Policyholder Must Pay Full SIR "Deductibles" Across All Triggered Policies
January, 2003
A New Jersey appellate court requires the exhaustion of every self-insured retention in each triggered policy prior to coverage arising under any of the policies. Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., et al, No. A-4423-01T2F (N. J. App. Div. Jan. 14, 2003) (unpublished).
Facts
In Benjamin Moore, plaintiff paint manufacturer sought coverage under several insurance policies for a suit brought against it alleging bodily injury from lead paint products. Benjamin Moore was an insured under ten CGL policies issued by Lumberman’s Mutual Casualty Company (“LMCC”) between 1985 and 2001 with liability limits of $1 million. The 1985-1990 policies contained an endorsement providing as follows:
The Company’s obligation under this policy for all damages and allocated claim expenses shall be reduced by a deductible amount (hereinafter called the “self-insured retention”) equal to the limits of liability of this policy and the allocated claim expenses incurred by the Company...
Under this endorsement, the policy expressly stated that LMCC bore “no insurance risk for either such damages or allocated claim expense.” The 1990-91 LMCC policy had a deductible of $500,000. The remaining policies (1991-2002) had a deductible1 of $250,000 and contained an endorsement providing that LMCC had “the right, but not the duty or obligation,” to defend or participate in the defense of any suit against Benjamin Moore. Thus, LMCC had no exposure under the policies issued between 1985 and 1990, while the policies issued between 1991 and 2001 contained deductibles of $250,000 with endorsements providing that LMCC was under no obligation to defend the insured.
Following the tender from Benjamin Moore in the lead exposure suit, LMCC denied coverage under the 1990-91 policy but agreed to defend Benjamin Moore with respect to the claims in the other years subject to a reservation of rights.
The instant dispute concerned Benjamin Moore’s right to choose the insurance policy under which it would be covered for the lead paint liability claims made against it. Benjamin Moore argued that if it could not choose a single policy, the deductibles in the consecutively triggered policies should be allocated on the same basis as insurance coverage, thus exhausting the deductibles and the coverage on a single policy before moving to the next policy. LMCC argued that Benjamin Moore should be required to satisfy the deductible in each triggered policy without proration before coverage would arise under any policies.
Analysis
The court of appeals reviewed whether the full deductible must be paid in a continuing trigger case in each triggered year and for each triggered policy before coverage under the policy was available. The court noted that New Jersey has adopted the “continuous trigger” theory. Under this theory, when progressive indivisible injury or damage results from exposure to injurious conditions, the courts treat the progressive injury or damage as an occurrence within each of the years of a CGL policy. New Jersey adopted this theory because it allows for the maximization of coverage and acts as an incentive to parties to obtain insurance when available to cover risks. New Jersey has also adopted the theory of horizontal exhaustion, which requires that each layer of coverage in a given year be exhausted before moving to the next layer of coverage.
The trial court had rejected Benjamin Moore’s request to apply a joint and several allocation scheme to the deductibles, which would have allowed it to collapse the coverage into one policy, as this allocation method was expressly rejected by New Jersey courts in favor of an allocation in proportion to the degree of risks transferred or retained during the years of exposure. The court of appeals likewise found that each LMCC policy was triggered due to exposure to Benjamin Moore lead paint within that policy year. Under the policies, LMCC’s obligation to pay damages applied only to the amount of insurance remaining after deducting the deductible amount. In addition, as between these parties, the deductible was historically treated as the first layer of coverage and the coverage above that deductible was similar to “excess GL” coverage. Benjamin Moore paid substantially less for the higher deductible amounts than it would have had it purchased first dollar coverage. Consequently, Benjamin Moore had agreed to accept the risk of a high deductible in exchange for significantly lower premiums. The court held that Benjamin Moore must also accept a piece of the burden of paying the claims since New Jersey is a pro rata allocation state and under horizontal exhaustion, Benjamin Moore accepted the first layer of coverage as its deductible which must be exhausted before moving to the next layer. Benjamin Moore was accordingly required to satisfy the deductible in each triggered policy prior to coverage arising under any of the policies.
The court also rejected Benjamin Moore’s argument that it should be able to choose the policy under which it would receive a defense as contrary to the policy language providing that LMCC had the “right, but not the duty or obligation to...defend or participate in the defense of any ‘suit’ against the insured.”
Learning Point:
This case demonstrates the distinction between a true deductible and a self-insured retention (“SIR”). With a deductible, the policy typically contains a duty to defend which is triggered by notice of a suit. The insurer would then provide a defense to the insured and require the insured to pay the deductible at the time of judgment or settlement. Under an SIR, the insured is required to first incur the expense that was self-retained before an obligation arises on the part of the insurer. With the introduction of the continuous trigger theory, a wrinkle in this system was created. Under the New Jersey decision, the court has taken the position that the SIRs under all triggered policies must be paid by the insured prior to any obligation arising on the part of the insurer.
The difficulty with applying this decision will arise when the insured and insurer disagree over which policy years have been triggered. If, for example, the insurer alleges that four policy years have been triggered it could assert that the insured must satisfy the SIRs for all four policy years before coverage would arise under any policy year. The insured may allege that only two policy years have been triggered therefore requiring the satisfaction of only two SIRs. Unfortunately, it is sometimes only after discovery that we learn the actual dates of damage and the corresponding years of coverage. This issue was not answered by the New Jersey court. The insurer is advised to review the law within the applicable jurisdiction, the specific policy language and the tendered complaint carefully before asserting a demand for the payment of multiple SIRs. Even then, it is possible that careful negotiation with an insured will be necessary before the issue is resolved. ?
1 Although the court's opinion uses the term "deductible", the policy language discussed is actually a "self-insured retention."
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