Court Applies Pro
Rata “Time on the Risk” Method to Allocate Loss From Environmental Damage Among
Liability Insurance Policies
One of the
challenges facing potentially responsible parties and their insurers is the
development of an equitable allocation of responsibility for defense costs, cleanup
costs and other indemnification costs associated with environmental
contamination from several potentially responsible parties.
Many of Metropolitan’s
clients ask our remediation experts to evaluate the appropriateness and cost of
remediation decisions, estimate future liabilities, and apportion costs among
potentially responsible parties. Our
experts rely on forensic methods developed in-house and/or widely used in
practice, hands-on practical experience and knowledge of rigorous financial and
engineering models to conduct such cost evaluations and cost apportionments. Metropolitan scientists have been supporting
clients in developing technically sound apportionment strategies and obtaining
appropriate evidence for more than 30 years. This work has resulted in
successful, quantitative apportionment of chemical inputs to CERCLA, RCRA and
state sites as determined by the courts.
·
The
common questions posed to us by the clients include:
·
What
is the source of the contamination?
·
What
are the characteristics of each source?
·
Who
is responsible for each source?
·
What
is my cost?
Metropolitan staff
has been involved in numerous cases where liability and cost allocation are
evaluated using strict review of the National Contingency Plan (NCP). These cases arise from environmental cleanup
and restoration project disputes under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), and also include natural
resource damage (NRD) claims for restoration n costs. Projects have included
commingled groundwater contaminant plumes, large river and urban bay projects
with multiple contributing parties, waste landfills, mines, and other
contaminated sites. This work has involved investigation of potentially
responsible parties, historical site reconstruction, financial analyses,
database development, and environmental forensics.
ALLOCATION APPROACHES
After we determine
the age of the release or the start of the contamination, we have to come up
with a method of determining the allocation of the various costs. There are a number of allocation methods
available.
·
Waste
Mass-based allocation method;
·
Waste
Volume-based allocation method;
·
Area-of
–impacts allocation method;
·
Weighted
Site Attributes model
Many times we encounter
situations where a contamination cannot be attributed to a PRP. One of the ways to deal with these unaccounted
shares is to increase each known PRP's share to cover the total costs of the unaccounted
shares. The increase is proportional to
each PRP's known relative contribution developed by any of the previous
methods.
PRO RATA SHARE ALLOCATION
This is a method
that applies mostly to insurance contribution allocations based on the number
of years a certain policy is on the risk.
It has been used for many years in insurance contribution cases.
On October 14,
2014, Justice Scarpulla of the New York County Commercial Division issued a
decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc.,
2014 NY Slip Op. 24306, applying a pro rata “time on the risk”
allocation to determine damages in an insurance coverage matter arising from an
environmental clean-up at two former manufactured gas plant sites located in
Hempstead and Rockaway Park New York.
Where environmental
damages occur over a period of years, triggering coverage under multiple
insurance policies, allocating the losses has proved “a nettlesome problem.” As
Justice Scarpulla explained, courts faced with this dilemma have allocated the
loss among the carriers and the insured on a pro rata basis based on
their respective “time on the risk”:
A pro rata
“time on the risk” allocation requires costs to be allocated according to the
number of years that the insurer was on the risk by multiplying the total loss
by a fraction that has as its denominator the entire number of years of the
claimant’s injury, and as its numerator the number of years within that period
when the policy was in effect. Proration of liability among the insurers
acknowledges the fact that there is uncertainty as to what actually transpired
during any particular policy period.
For years where an
insured has no insurance coverage, the insured generally bears its own pro
rata share of the loss. Proration to the insured is appropriate for the
years where the insured elected not to purchase insurance or purchased
insufficient insurance. For those years, the insured is treated as
self-insured and bears responsibility for its pro rata share of damages.
Proration to the insured is inappropriate, however, for those years where
insurance was unavailable in the marketplace.
In Keyspan,
the court found issues of fact precluding summary judgment as to (1) the time
period over which the damage occurred, and (2) when insurance coverage was
available. The Court did find that Keyspan should be required to bear losses
incurred during the period 1971 to 1982 when New York law precluded insurance
coverage for “liability arising out of pollution.” The policy reason underlying
the rule was “to prohibit commercial or industrial enterprises from buying
insurance to protect themselves against liabilities arising out of their
pollution of the environment.” Justice Scarpulla concluded: “Given the Legislature’s
clear intent that companies such as Keyspan bear the full burden of their own
actions affecting the environment, I decline to exclude the period between 1971
and 1982 from the allocation period when pollution insurance was prohibited.”
