This commentator has previously noted that, for continuously triggered occurrences, the notion that pro rata is the accepted method of allocation of liability for defense and indemnity costs at the primary level in Illinois is a myth. Kenneth Anspach, “The Illinois Pro Rata Myth,”Coverage, Sept./Oct. 2009. Pro rata allocations have been applied in Illinois only in limited situations involving the doctrine of horizontal exhaustion or where unique policy language limits the “all sums” language of the typical comprehensive general liability policy and where multiple occurrences are the subject of the claim for coverage. Otherwise, the Illinois courts have uniformly applied the holding of the Illinois Supreme Court in Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill. 2d 23, 49–51, 514 N.E.2d 150 (1987), that “all sums” does not allow for proration and that, where coverage is horizontally triggered over a number of years, insurers whose policies are triggered are each jointly and severally liable for defense and indemnity. Yet, despite the holding in Zurich, insurance carriers have resisted an “all sums” approach to coverage. However, if there was any remaining doubt regarding the continuing viability of “all sums,” it was entirely dispelled by the recent holding in John Crane v. Admiral Insurance Co., 2013 IL App (1st) 093240-B, 991 N.E.2d 474, 2013 Ill. App. LEXIS 358 (1st Dist. 2013). In echoing the decisions of courts in a number of jurisdictions, John Crane held that “where coverage for asbestos-related injury claims is triggered by bodily injury or sickness or disease, all triggered policies are jointly and severally liable.” See, e.g.,Teck Metals, Ltd. v. Certain Underwriters at Lloyd’s, 735 F. Supp. 2d 1231, 1245, 2010 U.S. Dist. LEXIS 80659 (E.D. Wash. 2010); Chem. Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 817 F. Supp. 1136, 1153 (D.N.J. 1993); Md. Cas. Co. v. Hanson, 169 Md. App. 484, 521, 902 A.2d 152, 2006 Md. App. LEXIS 104 (Md. Ct. Spec. App. 2006); Hercules, Inc. v. AIU Ins. Co., 784 A.2d 481, 491, 2001 Del. LEXIS 357 (Del. 2001); Cal. Union Ins. Co. v. Landmark Ins. Co., 145 Cal. App. 3d 462, 476-78, 193 Cal. Rptr. 461, 469–71 (1983). [Login required.]John Crane thereby places Illinois in accord with the majority rule forbidding insurers from limiting their liability to a pro rata share unless the policy expressly allows it. Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 95 Ohio St. 3d 512, 2002-Ohio-2842, 769 N.E.2d 835, 841 (Ohio 2002). [Login required.] The holding is applicable to any pollution or toxic-tort case involving a continuous trigger of coverage over a period of years.
June 05, 2014 Articles
John Crane Explodes the Pro Rata Myth
The holding is applicable to any pollution or toxic-tort case involving a continuous trigger of coverage over a period of years.
By Kenneth Anspach – June 5, 2014
The Meaning of “All Sums”
The grant of coverage in the typical comprehensive general liability policy contains the following provision:
The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence. . . .
See, e.g., Ludwig Candy Co. v. Iowa Nat’l Mut. Ins. Co., 78 Ill. App. 3d 306, 396 N.E.2d 1329 (1st Dist. 1979).
Courts construing the language “all sums as damages” have found that it is clear and unambiguous. For example, in State v. Glens Falls Insurance Co., the court stated:
Under the policy the insurer agreed to pay “all sums which the insured shall become legally obligated to pay as damages.” The language “all sums as damages” means the whole amount due a plaintiff as damages pursuant to a legal judgment or settlement regardless of how characterized. We need not repeat the insurer’s elaborate attempt to convince us otherwise because it overlooks the cardinal rule of construction that disputed contract language, if clear and unambiguous, must be given force and effect in its plain, ordinary, and popular sense.
404 A.2d 101, 105 (Vt. 1979) (emphasis added).
The unambiguous intention of this provision has been described as follows:
The liability policy undertakes to pay on behalf of the insured all sums which he becomes legally liable to pay as damages. Once the obligation to pay is fixed, at that moment liability attaches. If the insured has a duty to pay but has not, then a liability policy, as distinguished from an indemnity policy, would provide coverage. *** Loss from liability is literally loss which arises immediately upon one becoming liable to another . . .
