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The N.J. Supreme Court’s “Owens-Illinois” Environmental Coverage Allocation Formula-- Intended to Fairly Marshal Coverage for An Insured--Survives Yet Another Insurer Attempt to transpose Insurance Policy Allocation Into An insurance coverage reduction formula

Farmers Mut. Fire Ins. Co. of Salem v. N.J. Property-Liability Ins. Guar. Ass’n,

215 N.J. 522 (2013), Decided September 24, 2013 (“Farmers Mutual”):


Insurance law usually arises out of litigation between insureds and their insurance carriers, but twice within the space of a few weeks this past term, the New Jersey Supreme Court issued insurance coverage opinions that have significant impacts on insureds, in a case without an insured’s participation.[1]

Farmers Mutual, the latest N.J. Supreme Court insurance coverage case without an insured party, resolves the question of whether, or when, the insurance allocation “shares” of an insolvent carrier may be assigned to the State’s Guaranty Fund under the Supreme Court’s Owens-Illinois/Carter-Wallace insurance policy allocation methodologies developed in prior cases of those names.

  1. An Attempt to Dissipate Coverage, Rather Than Marshal Coverage, By Allocating An Undue Share to Either an Insolvent Carrier or the Guaranty Fund which Only Partially Assumes A Bankrupt Insurer’s Share of Liability

Had the insurer prevailed in Farmers Mutual, insured property owners, facing otherwise covered claims for environmental contamination of historic origin, would have been adversely impacted.  Property owners would have found their insurance coverage resources, assembled through years of diligently purchasing liability insurance, significantly diminished.

Solvent insurers would have been able to use the precedent to advocate for allocation of a disproportionate share of coverage responsibility to insurance policies issued by insolvent carriers, subject to only very limited assumption by the Guaranty Fund (under a statutory $300,000 maximum). The insured would have been chargeable with personally assuming the balance of the insolvent carrier’s share which, in most complex environmental insurance cases involving significant clean-up costs, the Guaranty Fund would only partially address.

Perhaps appreciating this overreaching agenda on the part of the insurance industry, the Supreme Court instead reaffirmed the pro-coverage public policies earlier enunciated in Owens-Illinois and Carter-Wallace, the precedents that established coverage allocation methodology expressly in order to equitably maximize the insurance available from multiple insurance policies to cover environmental harm.  The Supreme Court rejected attempts by the insurance industry to recast the Owens-Illinois and Carter-Wallace allocation process for use as a vehicle for reducing insurer responsibility for environmental claims.

The Supreme Court instead held that the Guaranty Association was the “payor of last resort”, and directed that “solvent carriers pay the maximum limits of their policies before insureds may seek statutory benefits from the Guaranty Association”.  Farmers, supra. at 548; see also, Owens-Illinois v. United Ins. , 138 N.J. 437, 1994); Carter Wallace v. Admiral Ins., 154 N.J. 312 (1998), cited therein.

Context:  Laboratory Conditions Created For an Insurer Test-Case Seeking to Undermine Owens-Illinois’ Proportionate Insurance Policy Marshaling

In Potomac Insurance Co., v. Pennsylvania Mfg. Ass’n Ins. Co., a Supreme Court decision issued a few weeks earlier than Farmers Mutual, the same Court had recognized direct claims for contribution, assertable by insurers that had settled with their insureds, allowing settling insurers to pursue reimbursement from non-settling insurers. The underlying claims of the insured in Farmers Mutual had also been resolved before the related allocation issues among the insurers made their way up to the New Jersey Supreme Court. (See, preceding WMM Law Blog entry--Potomac Ins. Co.--explaining the significance to insureds of the Court’s authorization of direct contribution suits among insurers.)

As in Potomac Ins. Co., the petitioner, Farmers Mutual, had allies from the insurance industry at its side as amicus curiae. The Complex Insurance Claims Litigation Association (CICLA)[2] and Zurich American Insurance Company (Zurich) were each granted leave to participate as amicus curiae.

