Michael Frantz, Jr. and Marc Sanchez Published in ABA Forum on Construction Newsletter. 

Article was originally published in Division 7 of the ABA Forum on Construction Newsletter on March 28, 2016. 

Your client negligently installs the curtainwall on an office tower causing hidden moisture damage for 10 years until it is discovered.  The owner sues and you tender the contractor’s defense and indemnity under all the commercial general liability policies your client has purchased over the last 10 years.  Who pays and how much?

Over the past few decades, courts have grappled with long-tail insurance claims and have endeavored to fashion allocation methodologies that are fair to both policyholders and insurance carriers.

The states that have addressed the issue have developed two principal methodologies: (1) the All Sums approach (also called “Pick and Choose”) – joint and several liability among insurers on the risk during the triggered coverage period, and (2) the Pro Rata approach – each insurer is only liable for its pro rata portion of the damages.  The Pro Rata approach has been further split into two: (a) pro rata by time and (b) pro rata by limits. 

At this time, eleven states utilize the All Sums approach to allocate coverage over multiple policy periods.  (See Chart that follows).  Courts have supported these decisions by focusing on the “all sums” language in the policies.  The All Sums approach is, far and away, the most policyholder-friendly approach, and allows a policyholder to simply choose the policy or policies that must respond entirely to a loss spanning multiple policy periods.  See Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 769 N.E.2d 835 (Ohio 2002).  The selected carrier will then pay the entire loss and seek contribution from the other carriers on the risk. 

The majority of jurisdictions addressing this issue (18 to date) have applied, and many have adopted, the Pro Rata method to allocate the carriers’ indemnification obligations for long-tail losses.  The courts applying the Pro Rata by time approach allocate a loss among all triggered policies based solely upon the insurer’s time on the risk.  See Public Serv. Co. v. Wallis & Cos., 986 P.2d 924 (Colo. 1999). The pro rata by time allocation is viewed as the most fair to the insurer, as it does not force a carrier to indemnify a policyholder for losses occurring outside of its policy period. 

The pro rata by limits approach allocates a loss among all triggered policies based on the amount of coverage provided during any given policy period. See Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J.1994).  The Pro Rata by limits approach seeks to be the middle ground.  While the policyholder must still make up the difference for underinsured policy periods, the limits approach allocates more of the loss to policy periods that have higher limits available to cover the loss.

The applicable allocation methodology can have a dramatic impact on the coverage available to a policyholder for these long-tail losses.  For example, the impact of an insurer’s insolvency can be eliminated entirely by the policyholder under the All Sums approach, where the policyholder selects one policy period (presumably one where the carrier is still solvent) to respond to the entire loss.  The policyholder can also minimize the impact of any deductible or Self-Insured Retention (SIR) by choosing the most favorable policy period.  Finally, the policyholder can avoid sharing in the loss if it was uninsured for a period of time when the loss was on-going. 

To the contrary, the overall coverage available to a policyholder can be dramatically reduced by carrier insolvency, deductible/self-insured retention, and uninsured periods under the Pro Rata approach. 

As illustrated below, under the All Sums approach, the policyholder selects the policy periods with the most coverage.  These are shown in blue.  By doing so, the policyholder effectively avoids the years where it went uninsured (2000), maintained a significant SIR (2005) and endured several carrier insolvencies (2006, 2008 and 2009).  By designating these policy periods, the policyholder maximized its available coverage at $20 million dollars.

Under the Pro Rata by time approach, the court selects how the loss will be apportioned.  Specifically, the court will take the $20 million dollar loss and spread it evenly over ten (10) years of coverage.  This results in $2 million dollars of apportioned loss for each period and is shown by the red line.  This impacts the policyholder’s coverage for this loss as follows:

  • 2000 – No coverage as the company did not purchase coverage for that year.  This is a $2 million dollar difference from All Sums.
  • 2001, 2002, 2003 and 2004 – Only $1 million dollars per year in coverage was purchased.  This is a $4 million dollar difference.
  • 2005 – No coverage unless the policy holder pays the $1 million dollar SIR.  This is a $1 million dollar difference.
  • 2006 – Only $1 million dollars in coverage as the excess carrier is insolvent.  This is a $1 million dollar difference.
  • 2007 – $2 million dollars in coverage.  No change.
  • 2008 – Only $1 million dollars in coverage as the excess carrier is insolvent.  This is a $1 million dollar difference.
  • 2009 – $2 million dollars in coverage.  No change.     

Thus, in a state that has adopted the All Sums approach, the policyholder would be fully covered for the loss.  In a Pro Rata state, on the other hand, the policyholder would only have $11 million of coverage for the $20 million loss.