E. Holmes. “Applicability of Liability Insurance Coverage to Private Pollution Suits: Do We Insure Pollution?” 40 Tenn. L. Rev. 377, Spring 1973 (emphasis added). [Login required.]
In other words, immediate liability for the “whole amount” attaches under the “all sums” provision “once the obligation to pay has become fixed.”
The notion that the insurer is liable for the whole amount of the insured’s legal obligation is entirely inconsistent with the notion that the insurer’s payment obligation may be parsed out over a number of carriers on a pro rata basis. While no ambiguity exists in the policy language that would require looking at the “all sums” drafting history, if one did so, one would find that the drafters of the “all sums” provision recognized that pro rata allocation was not available under the “all sums” provision. As set forth in Owens-Illinois, Inc. v. United Ins. Co., “‘[T]here is no pro-ration formula in the policy, as it seemed impossible to develop a formula which would handle every possible situation with complete equity.’” 138 N.J. 437, 469, 650 A.2d 974 (N.J. 1994) (quoting from Eugene R. Anderson et al., “Liability Insurance Coverage for Pollution Claims,” 59 Miss. L.J. 699, 729–30 (1989), quoting, in turn, a drafter of the comprehensive general liability policy). [Login required.] Thus, there was never a question that each insurer among multiple insurers liable under “all sums” is equally liable.
History of Application of “All Sums” in Illinois
In Illinois, where coverage for a single occurrence is triggered amongst primary carriers insuring consecutive periods over a number of years, the insurance industry has routinely argued that its obligations of defense and of indemnification for judgments or settlements must be allocated on a pro rata basis. Under such a scheme, the insured would be allocated a portion of the indemnity costs for any gaps in coverage due to uninsured periods resulting from carrier insolvencies, coverage buy-backs, self-insured retentions, or lack of insurance. This “all sums” provision has been interpreted in Illinois to require that “each carrier covering the insured during the continuously triggered period is independently responsible for the full cost of defense once a specific policy period is implicated.” Caterpillar, Inc. v. Century Indem. Co., 2007 Ill. App. Unpub. LEXIS 2 (3d Dist. 2007).
This “all sums” approach to allocation amongst primarycarriers was first adopted by the Illinois Supreme Court in Zurich. In Zurich, the court addressed the trigger of insurance coverage in cases involving bodily harm from asbestos exposure. The court adopted the position advocated by the insured, that “each carrier whose policy is triggered is jointly and severally liable for the total indemnity and defense costs of a claim without proration,” holding as follows:
The appellate court relied on the language of the policies. Zurich undertook to “pay on behalf of [Raymark] all sums which [Raymark] shall become legally obligated to pay as damages because of * * * bodily injury * * * caused by an occurrence.” Zurich further agreed “to defend any suit against [Raymark] seeking damages on account of such bodily injury.” The court found nothing in the policy language that permits proration. Zurich urges this court to adopt the pro rata approach set forth inInsurance Co. of North America v. Forty-Eight Insulations, Inc. (6th Cir. 1980), 633 F.2d 122, aff’d on rehearing (1981), 657 F.2d 814, cert. denied (1981), 454 U.S. 1109, 70 L. Ed. 2d 650, 102 S. Ct. 686.
. . . Having rejected the premise underlying the pro rata approach adopted in Forty-Eight Insulations, we conclude that the appellate court did not err insofar as it declined to order the pro rata allocation of defense and indemnity obligations among the triggered policies.
Zurich, 118 Ill. 2d at 49–51 (emphasis in original). This holding declining to apply pro rataallocation of defense and indemnity obligations has never been reversed.
