Presenting a live 90 minute webinar with interactive Q&A. Td Today s faculty features:

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1 Presenting a live 90 minute webinar with interactive Q&A Primary v. Excess Insurance: Pi Priority i and Allocation of Coverage Resolving Disputes Over Triggers of Coverage, Allocation of Liability, and Exhaustion of Policy Limits WEDNESDAY, JULY 24, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: John T. Harding, Partner, Morrison Mahoney, Boston Marshall Gilinsky, Shareholder, Anderson Kill & Olick, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 ARE YOU EXHAUSTED? Long-Tail Disputes Presented by: John T. Harding Morrison Mahoney LLP

6 What Are the Sources? Allocation/Trigger Exhaustion (Vertical v. Horizontal) Stacking Re-allocation Inter-insurer disputes 6

7 HOT OFF THE PRESS Ali v. Federal Insurance Co., 2013 wl (2d Cir. June 4, 2013) 7

8 8 COMMODORE COMPUTER

9 Liability v. Payment Policyholder: Just that the liabilities must reach attachment point to trigger excess coverage. 9

10 Liability v. Payment The Insurers: Excess coverage is triggered only when liability payments reach the attachment point 10

11 The Problem Directors sued in the Bahamas Primary policy covered first $10 million Successive excess policies i in the tower Several layers insolvent 11

12 The District Court s Solution Granted motion re no drop down the Excess policies expressly state that coverage does not attach until there is payment of the underlying losses (original emphasis) 12

13 The Second Circuit Agrees Clear language: g payment of claims or payment of losses Obligations are not synonymous with payments Plain language requires payments 13

14 There s Always a But But... District Court did not hold that the underlying insurers must be the ones to make the payments. No specification of which party is to make the underlying payments. 14

15 Zeig v. Mass. Bonding & Ins. Co. Justice Hand decision. 23 F.2d 665 (2d Cir. 1928) Whether excess insurer has an obligation when policyholder settles primary layer for less than policy limits Could exhaust by settlement 15

16 Zeig Rejected It is a property p policy Losses were fixed If the Directors were able to trigger the Excess Policies simply by the virtue of their aggregated [but unpaid] losses, they might be tempted to structure inflated settlements 16

17 Why Is Allocation An Issue? Growing Number of Long-Tail Claims Asbestos Construction Lead Mold Pollution Silica Widespread acceptance of multi-year trigger Since 1990s, nearly every state but Rhode Island has abandoned manifestation as the sole trigger of coverage for long-tail claims. 17

18 Trigger Meets Allocation Policyholder success in broadening the trigger of coverage created unintended problems for insureds and insurers Who bears responsibility for triggered years for which insurance is unavailable? 18

19 Orphan Shares Orphan shares are gaps due to: Insurance wasn t purchased Missing policies Exhausted limits Exclusions Insolvency Self-Insurance 19

20 A Sample Coverage Block 20

21 Conflicting Approaches Insured Allowed To Assign Entire Loss To Any Triggered Year of Coverage All Sums Joint and Several Liability Loss Pro-Rated Across Period of Injury Pure time on the risk Modified time on the risk 21

22 All Sums Language formerly contained in CGL requiring insurer to pay all sums that insurer was legally obligated to pay as damages because of BI or PD. 22

23 Spiking Insured allowed to assign its entire loss to a single year s stack of policies, causing the loss to spike into higher years. Not to be confused with the effect that t such claims may have on the blood pressure of fi insurance companies. 23

24 Hop Scotch Policyholders allowed to pick its way through coverage block without having to bear responsibility for any orphan shares. 24

25 Time on The Risk Insurer s s share is calculated by dividing months or years of coverage by months or years when injury occurred. Insurer s share is not affected by availability of coverage for uninsured periods. Insured responsible for all orphan shares. 25

26 Modified Time on Risk Loss only allocable to periods when insured could have transferred risk. No allocation to years where insurance was unavailable for such losses. Limits purchased included (NJ) 26

27 Availability Issues Early Years (pre-cgl) Claims Made Coverage Asbestos Exclusions (post-1986) Pollution Exclusions Sudden and accidental (1970) Absolute/Total Pollution Exclusions (1986 ) 27

