October 28-29, 2013
Linda Kornfeld
Kasowitz Benson Torres & Friedman LLP

Rob Pfister
Klee, Tuchin, Bogdanoff & Stern LLP
Allocation Methods and Their Effect


Insured chooses which policies will pay among
multiple triggered policies
◦ Selected insurers then obtain contribution ...


Majority position adopted in:
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦

California
Delaware
Hawaii
Illinois
Indiana
Massachusetts
Ohio
Pen...


Insured’s loss is divided proportionately among all
triggered policies based on the portion of loss that
occurred durin...


“Time-On-The-Risk” Approach
◦ Loss allocated among insurers based on the proportional
time that each insurer was on the...


Minority position adopted in:
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦

Colorado
Hawaii (adopted “all sums” in another case)
Minnesota
New...


$2 Million Claim



Results Based on Type of Allocation:
◦ “All Sums”
◦ “Pro Rata”


What if one year of coverage has a fronting policy
or a high self-insured retention?



What if one year has an insolv...


“All Sums”: Insured Preference
◦ Allows insured to avoid periods when it was uninsured,
self-insured or had gaps in cov...


“Pro Rata”: Insurer Preference
◦ Insured contributes for periods when it did not purchase
insurance, was self-insured, ...


$2 Million Claim
$2M Excess
Policy

$2M Excess
Policy

$500K Primary
Policy

$500K Fronting
Policy

$500K Primary
Polic...
Analogues, Mechanics & Deference
Bankruptcy Code – Default option, governing everyone and everything
other than specifically enumerated exceptions in 11 U....


“Only those entities [that] have a comprehensive
scheme of liquidation provided for by other
statutes or regulations sh...
Bankruptcy Code – Default option, governing everyone and everything
other than specifically enumerated exceptions in 11 U....
Bankruptcy Code – Default option, governing everyone and everything
other than specifically enumerated exceptions in 11 U....
Bankruptcy Code
Bankruptcy Code
Title 12 / Banks
Bankruptcy Code
Title 12 / Banks
Dodd-Frank
Financial Guaranty Insurance Company (FGIC) – Clash of the
competing comprehensive regimes, or How can two courts each
hav...
Financial Guaranty Insurance Company (FGIC) – Clash of the competing
comprehensive regimes, or How can two courts each hav...
passing of time or the giving of notice or both) under any FGIC
Contract or Transaction Document, as a result of (whether ...
(b) Neither the Rehabilitation nor the Rehabilitation Circumstances
shall ... cause to inure to any Person any greater rig...


Section 3.6(a): “Each reinsurer shall pay FGIC in full in
Cash for such reinsurer’s reinsured portion of the entire
amo...


“Consistent with the foregoing, the terms ‘Loss’ or ‘Losses’ (or
similar terms) used in the Reinsurance Agreements shal...
Farmers Mutual Fire Insurance Co. v. New Jersey Property-Liability
Insurance Guaranty Association, 74 A.3d 860 (N.J. 2013)...
However, the Legislature has designated the Guaranty Association
as an insurer of last resort when substituting for an ins...
Linda

Kornfeld
KASOWITZ BENSON TORRES & FRIEDMAN LLP
2029 Century Park East, Suite 750
Los Angeles, California 90067
(42...
HB Allocation oct2013 impact of gaps final
HB Allocation oct2013 impact of gaps final
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  • HB Allocation oct2013 impact of gaps final