Attempts to Abrogate “All Sums,” Limited to Allocation on the Excess Level, Have Been Unsuccessful
The insurance industry has worked steadfastly in the lower courts to attempt to chip away atZurich and thereby renege on its duties to its policyholders. Yet, when one examines the holdings of the cases the industry touts as having made inroads against the Zurich holding, one finds less than meets the eye. The battlegrounds of the industry’s opposition to joint and several liability have included the following cases: United States Gypsum Co. v. Admiral Insurance Co., 268 Ill. App. 3d 598, 643 N.E.2d 1226 (1st Dist. 1995), and Outboard Marine Corp. v. Liberty Mutual Insurance Co., 283 Ill. App. 3d 630, 670 N.E.2d 740 (2nd Dist. 1996) (Please note that this case is referred to as “Outboard Marine II” in the text to distinguish it from its predecessor, Outboard Marine Corp. v. Liberty Mutual Insurance Co.,154 Ill. 2d 90, 607 N.E.2d 1204 (1992).), and AAA Disposal Systems, Inc. v. Aetna Casualty and Surety Co., 355 Ill. App. 3d 275, 821 N.E.2d 1278 (1st Dist. 2005). Ironically, these cases do not even address the issue of allocation at the primary coverage level. Instead, these cases deal with the issue of horizontal exhaustion as it relates to excess and umbrella coverage.
For example, U.S. Gypsum did not involve a dispute about allocation at the primary level but between the primary and excess level. Gypsum, the insured, argued that its excess layer of coverage could be reached if exhaustion occurred in even one of a number of primary policies triggered over consecutive periods. The court disagreed, stating:
In support of its position that “horizontal” exhaustion of all triggered primary policies is not required, Gypsum argues that each excess insurer has an independent obligation under its policy. According to Gypsum, under this independent obligation, the excess insurer must provide coverage once the underlying primary policy particular to the excess policy in question is exhausted regardless of whether the insurer has concurrent primary or excess insurance obligations. We disagree.
United States Gypsum Co., 268 Ill. App. 3d at 653.
Thus, the doctrine of “horizontal exhaustion” was born. U.S. Gypsum explained the doctrine as being based on the “other insurance” provision set forth in most excess policies, quoted in U.S. Gypsum as follows:
“If other valid and collectible insurance with any other insurer is available to the insured covering a loss also covered by this Policy, other than insurance that is in excess of insurance afforded by this Policy, the insurance afforded by this Policy shall be in excess of and shall not contribute with such other insurance.”
The U.S. Gypsum court found that this “other insurance” provision requires that any one excess policy becomes excess over all other primary insurance, not just the primary insurance underneath that particular excess policy, as follows:
This clause clearly sets forth this policy’s status as an excess policy. The excess policy also unequivocally sets forth that the excess insurer will not contribute “if other valid and collectible insurance with any other insurer is available to the insured.” This supports an interpretation that this policy serves as an excess policy to all triggered primary policies, regardless of whether they extend over multiple policy periods or only one.
. . .
A plain reading of the “other insurance” provision contained in the policies requires Gypsum to exhaust all triggered primary insurance before pursuing coverage under those excess policies.
Id. at 654.
Thus, horizontal exhaustion is the rule in Illinois in cases involving allocations between primary and excess levels of coverage. Yet, cases involving horizontal exhaustion have no applicability to allocations of coverage solely at the primary level. That is so because cases involving excess coverage have employed a different standard of coverage, recognizing that excess carriers were paid a smaller premium than primary carriers to accommodate a lesser risk. As set forth in Missouri Pacific Railroad v. International Insurance Co.:
Under Illinois law, all underlying coverage must be exhausted before excess coverage may be reached. United States Gypsum Co., 268 Ill. App. 3d at 653–54;Illinois Emcasco Insurance Co. v. Continental Casualty Co., 139 Ill. App. 3d 130, 133, 93 Ill. Dec. 666, 487 N.E.2d 110 (1985). [Login required.] This principle, commonly referred to as “horizontal exhaustion,” is required because excess coverage carries a smaller premium than primary coverage due to the lesser risk insured. Ill. Emcasco Ins. Co., 139 Ill. App. 3d at 133.
288 Ill. App. 3d 69, 679 N.E.2d 801, 809 (2d Dist. 1997)
In Outboard Marine II, a case oft-cited by the insurance industry, the court was called upon to determine whether the insured’s excess carriers were responsible for a period during consecutive triggered years of coverage where the insured had had no primary insurance. Following the holding regarding horizontal exhaustion in U.S. Gypsum, the court held:
We find that Gypsum supports an allocation of the damages to OMC for the years during which it carried no insurance. This is the only fair approach. While the insurers agreed to indemnify OMC for “all sums,” it had to be for sums incurred during the policy period. Gypsum supports the notion that OMC cannot shift its responsibility for uninsured years to its excess carriers.
