Winning Strategies to Defeat the “All Sums” Allocation Approach

Allocation Trends By Lawrence D. Mason Winning Strategies to Defeat the “All Sums” Allocation Approach

Courts throughout the United bermens Mut. Cas. Co., 826 A.2d 107, 116-17 1222–23 (6th Cir. 1980), cert. denied, 454 (Conn. 2003). Under the all sums method, U.S. 1109, 70 L. Ed. 2d 650, 102 S. Ct. 686 States are frequently challenged all costs are allocated solely among the (1981), contained the following “all sums” insurers and the insured receives a wind- language: with the question of how defense fall for any uninsured periods, its deduct- [The insurer] will pay on behalf of the ibles, and retentions. Id. at 117–18. insured all sums which the insured shall and indemnity payments should Insurers confronted with the alloca- be legally obligated to pay as damages tion challenge, especially in jurisdictions because of… bodily injury or… prop- be allocated in commercial general lia- where the allocation issue is a matter of erty damage to which this policy applies bility (CGL) coverage disputes arising out first impression, should be mindful of sev- caused by an occurrence. of long-tail bodily injury claims. Further eral persuasive arguments in favor of a pro The coverage provided by most CGL complicating the issue is the typical sce- rata approach, including: “all sums” pol- policies is unambiguously limited to inju- nario where courts are confronted with the icy language does not bar pro rata allo- ries or damages suffered “during the pol- need to analyze multiple layers of disparate cation; the overwhelming judicial trend icy period.” CGL policies are underwritten insurance coverage spanning several pol- supports pro rata allocation; pro rata allo- with a policy period and a calculated pre- icy periods. cation fairly apportions responsibility for mium based on the risks to be insured There are two allocation methods courts coverage gaps to the insured; pro rata allo- during the policy period. The CGL poli- commonly apply: (i) pro rata allocation, in cation avoids the necessity of a subsequent cies provide coverage for damages arising which costs are spread among the triggered contribution lawsuit, which would other- out of bodily injury [and property dam- insurers, and to the insured for uninsured wise be required by all sums allocation; and age] that occurs during the applicable pol- periods, in a time-on-the-risk manner; and insureds do not have a reasonable expecta- icy period. These policies typically define (ii) all sums allocation, in which a triggered tion of all sums coverage. “bodily injury” to mean “bodily injury, insurer is liable for all costs associated with sickness or disease sustained by any per- a claim, subject to a right of contribution All Sums Policy Language Does son which occurs during the policy period, among any other triggered insurers. Not Bar Pro Rata Allocation including death at any time resulting there- A principal difference between the pro Insureds advocating the all sums approach from.” Consequently, the insuring agree- rata and all sums allocation methods is routinely argue that the presence of the ment means that the insurer agrees to pay their treatment of uninsured periods, term “all sums” in most CGL insuring all sums the insured must pay as damages deductibles, and self-insured retentions. agreements requires an application of an because of bodily injury during the pol- See, e.g., Owens-Illinois, Inc. v. United Ins. all sums allocation approach. It does not. icy period. The insurer is only responsible Co., 650 A.2d 974, 989 (N.J. 1994). Under This is clear from the fact that most, if not for the bodily injury that takes place dur- the pro rata method, the insured is liable all, courts adopting pro rata allocation have ing its policy period, not all bodily injury for costs attributable to losses occurring done so relative to policies containing the to an underlying plaintiff, so long as any during periods it was uninsured, as well same “all sums” language. For example, portion of it occurred during the policy as the insured’s contractual risk-sharing the coverage grant in the seminal pro rata period. Instead, all implicated policies will responsibilities for deductibles and self- allocation case of Insurance Co. of N. Am. share the obligation. Accordingly, the only insured retentions. Security Ins. Co. v. Lum- v. Forty-Eight Insulations, 633 F.2d 1212, appropriate way to allocate damages from

■■ Long-term DRI Insurance Law Committee member Larry Mason is a senior shareholder in the Chicago office of Segal McCam- bridge Singer & Mahoney, where he serves as co-chair of the firm’s Insurance Coverage/Bad Faith Practice Group. His complex commercial litigation experience includes a concentration in insurance and reinsurance coverage, product liability, contract, environmental, toxic tort, construction, cyber liability, and professional liability issues. In addition to Mr. Mason’s trial and appellate work, he is retained as an expert witness, mediator, arbitrator, and appraiser. Mr. Mason is frequently called upon to protect the interests of insurers and reinsurers in complex insurance coverage disputes and to defend their insureds concerning a variety of third-party liability issues.

