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Allocation oct2013 Continuous Progressive Losses


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Allocation oct2013 Continuous Progressive Losses

  1. 1. final October 28-29, 2013 1
  2. 2. Max H. Stern Duane Morris LLP Paul Zevnik Morgan Lewis LLP Philip R. Watters, P.E. RimkusConsulting Group
  3. 3.  Goulds v. Travelers (Los Angeles Superior Court)  Plant Insulation Co. v. Fireman’s Fund (San Francisco Superior Court)  State of California v. Continental (California Supreme Court)  Lennar v. Markel (Texas Supreme Court) 4
  4. 4.     Asbestos bodily injury Excess insurance coverage New York law Pro rata allocation 5
  5. 5.    Pro rata allocation: what does it mean when dealing with language and insurer differences? Impact of allocation method employed by underlying insurer to exhaust policies Allocation to insured for so-called “uninsured” or “under-insured” periods ◦ Post-1985 asbestos coverage ◦ Pre-1955 asbestos coverage ◦ So-called “under-insured” periods at excess level prior to 1963 6
  6. 6.   Pro Rata Allocation Hypothetical (Slide 3 - interactive) 7
  7. 7. Hypothetical Pro Rata Allocation/Exhaustion Model Date of First Exposure "DOFE” POLICY YEAR 1 2 3 4 5 6 7 8 9 10 Loss Five - $700,000 Loss Four - $1,000,000 Loss Three - $900,000 Loss Two - $400,000 Loss One - $600,000 Triggers Umbrella Coverage $500,000 Primary
  8. 8. Hypothetical Pro Rata Allocation/Exhaustion Model Date of First Exposure "DOFE” NON AGGREGATED POLICY YEAR 1 2 3 4 5 6 7 8 9 10 Loss Five - $700,000 Loss Four - $1,000,000 Loss Three - $900,000 Loss Two - $400,000 Loss One - $600,000 Triggers Umbrella Cov $500,000 Primary 9
  9. 9. Insurersargued for allocation to Goulds for so-called uninsured and under-insured periods.    Post-1985 asbestos coverage. Pre-1955 asbestos coverage. (Greenman v. Yuba Power Products) “Under-insured” periods at excess level prior to 1963. 10
  10. 10.       Asbestos bodily injury Primary, umbrella and excess insurance coverage California law Continuous trigger Policyholder selection/equitable contribution “Operations” coverage ◦ Wallace & Gale   Double anchor trigger Cancer trigger 11
  11. 11.  “Operations” coverage ◦ Wallace & Gale   Double anchor trigger Cancer trigger 12
  12. 12. Known General Liability Coverage Issued To Plant Insulation Company/Plant Asbestos Company ACE (ACE Fire and ACE P/C) Transport Insurance Mt. McKinley USF&G Fireman‟s Fund/American Auto Royal Indemnity United National Insurance Company of the West Safety National Unavailable Coverage Industrial Indemnity/U.S. Fire $15MM - OneBeacon AIG (Granite State; ISOP; American Home) Sompo Japan - $15MM Granite State 6181-5654 Unavailable Transport TEL900340 Unavailable Unavailable 1952-1961 10MM - - 10MM Unavailable $1MM - 0.5MM - ACE P&C UL 851337 Mt. McKinley GMX00183 0.3MM - - 5MM 5MM - ISOP 4173-5420 Safety National Granite State 6180-6900 Unavailable 3MM Ins. Co. of the West UC 363062 Unavailable ISOP 410-4478 2MM Unavailable Unavailable American Home 614-1047 Unavailable 1MM OneBeacon OneBeacon OneBeacon OneBeacon OneBeacon OneBeacon OneBeacon OneBeacon 0.5MM - 0.25MM - - 0.5MM Fireman‟s Fund LC 2389305 Sompo Japan USF&G USF&G Royal Indem. Fund MXP 457-25-57 ACE Fire MFC DO 612527A United National SMP 12132 - 0.25MM
  13. 13. Aggregate limit applies only to claims falling within the “products hazard” or the “completed operations hazard.” Aggregate limit does not apply to “operations” claims that do not fall within the definitions of these two hazards. 14
  14. 14. ◦“’Products Hazard‟ includes bodily injury and property damage arising out of the Named Insured‟s products or reliance upon a representation or warranty made at any time with respect thereto, but only if the „bodily injury or property damage occurs away from premises owned by or rented to the Named Insured and after physical possession of such products has been relinquished to others.‟” ◦ “„Completed Operations Hazard‟ includes bodily injury and property damage arising out of operations or reliance upon a representation or warranty made at any time with respect thereto, but only if the bodily injury or property damage occurs after such operations have been completed or abandoned and occurs away from premises owned by or rented to the named insured.” 15