Outboard Marine II, 283 Ill. App. 3d 630, 642 (emphasis added).
Thus, note that the Outboard Marine II holding only addresses allocations between the primary and excess layers of coverage, not those occurring exclusively at the primary level. It is, therefore, in the context of the horizontal exhaustion doctrine that Outboard Marine II finds “the policyholder responsible for a pro rata share for periods of no insurance or self-insurance.” Outboard Marine II, 283 Ill. App. 3d 630, 643.
The same conclusion must be reached with respect to AAA Disposal. There, in construing the provisions of certain excess insurance policies, the court determined as it had inOutboard Marine II “that excess policies are triggered only after the primary insurers’ coverage is horizontally exhausted.” AAA Disposal Systems, Inc.,355 Ill. App. 3d at 286. Thus, AAA Disposal is also inapplicable where coverage is being construed only at the primary level.
Where Allocation Issues Have Arisen at the Primary, Rather Than Excess Level, the Courts Have Uniformly Held That “All Sums” Is the Rule
While none of the cases relied on by the insurance industry support a pro rata allocation of liability strictly at the primary level, several Illinois appellate decisions examining allocation at the primary level have held that such allocation must be joint and several. In Caterpillar, the court addressed the allocation of the costs of defending asbestos claims against the insured, Caterpillar, implicating multiple and successive policy years under primary policies, some of which were covered by insurance, and some where Caterpillar was either self-insured or had no insurance. In Caterpillar, the insurer (INA) argued that defense costs should be allocated pro rata over the years of successive primary coverage and that for the periods that Caterpillar was either self-insured, had self-insured retentions, had deductibles, or had no insurance (all of which INA also categorized as periods of self-insurance), Caterpillar should be treated as an insurer on the risk and also share liability pro rata. On the other hand, Caterpillar argued that defense costs should be allocated on an “all sums” basis for which any one insurer would be liable for the entire amount. On the issue of whether Caterpillar was to be treated as another insurer for allocation purposes, the court stated: “We disagree with INA. Caterpillar is not to be included in the allocation for periods when it was self-insured.” With respect to whether defense costs were to be allocated on a pro rata or an “all sums” basis, the court ruled that such costs were to be paid on an “all sums” basis, as follows:
Based on our above analysis, we conclude that there is nothing in the language of the INA policies that permits a pro rata reduction in its obligation to pay “all sums” and defend “any suit.” This conclusion is also prescribed by the decision in Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill.2d 23, 514 N.E.2d 150, 112 Ill. Dec. 684 (1987), which is controlling in this case.
Caterpillar, Inc., 2007 Ill. App. Unpub. LEXIS 2, at *17–18.
The Caterpillar court thus found “all sums” to be the applicable methodology to allocate defense costs. In so doing, the Caterpillar court distinguished both U.S. Gypsum andOutboard Marine II.
Similarly, in Benoy Motor Sales, Inc. v. Universal Underwriters Insurance Co.,287 Ill. App. 3d 942, 679 N.E.2d 414 (1st Dist. 1997), the court held that in a continuous-trigger scenario, gaps in the insured’s primary coverage are the responsibility of the primary insurers, not of the insured. In Benoy, the Illinois Environmental Protection Agency sued 10 automobile dealerships for recovery of costs incurred due to the release of hazardous substances at the Lenz Oil facility. The dealerships sold used crank oil to Lenz Oil, which leaked at the Lenz Oil site and contaminated the groundwater. Between 1977 and 1985, the dealerships purchased “Unicover” broad-coverage insurance policies from Universal Underwriters Insurance Company. The trial court found Universal was not responsible to pay costs covering any period where a particular dealer did not have an active policy. In other words, shipments made during gaps in coverage were not covered.