© 2017 DRI. All rights reserved. In-House Defense Quarterly ■ Spring 2017 ■ 53 a long-term exposure claim is by pro-rating providing indemnification for ‘all-sums’ cy’s liability for damage or loss that occurs those damages among all years during the of liability that resulted from an accident during the policy period”); Owens-Illinois, continuum over which the bodily injury or occurrence ‘during the policy period.’”) 138 N.J. at 459–62 (questioning Keene). occurred. (internal citation omitted). This reading of Owens-Illinois specifically rejected an all Insureds purchase CGL insurance to pro- the policy language “give[s] effect to each sums allocation in the context of a long-tail tect themselves from third-party bodily in- part of the insuring agreement rather than exposure claim, stating: jury and property damage liability risks focusing solely on the terms ‘all sums’ or [T]o convert the ‘all sums’ or ‘ultimate that might occur during a discrete policy ‘those sums’.…” Crossmann Cmtys. of N. net loss’ language into the answer to ap- period. Policyholders buy CGL insurance portionment when injury occurs over a INSURANCE LAW in exchange for a premium paid to the in- ■ period of years is like trying to place one’s surer that was calculated based on the po- hat on a rack that was never designed to tential risks during a particular time period. The overwhelming trend hold it. It does not work. The language In contrast, imposing liability on an all was never intended to cover apportion- sums basis would give insureds that pur- in jurisdictions across the ment when continuous injury occurs chased CGL insurance for a specific policy over multiple years. In addition, the ar- period the same coverage as policyholders United States is toward gument that all sums to be assessed be- that bought CGL insurance continuously cause of long-term exposure to asbestos over many years. pro rata allocation. could have been established in any one As the Louisiana Supreme Court [one of the policy years is intuitively suspect of the most recent state supreme courts to ■ and inconsistent with our developing address the issue] concluded, this “policy jurisprudence in the field of toxic torts. language limits coverage for bodily injury C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. Id. at 465–66. to that which occurs during the policy 40, 62, 717 S.E.2d 589, 600–01 (S.C. 2011). As recognized by these courts, an all period.” Arceneaux v. Amstar Corp., 200 Other courts in diverse jurisdictions ap- sums allocation in a longtail exposure So.3d 277, 286 (La. 2016) (adopting pro ply a pro rata allocation in the context of context is inconsistent with the unambig- rata allocation of defense and indemnity long-tail claims and “all sums” policy lan- uous language of the typical CGL policy costs for progressive bodily injury caused guage See, e.g., Security Ins. Co. v. Lumber- and should be rejected in favor of pro rata by noise exposure). With its holding, the mens Mut. Cas. Co., 826 A.2d 107; 264 Conn. allocation. Louisiana Supreme Court joined the major- 688, (Conn. 2003); Owens-Illinois, Inc. v. ity of courts in interpreting the typical CGL United Ins. Co., 138 N.J. 437, 650 A.2d 974 A Majority of Jurisdictions language as unambiguously requiring the (N.J. 1994); Stonewall Ins. Co. v. Asbestos Adopt Pro Rata Allocation use of pro rata allocation for long-tail inju- Claims Mgmt. Corp., 73 F.3d 1178 (2d Cir. The overwhelming trend in jurisdictions ries or damage. See, e.g., Boston Gas Co. v. 1995). In each of these cases, the clear pol- across the United States is toward pro rata Century Indem. Co., 454 Mass. 337, 359-60, icy language and ability to apportion claims allocation. These pro