(Article from Insurance Law Alert, April 2016)
For more information, please visit the Insurance Law Alert Resource Center.
Applying New York and Georgia law, a New York federal district court ruled that losses from progressive asbestos injuries must be allocated among insurers on a pro rata basis. The court further held that the policyholder was responsible for “orphan shares” created by the insolvency of one insurer. Liberty Mutual Ins. Co. v. The Fairbanks Co., 2016 WL 1169511 (S.D.N.Y. Mar. 22, 2016).
Fairbanks, a valve manufacturer, was named as a defendant in numerous asbestos-related injury suits. Fairbanks’ insurers paid its defense and indemnity costs. When one insurer became insolvent, Fairbanks argued that the solvent insurers had to assume the costs previously borne by the now-insolvent insurer (the “orphan shares”). Fairbanks further contended that each insurer was liable on a joint and several, or “all sums” basis, up to policy limits. In contrast, the insurers argued that Fairbanks was responsible for payment of the orphan shares and that indemnification costs should be allocated among insurers on a pro rata basis. The court agreed with the insurers, ruling that under both New York law (which governed some policies) and Georgia law (which governed others), pro rata allocation was appropriate.
The court held that New York precedent supports a pro rata approach to allocating progressive injury claims, recognizing that New York courts have consistently rejected an all sums approach as inconsistent with policy language requiring injuries to occur “during the policy period.” The court also dismissed Fairbanks’ argument that non-cumulation provisions in certain policies were inconsistent with pro rata allocation. Although one court applying New York law has applied an all sums approach, see Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76 (Del. Ch. Ct. 2009) (discussed in December 2009 Alert), the court commented that the decision had “limited persuasive value” given the weight of authority against it and the fact the Delaware Supreme Court certified the issue for review by the New York Court of Appeals, which heard argument in March 2016. The court reached the same conclusion under Georgia law. Although Georgia appellate courts have not expressly addressed allocation for progressive injuries, the court held that “well established principles of contract interpretation support applying a pro rata approach.”
The court also ruled that under both New York and Georgia law, Fairbanks was responsible for the orphan share payments. The court explained that when one insurer becomes unable to pay, “there is logic in having the risk [of] such defalcation fall on the insured, which purchased the defaulting insurer’s policy, rather than on another insurer which was a stranger to the selection process.” The court rejected Fairbanks’ argument that a Georgia insolvency statute required solvent insurers to cover the costs of an insolvent insurer. The court held that the statute applied only where there is an overlap in coverage between a solvent and insolvent insurer. Here, Liberty Mutual and the insolvent carrier were never on the risk at the same time.