NEW JERSEY ALSO USES THE PRO RATA METHOD
Owens-Illinois is
the seminal case in New Jersey setting forth the methodology for proportional
allocation of indemnity and defense costs among multiple insurers in
"long-tail" environmental exposure litigation. Spaulding Composites
Co. v. Aetna Cas. & Sur. Co., 176 N.J. 25, 39 (2003), cert. denied sub nom.
Liberty Mut. Ins. Co. v. Caldwell Trucking PRP Grp., 540 U.S. 1142, 124 S. Ct.
1061, 157 L. Ed. 2d 953 (2004).
The insurance
policies in Owens-Illinois contained standard clauses providing liability
coverage for bodily injury that "occur[ed]" within the policy period.
Owens-Illinois, supra, 138 N.J. at 447. The Court explained that, where
injuries were sustained over long periods of time, questions arise as to when
and how liability insurance coverage of the allegedly responsible parties is
triggered and as to how losses should be fairly allocated among the range of
triggered policies. Spaulding Composites, supra, 176 N.J. at 32. The Court
observed that rigid enforcement of the policy terms as governed by traditional
principles of insurance law could not capture the time of an occurrence in the
context of such toxic-tort litigation. Owens-Illinois, supra, 138 N.J. at
457-59. It concluded that "[m]ass-exposure toxic-tort cases have simply exceeded
the capacity of conventional models of judicial response." Id. at 459.
The Court reviewed
a number of options to resolve the question of determining the
"occurrence" of an injury that does not manifest for many years. It
ultimately adopted a "continuous-trigger" theory by which an injury
would trigger coverage continuously from the date of the claimant's first
exposure to asbestos onward as a single "occurrence" for each year.
Id. at 478-79. The Court then adopted a pro-rata allocation methodology,
distributing the insured's losses for the triggered time period in percentage
shares commensurate with the "degree of risk transferred or retained in
each of the years of repeated exposure to injurious conditions." Id. at
475. The resulting allocation among insurance policies would thus be
"related to both the time on the risk and the degree of risk
assumed." Id. at 479. The insured would share in the allocation for
periods where it voluntarily retained the risk rather than contracting for available
insurance. Ibid. Policy limits and exclusions would remain applicable, and the
resulting allocation would conform to the particulars of the policies at issue.
Id. at 476.
The Court
"recognize[d] the difficulties of apportioning costs with any scientific
certainty," but accepted that a "rough measure" of each
insurer's proportionate allocation of losses might be the best that could be
achieved. Id. at 476-77. The Court never independently addressed allocation of
defense costs as opposed to indemnification for claims that the insured would
have to pay to the injured person, though the undeniable implication of
Owens-Illinois is that defense costs are also allocable, subject to policy
terms, in the same manner as indemnity expenditures.
In Carter-Wallace,
supra, 154 N.J. at 325-27, the Court confirmed the application of the
continuous-trigger theory and pro-rata methodology in allocating liability
among both primary and excess policies. It rejected an argument made by the
second-level excess insurer in that case that the insured party must exhaust
all primary and first-level excess policies in the entire coverage block before
accessing any second-level excess coverage. Id. at 324.
The Court also
rejected the insured's contention that the entire universe of losses should be
collapsed to a single year so as to access immediately the coverage from all
insurers for that one year. Id. at 325. Neither of these arguments was faithful
to the holding of Owens-Illinois that ongoing injuries should be treated as a
single occurrence within each year. Consequently, the Court adopted an approach
requiring that losses first be allocated "horizontally" among the
range of years in the coverage block, but that policies be exhausted
"vertically" within each year, such that each successive layer of
insurance within a given year would be accessed as the one below was exhausted.
Id. at 327-28. The Court added:
Our jurisprudence in this area has not been marked by
rigid mathematical formulas, and we do not advocate any such inflexibility now.
Rather, our focus remains on "[a] fair method of allocation . . . that is
related to both the time on the risk and the degree of risk assumed."
[Owens-Illinois, supra, 138 N.J.] at 479. Nevertheless, we anticipate that the
principles of Owens-Illinois, as clarified by our decision today, represent the
presumptive rule for resolving the allocation issue among primary and excess
insurers in continuous trigger liability cases unless exceptional circumstances
dictate application of a different standard.
[Carter-Wallace, supra, 154 N.J. at 327-28.]