rata decisions encom- 910 N.E.2d 290, 307 (Mass. 2009) (citing directly over the coverage block were the pass allocation for both long-tail property EnergyNorth Natural Gas, Inc. v. Certain keys to the application of pro rata allocation. damage (e.g., pollution) and bodily injury Underwriters at Lloyd’s, 156 N.H. 333, 340, Consequently, the presence of all sums (e.g., asbestos). State Supreme Courts in 934 A.2d 517 (N.H. 2007)) (“We read the language in a policy’s coverage grant is not Alabama, Alaska, Colorado, Connecticut, phrase ‘during the policy period’ in the an a priori bar to pro rata allocation. Those Hawaii, Indiana, Kansas, Kentucky, Louisi- definitions of ‘occurrence’ as limiting the courts that find in favor of all sums alloca- ana, Massachusetts, Minnesota, Nebraska, promised ‘ultimate net loss’ coverage.”); see tion in a multi-insurer long-tail claim situ- New Hampshire, New York, South Carolina, also Towns v. N Sec. Ins. Co., 184 Vt. 322, ation essentially focus their analysis on the Utah, and Vermont have adopted a pro rata 345, 964 A.2d 1150, 1166 (Vt. 2008)(“[T]he all sums wording in the coverage grant. See approach. See, e.g., Liberty Mut. Ins. Co. v. ‘time on the risk’ method of allocating generally Keene Corp. v. Ins. Co. of N. Am., Wheelwright Trucking Co., 851 So.2d 466 loss to each insurer proportionate to the 667 F.2d 1034, 1047–50 (D.C. Cir. 1981); (Ala. 2002); Cont’l Ins. Co. v. U.S. Fid. & damage suffered during its policy’s term Plastics Eng’g Co. v. Liberty Mut. Ins. Co., Guar. Co., 528 P.2d 430 (Alaska 1974) (over- is most consistent with… the standard 759 N.W. 2d 613, 625–27 (Wis. 2009). These ruled on other grounds); Hoang v. Assur- occurrence-based policy provision limit- decisions, however, ignore the unambigu- ance Co. of Am., 149 P.3d 798 (Colo. 2007); ing coverage to damages occurring during ous limitation that the sums the insurer Pub. Serv. Co. of Colo. v. Wallis & Cos., 986 the policy term…’”); Consol. Edison Co. of is obligated to pay must be on account of P.2d 924 (Colo. 1999); Security Ins. Co. v. N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 224, injury during the policy period. See, e.g., Lumbermens Mut. Cas. Co., 826 A.2d 107 774 N.E.2d 687, 695 (N.Y. 2002) (“Although In re Wallace & Gale Co., 385 F.3d 820, 832 (Conn. 2003); Sentinel Ins. Co. Ltd. v. First more than one policy may be implicated by (4th Cir. 2004) (the “all sums” language in a Ins. Co. of Haw., Ltd., 76 Haw. 277, 875 P.2d a gradual harm, joint and several alloca- standard CGL policy “must be read in con- 894 (Haw. 1994); Thomson Inc. n/k/a/ Tech- tion is not consistent with the language… cert with other language that limits a poli- nicolor USA, Inc. v. Ins. Co. of N. Am. n/k/a

54 ■ In-House Defense Quarterly ■ Spring 2017 Century Indem. Co., 33 N.E.3d 1039 (Ind. izona law); Liberty Mut. Ins. Co. v. Fairbanks Under the all sums method, all costs are 2015); Atchison, Topeka & Santa Fe Ry. Co. v. Co., 170 F. Supp. 3d 634, 651 (S.D.N.Y. 2016) allocated solely among the insurers and the Stonewall Ins. Co., 71 P.3d 1097 (Kan. 2003); (“Although Georgia law on the issue of allo- insured receives a windfall for any unin- Aetna Cas. & Sur. Co. v. Commonwealth, 179 cation is scant, well established principles sured periods and its deductibles and reten- S.W.3d 830 (Ky. 2005) (PD, pollution); Arce- of contract interpretation support applying tions. Security, 826 A.2d at 117. To protect neaux v. Amstar Corp., 200 So.3d, 277 (La. a pro rata approach.”). against this inequity, multiple courts rec- 2016); Southern Silica of La., Inc. v. Loui- During the past decade, only one state ognize as a general principal that for unin- siana Ins. Guar. Ass’n., 979 