Connecticut Supreme Court Adopts Pro Rata Method of Allocating Defense Costs in Long Latency Loss Claims Involving Multiple Insurance Policies
September, 2003
In Security Ins. Co. of Hartford v. Lumbermens Mut. Casualty Co., et al., 826 A.2d 107 (Conn. 2003), the Connecticut Supreme Court adopted the pro rata method of allocating defense costs in long latency loss claims involving multiple insurance policies. The court further held that when pro rata allocation occurs, insurers have causes of action for equitable contribution and reimbursement of defense costs against their insureds during periods of self-insurance.
Facts
ACMAT Corporation (“ACMAT”) operated a construction and renovation business since March 16, 1951. During various periods of time, ACMAT used a fireproofing spray that contained asbestos. On May 1, 1996, over 100 plaintiffs sued ACMAT for asbestos related bodily injury (“asbestos litigation”). None of the asbestos litigation plaintiffs specified precisely when the alleged injuries occurred. Consequently, it was agreed that ACMAT was potentially liable for asbestos related bodily injury during the period from March 16, 1951 to May 1, 1996.
During this period of potential liability, ACMAT purchased several occurrence based comprehensive general liability policies. From March 16, 1951 through April 22, 1959, however, ACMAT either lost or destroyed the policies providing potential coverage and did not know the carrier(s) that issued those policies. In addition, ACMAT lost or destroyed assorted policies issued by known carriers during the periods from April 22, 1961 through January 1, 1964 and January 1, 1964 through January 1, 1968. The respective carriers denied ACMAT’s demand for coverage under the “lost or destroyed” policies. ACMAT identified potentially applicable policies, issued by four carriers, for the period from January 1, 1968 through April 15, 1985.
On July 1, 1992, ACMAT entered into a buy-back agreement and release, which provided that ACMAT would indemnify and hold the carrier harmless for claims related to the policy for the period from January 1, 1979 through April 15, 1981 (“buy-back period”). One of the four insurers filed a complaint seeking to impose an equitable portion of the defense costs related to the asbestos litigation on ACMAT. The trial court held: (1) ACMAT must assume an equitable share of the defense costs in the asbestos litigation attributable to the buy-back period; (2) ACMAT must contribute an equitable share of defense costs to its insurers, including non-party insurers, in the asbestos litigation for the years in which no insurer was identified or for which it lost or destroyed the policies; and (3) ACMAT was responsible for a pro rata share of defense costs in the asbestos litigation equaling 50.18 percent. The Connecticut Supreme Court assumed jurisdiction over the subsequent appeal.
Analysis
The Connecticut Supreme Court found Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified, 657 F.2d 814, cert. denied, 454 U.S. 1190, and Owens-Illinois, Inc. v. United Ins. Co., 650 A. 2d 974 (N.J. 1994), persuasive regarding the proper method of allocating defense costs in long latency loss claims involving multiple insurance policies. Forty-Eight Insulations applied the pro rata method of allocating defense cost, i.e., the insured is liable for costs attributable to losses occurring during periods when it was uninsured, and rejected the joint and several method of allocation, all costs are allocated among insurers regardless of periods of self-insurance by the insured.
In Forty-Eight Insulations, the court explained:
it is reasonable to treat the insured as an insurer for those periods of time that it had no insurance coverage. To hold otherwise would result in an insured, which had insurance coverage for only one year out of twenty, being entitled to the same comprehensive level of coverage as an insured which had coverage for twenty years out of twenty. Neither logic nor precedent support such a result.
The Connecticut court agreed with the above rationale and likewise adopted the pro rata approach.
The court also addressed the following arguments asserted by ACMAT: (1) the pro rata method improperly treats the duty to defend more narrowly than the duty to indemnify; (2) the pro rata method improperly recognizes causes of action for equitable contribution and reimbursement by an insurer against its insured; and (3) the trial court lacked jurisdiction to order contribution or reimbursement of defense costs to non-party insurers.
Regarding the duty to defend versus the duty to indemnify, the court opined that since insurance companies do not contract to defend insureds for periods outside of the policy period, requiring an insured to pay its pro rata share does not treat the duty to defend more narrowly than the duty to indemnify. Proceeding with its analysis, the court quickly disposed of ACMAT’s argument regarding the propriety of equitable contribution for periods of self-insurance by noting that the applicability of this doctrine necessarily follows from the rationale underlying the pro rata method of allocation, i.e., the duty to defend does not extend to periods of self-insurance. The court was equally succinct in rejecting ACMAT’s argument regarding reimbursement, explaining that such a cause of action is cognizable to the extent required to ensure the insured does not reap a benefit for which it has not paid. ACMAT’s only cause for celebration occurred when the Supreme Court held that the trial court lacked jurisdiction in ordering ACMAT to contribute and/or reimburse defense costs to non-party insurers.
Learning Point:
Security Ins. Co. of Hartford provides a straightforward, logical framework for arguing in favor of a pro rata method of allocating defense costs in long latency loss claims involving multiple insurance policies, especially in cases involving missing policy periods. Security Ins. Co. of Hartford should also provide solid support for actions by an insurer seeking contribution and/or reimbursement of defense costs from its insured in cases employing a pro rata allocation.
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