These insurer interests, unconstrained by the pressure of an insured party as a litigant giving voice to the insured community’s interests, made several extraordinary, and ultimately unconvincing, arguments in support of their view of New Jersey insurance precedent. The Court was urged to allow insurers to use the so-called long-tail allocation methodology which had been articulated as a means of collecting the insured’s purchase of liability coverage over a period of years, or even decades, in order to fairly maximize indemnification of pollution liability, to also serve as an insurer device to reduce otherwise available coverage.

As argued in Farmers Mutual, this would have meant transposing the Owens-Illinois insurance allocation process into a method for shifting more than the 3/4ths of the losses assignable to a period covered by the Guaranty Association, which was statutorily charged with the share of an insolvent insurer.

If this new rule of allocation had been established, the Guaranty Association’s low statutory cap ($300,000.00) would dictate that in most multimillion clean-up liability cases, no insurance dollars would be available for the bulk of the liability assignable to an insolvent insurer or insureds.

As insurance coverage allocation litigation goes, Farmers Mutual is a procedurally compact case, in that, in addition to the insured having been taken out of the controversy, there were only two carriers and two claims.  There were also no underlying coverage arguments for the application of insurance policy exclusion clauses to distract from the central policy allocation issues.

In the absence of usual tangential coverage issues, such as: the pollution exclusion clause, the primary versus excess coverage issue, the policy definition questions of “occurrence”, “expected and intended”, etc., the holding in Farmers Mutual  is  clear and direct. The insurers and the insurance industry amici may now regret the ultimate outcome of what must have, at first, seemed an ideal set up for generating insurance coverage precedent favorable to insurers.

Background: Small Dollar Stakes in the Small Policy Case at Hand, With Big Stakes for Insureds Seeking to Favorably Allocate Coverage of Environmental Liability

 The two underlying claims[3] in Farmers Mutual involved soil and groundwater contamination emanating, over the course of a number of years, from two residential properties under common ownership interest. The properties each insured under homeowners policies, the first of which was issued by Newark Insurance Company (“Newark Ins.”) (1998 - 2002) with limits of $300,000, and the later policies issued by Farmers Mutual Fire Insurance Company of Salem (“Farmers Mutual”) (2002 - 2003), under policy terms limiting coverage at $500,000.

That the contamination had begun during the Newark Ins. periods of coverage and had continued during the Farmers Mutual period of coverage was not in dispute.  All of the policies of both carriers provided coverage for environmental contamination, apparently lacking the coverage avoiding, so-called “absolute pollution exclusion” clause, despite the relatively late dates of issuance of the insurance.

Contamination from underground storage tanks on the insured property was discovered in 2003 and insured claims were made against Newark Ins. and Farmers Mutual.  Newark Ins., however, was declared insolvent in 2007, at which point, the New Jersey Property-Liability Insurance Association (“Guaranty Association”) took over administration of claims against Newark Ins.

The Guaranty Association’s administration of claims against insolvent insurers is governed by the New Jersey Property Liability Insurance Guaranty Association Act, N.J.S.A. 17:30A–1 to –20 (“PLIGA Act or Act”).  The statutory liability cap for the Guaranty Association under the PLIGA Act happened also to be $300,000, neatly matching the Newark Ins. coverage limits.

The trigger of coverage and policy periods pertaining to the underlying claims were such that under a strict  Owens-Illinois and Carter-Wallace allocation, Newark Ins. was on the risk for a much longer time than was Farmers Mutual, so that, but for its insolvency, Newark Ins. would have been responsible for as much as three-quarters of the risk.  The total amount of the remediation cost exposure at stake for the two claims was low enough (less than $150,000) so there was no possibility that any of the policies, nor any Guaranty Fund allocation, would have been exhausted.  The total cost fell within available policy limits, no matter how the losses were allocated. (The modest total exposure might ordinarily have been thought to be not sufficiently significant, in dollar terms, so as to warrant multiple rounds of insurer financed appellate litigation.)

The Coverage Positions

Farmers Mutual took control of the clean-up claims from the insured and paid all of the modest remedial costs at both sites. Farmers Mutual thereafter filed suit against the Guaranty Association, seeking reimbursement of payments that Farmers Mutual argued should have been borne by the Guaranty Association in Newark Ins.’ stead.  Farmers Mutual argued that the amount of reimbursement should be determined by the so-called  long-tail allocation methodology set out in Owens-Illinois and Carter-Wallace.

