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Liability Insurance

Allocation of Damages for Ongoing Losses over Multiple Policies: Who Pays and How Much?

Steven Rawls | January 1, 2006

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Allocation issues arise when the loss is ongoing and indivisible and implicates multiple policies and multiple policy periods. These issues arise in both bodily injury and property damage claims (latent property damage, asbestosis, environmental contamination, etc.).

Allocation requires courts to decide "which policies, to what extent, and in which sequence, are applicable to the damages at issue." Mayor and City Council of Baltimore v. Utica Mutual Ins. Co., 802 A.2d 1070, 1100 (Md. Ct. App. 2002).

Coverage Trigger

Allocating damages for ongoing losses over multiple policies can vary significantly in different jurisdictions. The first step is determining which trigger of coverage theory the court will apply. Courts do not uniformly choose and apply the possible trigger theories, nor do they uniformly apply allocation methods. See, e.g., Trizec Properties, Inc. v. Biltmore Constr. Co. Inc., 767 F.2d 810 (11th Cir. 1985) (rejecting manifestation and adopting injury-in-fact in Florida); contra Auto Owners Ins. Co. v. Travelers Cas. & Sur. Co., 227 F.Supp.2d 1248 (M.D. Fla. 2002) (adopting manifestation in Florida).

"Trigger" is a term of art meaning the event that activates coverage under the policy. SeeHoechst Celanese Corp. v. Certain Underwriters at Lloyd's London, 673 A.2d 164, 166, n.2 (De. 1996). Determining the applicable trigger is the first step in the allocation analysis because the "choice of trigger theory is related to the method a court will choose to allocate damages between insurers." Northern States Power Co. v. Fidelity & Cas. Co. of N.Y., 523 N.W.2d 657, 662 (Minn. 1994).

There are four generally used trigger of coverage theories:

  1. Exposure (coverage is triggered when the first injury-causing conditions occur);
  2. Manifestation (coverage is triggered when the personal injury or property damage becomes known, or is discovered by, the property owner or victim);
  3. Continuous (progressive indivisible injury or damage occurs continuously from the time of exposure or installation until the time of discovery); and
  4. Injury-in-fact (coverage is triggered when the personal injury or property damage underlying the claim actually occurs).

See e.g., In re Celotex Corp., 196 B.R. 973, 1000 n.187 (Bankr. M.D. Fla. 1996); GenCorp, Inc. v. AIU Ins. Co., 104 F.Supp.2d 740, 745 (N.D. Oh. 2000).

Allocation Methods

Insurance Company of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), and Keene Corporation v. Insurance Company of North America, 667 F.2d 1034 (D.C. Cir. 1981), generated the two most common allocation methods for determining indemnity responsibility in ongoing damage situations which trigger multiple policies.

All-Sums Approach

In Keene, the court applied the continuous trigger theory to a long latency occupational disease case (asbestos). The Keene allocation method, often called the "joint and several" or "all-sums" approach, held that the "insurers' liability to the plaintiff was joint and several, such that the plaintiff was entitled to select one of the triggered policies and collect the full amount of indemnification from that policy. Once the plaintiff has been compensated, the insurers were responsible for allocating the loss among themselves." Keene at 1049-50. Under the Keene approach, the insured is entitled to choose, at its discretion, which policy is required to respond to the full liability "subject only to the provisions in the policy that govern the allocation of liability when more than one policy covers an injury." Id.

Under the joint and several allocation approach, "the problem of indivisible injury is resolved simply by collapsing the continuous injury into one year. Joint-and-several allocation effectively allows a policyholder to simply select one triggered year and exhaust the coverage provided during that period in satisfaction of its claim ... requiring the insurers to sue each other for contribution." Spaulding Composites Co., Inc. v. Aetna Cas. & Sur. Co., 819 A.2d 410, 416 (N.J. 2003) (citations omitted). The rationale behind this approach is that each policy promises indemnification to the insured for "all sums" for which the insured is legally obligated to pay as damages. Further, this method comports with the insured's reasonable expectations in purchasing insurance: "that it was covered for all future liability, except liability for injuries of which [the insured] could have been aware prior to its purchase of insurance." Keene at 1044.

