Case: Arceneaux v. Amstar
Louisiana Supreme Court
No. 2015-C-0588, 2016 La. LEXIS 1675 (La. 2016).
In a case of first impression, the Louisiana Supreme Court addressed the question of allocation of defense expenses in long latency disease cases and adopted the "pro rata" approach according to periods of coverage and an insurer's time on the risk. Arceneaux v. Amstar Corp., No. 2015-C-0588, 2016 La. LEXIS 1675 (La. 2016).
Arceneaux involved a hearing loss claim, which asserted exposure over a 60 year period at a sugar refinery in Arabi, Louisiana. A CGL insurer of the refinery provided coverage for only 2 of those years. The intermediate appellate court applied the standard "eight corners" rule and held that the insurer had the duty to defend the entire lawsuit, involving decades of exposure, even where the majority of the claims fell outside the insurer's coverage.
The Louisiana Supreme Court unanimously reversed and, in doing so, considered Louisiana's "exposure theory" for trigger of coverage and determining an insurer's obligation to indemnify. The exposure theory provides that an insurer is obligated to indemnify an insured only to the extent there was an "occurrence," i.e. exposure, during its policy period. Thus, in long latency cases, the risk during any period in which the insured had no coverage for any reason, including exhaustion and insurer insolvency, rests with the insured.
The Court also analyzed case law from other jurisdictions on allocation of defense expenses in long latency cases. The Court noted that there are two general approaches to allocation of defense on expenses in long latency cases: the "pro rata" approach per Insurance Co. of North America v. Forty-Eight Insulations Inc., 633 F.2d 1212 (6th Cir. 1980); and the "joint-and-several" approach per Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034 (D.C. Cir. 1981). Under the pro rata method, defense expenses are pro-rated among all insurers potentially on risk and the insured for any periods of non-coverage. Pro rata formulas differ from state to state and can use the length of the policy periods on risk, policy limits at risk or both.
In contrast, under the joint-and-several approach, the insured can choose to demand a defense to the entire claim from any one insurer, and that insurer must then demand contribution from other potentially liable insurers. A significant effect of the joint-and-several approach is to relieve the insured of any monetary obligation for its own defense, even for periods in which it chose not to purchase insurance or was otherwise self-insured.
The Louisiana Supreme Court rejected the joint-and-several approach in favor of the pro rata approach on multiple grounds. It reasoned a pro rata approach was more consistent with the "exposure theory" in determining indemnity in long latency cases. The Court also relied heavily on the policy language of the CGL policy at issue, which afforded coverage only for bodily injury that occurs during the policy period. The Court further considered the reasonable expectations of the parties, equity and public policy, finding based on the policy language at issue, neither party could reasonably expect that the insurer was liable for losses that occurred outside the policy coverage periods.
The Court thus found the insured would be required to pay for its defense during years in which it did not acquire an insurance policy. After concluding that defense costs were to be prorated, the Court then determined the formula for allocation. The Court adopted the "time on the risk" formula and as a result, suggested that the refinery's insurer which was on risk for only about 3% of the alleged period of exposure should be allocated only roughly 3% of the total defense expenses.
Of note, the Arceneaux Court refused to make a bright-line ruling, reasoning the allocation issue must be decided on a case-by-case basis and contingent upon the specific policy language at issue.
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