  15. 15. ◦ “A manufacturer or service provider can incur liability both while work is in progress and after completion. Claims for injuries arising while an activity is in progress fall within „nonproducts‟ or „operations‟ coverage. Claims for injuries arising once the product has been completed and sent to market fall within „products‟ or „completed operations‟ coverage. The coverages are complementary and not overlapping. Products coverage takes over where operations coverage leaves off.” Employers Reinsurance Co. v. Superior Court (Thorpe), 161 Cal. App. 4th 906, 911 fn. 2 (2008) 16
  16. 16.  Plant Court applied a Wallace & Gale approach, which provides that non-aggregated coverage is limited to policies in effect at the time of exposure to asbestos during “operations.” ◦ “If a claimant‟s initial exposure occurred while Wallace & Gale was still conducting operations, policies in effect at that time will not be subject to any aggregate limit. If, however, initial exposure is shown to have occurred after operations were concluded or if exposure that began during operations continued after operations were complete, then the aggregate limits of any policy that came into effect after operations were complete will apply. Where a given claimant falls within this framework will have to be considered on a case-by-case basis.” In Re Wallace & Gale, 385 F.3d at 833 17
  17. 17.  Certain insurers argued that both exposure to asbestos and resulting bodily injury must occur during the policy period for coverage to apply.  Operative policy provisions: ◦ “Policy period, Territory: This policy applies only to accidents or occurrences which take place during the policy period.” ◦ “Occurrence” means “an accident or continuous or repeated exposure to conditions that results in bodily injury during the policy period.” 18
  18. 18. “[T]his Court concludes that the normal trigger of coverage under California law applies to the policies here at issue. In other words, coverage under those policies is triggered solely by injury during the policy period. The injury-causing event need not occur during the policy period to trigger coverage.” Plant, Final Statement of Decision on the Phase III Issues, April 8, 2013, at p. 30. 19
  19. 19.    Certain insurers argued that coverage for asbestosrelated cancers would only be provided under policies issued within a few years of diagnosis. The impact of certain insurers‟ trigger approach would eliminate coverage for most asbestos claims. Based on a thorough review of medical scientific evidence, the Court rejected a separate trigger for asbestos-related cancers, and instead applied the traditional California continuous trigger of coverage. 20
  20. 20. “In sum, although Armstrong was decided in 1987, this Court finds that the factual findings of Armstrong regarding the timing of injury due to inhalation of asbestos have been confirmed and augmented by subsequent developments in the medical and scientific fields. Specifically, as in Armstrong and as previously noted, the Court finds that in those who develop asbestos-related disease, the disease process begins soon after inhalation of asbestos fibers. The injurious process begins at initial exposure, continues after cessation of exposure and throughout an individual‟s life.” Plant, Final Statement of Decision on the Phase III Issues, April 8, 2013, at p. 43. 21
  21. 21.       Environmental damage. Primary, umbrella and excess insurance coverage. California law. Continuous trigger. Rejected pro rata allocation. All-sums-with-stacking adopted. 22
  22. 22.  Insurers argued for a “pro rata” allocation approach to coverage for continuous and progressive environmental property damage.  Insurers also argued for “anti-stacking” of policy limits, which would limit coverage to one policy period.  Supreme Court rejected “pro rata” allocation and confirmed California‟s “continuous” trigger and an “all-sums-with-stacking” approach. 23
  23. 23. “We therefore conclude that the policies at issue obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was “on the loss.” The coverage extends to the entirety of the ensuing damage or injury (Montrose, supra, 10 Cal.4th at p. 686, 42 Cal.Rptr.2d 324, 913 P.2d 878), and best reflects the insurers‟ indemnity obligation under the respective policies, the insured‟s expectations, and the true character of the damages that flow from a long-tail injury.” State of California, 55 Cal.4th at 200. 24
