In Boston Gas Co. v. Century Indem. Co., 454 Mass. 337 (2009), the Massachusetts Supreme Judicial Court held that damages and indemnity, in long-tail claims, should be allocated on a pro-rata share among multiple insurers and the insured. “Long-tail” claims are claims where the alleged damage occurs continuously or progressively over a number of years (even decades) and triggers a series of insurance policies and or periods. Examples of long-tail claims are toxic tort claims, asbestos personal injury claims and environmental clean-up claims.
The question then becomes what portion of the defense costs will be allocated among particular insurance policies and the insured. Boston Gas Co. did not resolve this issue. Thus it remains an open question whether defense costs are to be allocated pro-rata share (insured is responsible for any uninsured periods) or joint and several (insured is entitled to all defense costs from a single insurer, who may seek contribution from other insurers).
Some guidance on how the Massachusetts courts will determine this issue can be found in New York. A recent United States District Court case from New York, applying Massachusetts law, suggests that defense costs should be allocated by the joint and several method. In Narragansett Electric Co. v. America Home Assurance Co., -- F.Supp.2d --, 2014 WL 626929 (S.D.N.Y), Judge Schofield held that the insurer was jointly and severally liable for defense costs in an environmental lawsuit. Recognizing that Massachusetts has not dealt with this issue, the Judge’s decision was based on her interpretation of Massachusetts law.
In Narragansett Electric, the electric company brought a declaratory judgment action against its insurers seeking to recover defense costs in an underlying environmental action. The Court concluded that the joint and several method would apply to defense cost allocation despite the fact that Massachusetts applies a pro rata method to indemnity.
The Narragansett Court summarized the difference between joint and several and pro rata allocation methods: “The pro rata method makes the Defendant responsible to Plaintiff only for its pro rata share of the loss suffered during the policy term as compared with other insurers. The joint and several method requires the Defendant to pay for all of the defense costs, and then seek contribution from the other insurers. See Boston Gas Co. v. Century Indem. Co., 454 Mass. 337, 352, 910 N.E.2d 290 (2009). The pro rata approach places the risk and burden on the insured to seek payment from other insurers, while the joint and several approach places that burden on the insurer.”
The Narragansett Court had three reasons for applying the joint and several method to defense costs. First the policy language at issue broadly required the insurer to defend any suit seeking damages. Second, the Court recognized that the duty to defend is broader than the duty to indemnify and Massachusetts requires an insurer to defend the entire lawsuit if it has a duty to defend any part of it. Third, public policy considerations applicable to the duty to defend differ from those applicable to the duty to indemnify.
While the Narragansett Electric decision is important, it is not binding in Massachusetts. Again, the Supreme Judicial Court has not squarely addressed how defense costs, as opposed to indemnity costs, must be allocated and there is uncertainty on how an allocation should be made. While there may exist logical arguments in favor of applying a consistent allocation method to defense and indemnity costs, the Narragansett Court pointed out that there are arguments against such an approach.
The impact of Boston Gas on businesses is significant. Long-tail claims such as asbestos personal injury claims or environmental contamination claims, arise out of injuries and damages that have manifested over long periods of time from a few years to decades. As such a business that purchased polices in the 1950’s may no longer have access to policies or policy numbers when a claim arises in 2014. Smaller companies typically bought insurance policies through insurance agents and may not have had a sophisticated paper retention system. Over the decades papers were discarded or lost, insurance agents went out of business and there were no computer systems to maintain records. Under the pro rata analysis the businesses may be allocated the majority share as they often have decades of gaps in coverage for the alleged exposure time periods. This leaves businesses, especially smaller businesses, with the prospect of an exposure to significant damages and defense costs from claims that have developed over decades. If Narragansett Electricreasoning is adopted by the Massachusetts Court, the impact on insurers will be significant as the insurers may be responsible for significant defense costs for claims stretching back decades, even though the insurer only provided coverage for a few years.
The lesson here is that businesses should make every attempt to locate and maintain insurance policies or coverage for past periods of time. An insured can engage an insurance archeologist to recover old policies. The older the company, the more time and money will likely be expended to located or reconstruct old policies. However, this cost may be minimal compared to the costs and liability exposure that may be associated with large gaps in coverage lineage. Additionally, going forward, businesses need to maintain insurance policies on a permanent basis to safe-guard against future litigation that could be brought decades from now.