When an insured incurs losses over a period of years in which it was covered by a series of different insurers and the evidence does not establish the amount of loss incurred in each policy period, how should the losses be allocated among those insurers?
One of the hottest issues in the past decade was allocating "long-tail," or progressive, damages among successive insurance periods. As I discussed in a recent article in The Risk Report, this issue prompted opinions taking various approaches by courts in South Carolina, New York, California, and other states.1
A Texas appellate court recently joined several other jurisdictions in applying "time on the risk" allocation method to a dispute between homebuilder Vines-Herrin and its liability insurers. This was the third appellate opinion in a long-fought battle, which arose from a homeowner's construction-defect lawsuit against Vines-Herrin.
Facts of the Case
In the years potentially relevant to the claim (1998–2002), Great American covered Vines-Herrin for 2 years, followed by Mid-Continent for another 2 years. Both insurers refused to defend and denied coverage on the grounds that the home owner did not allege property damage occurring in any specific policy period. Vines-Herrin defended itself in the litigation and ultimately agreed to binding arbitration, which resulted in a $2.5 million award for the home owner.
The insurers continued to deny coverage, and Vines-Herrin sued for breach of contract and bad faith. Vines-Herrin then settled with the home owner and assigned its rights against the insurers to the home owner, who intervened in the coverage case.
The trial court, applying the "manifestation" test for triggering coverage, initially entered judgment for Vines-Herrin. However, while post-judgment motions were pending, the Texas Supreme Court rejected the manifestation rule and adopted "actual physical injury" as the coverage trigger. See Don's Building Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008). The trial court, therefore, reopened the evidence and ultimately rendered a take-nothing judgment because Vines-Herrin had "failed to show, by expert testimony, the date when actual physical damage to the property occurred."
On the first appeal, the court of appeals reversed and remanded, holding that both insurers owed a duty to defend and that at least Great American had a duty to indemnify for some portion of the arbitration award. Vines-Herrin Custom Homes LLC v. Great Am. Lloyds Ins. Co., 357 S.W.3d 166 (Tex. App.—Dallas 2011, pet. denied) ("Vines-Herrin I").
On remand, the trial court entered judgment for Vines-Herrin against both insurers, holding them jointly and severally liable for the arbitration award. In the second appeal, the appellate court affirmed the trial court's judgment that both insurers owed a duty to indemnify Vines-Herrin. But it reversed the finding of joint and several liability and again remanded for a determination of the amount owed by each insurer. Great Am. Lloyds Ins. Co. v. Vines-Herrin Custom Homes, LLC, No. 05-15-00230-CV, 2016 WL 4486656 (Tex. App.—Dallas Aug. 25, 2016, pet. denied) ("Vines-Herrin II").
On the second remand, the trial court allocated damages "on a pro rata basis on the number of days each insurer's policy was implicated," otherwise known as "time on the risk" allocation. In apparently the first Texas opinion to address the issue, the court of appeals affirmed. Great Am. Lloyds Ins. Co. v. Vines-Herrin Custom Homes, LLC, No. 05-18-00337-CV, 2020 WL 104622 (Tex. App.—Dallas Jan. 9, 2020, no pet. h.) ("Vines-Herrin III").
The court emphasized evidence establishing that the "damages resulted from separate occurrences, each of which caused damages in a single policy period." Pro rata allocation was justified by the fact that it was not feasible to determine the amount of damages occurring during each policy period.
Under the time-on-the-risk or "pro rata allocation" approach regarding the duty to indemnify, it is a default rule that assumes the damage occurred in equal portions during each year that it progressed. If proof is available showing that the damage progressed in some different way, then the allocation of losses would need to conform to that proof. However, absent such proof, the court noted that assuming an even progression is a logical default.
In this case, the court first noted that the insured established that it suffered damages from "occurrences" in each of the three policy periods. Moreover, the court noted that the insurer failed to present any evidence that the damages did not occur within their respective policy periods. Thus, the court ruled that the time-on-the-risk approach or "pro rata allocation" was appropriate.
The court found that, since Great American issued a policy for one of these policy periods and Mid-Continent issued policies for the remaining two, each was required to indemnify Vines-Herrin accordingly.
It is anticipated that the insurers will seek review by the Texas Supreme Court of the allocation judgment in Vines-Herrin. Stay tuned.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI.
Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion.
If such advice is needed, consult with your attorney, accountant, or other qualified adviser.