Policyholders on the Hook for Insolvent Insurers’ Allocated Share in New Jersey

On January 12, 2016, the New Jersey Superior Court, Appellate Division, issued a non-precedential opinion in Ward Sand & Materials Co. v. Transamerica Ins. Co., et al. The long–anticipated ruling found that, in long-tail claims, insureds are responsible for the share of liability allocated to insurers that became insolvent prior to December 22, 2004.

In Ward Sand, the insured – which accepted a township’s municipal waste in the 1970s and was later sued for contribution towards site cleanup – sought to have a prior allocation ruling revised based on the New Jersey Supreme Court’s decision in Farmers Mutual, which held that the 2004 amendment to the New Jersey Property-Liability Insurance Guaranty Association Act (“PLIGA Act”), N.J.S.A. 17:30A-1 et. seq. required solvent insurers to pay within their policy limits for the share of any long-tail claim otherwise covered by an insolvent insurer. Farmers Mut. v. N.J. Prop.-Liab. Ins. Guar. Ass’n., 215 N.J. 522, 544 (2013) (previously discussed here). Five of Ward Sand’s insurers on the risk had, by then, become insolvent. It was undisputed that these insurers were declared insolvent prior to the effective date of the 2004 amendment to the PLIGA Act. The insured argued that (1) the 2004 amendment to the PLIGA Act, understood in light of Farmers Mutual, was intended to be corrective and curative and, therefore, had retroactive effect and (2) even if the 2004 amendment was not retroactive, the reasoning of the Farmers Mutual Court clarified principles that predate the amendment such that all coverage available from a solvent carrier must be exhausted prior to the policyholders’ obligation to pay the insolvent insurer’s share.

The trial court disagreed, and the Appellate Division affirmed, finding that the 2004 amendment to the PLIGA Act could only be given prospective effect, and did not control allocation issues for insurers that became insolvent prior to its enactment. Relying on Farmers Mutual, the Appellate Division held that for the years in which PLIGA is standing in the place of an insolvent carrier in a long-tail environmental contamination case, the insured – not the solvent insurer – is compelled to make payments under the Owens-Illinois allocation scheme before accessing statutory benefits under the PLIGA Act.

The decision is non-precedential and Ward Sand will almost certainly seek review by the Supreme Court of New Jersey. Nevertheless, Ward Sand represents an important victory for solvent insurers, which never contracted to cover the insolvent policy periods or layers.

New Jersey Supreme Court Rewrites Carter-Wallace Allocation Rules in Cases Involving State Guaranty Association

In a critical insurance decision, the New Jersey Supreme Court ruled on Sept. 24 that liability insurers covering a long-tail loss cannot seek contribution from the New Jersey Property-Liability Insurance Guaranty Association for the Carter-Wallace shares of insolvent insurers. More importantly, while perhaps not a true holding, the court rebuffed an argument that the insured would have to bear the burden of the insolvent insurer’s Carter-Wallace allocation to the extent the Guaranty Association was not required to pay.

In Farmers Mut. Fire Ins. Co. v. New Jersey Property-Liability Ins. Guar. Assoc., Farmers Mutual sued the Guaranty Association to recover a portion of environmental remediation costs that were allocable to Newark Insurance Company, which was declared insolvent in 2007.  The Guaranty Association argued that the New Jersey Property-Liability Insurance Guaranty Association Act (PLIGA Act) required exhaustion of all available solvent coverage before it had any payment obligation. The PLIGA Act’s exhaustion provision “requires the exhaustion of all insurance benefits from solvent insurers on the risk before [the Guaranty Association], standing in the shoes of an insolvent insurer, must pay statutory benefits.” (N.J.S.A. 17:30A-5).  The PLIGA Act was amended in 2004 to further define exhaustion: “[I]n any case in which continuous indivisible injury or property damage occurs over a period of years as a result of exposure to injurious conditions, exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years has been applied[.]”  (N.J.S.A. 17:30A-5)

The New Jersey Supreme Court affirmed the Appellate Division’s ruling in favor of the Guaranty Association, holding that “when one of several insurance carriers on the risk is insolvent in a continuous-trigger case, then the limits of the policies issued by solvent insurers ‘in all other years’ must first be exhausted before the Guaranty Association is obligated to pay statutory benefits.”  Because the Farmers policies were not fully exhausted, it could not tap the Guaranty Association for Newark’s Carter-Wallace share of remediation costs.

The court also rejected an argument made by another insurer, appearing amicus curiae, that the insured should bear responsibility for insolvent insurers and then seek reimbursement from the Guaranty Association.  The court, noting that, in its view, the insurers’ interpretation “would turn the PLIGA Act on its head,” stated that the aim of the PLIGA Act “would be defeated by making the insured bear the loss for the carrier’s insolvency before the insured received any statutory benefits from the Guaranty Association.”

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