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On September 24, 2013, the New Jersey Supreme Court handed down an important insurance case in Farmers Mutual Fire Ins. Co. of Salem v. New Jersey Property-Liability Ins. Guar. Ass’n, ____ N.J. ____ (2013) that could change the way that insurance coverage is allocated for environmental claims when dealing with an insolvent insurance carrier.
In Owens-Illinois v. United Insurance Co., 138 N.J. 437 (1994), the Court recognized the difficulty in determining the degree of harm caused by contamination within any particular year from the start date to manifestation. See id. at 457-59. As such, the Court treated the progressive damages as an occurrence triggering the insurance policies in each of the intervening years. See id. at 478-79. Ultimately, the Court determined that the allocation of remediation costs among the policies is based on an insurance carrier’s years on the risk and the degree of the risk assumed as measured by the coverage provided. See id. at 479. This allocation methodology was reaffirmed in Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312 (1998).
In Farmers Mutual, that Court held that in long-tail environmental or bodily injury exposure claims (e.g. asbestos), where multiple successive liability policies are triggered, any allocation of defense and indemnity costs to periods where an insurer has become insolvent must now be absorbed by other solvent insurers until the solvent insurers’ policies are exhausted regardless of the Owens-Illinois insurance allocation. Only when they are exhausted will the New Jersey Property-Liability Insurance Guaranty Association (“NJPLIGA”) be required to step into the shoes of the insolvent insurer and pay its share (subject to the other limitations in the PLIGA statute, such as the $300,000.00 statutory cap).
This is likely a major benefit to the insured because periods of insolvent insurance, which are common for these types of claims where old policies are triggered, will most likely not have to be absorbed by the insured, as the exhaustion of multiple solvent policies, including excess policies, often requires quite a large number, depending on the circumstances. In addition, the insured may be spared the expense of obtaining coverage through NJPLIGA, which can be an administratively difficult process when dealing with lost policy issues or with insurers that became insolvent long ago, where it may be too late to submit any kind of claim or where the insured was given notice of an insolvency but failed to file a proof of claim.
Thus far, this ruling has been touted as good news for policyholders in New Jersey. However, altering the procedure for allocation in an already complicated and often time-consuming allocation scheme could add frustration to insurers and insured's alike, but only time will tell.