Is ‘‘Fair’’ Fair?: ‘‘All Sums’’ and the Allocation of Deductibles by Lorelie S. Masters and Jerold Oshinsky concept should also be used to benefit policyholders in Mr. Oshinsky is a partner at Jenner & the allocation of liability to deductible periods or SIRs. Block LLP in Los Angeles. He is co-author of ‘‘Fair’’ should be fair. Practitioner’s Guide to Litigating Insurance In addressing the allocation of deductibles issue, Coverage Actions (2d ed. Aspen Law & Busi- courts inevitably need to address the related issue of ness 2009) and often called the ‘‘Dean of the what constitutes ‘‘insurance’’ for purposes of alloca- Policyholder Bar.’’ tion. Cases generally use the term ‘‘deductibles’’ to Ms. Masters is a partner at Jenner & Block LLP include fronting policies, SIRs, and deductibles; for that reason, this article generally uses the term in Washington, DC. She is co-author of two ‘‘deductibles’’ in the same fashion. treatises, Insurance Coverage Litigation and Liability Insurance in International Arbitration: SUMMARY The Bermuda Form. She is a past policyholder Chair of the Insurance Coverage Litigation Cases addressing the allocation of deductibles can be Committee. divided into three general categories: First, some courts have correctly interpreted ‘‘all sums’’ or similar policy language to Many articles and seminars dissect the issue of allo- preclude any allocation to insurance policies cation, analyzing the allocation of a policyholder’s containing deductibles, even in circumstances liability across policy limits under comprehensive in which the courts have found that the policy- and commercial general liability (CGL) insurance holder has deductibles or other arrangements policies. Much less has been written about the issue under which the policyholder is responsible to of allocation of a policyholder’s liability to policies reimburse the insurance company for some or containing deductibles or self-insured retentions all of the insurance company’s policy limits. (SIRs), despite the fact that deductible allocation is This line of cases relies solely on the contract also a significant ‘‘dollars and cents’’ issue for both language, applying the standard-form language policyholders and insurance companies. Relatively drafted by the insurance industry. few cases have addressed this issue outright. In Second, some courts have prorated a liability to those that do, the courts have generally followed the deductibles contained in triggered policy law of the state in question on allocation of policy periods in the same manner that coverage is limits. Thus, if a state follows ‘‘all sums’’ joint and prorated, employing the ‘‘fairness’’ rationale several liability on the allocation of policy limits, it is used to support proration in standard allocation likely that a court in that state will apply the same cases. Courts prorating liability to deductible rationale to the issue of allocation of deductibles. periods in this fashion typically have done so ‘‘All sums’’ allocation of deductibles is the result in situations in which the policyholder’s liability required by ‘‘all sums’’ or similar language in stan- is triggered by one occurrence. Thus, a complete dard-form general liability policies. Some courts, analysis of this issue also requires an analysis of however, have adopted pro-rata approaches, ignoring the ‘‘number of occurrences’’ issue. the public policy upholding the sanctity of contract Third, courts in some states that prorate liability language and instead imposing erroneous concepts of across policy periods nevertheless have incor- ‘‘equity’’ and ‘‘fairness.’’ In the most extreme versions rectly required policyholders to pay a full of pro-rata allocation, however, courts refuse to apply deductible in each triggered policy year even if those same concepts of fairness to deductible alloca- liability is prorated. Thus, these courts have tion. If ‘‘fairness’’ is used to extra-contractually refused to limit the policyholder’s liability to allocate liability on a pro-rata basis across policy pay deductibles to a proportionate share. The limits on behalf of insurance companies, the ‘‘fairness’’ most extreme of these approaches is ‘‘horizontal Coverage–18 Volume 20, Number 2, March/April 2010 allocation,’’ which requires the policyholder to deductibles. State courts in Washington have speci- exhaust the fronted policies or deductibles in all fically held that insurers are jointly and severally triggered years before any ‘‘real’’ insurance liable under CGL insurance policies for the policy- applies. These courts have rejected the ‘‘sauce holder’s liability in cases in which damage for the goose, sauce for the gander’’ application continuing over a period of years constitutes a of the ‘‘fairness’’ argument that is used