Farmers Mutual secondarily relied on the Appellate Division opinion in Sayre v. Insurance Co. of North America, 305 N.J. Super. 209 (App.Div. 1997) (“Sayre”) which, in another context securing insurance dollars for an insured, had held that the Guaranty Association, in the particular matter, effectively stood in the shoes of the insolvent insurer, and had all of its rights, duties and obligations, including the obligation to contribute its allocated share of losses in a long-tail environmental claim.

The trial court had ruled in Farmers Mutual’s favor, holding that the Guaranty Association had to reimburse Farmers Mutual  for Newark Ins.’ share of the costs, which were allocated pursuant to Owens-Illinois and Carter-Wallace and Sayre.   The Guaranty Association appealed the Appellate Division from the judgment in Farmers Mutual’s favor.

The PLIGA Act, creating the Guaranty Association, had been amended in 2004, after Sayre had been decided, in order to specifically account for long-tail continuous-trigger cases involving progressive injury and property damage, (the kind of coverage claims presented in Sayre and Farmers Mutual). The amendment to N.J.S.A. 17:30A-5 defined “exhaust”, to expressly provide that all other available triggered insurance coverage had to be depleted before the Guaranty Association could be made to contribute toward a share allocated to an insolvent or unavailable insurer under the Owens-Illinois and Carter-Wallace methodology. The amendment effectively turned the Guaranty Association into “the insurer of last resort”.[4]

The Appellate Division in Farmers Mutual found the 2004 Amendments to the PLIGA Act expressly overruled Sayre and therefore reversed the trial court, holding that since Farmers Mutual’s indemnity payments toward environmental remediation were within the Farmers Mutual policy limits, the Farmers Mutual insurance policies had not been exhausted and the Guaranty Association thus had no obligation to reimburse Farmers Mutual.   The New Jersey Supreme Court affirmed, rejecting Farmers Mutual’s arguments that the PLIGA amendment had somehow impermissibly overruled the Owens-Illinois and Carter-Wallace line of insurance allocation cases.

Owens-Illinois and Carter-Wallace Did Not Create an Insurer Contractual Right to Engineer the Allocation of Covered Losses Back to an Insured

As amicus curiae, CICLA argued that Owens-Illinois and Carter-Wallace allocation offsets were, in essence, inviolable, “well-entrenched” contractual entitlements for insurers. CICLA contended that to the extent that the amendment was used by the Appellate Division to interdict the trial Court’s allocation, favoring insurers, the result must be voided as being an “unconstitutional impairment of existing contract rights.”  Farmers Mutual, at 533.  This “right” of insurers, once created by the Owens-Illinois Court, became “sacrosanct” and was beyond the reach of the Legislature and the Courts, according to this Contracts Clause argument.

At its base, the Farmers Mutual decision presents a straight-forward instance of the Supreme Court, interpreting its own common law (as earlier set forth in the Owens-Illinois and Carter-Wallace line of cases), and then accommodating the State Legislature’s prerogative of modifying or clarifying that common law (in the form of the 2004 PLIGA Act Amendments), by applying the common law, as modified by the Legislature, to the facts before it. [5]

The Supreme Court’s opinion, in places, seems genuinely nonplussed by insurers’ insistence that the industry’s preferred interpretation of Owens-Illinois and Carter-Wallace should trump legislative action and judicial review.  The Supreme Court noted that such a primacy of a private litigant’s interpretation of original common law “is inconsistent with the most basic principles of our democratic form of government”.  Farmers Mutual, at 545.

The Supreme Court concluded that, in a heavily regulated industry, it matters not how strongly enamored (or heavily invested in) a litigant is regarding its own self-serving interpretation of the common law: “[T]he way Farmers Mutual envisioned the Owens-Illinois allocation would work in the present case when it contracted with its insureds did not vest it with a right to the outcome it wanted.”  Farmers Mutual, at 547.

The insurers were found to be fundamentally wrong on the operation of common law, wrong on the interrelationship of judge-created common law and legislative modification of the common law, and wrong on the effect of judicial review of legislative modifications of common law.  Fortunately for insureds, the insurers were also found to be wrong in their interpretation of the common law in the first instance--an Owens-Illinois allocation was never intended to operate as a coverage reduction device.

