The United States Court of Appeals for the First Circuit has put hope into the hearts of those of us who deal frequently with questions of allocation of loss. In Boston Gas Co. v. Century Indem. Co., 529 F.3d 8 (1st Cir. 2008), the court certified questions to the Supreme Judicial Court of Massachusetts about how insurance in environmental damage cases should be allocated among insurers and between insurers and insureds.
Allocation is an issue that comes up most frequently in environmental and toxic tort cases, in which damage occurred over years or decades before it was discovered, thereby possibly triggering coverage by many insurance policies. The Boston Gas case is a typical example: over the course of decades, Boston Gas had factories that produced fuel along with hazardous by-products that leached into the environment. During one 18 year period, Boston Gas had insurance with three consecutive insurers. It sought coverage for the environmental damage from one of the insurers. That insurer wants the other two insurers to contribute to the loss. Whether they must do so is a question of allocation.
Another issue that came up in the Boston Gas case is whether coverage is triggered separately for each policy year. That issue is significant because Boston Gas had a yearly self-insured retention (a deductible) of $100,000. If each policy year is triggered separately, then Boston Gas will have to contribute several deductibles instead of just one.
There are numerous other issues with respect to allocation, from how to deal with periods where the insurance company that provided coverage no longer exists; to how to divide coverage where more than one insurer covers the same policy year; to how to allocate loss among insurers with different policy limits; to . . . I could go on and on.
But the answer to every such question that has come up under Massachusetts law, until now, has been: Who knows? The Supreme Judicial Court of Massachusetts has never issued a clear ruling on allocation. Other states are sharply divided on every issue.
The United States Court of Appeals has now asked the Supreme Judicial Court to answer three basic questions:
1. Should a pro rata (all insurers initially contribute) or joint and several (only one insurer initially contributes) allocation method be used?
2. If a pro rata method should be used, which pro rata method?
3. For an insurer who covered the risk for more than one policy period, should only one self-insured retention apply, or should the self-insured retention for each policy period apply?
Although some allocation methods tend to be more helpful to insurers and some more helpful to insureds (always with exceptions, depending on the case), in the long run clarity will help everyone. Here's hoping the Supreme Judicial Court agrees and chooses to answer the certified questions.