to justify ‘‘single injury’’ or occurrence and triggers multiple proration concepts. ‘‘Fair’’ in these cases is policy years.3 The Washington Supreme Court’s really not fair. reasoning in holding that CGL insurers are jointly A number of cases have stated that rejecting pick and severally liable for years of continuing damage and choose or joint and several allocations and later provided crucial support for a Washington federal court’s decision not to treat fronting policies imposing liability on the policyholder even for self- 4 insured deductibles is contrary to clear policy and SIRs as primary insurance. That subsequent language and violates the principle forbidding equi- federal decision rejected the insurance companies’ table contribution between a policyholder and its argument that the policyholder’s decision to use fronting policies and SIRs required application of insurer. Although few courts have explicitly 5 addressed this issue, the ‘‘all sums’’ rationale that pro-rata allocation. California courts have likewise has persuaded courts to reject proration of policy rejected insurer arguments that fronting policies, limits continues to apply in the context of deductible SIRs, and deductibles should be treated as ‘‘insur- allocation. By contrast, the pure ‘‘horizontal alloca- ance,’’ and thus do not require the policyholder to shoulder a share of its own liability if it otherwise tion’’ option contravenes the ‘‘all sums’’ contract 6 language and relies instead on misguided extra- has sufficient insurance coverage. contractual notions of fairness and equity that These courts construe the ‘‘all sums’’ policy should not govern issues of contract interpretation. language to require the insurer to pay the limits of its policy or policies, without proration to the policy- holder, even for deductibles or periods of ‘‘self- Courts adopting this approach have rejected insurance.’’ They find no ‘‘unfairness’’ or ‘‘inequity’’ the argument that SIRs should be considered in holding insurers to the terms of the standard-form primary coverage and, instead, have adopted a policy language that the insurers themselves drafted. ‘‘vertical exhaustion’’ approach, treating SIRs In refusing to assign liability to policyholders based like deductibles, with only a policy’s own SIR on the existence of fronting arrangements, these needing to be exhausted before its coverage courts rely on principles of policy interpretation becomes available and reasoning that mirror those used by the courts adopting ‘‘all sums’’ allocation of policy limits. The Washington and California decisions are thus compelling authority for the argument that the ‘‘all ANALYSIS sums’’ language should be applied as written to allow the policyholder to pick and choose the year or years I. Law on Allocation of ‘‘Deductibles’’ that will apply to a claim. This result will allow a policyholder to avoid liability, to the extent possible, A. Application of ‘‘All Sums’’ or Joint and under fronting policies and other kinds of ‘‘deducti- Several Liability to Deductibles bles’’ found in the standard-form CGL policies. Many cases provide authority for ‘‘all sums’’ alloca- tion, and policyholders have an unequivocal basis to 1. Washington State Court Cases: Gruol argue under the law of many states, and under general and B&L Trucking principles of policy interpretation, that the all-sums In Gruol Construction Co. v. Insurance Co. of North language allows the policyholder to select a policy 1 America, the Washington Court of Appeals found year or years that provide optimum coverage. Courts that continuing damage from dry rot triggered all adopting this approach have rejected the argument insurance policies covering the risk during the years that SIRs should be considered primary coverage of damage.7 The court held that both Insurance and, instead, have adopted a ‘‘vertical exhaustion’’ Company of North America and Northwestern approach, treating SIRs like deductibles, with only Mutual Insurance Company were liable because a policy’s own SIR needing to be exhausted before 2 continuous damage took place during their policy its coverage becomes available. periods.8 Moreover, the court specifically rejected The case law in Washington and California the insurers’ effort to place the burden of proof of appears to be the most developed on the issue of apportionment on the policyholder.9 Instead, the non-allocation to CGL insurance policies containing court required the insurers to show that the policy Volume 20, Number 2, March/April 2010 Coverage–19 language supported apportionment to the policy- In reaching its ‘‘all sums’’ decision, the court in holder, holding that ‘‘in a dispute between an B&L Trucking cited Insurance Co. of North insured who has sustained damages of a continuing