Defense Costs For Long-Tail Claims: Making The Most Of Your Insurance Coverage – Insurance Laws and Products

Long-tail claims involve continuous or progressive injuries that
occur over the course of multiple years. Often these claims occur
in the context of long-latency diseases, such as those arising from
asbestos exposure, or long-term pollution releases in the
environmental context.

Business entities may be found liable for these
“long-tail” exposures and, as a result, may be required
to pay large sums in damages. Since the “bodily injury”
or “property damage” occurs over the course of multiple
years, successive years of insurance policies may provide coverage.
Determining the availability for insurance coverage in these
instances can be a complex exercise and depends largely on
applicable state law.

In general, when dealing with insurance coverage for damages or
settlements, jurisdictions have adopted either the “pro
rata” or “all sums” approach. Under the “pro
rata” approach, when multiple policies are triggered,
insurance carriers are responsible only for the portion
commensurate with that insurer’s time on the risk. For example,
if one insurer issued the policies for 5 out of the 10 years at
issue, that insurer would be allocated 50% of the responsibility.
By contrast, under the “all sums” approach, each of the
“triggered” insurance carriers is jointly and severally
liable for the entire loss, up to the applicable policy limit.

An additional layer of complexity arises in the context of legal
fees expended in connection with defending against the long-tail
claim, since most occurrence-based policies provide a duty to
defend that does not reduce the policy limits and continues through
the claim’s resolution. Insureds should closely examine the
policy language and relevant case law to determine the availability
of coverage for these fees.

Jurisdictional Approaches

In general, insurance carriers will argue that they are
responsible only for a “pro-rata” share of defense costs,
but this argument often does not withstand scrutiny. For example,
in an ongoing long-tail case in Massachusetts (where indemnity
costs are generally allocated on a pro-rata basis, subject to
certain exceptions), the insurance carriers recently argued that
defense costs should be similarly allocated based on a
time-on-the-risk formula. Crosby Valve LLC et al. v. OneBeacon
America Insurance Company, et al.,1284 CV 02705-BLS2 (Mass.
Super. Ct. Feb. 22, 2022), order superseded on different
grounds by July 19, 2022 order on a motion for
reconsideration. The judge disagreed, finding that
apportionment is not appropriate with respect to the duty to
defend. In a subsequent order, the court reiterated that the
insured is “entitled to a full and complete defense from every
insurer having a duty to defend” and the defending carrier may
not allocate any defense costs to the insured, even for
uninsured portions of the relevant time period. Crosby Valve
LLC et al. v. OneBeacon America Insurance Company, et al.,1284
CV 02705-BLS2 (Mass. Super. Ct. July 19, 2022) (quoting
Rubenstein v. Royal Ins. Co. of Am., 44 Mass. App. Ct.
842, 849 (1998) (“Quite simply, the rules that govern
allocation of defense costs are different than the rules that
govern allocation of indemnity costs”)).

On the other hand, certain states have endorsed pro rata
allocation of defense costs for long-tail claims. See,
e.g., Sec. Ins. Co. v. Lumbermens Mut. Cas. Co., 826
A.2d 107 (Conn. 2003); Towns v. N. Sec. Ins. Co., 184 Vt.
322 (Vt. 2008); Arceneaux v. Amstar Corp., 200 So. 3d 277
(La. 2016).

Finally, other courts have refused to endorse a standard
allocation method and, instead, focus on the particular language of
the insurance contract to determine the appropriate allocation
method. See, e.g., Danaher Corporation v. Travelers Indem.
Co., 414 F. Supp. 3d 436, 449 (S.D.N.Y. 2019) (quoting
Keyspan Gas E. Corp. v. Munich Reinsurance Am., Inc., 31
N.Y.3d 51, 58 (2018)).

Recommendations

When pursuing coverage for defense costs related to long-tail
claims, insureds should keep the following in mind:

• Locate all applicable insurance policies and provide notice
  under each
  
  • As an initial matter, commercial general liability policies are
    occurrence-based, so each policy period in which the alleged damage
    occurred could be available to respond to a claim. It is imperative
    that insureds provide prompt notice under all policies (primary and
    excess) for the entire exposure/long-tail period.




• Don’t assume the carrier is permitted to apportion
  defense costs
  
  • An insurance carrier will typically take an initial stance that
    it is responsible only for an allocated portion of defense costs
    based on the number of policies issued by the carrier that are
    triggered by the claim. This is because pro-rata allocation enables
    the carrier to limit its defense cost exposure and allocate periods
    in which the company may not have coverage back to the policyholder
    to be self-insured. It also potentially allows a carrier that has
    issued multiple policies to trigger multiple
    deductibles/retentions. Insureds should demand that the carrier
    provide adequate case law to support its position that pro-rata
    allocation applies to their defense costs. You may find that the
    carrier’s position has no foundation in applicable law.

• Examine all possible choices of law
  
  • The choice of law applicable to the interpretation of an
    insurance policy can involve a complex analysis, and there may be
    arguments that different states’ laws apply. Insureds should
    explore all possible options and determine whether the law of a
    favorable jurisdiction (for example, a state that has strong
    “all sums” case law) is applicable to the policies’
    interpretation.




• Make arguments based on the specific policy language
  
  • Insureds’ first resort should always be the policy/contract
    language, especially in jurisdictions where no bright-line rule has
    been adopted as to the allocation method for long-tail claims. For
    example, the presence of a non-cumulation clause generally weighs
    in favor of an all-sums approach.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.