28 Collapsing Bathtub As certain years become exhausted due to inadequate limits, those years are eliminated from inclusion in either numerator or denominator for calculating pro rata shares. Not to be confused with defective plumbing appliance claims. 28

29 Supreme Courts Are Split State supreme courts narrowly divided. Eleven supreme courts have permitted allocation, albeit on different theories. Six state supreme courts have adopted all sums or joint and several liability No law at all in most states. 29

30 THE STATE OF THE STATES Supreme Court Rulings = Pro-insurer = Pro-policyholder 30

31 EXHAUSTION 31

32 Or am I just tired? What mechanism to determine exhaustion? Is actual exhaustion required or can it be imputed? Role of aggregates and multi-year policies 32

33 Is Horizontal Exhaustion on the Way Out? Many courts continue to require that all policies in underlying layer be exhausted before moving to the next layer. e.g., California, i Illinois, i Maryland, Massachusetts, Minnesota, New Jersey 33

34 The Bathtub Also Rises The Rising Bathtub Approach 34

35 Recent Rejections Legacy Vulcan Corp. v. Superior Court, 185 Cal. App. 4 th 677 (2010) Northwest Pipe Co. v. RLI Ins. Co., 734 F.Supp. 2d 1122(D. Ore. Aug. 11, 2010) LSG Technologies v. U.S. Fire, 2010 WL (E.D. Tex. 2010) 35

36 Yeah, Well Prove It! LSG Technologies v. U.S. Fire (E.D. Tex. 2010) Rejected umbrella insurer s s claim that insured had not proven exhaustion of underlying insurance. No express policy definition so proof of payments was enough No re-examination of whether payments were proper 36

37 IDon t Have To!!!!! American Ins. Co. v. St. Jude Medical, 2010 WL (D. Minn. Sept. 20, 2010) Court refused to allow excess insurer to demand claim by claim accounting Exhaustion doesn t require proof of defined losses Underlying insurers paid sums equal to limits 37

38 STACKING 38

39 Stacking - Defined In its broadest sense, stacking means treating multiple policies that apply to a single loss as cumulative as a stack of coverage rather than as mutually exclusive. State v. Continental Ins. Co.,, 88 Cal. Rptr.3d 288, 302 (Cal. Ct. App. 2009) (review granted) 39

40 Stacking Consequences Thus, if stacking is allowed, an insured can obtain indemnity for a loss under more than one policy period if the loss exceeds the limits of liability of all of the policies in a single policy period or coverage tower. 40

41 Stacking The Consequences Indeed Indeed, the choice between stacking and not stacking can have an even more drastic effect than the choice between an all-sums approach and a pro rata approach. State v. Continental Ins. Co., 88 Cal. Rptr.3d at

42 Stacking-When Applicable? In pro-rata rata states, stacking is not usually an issue, the loss is pro-rated rated over several policy periods. Horizontal exhaustion in pro-rata rata jurisdictions requiring that all primary insurance must exhaust prior to impacting excess coverage is a completely different issue than whether, in the first instance, stacking of per occurrence limits of liability is permissible in an all sums jurisdiction. 42

43 Arguments Against Stacking Stacking treats a single occurrence as multiple occurrences if the court holds that a loss constitutes a single occurrence then only one per occurrence limit of liability in a single policy should apply. 43

44 Arguments Against Stacking The principle of indemnity implicit in the policies requires that successive policies cover single asbestos- related injuries. That principle, however, does not require that Keene be entitled to stack applicable policies limits of liability... Therefore, we hold that only one policy s limits can apply to each injury.. Keene may select the policy under which it is to be indemnified. Keene Corp. v. Insurance Co. of N. Am., 667 F.2d 1034, 1049 (D.C. Cir. 1981) (emphasis added). 44

45 Arguments Against Stacking Simply because a Claim Occurrence extends throughout several policy periods does not raise the per-occurrence indemnity cap established in every policy. Even the jurisdiction embracing the broadest trigger rule has held that t multiple l coverage does not permit an insured to stack the limits of multiple policies that do not overlap. American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842, (Tex. 1994) (discussing Keene). ). 45