Pro Rata and Proration to the Insured

Forty-Eight Insulations finds that the more appropriate method of allocation is pro rata time on the risk. Pro rata allocation places emphasis not on the "all-sums" language but rather on the fact that the policies provide "indemnification for liability incurred as a result of an accident or occurrence during the policy period, not outside that period." Utica at 1104 (internal citations omitted)(emphasis supplied). Here, "[e]ach insurer is liable for that period of time it was on the risk compared to the entire period during which damages occurred." Id. (citations omitted).

The pro rata time on the risk approach raises an additional issue of whether the insured has any responsibility for that portion of time when it was, effectively, uninsured. In explaining proration to the insured, the Forty-Eight Insulations court explained that "[a]n insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period. The insurer has not contracted to pay defense costs for occurrences which took place outside the policy period. Where the distinction can be readily made, the insured must pay its fair share for the defense of the noncovered risk." Forty-Eight Insulations at 1224-5.

Allocating to the insured requires a consideration of both time on the risk and "the degree of risk assumed. When periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable." Stonewall Ins. Co. v. Asbestos Claims Management Corp., 73 F.3d 1178, 1203 (2nd Cir. 1995), modified on other grounds, 85 F.3d 49 (2nd Cir. 1996) (citations omitted). Such assignment to the insured is inappropriate where coverage was unavailable, but choosing not to purchase coverage for a particular risk does not render it "unavailable." See id. and Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974, 995 (N.J. 1994).

Courts allowing proration to the insured have done so to require an insured "to accept a proportionate share of a risk that it elected to assume, either by declining to purchase available insurance or by purchasing what turned out to be an insufficient amount of insurance." Stonewall at 1204. Thus, prior to the availability of coverage for a particular risk or where coverage for a particular risk could no longer be obtained, proration is inappropriate. See, e.g., Keene, Owens-Illinois, and Stonewall, supra. However, in Security, infra, the court determined that proration to the insured was appropriate for periods during which it was uninsured or has "lost or destroyed its policies."

Security: Allocating Defense Costs to the Insured

Security Insurance Company of Hartford v. Lumbermens Mutual Casualty Co., 826 A.2d 107 (Conn. 2003), focuses solely on the issue of the proper allocation of defense costs in cases involving long latency loss claims that implicate multiple policies. The underlying claims in Security were for bodily injury resulting from plaintiffs' employment with certain construction firms which required them to contact asbestos products. The underlying complaint did not allege a date on which the plaintiffs' injuries occurred. However, the parties agreed that the insured was potentially liable to the plaintiffs for bodily injury during the period from March 16, 1951, through May 1, 1996.

The insured sought a defense from numerous insurers that provided coverage during the 1951 through 1996 period. However, the insured either lost or destroyed the policies issued between 1951 and 1959 and those between 1961 and 1968. One of the insurers, Security, filed a complaint seeking a declaratory judgment requiring the insured to assume an equitable portion of the defense costs for the underlying asbestos action. Security's motion for summary judgment on that issue was denied. Security then filed an amended complaint seeking a declaration that the insured was obligated to assume an equitable share of the cost of its defense proportionate to the lost policy period. After a bench trial, the court found that the insured "is responsible to contribute an equitable share of the costs of defense for years in which no insurer was identified or for which [the insured] lost or destroyed the policies and the alleged insurer has refused coverage." Security at 113.

The trial court first determined that the underlying asbestos litigation involved a continuous trigger situation "such that all asbestos related injury policies issued during the extended exposure period have been triggered for coverage and all companies that issued such policies are responsible for defense costs related to the Bridgeport asbestos litigation." Id. at 113-4. The court then reviewed the law in the Second Circuit and determined that the pro rata allocation method had been adopted and the insured was responsible for its pro rata share of defense costs.

The court used the following allocation method: the denominator is the number of months, beginning on the date the insured came into existence—March 1951, through April 1, 1985—the time when asbestos-related injury insurance was no longer available. This was a period of 408.5 months. The numerator is the total number of months for which the insured was essentially self-insured: by reason of the loss or destruction of earlier policies and a buy-back settlement. The total time being 177.5 months, or 43.45 percent of the denominator. SeeSecurity at 114, n.13.