There is No Insurer Entitlement to Make an Insured Responsible for “Insolvent Periods” Under Owens-Illinois and Carter-Wallace

The other Amicus Curiae, Zurich, had asserted that regardless of how the Supreme Court might decide the insolvency issue as to the Guaranty Association, Owens-Illinois and Carter-Wallace categorically and unassailably protected solvent carriers from responsibility for losses that Zurich would attribute to an ‘insolvent period’.  As the Farmers Mutual Court recounted Zurich’s argument:

“. . . . the insured, and not its other insurers, remains responsible for periods where its insurer becomes insolvent. . . . From Zurich’s standpoint, even if the Guaranty Association is correct that the 2004 amendment prevents an insured from recovering statutory benefits before the policies of the solvent insurers are exhausted, the insured bears the loss for the period the insolvent carrier was on the risk. In short, Zurich would place the insured on the hook and not remove the insolvent period from the Owens-Illinois calculations.”

Farmers Mutual, at 531.

The Supreme Court rejected this argument, noting that such an interpretation “would turn the PLIGA Act on its head.”   Farmers Mutual, at 544.  The Appellate Division had similarly observed that the PLIGA Act is remedial legislation intended “to protect insureds not insurers”.   Farmers Mutual, at 531.

Owens-Illinois Did Not Shift of Risk of Insurer Insolvency to Insureds

As amicus, Zurich apparently argued that New Jersey Supreme Court had earlier held that an insured would be responsible for any ‘orphan shares’ when loss was allocated to policy periods where an insurer had become insolvent.  However, this argument was founded on a mischaracterization of the original holding in Owens-Illinois, which the insurance industry divined from later allocation opinions, which were progeny of Owens-Illinois.

Zurich, as amicus, and Farmers Mutual, as petitioner, had cited to Spaulding Composite Co. v. Aetna, 176 N.J. 25, 36 (2003), in support of their contention that the Supreme Court had somehow already endorsed shifting of the burden of an insurer insolvency to the insured, when conducting an Owens-Illinois allocation.

However, the actual holding of Spaulding Composite, supra, is limited to rejection of a so-called “non-cumulation” clause of a particular insurer’s series of liability policies which, as the insurer’s name for the clause suggests, would have exempted the insurer from a general Owens-Illinois allocation and confined coverage to a single policy, in direct derogation of the coverage maximization intention of Owens-Illinois.  Spaulding Composite, 176 N.J. at 44.

The insurers before the Court in Farmers Mutual nonetheless heavily relied upon a peripheral excerpt in Spaulding Composite, 176 N.J. at 36, in which the Spaulding Composite Court remarked that “the insured is required to pay its "aliquot" share of both defense and indemnification on account of years in which it was uninsured, self-insured, or its coverage was exhausted or bankrupt.”    (emphasis added)

Taken out of context, this quote from the Spaulding Composite opinion may have been colorably of help to the insurers, position in Farmers Mutual where they argued that the Guaranty Association, or, by necessary implication, a non-settling policyholder, ought bear the cost of insurer insolvency, rather than the remaining solvent insureds.

However, this short, tangential passage from Spaulding Composite is at variance with the substantive holding of Owens-Illinois, which had not addressed either coverage exhaustion, or the treatment of triggered periods where an insolvent carrier had taken on a portion of the risk.  As interpreted by the insurers before the Court in Farmers Mutual, the quoted comment is also discordant with both the Spaulding Composite  Court’s general reaffirmation of the broad principles of Owens-Illinois allocation methodology, and the Spaulding Composite opinion’s specific, pro-coverage holding, rejecting “non-cumulation” clauses in successive policies through which the carriers unsuccessfully sought to circumvent the risk-spreading directives of pro-rata allocation.   Exhaustion or carrier-insolvency was not at issue, not in dispute, not in the record, and not before the Court in Spaulding Composite. 

Similarly, the insurers secondarily cited to Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 179 N.J. 87, 99 (2004), a case involving the treatment of deductibles in a succession of policies, where in the course of brief discussion, while again reaffirming the general principles of Owens-Illinois, the Supreme Court appears to have lifted directly into the Benjamin Moore opinion, the same paraphrase from Spaulding Composite, quoted above, incongruently suggesting that insurer insolvency might be borne by the insured policyholder.