46 Arguments Against Stacking [E]very triggered policy has an independent obligation to respond in full to a claim... that does not entitle an insured to get more than it bargained for.... The policyholder cannot reasonably expect more simply because asbestos related claims trigger more than one policy. In re Asbestos Insurance Coverage Cases,, Judicial Council Coordination Proceeding No. 1072, Statement of Decision Concerning Phase IV Issues (Cal. Super. Ct. San Francisco Jan. 24, 1990) 46

47 Arguments Against Stacking Stacking makes aggregate limits and the separately negotiated premiums for each policy illusory by expanding coverage to the sum of both policies. Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp (E.D. N.Y. 1988) 47

48 Arguments Against Stacking The policy language during the policy period precludes stacking and is in essence an anti-stacking gp provision. In other words, if the court is not honoring the during the policy period limitation for allocation, it should do so for stacking. 48

49 Arguments Against Stacking Permitting stacking effectively rewards the insured for failing to mitigate or intervene and remedy property damage or bodily injury at an earlier date. 49

50 The Enemy Speaks-Arguments For Stacking The insured should get the benefit of the coverage. It paid a premium each year for coverage and the insurer calculated the policy premium based upon the risk it understood each policy year. If property damage occurs each policy year, it must make good on each policy. Society Ins. v. Town of Franklin,, 507 N.W. 2d 342 (Wis. Ct. App. 2000). 50

51 The Enemy Speaks-Arguments For Stacking The purpose of the all sums ruling is to make the insured whole. If contamination causes a covered occurrence in the 1978 policy period, and continued causing damage in the 1979 policy period, that contamination would trigger both policies.... We agree... that Dana may elect to seek indemnity from any or all of the policies at risk as to any single occurrence. Allstate t Ins. Co. v. Dana Corp., 759 N.E.2d 1049, (Ind. 2001) 51

52 The Enemy Speaks-Arguments for Stacking The absence of an anti-stacking or non- cumulation clause in a policy means, at a minimum, that no policy term expressly precludes the stacking of per occurrence limits of liability. 52

53 Arguments for Stacking The other insurance clause permits the insured to obtain coverage under other liability policies. i When multiple policies apply during a single policy period, the insured is entitled to stack limits. 53

54 Scorecard - Stacking in the Context of Long-Tail Claims Louisiana Maryland Wisconsin i California (?) 54

55 Anti-Stacking Clauses An insurer may limit stacking with an anti- stacking or non-cumulation provision. Is the clause unambiguous? Does the clause render coverage illusory? Does the clause violate public policy? Is the clause inconsistent with continuous trigger and pro-rata rata allocation law? 55

56 Non-Cumulation Clauses Plastics Engineering Co. v. Liberty Mutual Ins. Co., 759 N.W.2d 613 (Wis. 2009) Non-cumulation provision did not violate Wisconsin Statute (1)) because the statute applies only to cases involving concurrent policies and the application of other insurance provisions, i not to situations involving successive insurance policies. No oc challenge to oa ambiguity bgu yo of cause clause. 56

57 What Happens After the Spike? 57

58 The Biggest Loser Biggest loser in all sums world is the excess insurer. They receive less premium than primary insurers. They are initially stuck with the entire liability and risk of non-recovery due to insolvency, etc. They often must pick up the primary exposure and lower-level level excess exposures of other insurers. They have the burden of fronting the payment and seeking contribution from others. 58

59 Options for the Spiked Carrier What can an excess carrier do to reallocate the loss? Seek a credit for settlements entered into by settling insurers and reduce its liability in initial coverage case. Bring subsequent suit for equitable contribution and/or subrogation against settling carriers. Pursue both settlement credits and reallocation. 59

60 Settlement Credits and Offsets Avoiding double recovery and protracted litigation against settled insurers 60

61 Settlement Credits/Offsets Who bears the risk of the difference between the settlement amount and policy limits? Policy limits credit based on the policy limits of all settled policies. Pro-rata rata credit based on settled insurer s apportioned share of liability. Pro-tanto dollar for dollar credit based on amount recovered from settled insurers. 61

