The Southern District of New York has issued an interesting opinion for allocation disputes decided under Massachusetts law.  The case, which concerns long-tail environmental damage, is The Narragansett Electric Co. v. American Home Assurance Co., No. 11-8299 (S.D.N.Y., Feb. 18, 2014).  A copy of the opinion is available here.

The background facts are as follows.  In 1987, the Commonwealth of Massachusetts sued Blackstone Valley Electric Company, the predecessor of Narragansett Electric Company, in Massachusetts federal court.  The Commonwealth obtained a multimillion dollar judgment against Blackstone for hazardous waste clean-up costs.  After an appeal wound its way through the courts and the EPA, the matter was ultimately concluded in 2006 when Narragansett, as successor to Blackstone, paid the Commonwealth $5.013 million.

In 2011, Narragansett brought a declaratory judgment action in the Southern District of New York against Blackstone’s insurers seeking to recover, inter alia, the defense costs expended in the underlying litigation.  In a 2013 decision, the Southern District held that the primary insurer had breached its duty to defend Blackstone in the underlying action.  The insurer then sought to limit its exposure by arguing that its liability for defense costs should be determined by the pro rata allocation method rather than the joint and several allocation method.

The Southern District was not convinced.  It filed its allocation opinion on February 14, 2014, observing that Massachusetts “has not decided the issue” but nonetheless predicting that the “Massachusetts Supreme Judicial Court would allocate defense costs jointly and severally in determining [Narragansett’s] damages for breach of the duty to defend.”  In so holding, the Court summarized the difference between the two allocation methods as follows:

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. 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.

Id. at 10. 

The Southern District concluded that the joint and several method would apply to defense cost allocation despite the fact that the Massachusetts Supreme Judicial Court held that the pro rata method would apply to indemnity allocation.  See Boston Gas Co. v. Century Indem. Co., 454 Mass. 337 (2009).  The Court reasoned that the duty to defend is broader than the duty to indemnify and that the public policy considerations applicable to the duty to defend differ from those applicable to the duty to indemnify.  The Court further noted that its decision is in accord with the law in New York.

While the Narragansett Electric decision is undoubtedly important, it is not binding in Massachusetts and is not based directly on precedent from the Massachusetts Supreme Judicial Court.  Thus, there is room for further argument on the issue by future litigants.