So.2d 460 (La. supreme court allocation decision, from sured or underinsured periods, principles of 2008); Boston Gas Co. v. Century Indem. equity demand that the insured be respon- Co., 910 N.E.2d 290 (Mass. 2009); Domtar, ■ sible for its pro rata share of defense and in- Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724 demnity costs. See, e.g., Security, 826 A.2d at (Minn. 1997); Dutton-Lainson Co. v. Cont’l Under the pro rata method, 709–10 (holding when an insured decides to Ins. Co., 778 N.W.2d 433 (Neb. 2010); En- forgo insurance for a period of time, the in- ergyNorth Natural Gas, Inc. v. Certain Un- the insured is liable for sured must share in allocation); Forty-Eight derwriters at Lloyd’s, 934 A.2d 517 (N.H. Insulations, 633 F.2d at 1225 (“It is reason- 2007); Benjamin Moore & Co. v. Aetna Cas. costs attributable to losses able to treat [the insured] as an insurer for & Sur. Co., 179 N.J. 87, 843 A.2d 1094 (N.J. those periods of time that it had no insur- 2004); Quincy Mut. Fire Ins. Co. v. Borough occurring during periods it was ance coverage.”); In re Wallace & Gale Co., of Bellmawr, 172 N.J. 409, 799 A.2d 499 (N.J. 385 F.3d 820, 833 (4th Cir. 2004) (it is “nei- 2002); Owens-Illinois, Inc. v. United Ins. Co., uninsured, while under the all ther equitable nor fair to require an insur- 138 N.J. 437, 650 A.2d 974 (N.J. 1994); Con- ance company to pay for coverage during a sol. Edison Co. of N.Y. v. Allstate Ins. Co., 98 sums method, all costs are period for which no effective coverage is in N.Y.2d 208 (N.Y. 2002); Crossmann Cmtys. force”); Outboard Marine Corp. v. Liberty of N.C. v. Harleysville Mut. Ins. Co., 717 allocated solely to the insurers. Mut. Ins. Co., 283 Ill. App. 3d 630, 642, 670 S.E.2d 589 (S.C. 2011); Ohio Cas. Ins. Co. v. N.E. 2d 740, 748 (1996) (holding that the Unigard Ins. Co., 268 P.3d 180 (Utah 2012); ■ “only fair approach” is that the insured Sharon Steel Corp. v. Aetna Cas. & Sur. Co., cannot shift its responsibility for uninsured 931 P.2d 127 (Utah 1997); Towns v. North- Wisconsin, applied an all sums allocation. years to its insurers); Domtar, Inc. v. Niagara ern Sec. Ins. Co., 964 A.2d 1150 (Vt. 2008); Plastics Eng’g Co. v. Liberty Mut. Ins. Co., Fire Ins. Co., 563 N.W. 2d 724 (Minn. 1997) Agency of Nat. Res. v. Glens Falls Inc. Co., 759 N.W.2d 613 (Wis. 2009). The trend is (holding that the insured was responsible 169 Vt. 426, 736 A.2d 768 (Vt. 1999). in favor of pro rata allocation. for damages during years it lacked cover- The U.S. Courts of Appeal for the Sec- age or was self-insured). ond, Fourth, Fifth, Sixth, Seventh, Eighth, Pro Rata Allocation Fairly Court decisions to allocate costs to the and Tenth Circuits apply pro rata allocation. Apportions Responsibility for insured for uninsured or underinsured pe- See, e.g., Olin Corp. v. Ins. Co. of N. Am., 221 Coverage Gaps to the Insured riods are also grounded in pragmatic princi- F.3d 307, 324-25 (2d Cir. 2000) (overruled A principal difference between the all sums ples. For example, in regard to the allocation on other grounds); Pennsylvania Nat. Mut. and pro rata allocation methods is their of defense costs to the insured, the Forty- Cas. Ins. Co. v. Roberts, 668 F.3d 106, 113 treatment of uninsured or underinsured Eight Insulations court stated that, “[w]ere (4th Cir. 2012); Spartan Petroleum Co. v. periods. Owens-Illinois, 650 A.2d at 989. we to adopt [the insured’s] position on de- Federated Mut. Ins. Co., 162 F.3d 805 (4th Under the pro rata method, the insured is fense costs a manufacturer which had in- Cir. 1998); Porter v. Am. Optical Corp., 641 liable for costs attributable to losses occur- surance coverage for only one year out of F.2d 1128 (5th Cir. 