by ~ Michael F. Aylward (Web Site)
Long-tail claimsthose involving claims for bodily injury and property damage arising out of exposure to asbestos, pollutants, products and various alleged toxinshave been responsible for some of the most contentious disputes between cedents and reinsurers of the past decade. Reinsurance litigation ranged from the First Circuits bad faith opinion in Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 27 F.3d 333 (1st Cir. 2000) to the recent follow the settlements ruling of the House of Lords in Lexington Ins. Co. v. AGF Ins., Ltd., UKHL 40 (July 30, 2009). The difficulty and frequency of these disputes mirrors both the amount of money involved and the general sense that U.S. courts are forcing insurers to pay losses well beyond those contemplated in the insurance contracts. Now, the recent opinion of the Massachusetts Supreme Judicial Court in Boston Gas Co. v. Century Ind. Co., 910 N.E.2d 290 (Mass. 2009) may open a new front in the presentation and resolution of such claims.
Boston Gas is hardly the first major appellate opinion to construe allocation issues in the context of long-tail claims. Indeed, over twenty such opinions already exist, with insurers holding a slight majority in the overall count. What is striking about Boston Gas, however, is not its determination that such loss should be pro-rated on a time on the risk basis but its emphatic refusal to constrict the period of allocation to ignore years where insurance is unavailable for such losses.
On the crucial threshold question of joint and several v. pro rata, the court concluded that pro rata allocation of losses is consistent with, if not compelled by, the most reasonable construction of the policies at issue here. The court found support for this conclusion both in the language of the policies at issue and considerations of public policy.
The Supreme Judicial Court found that public policy favored the curtailment of the otherwise seemingly endless cycle of triggered insurers suing other insurers for equitable contribution. The SJC concluded, therefore that pro rata allocation produces a more equitable result than joint and several allocation, which "creates a false equivalence between an insured who has purchased insurance coverage continuously for many years and an insured who has purchased only one year of insurance coverage.
Further, in defining the period of time on the risk, the SJC expressly declined to make an exception for years for which insurance was unavailable because to do so would contravene the Century policies express limitation to liability attributable to property damage during the policy periods.
As a result, the SJC adopted a pure time on the risk model, whereby each insurers indemnity allocation is computed by dividing the period of coverage (numerator) by the period of time over which the covered loss occurred (the denominator). The court noted that this was a default rule of proof and left the door open to an alternative means of allocation if credible evidence can be presented showing the different amounts of damage in individual years within the period of loss.
Unavailability has long served as a shield to allocation claims against policyholders, whether the orphan share was due to missing policies, insolvencies, exhausted years of coverage or policy exclusions. Boston Gas now has clearly eradicated this defense, at least in Massachusetts.
Up until now, most discussions concerning allocation stopped at 1986. While insurers might argue that insureds should bear responsibility for earlier gaps, few seriously sought to force insureds to accept coverage for the period after 1986 when most policies were amended to include absolute pollution exclusions or asbestos exclusions.
Not only has Boston Gas eliminated any distinction with respect to how different types of orphan shares should be treated, it expressly rejects any argument that insureds should not be responsible for that share of indemnity corresponding to years in which policies contain pollution or asbestos exclusions.
Insofar as Boston Gas mandates that Massachusetts long-tail claims be resolved in proportion to the injury occurring during an insurers policy period, it may lessen the tension between cedents and reinsurers that gave rise to rulings such as AGF and will minimize concerns with respect to whether insurer settlements reflect losses other than those that insurers were contractually obligated to pay.
Just as Boston Gas resolves several points of dispute, it may give rise to a new type of follow the settlements controversy involving trigger of coverage. In the past, insurers receiving claims under policies issued years prior to any documented instance of harm have disputed whether the process of injury commenced during their policy period, whereas policyholders have argued for the broadest period of damage. Boston Gas now creates a different set of incentives, as insurers may willingly accept a broader triggered period in order to maximize the allocation denominator whereas insureds may now argue that injuries are specific to a narrow band of time for which they purchased insurance.
The long-term significance of Boston Gas may not be known for years to come. Just as insurer counsel will trumpet the importance of this new opinion, policyholder counsel have for months laid equal claim to the significance of the contrary analysis adopted a few months earlier in Plastics Engineering Co. v. Liberty Mut. Ins. Co., 759 N.W.2d 613 (Wis. 2009). Even so, this opinion is different, if only in pioneering a new set of allocation principles to guide insurers in their handling of such claims.Whatever the style you want, our trendy louis vuitton bags,cartier replica,replica patek philippe watches and patek philippe replica watches variety will supply it.
Michael Aylward can be reached at firstname.lastname@example.org.
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