In a long-awaited opinion, the North Carolina Supreme Court recently addressed several issues common to long tail exposure claims: trigger of coverage, allocation among multiple policy periods, and vertical versus horizontal exhaustion.
In the early 2000s, Radiator Specialty, a manufacturer of products containing benzene, was named in hundreds of personal injury lawsuits seeking damages for bodily injury (e.g. cancer and death) allegedly caused by repeated exposure to benzene over time. Over an approximately forty-year time period, Radiator Specialty had purchased a number of insurance policies from multiple different insurance companies. In 2013, Radiator Specialty brought a declaratory judgment action against several insurers, seeking coverage for defense costs and indemnity incurred because of the benzene litigation.
The Supreme Court first addressed the trigger issue, i.e., the point at which the various benzene claimants experienced bodily injury such that coverage under the policies was activated. The unambiguous language of each of the relevant policies required the insurers to indemnify Radiator Specialty for claims raised by claimants who suffered some form of personal or bodily injury caused by an occurrence and specified that either the occurrence or the resulting injury must have taken place during the effective period of the insurer's policy.
The Supreme Court was tasked with deciding which of two trigger theories to apply:
- injury-in-fact (all policies in effect during the time the injury or damage is shown to have actually taken place are triggered) or
- exposure (all policies in effect during exposure to injurious or harmful conditions are triggered).
The Supreme Court ultimately held that, in benzene cases, the injury that triggers coverage occurs at the time of exposure.
The North Carolina Court of Appeals had previously applied an injury-in-fact trigger to a case concerning property damage caused by a ruptured pressure vessel. The Supreme Court explained that Gaston County involved distinct factual circumstances relating to how to properly define the injury, which in turned controlled when coverage was triggered under the relevant policies, and that Gaston County did not suggest either that exposure to a substance causing alterations to a person's DNA (e.g., benzene) is not an "injury-in-fact" or that an insurer offering coverage when a claimant is exposed to benzene is not liable for all the damages arising from that injury.
Having established that the exposure trigger applied, the Supreme Court next turned to the issue of allocation. As the Supreme Court explained, some injuries, such as those resulting from benzene exposure, could have resulted from any one exposure over a period of years, which may implicate numerous insurance policies over the course of the period during which the damage could have occurred.
Apportion Costs and How the Court Approached
The Supreme Court explored two approaches to determining how to apportion costs arising during the various policy years:
- pro rata / time-on-the-risk (each triggered policy bears a share of the total damages proportionate to the number of years it was on the risk, relative to the total number of years of triggered coverage and
- all sums (allows recovery in full under any triggered policy of the policyholders' choosing and leaves the selected insurer to pursue crossclaims against other carriers whose policies were also available).
The Supreme Court explained that although the policies contained language agreeing that the insurers would pay "all sums" arising from certain liabilities, the policies also contain limiting language such as "during the policy period." The Supreme Court thus held, based on the language of the policies, that pro rata allocation was appropriate.
Finally, the Supreme Court addressed whether horizontal or vertical exhaustion applied to one of the insurer's duty to defend Radiator Specialty under the umbrella policies issued by that insurer.
Vertical exhaustion allows a policyholder to obtain coverage from an excess policy once the primary policies beneath it within the same policy period are exhausted. Horizontal exhaustion, on the other hand, requires a policyholder to exhaust all primary policies from other policy periods in order to access excess coverage.
The trial court held, and the appellate court affirmed, that horizontal exhaustion applied to the insurer's duty to defend, but vertical exhaustion applied to its duty to indemnify. In other words, according to the trial court and the appellate court, the duty to defend existed only when all other policies had been exhausted.
The umbrella policies at issue provided that the insurer's duty to defend did not arise unless:
- the applicable limits of insurance of the "underlying insurance" and other insurance had been used up in the payments of judgments or settlements, or
- no other valid and collectible insurance was available to the insured for damages covered by the umbrella policy.
The Supreme Court focused on the use of the disjunctive "or," explaining that the umbrella insurer's duty to defend was triggered so long as no other valid and collectible insurance was available to Radiator Specialty for damages covered by the policy. The primary policies covering the same periods as the umbrella policies did not provide coverage for the benzene actions, whereas the umbrella policies did; there was therefore no other "valid and collectible insurance" for damages from the benzene actions, other than the umbrella policies themselves. The Supreme Court thus concluded that the umbrella policies were triggered when vertical exhaustion had been achieved, such that there was no other "valid and collectible" policy to cover a benzene action during a concurrent policy period.
The North Carolina Supreme Court's decision reiterates that issues regarding trigger of coverage, allocation among multiple policy periods, and vertical/horizontal exhaustion must be determined based on the facts of the case and the language of the policies at issue.
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