The insured appealed, arguing that the trial court applied an improper method of allocation and should have followed Keene and applied the joint and several method. The court noted that the primary difference between the two methods is that "under the pro rata method, the insured is liable for costs attributable to losses occurring during periods when it was uninsured, while under the joint and several method, all costs are allocated among insurers." Security at 117.

The court first rejected the argument that proration of defense costs to the insured violates the insurer's duty to defend. The considerations requiring the insurer to undertake a complete defense "do not apply where defense costs can be readily apportioned. ... The insurer has not contracted to pay defense costs for occurrences which took place outside the policy period. Where the distinction can be readily made, the insured must pay its fair share for the defense of the noncovered risk." Id. at 123 (citations omitted). In "long latency loss claims that implicate multiple insurance policies, there is a reasonable means of prorating the costs of defense, i.e., time on the risk." Id.

The court then countered all of the insured's remaining arguments by recognizing that reimbursement of defense costs has been permitted where an insurer defends a mixed action which includes claims not even potentially covered by the policy. SeeBuss v. Superior Court, 939 P.2d 766 (Cal. 1997). The court rejects the decisions of those states which have not adopted equitable contribution as applying joint and several allocation and finds that indivisible duty to defend does not extend to periods of self-insurance.

Finally, the insured argued, that on these facts, where it allegedly purchased insurance but lost the policies, it would be inequitable to require the insured to pay a portion of the defense costs. However, the trial court specifically concluded that the insured was the party that could have prevented the loss or destruction of the insurance policies. Therefore, the court found "that the pro rata method of allocation is equitable under the circumstances of this case not only because [the insured], in effect, chose to forgo insurance, but also because Security never contracted to pay for defense costs arising outside of its policy period." Security at 126. The court continued, explaining that to require Security to pay defense costs arising outside the policy period would result in a windfall to, and unjustly enrich, the insured.

Alternative Approaches to Allocation

Although all sums and pro rata time on the risk are the most common allocation methods, courts have also applied a "pro rata by limits" allocation method, and New Jersey has adopted proration on the basis of policy limits, multiplied by years of coverage. Pro rata by limits "effectively makes those insurers with higher limits liable for damages incurred outside their policy period" because their percentage of responsibility is not determined by the risk assumed but by the number of available indemnity dollars. Northern States at 662.

Applying "pro-ration by years and limits," the Supreme Court of New Jersey explained that "any allocation should be in proportion to the degree of risks transferred or retained during the years of exposure" and thus "allocated the losses among the carriers on the basis of the extent of the risk assumed, i.e., proration on the basis of policy limits, multiplied by years of coverage." Spaulding at 415. Explaining this method differently, the court states that "a given insurer's liability is determined by comparing its particular exposure to the total amount of exposure assumed by all carriers of the triggered policies. This comparison yields a percentage that is then applied to the amount of loss the policyholder sustained." Id. at 416-7. This method requires the insured to pay its share of "both defense and indemnification on account of years in which it was uninsured, self-insured, or its coverage was exhausted or bankrupt." Id.


The method of allocation chosen by the court depends on the trigger theory applicable to the ongoing loss. Some courts have found particular allocation methods incompatible with particular trigger theories. Courts that apply the joint and several method of allocation generally do so based on the insured's reasonable expectations that it would not be responsible for unknown losses. Courts that apply the pro rata time on the risk method do so based on the insuring agreement's requirement that the loss must occur during the policy period. Courts applying the pro rata time on the risk method often find it equitable to assign a percentage of responsibility for indemnity and defense costs to the insured for that portion of time when the insured chose to be uninsured. However, there is no uniform application of either trigger theories or allocation concepts. Courts are often guided in this area by equitable considerations and the underlying facts in determining allocation of damages issues.

Contributing author Rebecca C. Appelbaum is an associate practicing in the area of third party coverage at the firm of Butler Pappas Weihmuller Katz Craig, LLP.

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