  24. 24. “An all-sums-with-stacking rule has numerous advantages. It resolves the question of insurance coverage as equitably as possible, given the immeasurable aspects of a long-tail injury. It also comports with the parties‟ reasonable expectations, in that the insurer reasonably expects to pay for property damage occurring during a long-tail loss it covered, but only up to its policy limits, while the insured reasonably expects indemnification for the time periods in which it purchased insurance coverage. All-sums-with-stacking coverage allocation ascertains each insurer‟s liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.” State of California, 55 Cal.4th at 201 25
  25. 25. Policy language limiting obligation to pay to damage “during the policy period.” Anti-stacking language – what language overcomes SOC? Effect of case when property damage partially or entirely divisible Choice of law / application in other jurisdictions Application to other types of (non-environmental, nonproperty damage) cases 26
  26. 26.      Construction defect allowing water damage. One umbrella insurer; all other insurance had settled. Texas law. Continuous trigger. Rejected pro rata allocation. 27
  27. 27. Lennar received homeowner complaints regarding EIFS causing water damage. Lennar notified insurers of plans to remediate homes after it had commenced remediation efforts, but insurers refused to participate, instead opting to respond to any individual homeowner claims. Lennar proceeded to replace EIFS in all homes. In the ensuing coverage dispute, Lennar ultimately settled with all insurers, except for Markel. 28
  28. 28. Markel: Pro-Rata - only responsible for its share of remediation expenses associated with the “property damage” occurring during its policy period. Lennar: All Sums – Markel is responsible for all of the loss from all years in which “property damage occurred. The policy does not require it to prove a specific amount of damage during the policy period to each house and it is practically impossible to do so. Court’s Holding: All sums where “property damage” began before or during the policy period and continued until it was repaired. Markel is obligated to pay the total amount of Lennar‟s loss. Relied on Amer. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 8442 (Tex. 1994), and stated allocation discussion in Garcia was not dicta.  Markel must first pay then can reallocate the loss among insurers according to their respective subrogation rights. . 29
  29. 29. Garcia held: If a single occurrence triggers more than one policy, covering different policy periods, then different limits may have applied at different times. In such a case, the insured's indemnity limit should be whatever limit applied at the single point in time during the coverage periods of the triggered policies when the insured's limit was highest. The insured is generally in the best position to identify the policy or policies that would maximize coverage. Once the applicable limit is identified, all insurers whose policies are triggered must allocate funding of the indemnity limit among themselves according to their subrogation rights. 30
  30. 30. What are the “respective subrogation rights” in this type of scenario? When other insurers settled with the insured, how is the last to settle insurer able to reallocate indemnity with previously settled insurers? 31
  31. 31.          Max H. Stern Duane Morris LLP (415) 957-3129 Paul Zevnik Morgan Lewis LLP (213) 612-2501 Philip R. Watters, P.E. Rimkus Consulting Group (713) 621-3550
  32. 32.       Demonstrate contributions are distinguishable Hazardous waste amounts Hazardous waste toxicity Parties involvement in waste generation…… Degree of care Cooperation with government
  33. 33. Relative fault of the parties  Property use during ownership  State of mind of the parties  Who benefited from disposal  Parties ability to pay  Weighted site attribute modeling  Monte Carlo statistical method 
  34. 34.  Regulatory changes ◦ Clean-up standards ◦ Allowed remediation technologies ◦ Vapor intrusion  Chemicals of concern ◦ Newly identified at site ◦ Detection limits ◦ Nanotechnology
  35. 35. Claimed Damages Product Defects A,B,... 1,2,3,4,5... Product Defects Q,R,… Product Defects X,Y,… $$$ Replace or Repair Everything $$$
  36. 36. Construction Defect Allocation Insured and Insurer Perspective Investigate Damage Product Defect Maintenance No Damage Unrelated Damage Issue Replace Product $ Resultant Damage $ $Resultant Damage $ Resultant Damage $
  37. 37. Questions 38