On September 30
th, 2014 New Jersey’s Appellate Division ruled on a slew of insurance coverage issues in the long – tail liability context, which could have serious implications for policyholders and insurance companies considering an appeal to the Supreme Court could be in the offing.
At the heart of the
IMO industries, Inc. vs. Transamerica Corporation, et al. is the extent to which $1.85 billion in insurance purchased by the policyholder (IMO), covered IMO’s defense of, and liabilities for, asbestos bodily injury claims.
Other examples of coverages ruled upon include the application of policy limits to multiyear and ‘stub’ policies, the interplay of self-insured retentions and erosions limits, reasonableness of underlying settlements, coverage for the defense of ultimately uncovered claims, and the right to a jury trial.
Central to the court’s opinion is the Supreme Court of New Jersey’s decisions in Owens-Illinois and Carter-Wallace adopting the “continuous trigger” theory for long-tail losses and a modified pro-rata allocation model based both on a carrier’s time on the risk and the limits of coverage.
The stated goal of these decisions was to implement a fair allocation scheme in the face of exceedingly complex and often times irreconcilable policy language. Importantly, the court in IMO Industries also relied on the Supreme Court’s decisions in Spaulding Composites and Benjamin Moore that a court may displace policy terms contrary to this model or simply “drop [them] out of the policy.”
The summary of other rulings are as follows:
- Exhaustion of TIG’s Fronting Policies – The Appellate Division affirmed the trial court’s decision that a primary insurance company’s duty to defend ends upon allocation of indemnity losses regardless of actual payment.
- Coverage limits of multi-year policies - The Appellate Division affirmed the trial court’s holding that the policyholder could recover a full policy limit for each year that various multi-year policies were in effect.
- ‘Stub Policies’ (Partial-year coverage) - The Appellate Division affirmed the trial court’s holding that it would not prorate the limits of a policy with a term less than a year. Although an insurance policy typically carries a policy period of one year, policyholders often will cancel a policy early, extend a policy beyond one year, or simply elect to purchase less than one year of coverage.
- SIRs as outside the limits of policies - The Appellate Division held that IMO’s policy limits were not eroded by its self-insured retention (“SIR”).
- Challenges to coverage for underlying claims settlements - In many long-tail coverage disputes, excess carriers attempt to second guess the policyholders’ and primary insurers’ decisions to settle underlying claims, often trying to argue that such settlements were unreasonable. The Appellate Division in IMO Industries expressly rejected such attempts and held that excess carriers cannot challenge the reasonableness of previously settled claims in long-tail coverage cases in the defense of which the excess carriers failed to participate.
- Duty to defend uncovered claims - Two insurance companies argued that the ultimate net loss provisions in their policies means that they need only indemnify IMO for defense costs if there was an actual covered claim at issue. The Appellate Division disagreed, affirming the trial court’s holding that defense costs are allocable even if some of the defense costs are attributable to claims in which no indemnity payments are made by the insurer.
- Right to a jury trial - The Appellate Division also affirmed the trial court’s denial of a trial by jury.
Above all for this case policyholders and providers should recognize the clear rejection of excess carriers’ common practice of attempting to re-litigate actions and second-guess settlements they could have participated in from the outset.
It remains to be seen whether the case will move on to the Supreme Court.
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