1981); Ins. Co. of N. Am. ring during periods it was uninsured, while 20 would be entitled to a complete defense v. Forty-Eight Insulations, 633 F.2d 1212 (6th under the all sums method, all costs are of all asbestos actions the same as a manu- Cir. 1980); Sybron Transition Corp. v. Sec. allocated solely to the insurers. Security, facturer which had coverage for 20 years out Ins. of Hartford, 258 F.3d 595 (7th Cir. 2001); 826 A.2d at 117. of 20. Neither logic nor precedent support Nationwide Ins. Co. v. Cent. Mo. Elec. Coop., Uninsured or underinsured periods such a result.” Forty-Eight Insulations, 633 Inc., 278 F.3d 742 (8th Cir. 2001); Commer- exist for several reasons: (i) the insured F.2d at 1225. The Pennsylvania Nat. court cial Union Ins. Co. v. Sepco Corp., 918 F.2d decided to forego the purchase of insur- explained that, “the pro rata approach not 920 (11th Cir. 1990). Additionally, two fed- ance; (ii) the insured decided to self-insure; only allocates liability across multiple insur- eral district courts recently predicted that (iii) the insurer entered into a policy buy- ers of a single tortfeasor, but also ‘accommo- the highest courts in Arizona and Georgia back with an insurer; (iv) a settlement may dates the need to hold liable those businesses would adopt a pro rata approach. See City not fully account for policy limits; (iv) the that chose not to purchase insurance or cov- of Phoenix v. First State Ins. Co., et al., CV- purchased policies were lost; or (v) pur- erage’ by allocating liability to them for pe- 15-00511-PHX-NVW, 2016 WL 4591906, chased policies were issued by insurers that riods during which they were uninsured.” at *12 (D. Ariz. Sept. 2, 2016) (applying Ar- later became insolvent. 668 F.3d at 113.

In-House Defense Quarterly ■ Spring 2017 ■ 55 Ultimately, as explained by Security, According to the court, “[t]he rationale fully account for the settled policy limits. allocation to the insured for uninsured/ underlying the pro rata method of allo- For example, if the insured settles a pol- underinsured periods stems from an insur- cation applies with even greater force to icy not to the full policy limits, it is not er’s right of equitable contribution. Accord- the buy-back period. The buy-back period enough that the insured be allocated the ing to the court, if all sums rather than pro presents not a period of time for which [the settlement amount. It also must be allo- rata allocation is employed, “the insurer insured] failed to obtain insurance, but cated the difference between the amount would have to defend the action in its rather a period for which it contractually for which the policy is settled and the entirety, and would not later be able to assumed the liability of its insurer.” Id. As full remaining policy limits. The insured obtain contribution for defense costs from potentially gains an unwarranted wind- INSURANCE LAW the insured” for uncovered claims, which ■ fall otherwise. would be inequitable. Security, 826 A.2d at Lost Policies: There should be no distinc- 124 (citation omitted). Ultimately, as explained tion between an insured that has chosen General equitable bases for pro rata allo- to forego insurance for a certain period of cation are also applied by courts to appor- by Security, allocation to time and an insured that has lost or other- tion to the insured its pro rata share of wise destroyed its policies. In either case, defense and indemnity costs in uninsured/ the insured for uninsured/ the insured “through its own actions or underinsured periods. For example: inactions… has put itself in the position of Insolvent Policies: The same rationale underinsured periods stems being, in essence, uninsured for a substan- underlying