62 Settlement Credits/Offsets Full Policy Limits GenCorp Inc. v. AIU Insurance Co.,, 297 F. Supp. 2d 995 (M.D. Ohio 2003) -An argument for application of horizontal exhaustion even in an all sums jurisdiction. EPA had identified GenCorp as a PRP for environmental cleanup. GenCorp sought coverage for the cleanup from its primary, umbrella, and excess carriers over different periods. 62

63 Gen Corp Just the Facts GenCorp then settled with all of its primary carriers, and several excess carriers, across the entire insurance period. The remaining excess insurers sought settlement credits. 63

64 Gen Corp The Arguments GenCorp argued that granting credits would reward the remaining excess carriers for not settling. GenCorp asserted that, under the all sums approach, it could choose a single policy year and rise up vertically to the coverage provided by the excess insurers it was targeting. 64

65 Horizontal Exhaustion in an All Sums World The court determined that GenCorp decided how to assign its liability when it settled policies in every year of available insurance: Having already made its allocation of liability through its settlements in all policy years, [i]t is not possible for GenCorp now to decide to allocate its liability to one policy or to one policy year because this would be contrary to the settlements it has reached. GenCorp,, 297 F. Supp. 2d at

66 Gen Corp. Settlement Credit for Full Policy Limits The insured had effectively eliminated the right of the excess carriers to seek contribution from lower level carriers, which, the court noted, would saddle the excess insurers with more than their share of the insured s liability. Gen Corp correctly places the risk of settlement on the party (the insured) who negotiated and controlled it. 66

67 Westport Ins. Co. v. Appleton Papers, 787 N.W.2d 894 (Wis. App. 2010) Settlements of primary coverage in every year of triggered policies. Settlements of excess policies at different levels in every year of triggered policies. Vertical allocation is consistent t with how policies were marketed and sold. 67

68 Pro-Rata Settlement Credits Purpose is to avoid double recovery by insured in light of prior settlements. Non-settling insurers are barred from seeking contribution from settled insurers. Reduce judgment by settling insurer s pro- rata apportioned share. Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440 (3rd Cir. 1996) (credit for apportioned share of each settled excess policy in comparison 68 to total limits of all triggered policies).

69 Settlement Credits/Set Offs Pro-rata rata settlement credit issues: Insurer has a difficult burden of proof. Terms of settlement-problem with unquantifiable basket of risks. Weyerhauser Co. v. Commercial Union Ins. Co., 15 P. 3d 115 (Wash 2000). Other sites. Other types of claims (e.g., asbestos, global warming, bad faith claims, etc.). Apportionment of defense costs v. indemnity. Policy buy-backs. backs. 69

70 Pro-Tanto Settlement Credits Insured s s argue that pro-tanto settlement credit locks in the all sums principle that the insured will be made whole whole. Consistent with tort law in some jurisdictions that reduce judgment by joint tortfeasor s payment rather than their share of liability. When settlement credit is less than the policy limits it may increase exposure to 70 non-settling insurers.

71 Occurrences A related issue that could be a whole program Valley Forge Insurance Co. v. National Union Fire Ins. Co., 2012 WL (Del. Super., March 16, 2012) 71

72 Duty to Settle Do duties run among the layers in an insurance program? Central Illinois Public Service Co. v. Agricultural l Ins. Co., 880 N.E.2d 1172 (Ill. App. 5 th Dist. 2008) 72

73 Contribution Actions Reallocation to other insurers - the gloves are off. 73

74 Reallocation-Inter-Insurer Insurer Claims Theories of Inter-Insurer Insurer Reallocation Claims Equitable subrogation. Equitable contribution/equitable indemnity. Unified Restitution. Draft Restatement (Third) of Restitution and Unjust Enrichment. 74

75 Equitable Subrogation Paying insurer is automatically subrogated to the insured s rights against third parties. Subrogation rights arise by operation of law and need not be expressly allowed in policy or settlement agreement/judgment. Major limitation: subrogated insurer has no greater rights than its insured. 75

76 Equitable Contribution/ Indemnity Most courts in all sums states recognize spiked carrier s right of contribution. Most states have well-developed law or statutes on contribution between joint tortfeasors. Main difference between indemnity and contribution ti is whether pursuing insurer gets some or all of its money back. May be issues regarding insurers at different layers. 76