However, as is the case with Spaulding Composite, the quoted remark is dicta as the issue of insurer insolvency was also not before the Court in Benjamin Moore.

The quoted remark originating in Spaulding Composite can be traced back to its source, which is cited in the opinion--a 1999 American Bar Association article, authored by an insurer coverage defense practitioner.  See, Emerging Coverage Issues in Continuous Trigger Regimes, 28 Brief 18, 20 (Summer 1999). See also, Spaulding Composite, 176 N.J. at 32 (with misprinted cross-citation to this article), and at 36 (with correct cross-citation to this article), quoting the author/insurer counsel’s speculative remarks about insurer insolvency, in the course of the Court’s general survey of the literature of “triple trigger” coverage allocation;  see also, Benjamin Moore, supra, 179 N.J. at 99, carrying forward the same citation.

The Insurer Myth of Insolvency Allocation

This is a point worth laboring through because some insurer commentators continue to mischaracterize the actual precedent, already misdescribing Farmers Mutual as overruling an established Court principal of insolvency allocation.[6]   Instead, the “precedent” that Farmers Mutual, and the two insurance industry amicus, claimed to have relied upon before the Farmers Mutual decision, was not actual precedent, or even a disinterested academic article.  It was instead, a perhaps provocative, but ultimately unfounded, speculative remark by an insurance industry advocate, which was infelicitously chain cited by the Supreme Court, in a lengthy, non-operative case survey section of the Spaulding Composite opinion that had no bearing on the Court’s holding. 172 N.J. at 36.  The Farmers Mutual Court flatly rejected the insurers’ contention that to hold against them would be to overturn established precedent, “[U]ntil today, we have not had occasion to speak to the intersection of the PLIGA Act and the allocation scheme in long-tail environmental contamination cases.”  Farmers Mutual, at 547.

The 1999 article ultimately failed to accurately predict how coverage allocation was “emerging” in New Jersey, as featured in the title to the article.  Both the Spaulding Composite and the Benjamin Moore opinions of a few years later, essentially reaffirmed Owens-Illinois’ coverage maximization principles, and, of course, in Farmers Mutual, the Supreme Court soundly rejected shifting insurer insolvency losses away from solvent insureds, in addition to generally re-endorsing the Owens-Illinois allocation process.

In sum, notwithstanding the insurer claims of surprise, and detrimental reliance on industry conjecture about the path of coverage allocation law, upon closer analysis, there can be no genuine upsetment of expectations at the Supreme Court’s citation to Benjamin Moore and Spaulding Composite as cases that supported its holding in Farmers Mutual (215 N.J. at 538), where the Court, in substance, held that insurer insolvency should be  allocated to the solvent insurers, rather than to the Guaranty Association, or  the insured.

During oral argument in Farmers Mutual, which is preserved in the Supreme Court’s recorded archives, the quoted remarks, excerpted from an insurer attorney’s article, were charitably dismissed by a Senior Justice, as “dicta”, and no further discussion of the 1999 article was found warranted in the Farmers Mutual opinion itself, despite the insurer’s efforts to hoist the earlier quoted passages from the article to a level of being reliance-worthy by the regulated insurance industry.

Returning to the larger coverage allocation focus of this post, upon closer analysis, the insurers’ arguments in Farmers Mutual prove to be a classic instance of a false premise being used to support false conclusion.  The false insurer premise was that the Owens-Illinois and Carter-Wallace line of cases were developed to invariably shift risks away from insurer-covered periods, by allocating losses to uninsured periods, or to periods constructively uninsured due to carrier insolvency, which would then have to be picked up by the insured, thereby reducing insurer responsibility for covered losses.

From this false premise, the insurers before the Court in Farmers Mutual insisted that the Guaranty Association’s arguments, the Appellate Division’s holding, and the PLIGA Act itself, were collectively unsustainable, because they would “scuttle” what the insurers perceived as an Owens-Illinois and Carter-Wallace imperative--establishing allocation as a device for lessening insurers’ collective share of covered losses.