pro rata allocation with respect tial period of time.” Security, 826 A.2d at to lost policies similarly applies to the from an insurer’s right of 126. As noted by the court, “[t]hose [alleged extent there are insolvent policies. Equity lost policy] insurers have refused coverage, and fairness favors the allocation to an inequitable contribution. and to impose the cost of defense upon [the sured of its pro rata share of defense and insurer] for periods outside of its policy indemnity costs to triggered insolvent peri- According to the court, if period, periods for which it has received ods. This outcome follows naturally from no premium from [the insured], would the underlying basis for pro rata alloca- all sums rather than pro unjustly enrich [the insured].” Id. Accord- tion in an exposure context because an ingly, principles of equity dictate that those insolvent policy cannot be used to cover rata allocation is employed, uninsured policy years be allocated to the liabilities that can otherwise be reason- insured. Id. at 125–26; see also Forty-Eight ably apportioned to the insolvent periods. “the insurer would have Insulations, 633 F.2d at 1225 (stating that See, e.g., H.B. Fuller Co. v. U.S. Fire Ins. it is reasonable to treat an insured as self- Co., 09-2827(JRT/JJG), 2011 WL 2884711, to defend the action in its insured for those periods of time in which at *8 (D. Minn. July 18, 2011) (allocating it has no insurance); Stonewall Ins. Co. v. coverage from an insolvent policy period entirety, and would not Asbestos Claims Management Corp., 73 to the remaining solvent insurers “would F.3d 1178, 1203 (2d Cir. 1995) (holding effectively force insurers to underwrite an later be able to obtain that in a long-tail exposure context pro rata insured’s other insurance purchasing deci- allocation of costs to the insured is proper sions, becoming a guarantor of all compa- contribution for defense as to the years in which the insured elected nies”); accord Olin Corp., 221 F.3d at 323; not to purchase insurance or purchased AAA Disposal Sys., et al., v. Aetna Cas. & costs from the insured” for insufficient insurance). Sur. Co., 821 N.E.2d 1278, 1290 (Ill. Ct. App. Self-Insured Periods: The same equitable 2005) (citing Sybron Transition Corp. v. uncovered claims, which principles underlying the other uninsured/ Security Inn of Hartford, 258 F.3d 595, 598 underinsured periods fully apply to that (7th Cir. 2001)); Benjamin Moore & Co. v. would be inequitable. self-insured period. An insured should be Aetna Cas. & Sur. Co., 843 A.2d 1094, 1102– allocated a share of defense and indemnity 03 (N.J. 2004). ■ for periods in the coverage block involv- Settlements/Policy Buy-backs: Noting ing policy buy-backs or other policy settle- that a policy “buy-back” is a contractual a result, liability for the insurer’s duty to ments, insolvent policies, lost policies, and transaction, Security rejected the insured’s defend is assumed by the insured. Id. “The self-insurance. claim that, “even if the pro rata method [insured’s] claim that Security has a duty to The Owens-Illinois court succinctly properly applies to the lost policy period,” defend it for the [buy-back] period is thus summarized the problem before it: spe- the trial court improperly allocated defense even more unpersuasive than for the lost cifically “[t]he problem is how to apply the costs on a pro rata basis based on the buy- policy period.” Id. abstract concepts of law and the related back agreement the insured entered into Captured within this reasoning also provisions of the insurance contract to with one of its insurers. 826 A.2d at 127. must be those policy buy-backs that do not the realities of environmental disease.”

