When seeking insurance coverage for “long-tail” mass tort and environmental claims that involve alleged exposures and injuries spanning multiple years, businesses often look to their occurrence-based commercial general liability (“CGL”) policies. These policies are designed to provide broad coverage for defense costs, settlements, and potentially adverse judgements. However, CGL policies generally cover “occurrences” during one-year policy periods and renew on an annual basis, which can complicate efforts to seek coverage for claims involving alleged injuries or property damage spanning decades. Moreover, for severe claims, businesses may need to obtain access to one or more of their excess CGL policies. Therefore, determining which policies to pursue, whether policies in multiple policy periods will respond, and how to access valuable excess coverage are factors that should always be considered with coverage counsel when facing long-tail exposures. Courts across the country are divided on how these questions should be answered. A recent decision issued by the Supreme Court of North Carolina in Radiator Specialty Co. v. Arrowood Indemnity Co., provides guidance to North Carolina policyholders attempting to maximize coverage for long-tail claims.
Radiator Specialty was sued in hundreds of underlying actions seeking damages for alleged exposure to benzene contained in Radiator’s products over a period of decades. Radiator then sought coverage for tens of millions of dollars in defense costs and other indemnity costs it had incurred under various CGL, umbrella, and excess insurance policies it had purchased from numerous insurers over a period of five decades. Protracted coverage litigation and a series of appeals then ensued over three key issues: (1) which of the more than 100 insurance policies at issue were “triggered”; (2) whether Radiator’s losses should be allocated among its insurers on an “all sums” or a “pro rata” basis; and (3) whether “horizontal” or “vertical” exhaustion should apply when determining when excess coverage would be available to Radiator. The Supreme Court of North Carolina weighed in on all three questions.
First, the Court adopted an “exposure” trigger of coverage, instead of a “manifestation trigger,” holding that in determining which policies should apply, the trial court should focus on when an underlying plaintiff was exposed to benzene, and not when their bodily injury arising from benzene exposure manifested—which in some cases allegedly occurred years later. In other words, the eventual illness is the consequence of that injury, not the injury itself. Therefore, the Court concluded coverage was triggered only under the policies in effect at the time the claimant was exposed to benzene. Moreover, because benzene leaves the body within hours or days, the Court rejected in a footnote a “continuous trigger” theory of coverage, under which all insurers who issued policies from the date of the injury-causing occurrence until the manifestation of the injury would be liable, rather than only the insurers whose policies were in effect on the date of the exposure. The Court did recognize, though, that in other cases where the injury-causing occurrence lingers for a longer period and creates a progressive injury, such as asbestos exposure or cases involving alleged environmental damage spanning multiple years, the application of a “continuous trigger” may be appropriate.
Next, the Court held that in situations where multiple policies are triggered across different years, losses should be allocated among insurers on a pro rata basis, instead of on an all-sums or joint and several basis, which is the rule in many other states. Pro rata allocation requires each triggered policy to share responsibility for the total coverage owed based on the number of years it covered the risk compared to all the years of triggered coverage. In doing so, the Court rejected the all-sums method of allocation, even though the policies’ insuring agreements generally required the insurers to pay all-sums. Instead, the Court focused on language found elsewhere in the policies purporting to limit the insurers’ obligations to bodily injury or property damage that occurs “during the policy period.” This “limiting language,” according to the Court, showed that the insurers did not intend to cover damages arising from injuries falling outside the pertinent policy period. In reaching this holding, the Court acknowledged that courts in many other jurisdictions have rejected this view and apply the all-sums / joint and several approach. The Court further noted that the presence of a non-cumulation clause might warrant the application of all-sums allocation in other cases, as the New York Court of Appeals held in In re Viking Pump. 27 N.Y.3d 244 (2016). However, the Court found that because that policy language was absent, and because benzene exposure is not a continuous injury like asbestos exposure (the injury in Viking Pump), the Viking Pump exceptions did not apply. Thus, while the Radiator Specialty Court declined to apply the more favorable all-sums allocation, it did not establish a bright-line rule that pro rata allocation always applies to long-tail claims in North Carolina. Instead, like the Viking Pump holding, allocation in North Carolina will depend on the language of the applicable policies and the type of alleged injury or property damage at issue.
Finally, the Court adopted a favorable vertical exhaustion rule for purposes of obtaining access to umbrella and excess policies, at least as it pertains to the duty to defend. Vertical exhaustion only requires the insured to exhaust the primary policies within the same policy period before seeking coverage from its umbrella or excess policies. Horizontal exhaustion, on the other hand, requires the insured to exhaust all primary policies from other potentially triggered policy periods before accessing any umbrella or excess coverage. The umbrella policies in Radiator Specialty required the insurer to defend the insured during the policy period so long as “[n]o other valid and collectible insurance [was] available to the insured for damages covered by th[e] policy.” That language, according to the Court, proved that the insurer intended that vertical exhaustion apply to its duty to defend. Because Radiator had no other primary insurance coverage during that policy period, the Court found that the umbrella insurer in that policy period had to cover Radiator’s defense costs, even though Radiator still had primary coverage in other years.
As the Radiator Specialty Court noted in its decision, the law on coverage for long-tail claims is complex and differs across the country. However, in North Carolina, the Supreme Court left the door open for insureds to obtain coverage for long-tail claims in multiple policy periods under the right set of facts, without placing unexpressed restrictions on a policyholder’s ability to access valuable excess policies. Indeed, even though the Court applied a pro rata allocation in this case, it also provided an avenue for all-sums allocation to apply in future cases.
The key takeaway from the Radiator Specialty decision may be that old commercial general liability policies are valuable corporate assets for companies facing potential long-tail exposures, even when those policies may be decades old. To maximize the potential for coverage under policies issued across successive policy periods, insureds in North Carolina (and elsewhere) facing long-tail losses should notice all potentially applicable policies and consult coverage counsel to help devise a coverage strategy. Counsel can analyze how multiple policies may provide valuable coverage, help insureds avoid accepting insurers’ arguments limiting what coverage may be available, and assist insureds in avoiding premature admissions about which policy year applies to the exclusion of other potentially available policy periods.