In Farmers Mutual, the Supreme Court rejected the insurers’ assumptions that the original coverage allocation case law was formulated to provide insurers relief. The Court instead restated and reaffirmed the original intent of its coverage allocation common law:

The Owens-Illinois methodology is a product of this Court’s equitable powers to advance public policy within the realm of the common law.  The purpose of the methodology is to make insurance coverage available, to the maximum extent possible, to redress such matters as toxic contamination of property.

Farmers Mutual, at 528;

Although insureds assembling their histories of insurance policy purchases, in effort to address environmental claims, have regularly encountered insurer attempts to subvert Owens-Illinois allocation process, the underlying public policy behind coverage allocation has nonetheless been repeatedly reaffirmed by the New Jersey Supreme Court.[7]  The Farmers Mutual Court pointedly reminded that insurance policy allocation should work to maximize solvent insurer resources, so that coverage assets may be directed toward funding cleanup.

The Supreme Court, also held that the Guaranty Association is to be the “payer of last resort”, and that the “conservation of the Guaranty Association’s resources is an objective of the PLIGA Act”.  However, consistent with the Legislative purpose in establishing the fund for the protection of insureds against the fallout from insurance carrier insolvency (Sayre, supra.), the Court effectively held that Guaranty Association’s resources were to be conserved at the expense of solvent carriers, not at the expense of insureds. Insurer insolvency was, in effect, recognized as being an inherent responsibility of the collective insurer enterprise, rather than have the risk of insurer insolvency visited upon on insureds.[8]

Farmers Mutual--Recentering Owens-Illinois Allocation As a Coverage Maximization Process

In sum, the text of the Farmers Mutual opinion represents a reaffirmation of the Owens-Illinois allocation process, and reclamation of the underlying public policy.

The insurers unsuccessfully presented a revisionist interpretation of New Jersey allocation law.  Zurich, in particular, as Amicus Curiae, had sought to exploit the incidental notation in Owens-Illinois that, under certain circumstances, outside of insurer insolvency, an insured might be fairly assigned a portion of liability under a coverage allocation. Zurich sought to expand the Owens-Illinois Court’s remarks into a statement of a general preference that the insured be the first choice for reassignment of any allocation share lacking a solvent insurer, notwithstanding that the orphaned shares of insolvent carriers will, in many cases, exceed the exceedingly modest coverage cap ($300,000.00) of the Guaranty Association.

Read objectively, the Owens-Illinois opinion of the the Supreme Court actually takes pains to confine any remarks regarding allocations to policy holders to limited instances in which an insured had purposefully retained risk and foresworn available insurance.  Allocation to an insured was said to have been appropriate only when “periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available”.  Owens-Illinois, at 479.

As to the specific insureds before the Court, rather than imprudently forego genuinely available coverage, the homeowner/insureds in Farmers Mutual had unequivocally transferred their risks, when they contracted and paid for insurance coverage from Newark Ins.  There was no deliberate decision by the homeowners to retain risk by “going bare” of insurance, and thus no colorable insurer entitlement under Owens-Illinois to adopt a methodology which would reallocate risks back to the insured.

Had the insurance industry interests prevailed in Farmers Mutual, the result to the insured community would have been a virtual recasting of the Owens-Illinois allocation methodology into a device that the insurers could exploit to reduce their shares, at the expense of the insured, by assigning generous shares of coverage to periods attributable to insolvent carriers where, in the best case, only low-cap, Guaranty Association protection would be available.  The industry would have also succeeded in establishing a broader principal that the allocation process, rather than being a shield for insureds, is, in effect, a sword for insurers, which they would be free to creatively deploy to, in effect whittle down coverage in multi-carrier, multi-policy situations.

Refocus on Maximization of Coverage for Clean-Up

The Farmers Mutual Court underscored the coverage outcome differences between an imprudent election by an insured to decline available coverage, and circumstance in which a carrier has become insolvent after an insured purchased coverage.  The Supreme Court noted that “[T]he PLIGA Act created the Guaranty Association as a means of providing benefits to insureds who, through no fault of their own, have lost coverage due to the insolvency of their carriers.” Farmers Mutual, at 544.    The PLIGA Act was interpreted as being intended to mitigate the losses otherwise suffered by insureds and claimants because, “[W]hen insurance companies are rendered insolvent, insureds no longer have the protection for which they contracted and claimants no longer have a source from which to be made whole for their losses.”   Farmers Mutual, at 540. 