77 Equitable Contribution Issues Bad actors may be denied equity. No clean hands, no contribution. Insurers conduct in failing to settle may be an issue. See, e.g., INA v. Kayser-Roth Corp., 770 A.2d 403 (R.I. 1991). Insurer bears the risk of uncollectibility. Insolvency. SIRs and deductibles. Fronted or reinsured policies. 77

78 Equitable Contribution Issues Carrier may arguably stand in the shoes of insured. Failure to tender. Late notice. Substantive exclusions and defenses. Making bad law for insurers Attack on validity of post-kiger pollution exclusion. See,, e.g., West Bend Mut. Ins. Co. v. USF&G, 598 F.3d 918 (7th Cir. 2010) 78

79 Inter-Insurer Insurer Contribution Issues Other insurance clauses. Pro-ratarata Excess Escape Absence of other insurance clauses. Similar v. dissimilar clauses. Applicability to successively issued policies. Primary v. Excess-exhaustion exhaustion principles. 79

80 Inter-Insurer Insurer Contribution Issues Pursuit of settled insurers. Public policy. Discouraging settlement by insured. Discouraging insurer from settling. Effect of release by insured. Release claims by non-settling insurers? Pierringer release- policyholder stands in the shoes of the settled insurer. Policy buy-back. back. 80

81 Inter-Insurer Insurer Reallocation Claims Against Settled Carriers The risk of future claims reinforces insurer desire for protection indemnification terms, judgment reduction clauses, etc. Indemnity clauses. Limited to amount of settlement payment. Full indemnity. 81

82 Not So Fast! OneBeacon America Ins. Co. v. American Motorists Ins. Co., 2012 WL (6 th Cir. May 17, 2012) 82

83 Remember Gen Corp? Doctrine of equitable contribution should be liberally applied. Non-settling excess insurers cannot seek equitable contribution from settled primary insurers; the settled primary insurers have no remaining obligation. Undermine the finality of settlements. t Settlement credits but no action. 83

84 QUESTIONS??? John T. Harding Morrison Mahoney LLP (617)

85 Pi Primary v. Excess Insurance: Priority and Allocation of Coverage Marshall Gilinsky, Esq. (212)

86 The Exhaustion Vanguard: Comerica and Its Progeny A. Many Policyholders Have Towers of Liability Coverage for: CGL D&O Property Towers consist of Primary policies and one or more umbrella and/or excess policies v Anderson Kill & Olick, P.C. All Rights Reserved.

87 Coverage Tower 2 nd Excess - $10 million 1 st Excess - $10 million Umbrella - $5 million Primary - $5 million $30 million of coverage in 4 layers v Anderson Kill & Olick, P.C. All Rights Reserved.

88 B. Policyholders often are able to reach settlements with some, but not all insurance companies in the tower v Anderson Kill & Olick, P.C. All Rights Reserved.

89 C. Example: Policyholder has incurred $3 million in defense of a shareholder suit Policyholder can settle the suit for $25 million Primary ($5 million in coverage) will pay $4.5 million Primary recognizes that its coverage will be exhausted either by continuing defense costs or a settlement Primary wants a small discount for coverage issues Excess believe the shareholder suit can be won and want to fight it with the primary carriers limits v Anderson Kill & Olick, P.C. All Rights Reserved.

90 D. Traditional Rule Zeig v. Mass. Bonding & Ins. Co. (2d Cir. 1928) [A. Hand] Excess policy provided coverage after primary policy was exhausted in the payment of claims to the full amount of the expressed limits. Court held that primary insurance company need not have actually paid its full limits (or anything) Rationale: Insurance policy did not explicitly require payment of underlying limits in cash Public policy favors settlements v Anderson Kill & Olick, P.C. All Rights Reserved.

91 E. TRADITIONAL RULE APPLIED TO EXAMPLE Coverage for $25 mm settlement $30 mm $20 mm $10 mm Excess Pays $20 mm $5 mm $4.5 mm $500k GAP Primary Pays $4.5 mm v Anderson Kill & Olick, P.C. All Rights Reserved.

92 F. After many decades, certain insurance companies have tried to get around Zeig and its progeny, arguing that they have no payment obligation unless underlying coverage is paid in full Strategy: Change policy language Argue that plain meaning trumps public policy v Anderson Kill & Olick, P.C. All Rights Reserved.

