In 1993 the Pennsylvania Supreme Court issued a ruling concerning a variety of issues including jurisdiction, joinder of indispensable parties, bad faith, trigger and – most significantly – allocation. In JH France v Allstate,(1) the highest court in Pennsylvania concluded that when multiple policies were triggered and were potentially liable for losses which occurred over many years, the insured could choose which policies would have to respond to make payment of those losses. JH France became the leading case for the implementation of pick-and-choose all-sums allocation. This continues to be the law in several states, including Pennsylvania.
This update explores the issue of whether a reinsurer may successfully challenge a reinsurance presentation based on a payment in accord with an all-sums allocation by the reinsured, where the reinsured does not seek contribution from other available triggered policies, but rather submits a billing to a single reinsurance period. In certain circumstances, given that reinsurers may vary from policy period to policy period, an all-sums allocation can result in a reinsurer being asked to pay substantially more if contribution from the other triggered policy periods is not sought. This update discusses of the JH France ruling and the reinsurance implications of reinsurance recovery based on that allocation decision.
JH France Refractories Company manufactured and marketed products that contained asbestos from approximately 1956 through 1972. JH France also marketed products that contained silica, which – like asbestos – was claimed by thousands of plaintiffs to have caused bodily injury due to exposure and inhalation. JH France was insured by six different insurance companies from 1967 to 1979. Those insurers all disclaimed coverage. JH France filed a declaratory judgment action in 1981 seeking a declaration that the insurers all had a duty to defend and indemnify it. As additional plaintiffs filed suit and claimed injury throughout the 1980s, additional insurers became allegedly involved in the potential loss liability. In 1984 Allstate filed a declaratory judgment action naming the additional insurers, and shortly thereafter the declaratory judgment actions were consolidated.
The main issue before the Pennsylvania Court of Common Pleas, and thereafter the Pennsylvania Superior Court, was whether the various companies were liable for the defence and indemnification of JH France for claims based on exposure to its asbestos and silica products and – if they were liable – how liability was to be apportioned among the insurers. The court found that the various insurers were required to defend and indemnify JH France and that the bodily injury occurred during all periods from the date of first exposure, through manifestation or diagnosis of the injury. The court also concluded that the loss would be allocated on a pro rata basis to all insurers on the risk and JH France would assume its portion of liability for uninsured or self-insured periods.
After multiple appeals, the Supreme Court of Pennsylvania affirmed in part and reversed in part the lower court's ruling. The Supreme Court found that the coverage was triggered by bodily injury occurring during the policy period. Therefore, the court agreed with the lower court that all policies in effect from exposure to manifestation would be triggered. However, the Supreme Court reversed the lower court's ruling on allocation. In analysing the various policy's insuring clause, the court focused on the 'all sums' language which stated that the "insurer was obligated to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages". Thus, the court ruled that the insured could pick any policy within the triggered coverage to respond to the losses, and found that no such obligation was attributable to the insured, JH France. The court also concluded that although each insurer was potentially liable for "all sums", the allocation ruling would not serve to impair the ability of an insurer to seek contribution from other insurers under the 'other insurance' clause in the policies or the equitable doctrine of contribution.
The effect of JH France was to allow an allocation of losses which triggered multiple policies to a single policy or policy period for all losses, which thereafter gives the insurers the right to then seek contribution. Arguably, there are two underlying reasons why the court issued the all-sums allocation ruling:
- First, the court wanted to accommodate the insured so they would be made whole without the inevitable delay of apportionment of liability; and
- Second, the court wanted to support the conclusion that the insured itself would not be liable for a pro rata share of the loss attributable to the uninsured or self-insured periods during which the bodily injury took place.
Although the allocation ruling benefitted the insureds, the effect of the all-sums allocation became complicated as it was applied by insurers seeking reinsurance recovery. Disputes arose between insurers that relied on the all-sums allocation ruling to make their reinsurance presentations and reinsurers that believed that the insurers should reallocate based on an assessment of actual liability. Insurers began to settle these long-tail matters with their insureds and then place the entire settlement amount into one year, even if several years of coverage had been issued. Further, when these settlements took place it was often the insurer – and not the insured – that would choose which policy to allocate the loss, even though JH France gave that right specifically to the insured.