If an insurer insolvency were held to not only deprive an insured of any coverage protection for a period applicable to the bankrupt carrier, but to also serve as an occasion for solvent carriers to reduce their coverage obligations, by imposing an insurer-oriented allocation process, then New Jersey’s “strong public policy interest in the remediation of environmental contamination within its borders”, on which Owens-Illinois was founded, would have been turned “on its head”.  Sensient Colours, at 394. 

Reading the PLIGA Act as in effect assigning solvent insurers to the role of first responders to environmental remediation, was found to be entirely consistent with the larger goal of Owens-Illinois “to make insurance coverage available, to the maximum extent possible, to redress such matters as toxic contamination”.  Farmers Mutual, at 528.    See also, Owens-Illinois at 472-73, recognizing that “insurance companies can spread costs throughout an industry. . . . Spreading the risk is conceptually more efficient.”

CICLA, the other Amicus alongside Zurich, had argued that by failing to allocate a portion of the losses to insolvent insurance periods, the Appellate Division had somehow violated settled New Jersey law by, in effect, compelling Farmers Mutual, “to pay for a loss that did not occur during its policy period.”  Farmers Mutual, at 533. However, the Owens-Illinois Court had been expressly reconciled to the prospect that its allocation methodology would at times cause insurers to pay for indivisible losses (accretion of pollutants)  that occurred outside of their specific policy periods: “[T]hat later insurers might need to respond to pre-policy occurrences is not unfair. "These are 'occurrence' policies which, by their nature, provide coverage for pre-policy occurrences (acts) which cause injury or damage during the policy period."” Owens-Illinois at  475.

As the Farmers Mutual Court similarly noted, “Farmers Mutual has not been required to pay beyond the maximum policy limits that it insured in each of the two cases.”  Farmers Mutual, at 548.  Thus, picking up insolvent coverage outside of an insured’s allocation period, still would not deprive insurers of the protection of insurance policy dollar limits on coverage.

Farmers Mutual—An Insured’s Precedent

In sum, insurers will undoubtedly continue to respond to insureds, that diligently assemble years of insurance history coverage and seek indemnification for environmental pollution claims, by publishing their own insurer-oriented coverage allocation formulas, which would effectively reduce net, available coverage.  It can also be expected that Farmers Mutual will be simplistically distinguished by insurers confronted with coverage claims by insureds, on the superficial basis that the opinion did not involve claims by an insured--the insured having been settled out of the case.

However, in substance, the Farmers Mutual opinion reaffirms the fundamental, coverage-maximizing purpose of the Owens-Illinois allocation process, and it can be cited by insureds to refute any proposed coverage allocation by an insurer that effectively reduces available coverage.

The prospect of an insurer having to pay more than its allocated share for its coverage period (always subject to the aggregate dollar limits of its policies), due to gaps in coverage allocation resulting from insurer insolvency, or other coverage shortfalls not attributable to the insured’s willfully foregoing genuine coverage, was recognized long ago as not being unfair to insurers in Owens-Illinois, as quoted above. This outcome is still not unfair to insurers.

This outcome remains all the more equitable, given the Supreme Court’s declaration in its Potomac Ins. decision issued two weeks prior to Farmers Mutual, that settling insurers feeling aggrieved by settlement now have a right to commence a direct contribution action against any other non-settling insurer that ought to have paid a fair share of pollution claims spanning a multiplicity of policy years.

In short, the insurance industry unsuccessfully engineered a challenge of Owens-Illinois’ fundamental coverage maximization purposes, through a small stakes (Farmers Mutual) test case.  The insurance industry will undoubtedly find recourse to direct (Potomac Ins.) contribution actions against other insurers to be a less than satisfactory tradeoff for the pro-coverage holding in Farmers Mutual, and the insured community will undoubtedly have to weather additional challenges to the proper, coverage-oriented use of Owens-Illinois.