93 G. Cases: 1. Comerica v. Zurich, 498 F. Supp (E.D. Mich. 2007) Policyholders paid $21 million to settle fraud suits Primary carrier paid $14 million of $20 million limits Excess policy provided that coverage was triggered only after underlying insurance was exhausted solely as a result of actual payment of loss thereunder by the applicable insurers Court held that payments by the Insured to fill the gap are not the same as actual payment by the insurance company. Excess had no obligation to pay a loss that reached its layer because the policyholder settled with the primary for less than the full amount of primary coverage v Anderson Kill & Olick, P.C. All Rights Reserved.

94 2. Qualcomm v. Lloyd s, 161 Cal. App. 4 th 184 (2008) Policy provided: Underwriters shall be liable only after the insurers under each of the underlying policies have paid or have been held liable to pay the full amount of the underlying limit of liability Same result as Comerica Court criticized Zeig s reliance upon public policy v Anderson Kill & Olick, P.C. All Rights Reserved.

95 H. QUALCOMM AND COMERICA APPLIED TO OUR HYPOTHETICAL EXAMPLE Coverage for $25 mm settlement $20 mm $10 mm $5 mm $4.5 mm 0 Policyholder Pays $21.5 mm Primary Pays $4.5 mm v Anderson Kill & Olick, P.C. All Rights Reserved.

96 I. JP Morgan Chase & Co. v. Indian Harbor, (1 st Dep t June 12, 2012) Policyholder settled underlying claim for $718MM. Policyholder settled two unrelated insurance claims (one for $15MM, the other for $13.4MM) with two different Zurich companies for $17MM. No allocation between the two claims in the settlement agreement. The $15MM claim represented the part of the $718MM claim that hit Zurich s $15MM layer x/s $80MM under a $200MM tower v Anderson Kill & Olick, P.C. All Rights Reserved.

97 JP Morgan Chase & Co. v. Indian Harbor (continued) Zurich s excess policy provided: liability for any loss shall attach... only after the Primary and Underlying Excess Insurers shall have duly admitted d liability and shall have paid the full amount of their respective liability. The next layer s excess policy said that t it shall only be liable to make payment under this policy after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance as covered loss thereunder. Court said that these conditions precedent were different from the language in Zeig and held that the conditions were not met to trigger the excess coverage. So, $718MM claim never got beyond $80MM layer v Anderson Kill & Olick, P.C. All Rights Reserved.

98 J. The Curious Case of Rosciti v. Liberty Mutual, (D.R.I. Aug. 30, 2010) Policyholder was in bankruptcy and unable to make payment towards $500,000 SIR Policy provided: Our duty to pay any sums that you become legally obligated to pay arises only after there has been a complete expenditure of your retained limit(s) by means of payments for judgments, settlements or defense costs. Your bankruptcy, insolvency or inability to pay, or the bankruptcy, insolvency or inability to pay of any of your underlying insurers shall not relieve us from the payment of any claim covered by this Policy. But under no circumstances shall the bankruptcy, insolvency or inability to pay require us to drop down or in any way replace your retained limit or assume any obligation associated with your retained limit v Anderson Kill & Olick, P.C. All Rights Reserved.

99 Rosciti v. Liberty Mutual (continued) Court applied the literal meaning of complete expenditure and held that insurance company did not have to pay anything. Court held that because there were theoretical (albeit farfetched) scenarios where someone might pay the SIR, the bankruptcy provision had meaning even though it did not require coverage for this claim v Anderson Kill & Olick, P.C. All Rights Reserved.

100 K. The New Landscape 1. So far, this argument has only succeeded for excess D&O and professional liability policies However, it is likely to be tried with CGL policies as well Property coverage? 2. Policyholders must seek assurances from excess carriers that settlements of underlying coverage will not be used as a defense to their payment obligations This is why some excess insurers changed their policies to have leverage over policyholders to exact better settlements for themselves 3. If assurances are not given, settle at your own risk 4. Focus on and actual payment language during placement and revise as appropriate v Anderson Kill & Olick, P.C. All Rights Reserved.

101 Thank You Marshall Gilinsky, Esq. (212)