After years of uncertainty on the subject of allocation in the context of continuing injury cases, today the Massachusetts Supreme Judicial Court, in Boston Gas Co v. Century Indem. Co, ruled that Massachusetts law requires pro rata allocation of damages resulting from progressive environmental contamination which occurred when one insurer was on the risk for only a portion of the time period when the damage occurred. The Court further ruled that the insurer can apply only a prorated amount of each self-insured retention or deductible of every policy in place during the coverage period to reduce the covered loss. In practical terms, the Court ruled that that an insured cannot hold one insurer liable for all progressive environmental damage resulting before or after that insurer’s coverage period, and the insurer can apply a prorated amount of all SIRs or deductibles on all policies in place when the damage occurred. The decision will have wide-ranging application under Massachusetts law to cases of progressive deterioration or damage beyond the context of environmental harm.

Background

Boston Gas Company was held liable for environmental damage from its operation of manufactured gas plant sites in Massachusetts throughout much of the 20th century. Boston Gas purchased commercial general liability policies from several different insurers, including Century Indemnity Company, and sought coverage from Century under its policies issued from 1951 through 1969. Massachusetts law governed the policies. The trial court awarded Boston Gas damages, imposed a joint and several, or “all sums” allocation, and accordingly permitted Boston Gas to recover from Century its total liability, subject to only one SIR and policy limit under any one of its policies in place between 1951 and 1969. Boston Gas selected the policy with the highest coverage limit, $17 million, and Century was held fully liable for the $6.2 million in damages it incurred, minus one $100,000 SIR. Century appealed, arguing that its liability should be limited to the proportion of damage sustained during its years of coverage (i.e., it argued for pro rata allocation), and that its share of liability should be spread among its policy years such that one full SIR applied for each policy triggered.

Prior to the SJC’s ruling, Massachusetts law was unclear as to whether joint and several or pro rata allocation was required for damages resulting from progressive environmental damage. One Massachusetts Appeals Court case in 1998, Rubenstein, had imposed joint and several liability on a single insurer in a progressive environmental damage case, but without extensive analysis, rendering its precedential value uncertain. In addition, there is no clear consensus among other state courts as to whether joint and several or pro rata allocation is preferable. The SJC decision clarifies that Massachusetts law requires pro rata by time-on-the-risk allocation for cases of progressive environmental damage and requires the application of prorated SIRs in such cases.

Massachusetts Adopts Pro Rata Allocation  

The SJC first ruled that Massachusetts law requires pro rata, rather than joint and several, allocation of progressive environmental contamination. The insurance policies provided that they applied to property damage or occurrences that took place “during the policy period.” The occurrence-based policy, moreover, defined “occurrence” to mean exposure to conditions causing property damage “during the policy period.” The Court ruled that “[t]he most reasonable reading of these provisions is that the Century policies provided coverage for that portion of Boston Gas’ liability attributable to the quantum of property damage occurring during a given policy period.”

The Court rejected Boston Gas’ argument that the phrase “all sums” required joint and several liability for all damages. It held that the provision that “all damages arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence” similarly evinced no intent to cover damages that take place outside the policy period. It ruled that the “other insurance” clauses in the policies reflected no intention to cover losses for damages outside the policy period, but rather addressed situations in which concurrent, not successive, coverage would exist for the same loss – a situation different from the facts presented in this case. Finally, the Court noted that the policies did not contain “noncumulation” clauses, which often provide for continuing coverage beyond the policy period. In sum, the Court ruled that “[n]o reasonable policyholder could have expected that a single one-year policy would cover all losses caused by toxic industrial wastes released into the environment over the course of several decades. Any reasonable insured purchasing a series of occurrence-based policies would have understood that each policy covered it only for property damage occurring during the policy year.”

The Court further ruled that pro rata allocation serves important public policy objectives. It promotes judicial economy by obviating the need for a single insurer subsequently to bring a contribution action against other, successive insurers, and it allocates to the insured (rather than to another insurer) the risk that an insurer becomes unable to pay, thus promoting commercially responsible behavior. While the logic of the Court’s decision could be applied to defense costs, the Court’s holding was limited to indemnity costs.

Massachusetts Adopts Time-On-The-Risk Allocation  

The SJC further ruled that Massachusetts law requires allocation by time-on-the risk in the absence of evidence closely approximating the actual distribution of property damage. The Court concluded that allocation by time-on-the risk promotes predictability, reduces incentives to litigate and ultimately reduces premium rates. It concluded that the policyholder should be allocated losses for a period when it was unable to obtain coverage for a particular risk, such as pollution-related or asbestos-related claims. It further concluded that the insured must satisfy only a prorated amount of its per-occurrence self-insured retention for each triggered policy period, to be prorated on the same basis as the insurer’s liability. In sum, the Court concluded that where fact-based allocation of losses cannot feasibly be attributed to individual policy periods:

The total amount of damages should be divided by the total number of years to yield the amount of damage that is fairly attributable to each year. For example, if an insured’s liability for a decade of pollution is one million dollars, then one tenth of the total liability, or $100,000, is fairly attributable to each policy year. The policyholder is responsible for any periods that it went without insurance. Finally, unless the policy language unambiguously provides otherwise, the policyholder is liable for only a prorated portion of its per occurrence self-insured retention for each triggered policy period, to be prorated on the same basis as the insurer’s liability.

Conclusion  

The Massachusetts Supreme Judicial Court has ruled that Massachusetts law requires pro rata by time-on-the risk allocation in the context of damage from progressive environmental contamination. It further ruled that responsibility should be allocated to the policyholder for losses for periods when it was unable or unwilling to obtain coverage for a particular risk, and that the insured must satisfy only a prorated amount of its per-occurrence self-insured retention for each triggered policy period. The Court’s decision will have broad application to cases of progressive deterioration and damage beyond the context of environmental harm.