However, Farmers Mutual can clearly be cited in order to refute the industry’s further resistance to the Supreme Court’s originally intended, coverage maximizing, Owens-Illinois allocation process.


[1] In early September, in Potomac Ins. Co. v. Pennsylvania Manufacturers’ Ass’n Ins. Co., 215 N.J. 409 (2013), a dispute that was exclusively carrier-on-carrier, the Court held that insurers who fund and control the defense of a long-tail claim against an insured have a direct right to seek contribution, via Owens-Illinois and Carter-Wallace allocation methodology, against other insurance carriers who disclaim coverage and decline to participate in the defense of a common insured.

[2] The Complex Insurance Claims Litigation Association (“CICLA”) is a trade association of major property and casualty insurance companies, including Farmers Mutual and Zurich.

[3] Coverage litigations between the insurers were consolidated while the cases were on appeal before the Appellate Division.

[4] “Exhaust” means with respect to other insurance, the application of a credit for the maximum limit under the policy, except that in any case in which continuous indivisible injury or property damage occurs over a period of years as a result of exposure to injurious conditions, exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years has been applied. . . .[L. 2004, c. 175, § 2 (effective Dec. 22, 2004).]  Farmers Mutual, at 542.

[5] Farmers Mutual, at 545, “Legislative enactments are never subservient to the common law when the two are in conflict with each other.  The saying “equity follows the law” is a recognition that the common law must bow to statutory law. See Letter from Thomas Jefferson to Phillip Mazzei (Nov. 1785), in 4 The Works of Thomas Jefferson 473, 476 (Paul Leicester Ford ed., 1904) (noting that a court of equity “cannot interpose in any case against the express letter and intention of the legislature”).”

 [6] See, for example, “New Jersey Supreme Court Requires Exhaustion of All Other Applicable Insurance Before N.J. Property-Liability Guaranty Association Pays Statutory Benefits For An Insolvent Insurer’s Long-Tail Claims”, Coughlin Duffy LLP,  “Reinsurance and Insurance Case Alerts”, September 24, 2013, suggesting that, “[H]istorically, the policyholder was responsible to pay for insolvent periods not covered by PLIGA based on Supreme Court precedent governing allocation of long-tail claims” and asserting that “[T]his decision represents a shift in New Jersey law, as it implicitly suggests that solvent insurers are responsible for long-tail losses otherwise allocable to an insolvent insurer in cases where PLIGA stands in the shoes of the insolvent insurer.” ; see also,  “New Jersey Supreme Court Rewrites Carter-Wallace Allocation Rules in Cases Involving the State Guaranty Association”, Gordon & Rees, LLP, Insurance Case Bulletin, October, 2013; “New Jersey Supreme Court Rules That State Statute Governing Insurer Insolvency Trumps Pro Rata Allocation for Continuous Property Damage”, Simpson Thacher, “Allocation Alert”, November, 2013.

[7] See also, for example, Sensient Colours Inc. v. Allstate Ins. Co., 193 N.J. 373, 394 (2008), grounding New Jersey forum selection in the State’s public policy:

 The most important special equity for not deferring to the first-filed rule is New Jersey's strong public policy interest in the remediation of environmental contamination within its borders. That interest includes ensuring that an insurance policyholder is not wrongly denied funds for the clean-up of a hazardous-waste-ridden site. This case touches not just on property, but on the health and safety of New Jersey's residents, a number of whom were exposed unsuspectingly to toxic substances, such as lead. We have made it clear that "the governmental interests of a New Jersey forum . . . are protection of the regulatory process in New Jersey, protection of New Jersey policyholders, protection of the victims of pollution, and protection of the New Jersey environment."

[8] Exhaustion of other sources of indemnification before reaching the Guaranty Association, of course, does not mean that the Guaranty Association can never be called upon to contribute to the remediation of environmental contamination.   A claim against the Guaranty Association can be made when other triggered polices have been depleted, or when a claim arises during a period of claims-made coverage (as contrasted with occurrence-based coverage) in which case a single carrier and single policy would be triggered and responsible.  If such a claims-made carrier were insolvent, there would be no other triggered policy to exhaust as a prerequisite so the claim could be made against the Guaranty Association.


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