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.
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 Feb. 22, 2022), order superseded on different grounds by July 19, 2022 order on a motion for reconsideration.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)).
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.
For more information on how to maximize your company's insurance protection (including coverage for defense costs in the context of long-tail claims), contact the authors of this client alert.