56 ■ In-House Defense Quarterly ■ Spring 2017 650 A.2d at 989. Within this context, the each insurer is only required to pay its fair In our view, pro rata allocation pro- court next explained the underlying ratio- share of the loss. As noted by the Supreme duces a more equitable result than joint nale for its pro rata decision. First, it noted Court of New Hampshire, all sums or and several allocation, which ‘creates a that applying either pro rata (Insurance “joint and several” allocation is improvi- false equivalence between an insured Co. of N. Am. v. Forty-Eight Insulations, dent because it: who has purchased insurance coverage 633 F.2d 1212 (6th Cir. 1980)) or all sums does not solve the allocation problem; continuously for many years and an in- (Keene Corp. v. Ins. Co. of N. Am., 667 F.2d it merely postpones it. … This method sured who has purchased only one year 1034, 1047–50 (D.C. Cir. 1981)), allocation divides the case into two separate suits: of insurance coverage.’ Public Serv. Co. will occur among the insurers on the risk. in the first suit, the insured selects and of Colo. v. Wallis & Cos., 986 P.2d 924, Id. It is just a matter of when the alloca- sues one of the triggered insurers; in 939–40 (Colo. 1999). This false equiv- tion occurs. The real difference between the second suit, the selected insurer alence would tend to “reduce[ ] the the two methods is in their treatment of then sues other triggered insurers for incentive of... property owners to insure periods of self-insurance. Id. Under the contribution. … In this way, despite against future risks.” Owens–Illinois, pro rata method, the insured is liable for its advocates’ claims to the contrary, Inc. v. United Ins. Co., 138 N.J. 437, 473, costs attributable to losses occurring dur- the joint and several method does not 650 A.2d 974 (1994). This in turn would ing periods it was uninsured, as well as the decrease litigation costs, does not give ‘reduce the available assets to manage insured’s contractual risk-sharing respon- courts guidance as to how to allocate the risk.’ Id. In sum, the pro rata alloca- sibilities for deductibles and self-insured liability, and requires insurers to factor tion method promotes judicial efficiency, retentions. Under the all sums method, all the costs of uncertain liability into their engenders stability and predictability in costs are allocated solely among the insur- premiums. the insurance market, provides incen- ers and the insured receives a windfall for EnergyNorth Natural Gas, Inc. v. Certain tive for responsible commercial behav- any uninsured periods and its deductibles Underwriters at Lloyd’s, 156 N.H. 333, 345, ior, and produces an equitable result. and retentions. Security, 826 A.2d at 117. 934 A.2d 517, 527 (N.H. 2007) (internal Boston Gas Co. v. Century Indem. Co., 454 In rejecting the Keene approach to allo- quotations omitted); see also Olin Corp. Mass. 337, 365–66, 910 N.E.2d 290, 311 cation, the Owens-Illinois court noted that, v. Ins. Co. of N. Am., 221 F.3d 307, 323 (2d (Mass. 2009) (alteration in original). while the Keene court “collapsed the injury/ Cir.2000) (“[pro rata allocation] may also occurrence into a single year, [it] allowed be more efficient because ‘any contribution Insureds Do Not Have a Reasonable contribution from the policies in force in proceeding will involve many of the same Expectation of All Sums Allocation the other years.” 650 A.2d at 991. How- issues that are raised in the initial liability Insureds argue that pro rata allocation is ever, while noting that the Keene court was proceeding, and… it is more efficient to inconsistent with their reasonable expec- attempting to reach an equitable solution to deal with these issues in a single proceed- tation of full protection and access to the need to apportion damages among the ing.’”) (quoting In re Prudential Lines Inc., full policy limits for any claim against successive carriers on the risk, it found the 158 F.3d 65, 85 (2d Cir. 1998)); Boston Gas them, and that they did not expect to Keene court’s reliance on the “other insur- Co. v. Century Indem. Co., 454 Mass. 337, only receive partial limits and protection. ance” clauses in the policies in reaching its 365 (Mass. 2009). There is case law to the contrary. “At the equitable contribution rationale “strained.” All sums allocation also discour- time [the insured] purchased each indi- Id. (noting that pro rata “other insurance” ages prompt settlement. By requiring re- vidual insurance policy, we doubt that [it] clauses are intended to apply only when allocation of loss in a second suit, joint and could have had a reasonable expectation coverage is concurrent). several allocation not only spawns addi- that each single policy would indemnify tional litigation, it discourages settlement [it] for liability related to property dam- Pro Rata Allocation Avoids the unless and until all insurers are brought age occurring due to events taking place Necessity of a Subsequent into a suit. Under pro rata allocation, an years before and years after the term of Contribution Lawsuit, Which insurer can settle with an insured by pay- each policy.