For the excess-of-loss reinsurer in the chosen year, the result was often a full-limit loss, even if it would have incurred no loss or less of a loss if the settlement had been apportioned to all triggered policies that had liability. Some reinsurers took the position that although JH France does not specifically require contribution to be sought, the reinsurance presentation should reflect the true liability to the policies that were settled. In effect, reinsurers intimated that insurers often conducted a cost/benefit analysis, whereby they selected a policy or policy period that had the most favourable reinsurance programme and provided for the greatest reinsurance recovery.
Reinsurers have contested the all-sums pick-and-choose allocation in reinsurance presentations, claiming that the reinsured should seek contribution even among its own coverage or reallocate the loss to all available triggered policies to reflect equitably the liability. Reinsurers have argued that the actual reinsurers on the risk may change from year to year, or the individual reinsurers' shares may change from year to year, and therefore it is inherently inequitable to allocate to a single period without seeking contribution. Selecting a single policy or policy period has the effect of requiring a reinsurer to reimburse a reinsured for a loss that – but for the spike allocation – would not have impacted its coverage or would have been lessened, while other reinsurers escape without payment.
In response, insurers typically argue that the affected reinsurers have agreed to provide reinsurance coverage to a policy that had all-sums language, and the allocation reflects the court's interpretation of that language. Therefore, insurers generally hold that an all-sums allocation is reasonable and thus not subject to challenge by reinsurers. Further, insurers utilise follow-the-settlement or follow-the-fortunes clauses to reinforce the argument that reallocation cannot be demanded and is not required by reinsurers.
Surprisingly, although the issue has been raised on many occasions by reinsurers, the courts have developed very little case law as to how this issue is to be resolved. Since most of these matters are settled amicably or are the subject of confidential arbitration proceedings, there is little court guidance as to whether reinsurers can successfully challenge an all-sums allocation. Courts traditionally view a reinsurers' denial of a reinsurance claim on the basis of an allocation issue unfavourably, unless the reinsurer can prove that the allocation is unreasonable. Generally, courts will deem an allocation unreasonable only when it can be shown that the allocation by the reinsured was done to maximise reinsurance recovery. Most of the reinsurance case law concerning allocation disputes involves the court interpreting whether the follow-the-fortunes or follow-the-settlement clauses in the reinsurance contracts bind the reinsurer to the reinsured's allocation of the loss. Once again, absent proof that the allocation is inherently unreasonable, the courts will usually find in favour of the reinsured.
Although it is difficult to prevail in a denial challenging the reasonableness of an allocation, in cases where the reinsured has not sought contribution, reinsurers should seriously consider arguing that allocation to a single period is unreasonable. Reinsurers should:
- analyse whether it can be proven that the insurer evaluated its available reinsurance and made allocation decisions based on the applicable reinsurance, which ultimately resulted in the greatest possible recovery;
- consider whether it can be proven that the inequity of not seeking contribution had a significant negative monetary impact on the reinsurer and a profitable outcome for the reinsured; and
- weigh the potential application of any follow-the-fortunes or follow-the-settlements clauses in the reinsurance contracts, as that will affect the potential for a favourable outcome in a dispute.
Ultimately, it does not appear that the court in JH France gave much consideration – if any – to the potential reinsurance implications of its all-sums allocation ruling. The ruling was based on a strict interpretation of the original policy language and was intended to ensure that the policyholder would not incur delay in being provided with defence or indemnification or be liable for a portion of the loss. However, the court specifically preserved the right to seek contribution. This is significant because, from a reinsurer's perspective, enforcement of the contribution rights is the only way equitably to apportion ultimate liability before seeking reinsurance reimbursement. Reinsurers should insist that the reinsureds engage in the exercise of seeking contribution to fairly apportion liability among insurers and reinsurers, as the court in JH France likely envisioned the contribution aspect to be an essential consideration when applying the allocation ruling.
For further information on this topic please contact Michael E Morley at Mendes & Mount LLP by telephone (+1 212 261 8000) or email (firstname.lastname@example.org). The Mendes & Mount website can be accessed at www.mendes.com.
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