematical results of the
application of each of the above four allocation theories to the same hypothetical
$2.8 million pollution loss.
As can be seen, the best allocation theory from the insured's standpoint
in this example is the "all sums" method. The best allocation theory from the
insurers' standpoint is the "time-on-the-risk" method. The two New Jersey "time-plus-limits"
theories yield results that fall between the other two methods.
Subscribers to Pollution Coverage Issues in IRMI Online can access additional information on this subject, including
the following:
-
A full analysis of the contractual language of the 1973 CGL, the contractual
allocation solution, and the three non-contractual judicial allocation theories.
(IRMI
Online; Sage)
-
Additional spreadsheets showing the math required to distribute the same
$2.8 million hypothetical loss under the contractual "contribution by limits",
time on the risk, and time plus limits allocation methodologies. (IRMI
Online; Sage)
-
A table showing which states have adopted which allocation theory. (IRMI
Online; Sage)
-
A hyperlinked map allowing the subscriber to click on a state and be
taken to a table listing/describing allocation cases from that state. (IRMI
Online; Sage)
-
A series of charts citing and summarizing the holdings of approximately
60 allocation cases. (IRMI
Online; Sage)
If you do not currently subscribe, learn more about Pollution
Coverage Issues.