… [T]here is no logic to sup- Would Otherwise Be Required ing its share without risk of being sued later port the notion that one single insurance by an All Sums Allocation by another insurer claiming that insurer policy among 20 or 30 years worth of poli- All sums allocation is inefficient and also paid more than its fair share. cies could be expected to be held liable for encourages serial litigation because an Finally, all sums allocation discourages the entire time period.” Public Serv. Co. of insurer may be forced to pay other insur- insureds from purchasing insurance in a Colo. v. Wallis & Cos., 986 P.2d 924, 940 ers’ shares of the loss in a suit with the commercially responsible manner because (Colo. 1999). To compress long-term dam- insured, and then sue those insurers for an insured that purchased insurance only age of a continuing nature into a single equitable contribution—a redundant and some of the time is treated just like an policy period, which would be the effect wasteful process. The pro rata approach insured that purchased insurance every of a joint and several all sums approach, eliminates the need for reallocation among year. The Massachusetts Supreme Court is “intuitively suspect.” Olin Corp. v. Ins. insurers through cross-claims in the cov- summed up the case for pro rata alloca- Co. of N. Am., 221 F.3d 307, 322–23 (2d Cir. erage action or in a separate action because tion as follows: Allocation❯ page 64

In-House Defense Quarterly ■ Spring 2017 ■ 57 Allocation ❮ page 57 coverage gaps to the insured and avoids 2000). Similarly, in adopting pro rata allo- the necessity of a subsequent contribu- cation, the Connecticut Supreme Court tion lawsuit, which would otherwise be stated: required by all sums allocation. Armed We are persuaded by the reasoning of the with these advantages, insurers should be courts in Forty-Eight Insulations, Inc., able to defeat insureds’ claims that they and Owens-Illinois, Inc., and, accordingly, have a reasonable expectation of all sums adopt the pro rata approach to the alloca- coverage. tion of defense costs in long latency loss claims that implicate multiple insurance policies. First, for all of the reasons set forth by the courts in both Forty-Eight Insulations, Inc., and Owens-Illinois, Inc., we conclude that applying the pro rata method of allocation does not violate the reasonable expectations of the parties to the insurance contracts. Neither the insurers nor the insured could reasonably have expected that the insurers would be liable for losses occurring in periods outside of their respective policy coverage periods. Security Ins. Co. of Hartford v. Lumbermens Mut. Cas. Co., 826 A.2d 107, 121, 264 Conn. 688, 709-10 (Conn. 2003). Moreover, pro rata allocation “does not violate the reasonable expectations of the insurer or the insured [because, b]ased on the policy language, neither party could reasonably expect that the insurer was liable for losses that occurred outside the policy coverage periods.” Arceneaux, 200 So. 3d at 286 (citing Security Ins. Co. of Hart- ford, 826 A.2d at 121 (Conn. 2003)); see also Crossmann, 395 S.C. at 62–63, 717 S.E.2d at 600–01 (citing Boston Gas, 454 Mass. at 363, 910 N.E.2d at 309-10).

Conclusion The majority of courts hold that pro rata allocation is the proper method for allocating payments in CGL coverage disputes involving long-tail bodily injury claims. The trend in that direction is overwhelming. With policy-based, equitable and legal precedent on their side, insurers are on the winning side of the allocation argument in most jurisdictions. Of particular importance, pro rata allocation of long-tail bodily injury claims upholds the unambiguous coverage grant in CGL policies requiring bodily injury occur during the policy period and does not reward an insured for failing to secure sufficient years of CGL coverage. Pro rata allocation fairly apportions responsibility for

64 ■ In-House Defense Quarterly ■ Spring 2017