Stop the presses! SJC adopts pro rata allocation!

As I discussed here nearly a year ago the United States Court of Appeals certified to the SJC questions regarding allocation. Today the SJC issued its decision in Boston Gas Co. v. Century Indem. Co. The decision is not yet available from the on-line SJC docket. The Westlaw citation is 2009 WL 2184647.

In a nutshell

The court adopted pro rata time-on-the-risk allocation, thereby overthrowing ten years of attorneys and litigants using their best guess that Massachusetts is a joint and several liability state based on a couple of not-very-clear Massachusetts Appeals Court decisions. The court also held that the insured must pay only a proportionate share of a self-insured retention for each triggered policy period.

What pro rata and joint and several allocation mean

In pro rata allocation a long-term loss, such as environmental contamination, is allocated among all insurers who provided insurance covering the time the loss was occurring (or "triggered"), and the loss is frequently allocated to the insured for periods where it had no or insufficient insurance.

In joint and several allocation, one insurer must pay the entire loss up to its policy limit even if there were several insurers on the risk or a period of uninsurance.

The basis for the pro rata decision

The court based its decision on both the policy language at issue and on public policy. In my opinion allocation issues should not be based on policy language because when more than one insurer, or even more than one policy form issued by the same insurer in different years, is involved they may have different policy language which would compel different results; but one loss cannot be allocated in more than one way. Had the court based its decision only on the policy language, it would not be clear that pro rata allocation would apply to other cases.

However, the court also adopted pro rata allocation based on public policy reasons. It stated that joint and several allocation does not "solve the Allocation problem; it merely postpones it." That is only partially correct. In many jurisdictions that have adopted joint and several allocation, an insurer who initially pays the loss may bring a suit for equitable contribution against other insurers to have them contribute their pro rata share to the loss. However, under joint and several allocation there is no contribution from the insured and no suit for equitable contribution can be brought against the insured.

Adoption of time-on-the-risk allocation

The court also adopted the time-on-the-risk method of pro rata allocation. Under that method each insurer pays up to its policy limits in proportion to the number of years it was on the risk. If a loss occurred over ten years and one insurer provided coverage for five years, it would be responsible for fifty percent of the loss up to its policy limits.

The insured will bear its proportionate share of the loss

The court held that the insured will be allocated losses for periods where it was self-insured, uninsured, or insufficiently insured. The court did not address a scenario where an insured had insurance but that insurance is no longer available due to bankruptcy of the insurer, but based on its discussion regarding periods where no insurance was available the court would almost certainly hold the insured responsible for loss during that period.

The insured must pay only a proportionate share of its self-insured retention for each policy period

The court held that the insured must satisfy only a prorated amount of its self-insured retention for each triggered policy period, to be prorated on the same basis as the insurer's liability. "Thus, if the pollution in this case had occurred over the course of a decade, then one-tenth of the total cleanup cost would be apportioned to each policy year and Boston Gas would be responsible for one-tenth of its applicable self-insured retention for each year."

More later

That's it in a nutshell. I'll be out of the office for a while, so you'll be reading some posts about some less earth-shattering decisions. But I will come back to this decision and provide more analysis of it.

As usual, thanks to Mike Tracy of Rudolph Friedmann LLP for bringing this decision to my attention within minutes of it being issued.