“Wis. Continues Pro-Insured Trend With Toxic Torts
Law360 11/22/13 Keith A. Bruett, Jeffrey O. Davis
So-called “long-tailed” toxic tort claims, such as asbestos or environmental liabilities, are one of the most pervasive corporate liability exposures around. Insurance coverage is a critical, and sometimes essential, part of the strategy in dealing with such exposures. While the coverage issues are complex, fortunately for Wisconsin policyholders, Wisconsin law is generally very favorable to insureds in this area. Wisconsin is a “continuous trigger” state, meaning that any policy on the risk during a period when continuous injury is occurring is responsible for responding to the claim. Wisconsin has adopted “joint and several” or “all sums” allocation, meaning that any policy that is “triggered” must pay in full up to policy limits, even if part of the damage takes place in uninsured periods. Finally, Wisconsin has adopted “vertical exhaustion,” meaning that an insured can access excess coverage without necessarily exhausting all primary coverage.
On Oct. 29, the Wisconsin Court of Appeals continued this pro-insured trend with its decision in Cleaver Brooks v. AIU Ins. Co., in which the court ruled that an insured under an excess layer “quota share” (three insurers shared the risk by percentages under separately issued policies) had the right to control which insurer(s) must respond to a given loss, including the right to force all three insurers to simultaneously respond to the loss. The insurers had attempted to have the policies respond sequentially, with the two policies that included a defense obligation responding (and exhausting) first. The insured argued that the insurers “sequencing of their joint and several obligations may deprive Cleaver Brooks of more than $30 million in its defense coverage.”
The facts of the case were somewhat unusual. The insured, Cleaver Brooks, was the subject of massive, ongoing asbestos litigation, with 200,000 suits filed against it, and many more likely to be filed in the future. Most of the suits included allegations that the claimants were exposed to asbestos in periods that included 1979 and 1980, when Cleaver Brooks had two $35 million blocks of solvent, unexhausted excess liability insurance coverage. In each of these years, three excess policies formed part of a “quota share,” meaning that a percentage of the policy limits was assigned to each of the three insurers. Of the three policies, two had duties to defend; the third only included a duty to indemnify. It followed that the insured wanted policies with defense obligations to stay on the risk for as long as possible, and the best way of doing that was to invoke joint and several liability to require that all three policies pay any judgments or settlements. The insurers objected to this approach, wanting the three policies to respond sequentially.
The court agreed with the insured.
The court ruled that the very nature — and definition — of joint and several liability was that who pays among equally responsible insurers could be apportioned at the discretion of the insured. In essence, the court said that the insured has the right to choose, and control, how its policies will respond. While the court found additional support in the unique aspects of the quota share structure — noting that the policies stated that they were “part of” a coverage block that was above a single primary policy and by their terms, attached upon exhaustion of a single underlying limit — policyholders should not view this decision as limited to those particular facts. The larger impact of the decision seems clear: the insured, not the insurer, has the right to control the manner and order in which multiple triggered policies respond to a given claim, a principle that could have far reaching consequences, since there are numerous circumstances going well beyond quota share policies where dictating which policy responds first can have a significant impact on the amount of available coverage.
This larger impact reflects a straightforward application of the Wisconsin Supreme Court's decision in Plastics Engineering v. Liberty Mutual, 759 N.W.2d 613 (Wis. 2009) in which the court adopted "all sums" or "joint and several" allocation. Cleaver Brooks reinforces the notion that plastics engineering is not simply a case that makes insurers liable for more than their pro rata share. Rather, it also — and this is a logical extension of that decision — allows policyholders the right to access policies in a manner that maximizes their overall coverage.
This broader principle may come into play in any number of different ways. Take, for example, the common situation where, for part of a long-tailed risk, an insured effectively is self insured at the primary layer through self insured retentions or through reimbursement or "fronting" policies. Or, an insured seeks to allocate losses to policies in early years for exhaustion purposes, thereby preserving the limits of later issued policies, which frequently is important in the asbestos arena since later policies are typically more likely to be triggered due to later dates of first exposure. Then there is the situation where an insured settles with some but not all carriers and, as is often the case, provides indemnification to the settling carriers.
In all of these scenarios, insurers will typically argue that they have the right, through contribution rights and other means, to either dictate coverage, or allocate losses, among all triggered policies in a way that works to the insured's disadvantage. The Cleaver Brooks ruling makes explicit what was already the logical import of "all sums" or "joint and several" liability, and arms policyholders with a powerful rejoinder to insurers' efforts to erode that principle: policyholders, not insurers control how their policies will apply. Contribution between insurers may be fine when it does not reduce or eliminate coverage. But when it does, the Cleaver Brooks decision says, in no uncertain terms, “not so fast”. This seems logical, and fair. For it is the policyholder, as the party who purchased the contracts, who should have the ability to direct the sequence and timing of when its contractual rights will be exercised, not an insurer seeking to minimize its exposure at the expense of its insured.
Originally published in Law360, November 22, 2013