On September 7, 2016, the Louisiana Supreme Court applied, for the first time, a pro rata allocation method to defense costs where commercial general liability policies provided coverage during a portion of the time of exposure in a long-latency disease case. See Arceneaux v. Amstar Corp., No. 2015-C-0588, 2016 La. LEXIS 1675 (La. 2016). The Court held that defense costs incurred by the insured in a suit alleging noise-induced hearing loss resulting from workplace conditions should be allocated among insurers and the insured based on the period of coverage or self-insurance.
The Court's decision arose from a suit filed by a group of sugar refinery employees who alleged that they suffered hearing loss from exposure to unreasonably loud noise over a period of approximately 60 years. American Sugar Refining, Inc. ("American Sugar"), the insured, demanded a defense and indemnification from its insurer, Continental Casualty Company ("Continental"), which had issued a series of general liability policies during the relevant time.
Due to the application of an exclusion, Continental and American Sugar agreed that coverage was available under only one of its policies, covering a period of just 26 months. Notwithstanding that the Continental policy covered such a small portion of the alleged decades-long period of injury, American Sugar brought suit seeking a declaration that Continental owed American Sugar a complete defense of the suit because the underlying complaint included allegations of exposure to harmful conditions during the policy period.
The lower courts agreed. Following the traditional rule that "an insurer's duty to defend arises when the pleadings disclose even a possibility of liability under the policy," even if some of the claims fall outside the policy's coverage, both the trial court and the Louisiana Court of Appeal sided with American Sugar, requiring Continental to pay for the entirety of its defense.
The Louisiana Supreme Court reversed. The State's highest court began its analysis by looking to Louisiana law concerning an insurer's duty to indemnify, under which liability may be prorated among insurance carriers that were on a risk during periods of exposure to injurious conditions. This rule is based in large part on Louisiana's adoption of the exposure theory in long-latency disease cases, which provides that the "occurrence" that triggers coverage is the plaintiff's exposure to harmful conditions within the policy period. When claims arise out of occurrences that take place during a period in which no insurer is on the risk, the insured may be assigned a pro rata share for purposes of indemnification.
Against that backdrop, the Court recognized that there was no Louisiana precedent concerning whether an insurer's duty to defend may be prorated among insurers and the insured during periods of self-insurance in long-latency disease cases. Accordingly, the Court examined the two leading approaches to allocation of defense expenses: the pro rata method as articulated by the Sixth Circuit in Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), and the joint-and-several method as adopted by the D.C. Circuit in Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034 (D.C. Cir. 1981). Under the pro rata allocation method, defense costs are prorated among the insurers and the insured (for periods of non-coverage) based on a formula taking into account the length of the applicable policy periods and, in some circumstances, the policy limits. By contrast, under the joint-and-several method, the insured elects one insurer to pursue for defense costs. Under this approach, the selected insurer then bears the burden to seek contribution from any other insurers; and the insurers on the risk bear the cost of defense among themselves with no contribution from the insured even for periods of self-insurance. As the Louisiana Supreme Court acknowledged, one of the key differences between these approaches is whether the insured shares in defense costs for periods during which it lacked coverage.
After examining the rationale underlying each of these approaches, the Louisiana Supreme Court held that it was "persuaded by the reasoning presented in Forty-Eight Insulations and its progeny" and thereby "adopt[ed] the pro rata allocation method for defense costs in the case before [it] based on the policy language." With respect to the policy language, the Continental policy defined "bodily injury" as "bodily injury, sickness or disease sustained by any person which occurs during the policy period." Based on this definition, the Court held that "the policy language limits coverage for bodily injury to that which occurs during the policy period." The Court emphasized, however, that its holding may have been different had the language of the policy not defined bodily injury in this way, stating "[t]he manner in which defense costs are to be allocated may need to be determined on a case by case basis, according to the precise language of the insurance contract at issue."
Although the Court tethered its decision most directly to the language of the policy, it also looked to the reasonable expectations of the parties to the insurance contract and to principles of equity and sound public policy. The Court observed that the pro rata allocation method best comports with the reasonable expectations of the parties where, based on the policy language, "neither party could reasonably expect that the insurer was liable for losses that occurred outside the policy coverage periods." The Court opined, "[w]hile the duty to defend is broader than the duty to indemnify, neither obligation is broader than the policy's coverage period in the context of long latency disease cases that trigger occurrence-based policies."
Finally, the Court found that principles of equity and public policy support the pro rata approach. It noted that application of the pro rata method was reasonable where "American Sugar will be required to pay for its defense during years in which it did not acquire an insurance policy that would be triggered by the instant litigation." By contrast, the joint-and-several approach "would treat an insured who had uninterrupted policies for twenty years the same as an insured who had a triggered policy for one year." The joint-and-several approach, the Court opined, "provides a disincentive to the insureds to purchase uninterrupted insurance coverage and provides a windfall to companies that fail to obtain continuous coverage." By contrast, the Court stated, the pro rata allocation method "promotes risk spreading."
The Court concluded by considering the appropriate formula for pro rata allocation of expenses. It held that the formula should be based on a "time on the risk assessment" and need not take into consideration the limits of the applicable policies. "Because the duty to defend is distinct from the duty to indemnify," the Court stated, "the details of the policy need not enter the equation . . . ." This is particularly so, the Court observed, where for the period the insured was self-insured, there was no policy in effect and thus no policy limits. Although the Court remanded the case to the trial court for application of the formula and determination of Continental's pro rata share, the Court noted Continental's contention that it was on the risk for only approximately three percent (3%) of the total alleged period of exposure. Accordingly, Continental's exposure for defense costs could be limited to 3% of the total.
Two of the Court's seven justices concurred in the outcome of the case but wrote separately. The first emphasized that a "distinct body of jurisprudence has been developed" which applies "solely" to long-latency occupational disease cases. The cases are "unique," and as such "the holding of this case should not, as a matter of course, be extended beyond this body of case law."
The second concurred with the result of the majority but not in the basis for its decision. In her separate opinion, she explained that she viewed this case as "a pure contract question," requiring nothing more than for the Court to apply "fundamental principles of contract interpretation." "Because this is exclusively a matter of contract law," she wrote, "I find the [majority] opinion's focus on other courts' analyses concerning indemnification for liability in long latency disease cases involving principles of tort law to be both misplaced and confusing."
Ultimately, this decision squarely establishes that, under Louisiana law, where damage occurs over a number of years and triggers insurance policies with language similar to that here, (i) defense expenses should be allocated pro rata based on time on the risk and (ii) the insured must bear its pro rata share of defense costs for uninsured periods. In other jurisdictions where these issues have not yet been addressed, insurers and their counsel should scrutinize their policy language to ensure that they do not agree to pay more than their pro rata share of defense expenses.
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