    1. 1. October 28-29, 2013
    2. 2. Linda Kornfeld Kasowitz Benson Torres & Friedman LLP Rob Pfister Klee, Tuchin, Bogdanoff & Stern LLP
    3. 3. Allocation Methods and Their Effect
    4. 4.  Insured chooses which policies will pay among multiple triggered policies ◦ Selected insurers then obtain contribution from rest of insurers of triggered policies   Also described as “joint and several,” “pick and choose” and “vertical” allocation Rationale is that each policy states insurer will defend “any suit” and pay “all sums” ◦ Trigger of coverage (must the policy respond) v. scope of coverage (how much must the policy pay)
    5. 5.  Majority position adopted in: ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ California Delaware Hawaii Illinois Indiana Massachusetts Ohio Pennsylvania Texas Washington District of Columbia Circuit Court of Appeals (multiple states’ law)
    6. 6.  Insured’s loss is divided proportionately among all triggered policies based on the portion of loss that occurred during each policy ◦ Requires insured to pursue coverage under each policy   Also described as “horizontal” allocation Rationale is that policy limits coverage to “occurrences” that take place during the policy period ◦ Also equity concerns regarding policyholder’s assumption of risk when deciding not to purchase any, or insufficient amount of, insurance
    7. 7.  “Time-On-The-Risk” Approach ◦ Loss allocated among insurers based on the proportional time that each insurer was on the risk  “Percentage of Limits” Approach ◦ Loss is divided into shares across triggered period with higher share given for years in which insured purchased more coverage ◦ Rationale was to balance the extremes of “all sums” and “pro rata/time-on-the-risk” approach
    8. 8.  Minority position adopted in: ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ Colorado Hawaii (adopted “all sums” in another case) Minnesota New Jersey New York Utah Second Circuit Court of Appeals (New York and Texas law) Fourth Circuit Court of Appeals (South Carolina law) Fifth Circuit Court of Appeals (Louisiana law) Sixth Circuit Court of Appeals (Illinois and New Jersey law) Eleventh Circuit Court of Appeals
    9. 9.  $2 Million Claim  Results Based on Type of Allocation: ◦ “All Sums” ◦ “Pro Rata”
    10. 10.  What if one year of coverage has a fronting policy or a high self-insured retention?  What if one year has an insolvent insurer?
    11. 11.  “All Sums”: Insured Preference ◦ Allows insured to avoid periods when it was uninsured, self-insured or had gaps in coverage ◦ California Supreme Court rejected claim that “because it was issued ‘fronting’ policies . . . [the insured] should be required to make such a contribution itself. Although insurers may be required to make an equitable contribution to defense costs among themselves, that is all: An insured is not required to make such a contribution together with insurers.” Aerojet-General Corp. v. Transport Indem. Co. , 17 Cal. 4th 38, 71-72 (1997).
    12. 12.  “Pro Rata”: Insurer Preference ◦ Insured contributes for periods when it did not purchase insurance, was self-insured, lost its policies or had gaps in coverage (but not for periods when coverage for a risk was unavailable) ◦ Second Circuit stated fairness required “pro rata” allocations so that insured bore consequence of “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 Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1204 (2d Cir. 1995).
    13. 13.  $2 Million Claim $2M Excess Policy $2M Excess Policy $500K Primary Policy $500K Fronting Policy $500K Primary Policy Year 1  $2M Excess Policy Year 2 Year 3 Results Based on Type of Allocation: ◦ “All Sums” ◦ “Pro Rata”
    14. 14. Analogues, Mechanics & Deference
    15. 15. Bankruptcy Code – Default option, governing everyone and everything other than specifically enumerated exceptions in 11 U.SC. § 109 (e.g., Small Business Investment Companies)
    16. 16.  “Only those entities [that] have a comprehensive scheme of liquidation provided for by other statutes or regulations should be excluded from eligibility under the Bankruptcy Code. [T]hose entities that do not enjoy such a scheme of liquidation should be able to avail themselves of the liquidation and reorganization provisions of the Bankruptcy Code.” In re Affiliated Food Stores, Inc. Group Ben. Trust, 134 B.R. 215, 222 (Bankr. N.D. Tex. 1991)
    17. 17. Bankruptcy Code – Default option, governing everyone and everything other than specifically enumerated exceptions in 11 U.SC. § 109 (e.g., Small Business Investment Companies) Title 12 – FDIC as Receiver for failed financial institutions
    18. 18. Bankruptcy Code – Default option, governing everyone and everything other than specifically enumerated exceptions in 11 U.SC. § 109 (e.g., Small Business Investment Companies) Title 12 – FDIC as Receiver for failed financial institutions Dodd-Frank Orderly Liquidation Authority for “Covered Financial Companies” (including insurers – albeit with special rules)
    19. 19. Bankruptcy Code
    20. 20. Bankruptcy Code Title 12 / Banks
    21. 21. Bankruptcy Code Title 12 / Banks Dodd-Frank
    22. 22. Financial Guaranty Insurance Company (FGIC) – Clash of the competing comprehensive regimes, or How can two courts each have exclusive jurisdiction over the same issues?
    23. 23. Financial Guaranty Insurance Company (FGIC) – Clash of the competing comprehensive regimes, or How can two courts each have exclusive jurisdiction over the same issues? FGIC Plan of Rehabilitation: “ Section 3.5 No Defaults Arising from Rehabilitation or Rehabilitation Circumstances. (a) [F]rom and after the date of the Order of Rehabilitation, any default, event of default or other event or circumstance relating to the FGIC Parties then existing (or that would exist with the
    24. 24. passing of time or the giving of notice or both) under any FGIC Contract or Transaction Document, as a result of (whether directly or indirectly) the Rehabilitation or the Rehabilitation Circumstances shall be deemed to be cured and not to have occurred (including, for the avoidance of doubt, any default, event of default or other event or circumstance that has arisen (or that may otherwise arise with the passing of time or the giving of notice or both) due to a lack of payment or performance of or by the FGIC Parties under any FGIC Contract or Transaction Document).
    25. 25. (b) Neither the Rehabilitation nor the Rehabilitation Circumstances shall ... cause to inure to any Person any greater right or Claim than that which would have existed in the absence of the Rehabilitation and the Rehabilitation Circumstances….”
    26. 26.  Section 3.6(a): “Each reinsurer shall pay FGIC in full in Cash for such reinsurer’s reinsured portion of the entire amount of each Permitted Policy Claim (irrespective of when such Policy Claim is submitted to FGIC, whether before the date of the Order of Rehabilitation, during the Rehabilitation Proceeding or after the Effective Date), in each case without giving effect to the Policy Restructuring and regardless of the amount paid in Cash by FGIC on account of such Policy Claim .”
    27. 27.  “Consistent with the foregoing, the terms ‘Loss’ or ‘Losses’ (or similar terms) used in the Reinsurance Agreements shall be deemed to refer to the entire amount of Permitted Policy Claims as and when such Permitted Policy Claims are Permitted by FGIC, irrespective of (i) the amount and timing of any Cash payments that FGIC may make with respect to any such Permitted Policy Claims, (ii) the modification pursuant to the Policy Restructuring of FGIC’s obligations to pay such Permitted Policy Claims in Cash and (iii) any language in the Reinsurance Agreements that contradicts this result.”
    28. 28. Farmers Mutual Fire Insurance Co. v. New Jersey Property-Liability Insurance Guaranty Association, 74 A.3d 860 (N.J. 2013) “The Owens–Illinois methodology is a product of this Court's equitable powers to advance public policy within the realm of the common law. The purpose of the methodology is to make insurance coverage available, to the maximum extent possible, to redress such matters as toxic contamination of property.
    29. 29. However, the Legislature has designated the Guaranty Association as an insurer of last resort when substituting for an insolvent carrier. [The statutes] specifically exempt the Guaranty Association from the Owens–Illinois allocation scheme until all solvent insurance companies' policy limits are exhausted. That statute also embodies an important public policy. The common law must bow when in conflict with a legislative scheme.”
    30. 30. Linda Kornfeld KASOWITZ BENSON TORRES & FRIEDMAN LLP 2029 Century Park East, Suite 750 Los Angeles, California 90067 (424) 288-7902 lkornfeld@kasowitz.com Robert J. Pfister KLEE TUCHIN BOGDANOFF & STERN LLP 1999 Avenue of the Stars, 39th Floor Los Angeles, California 90067 (310) 407-4065 rpfister@ktbslaw.com
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