The appellate court reversed. Although the court recognized there were gaps in coverage, the court held that the policies anticipated the continuing nature of pollution damage. The Unicover III policy, for instance, said: “All injury arising out of continuous or repeated exposure to substantially the same general conditions will be considered as arising out of one occurrence.” Benoy Motor Sales, Inc., 287 Ill. App. 3d at 947–48. The court noted that environmental pollution does not stop and start in discrete time periods; it is a continuing process. The court, quoting U.S. Gypsum, held that when property damage is deemed to have occurred continuously for a fixed period—“‘every insurer on the risk at any time during the trigger period is jointly and severally liable to the extent of their policy limits.’” Id. at 948,quoting U.S. Gypsum Co., 268 Ill. App. 3d at 644. The court concluded that coverage “should not be excluded for any dealer insured by Universal while the pollution process was occurring.” Id. Thus, Benoy, a First District case involving primary insurers addressing gaps in coverage over the continuous trigger of property-damage liability, held that the trial court’s exclusion of gap periods from coverage by the insuring primary carriers was erroneous.Benoy was also cited with approval by the U.S. District Court for the Northern District of Illinois in Coltec Industries Inc. v. Zurich Insurance Co., 2004 U.S. Dist. LEXIS 1207 (N.D. Ill. 2004), for the proposition that primary insurers are jointly and severally liable to the extent of their policy limits.
Contrast Zurich and its progeny, Caterpillar and Benoy, to Federal Insurance Co. v. Binney & Smith, Inc.,2009 Ill. App. LEXIS 599 (1st Dist. 2009). There, in construing coverage arising from separate and distinct occurrences over a period of years, the court found the primary carrier, Federal Insurance Company, liable on a pro rata basis. The court specifically distinguished Zurich by noting:
Even though the three Federal policies in this case contained “all sums” language, the policies also contained limiting language in the definition of “advertising injury.” The language limits the definition of an “advertising injury” to offenses “committed during the policy period in the course of the named insured’s advertising activities.” A policy period limitation to coverage is exactly what was missing from the insurance contracts at issue in Zurich, allowing for the proper application of joint and several liability under the “all sums” rule.
. . . .
In light of the separate and distinct nature of the occurrences at issue here, we find the trial court erred in determining Federal was required to pay Binney “all sums” Binney became legally obligated to pay as damages because of an advertising injury, regardless of whether the claimed injury occurred during the policy period.
Binney & Smith, Inc., 2009 Ill. App. LEXIS 599, at *30–35.
Thus, in Binney & Smith, Inc., although a pro rata allocation was made, the court distinguished Zurich by noting that the definition of “advertising injury” placed a limitation on the otherwise all-encompassing nature of the “all sums” rule and by noting that the occurrences were separate and distinct rather than continuous.
John Crane Reaffirms the Authority of Zurich
Moreover, as recently as on June 4, 2013, the Zurich holding that insurers are jointly and severally responsible for such costs was reiterated by the Appellate Court of Illinois, First District, in John Crane,2013 IL App (1st) 093240-B, 991 N.E.2d 474, 2013 Ill. App. LEXIS 358 (1st Dist. 2013). In John Crane, the plaintiff insured appealed a judgment from the Circuit Court of Cook County, Illinois, which, in a declaratory action, ruled that defendant umbrella and excess insurers had no coverage obligations because the insured had not satisfied its burden of proving exhaustion of primary policies by bodily injury claims. The insured had settled with its primary insurer and entered into an agreement retroactively amending the primary policies to allow previously excluded defense costs to erode the policy limits. The trial court concluded that the horizontal-exhaustion doctrine did not allow the insured and its primary insurer to make the original policy limits unavailable by retroactively amending the primary policies. The Illinois Appellate Court found that the trial court correctly ruled that a determination of exhaustion had to be based on the primary policy limits before the agreement. The trial court erred, however, in finding a pro rataallocation appropriate. The court held that where coverage for asbestos-related injury claims was triggered by bodily injury or sickness or disease, all triggered policies were jointly and severally liable for judgments arising during any policy period. 2013 IL App (1st) 093240-B, at P45. The court unequivocally held:
We adhere to our supreme court’s decision in Zurich and hold that where coverage for asbestos-related injury claims is triggered by bodily injury or sickness or disease, all triggered policies are jointly and severally liable. . . . Uninsured periods are irrelevant as only carriers providing policies for the period at issue will be liable. There are no credits for uninsured years. Policies that are triggered pay “all sums” up to their limits.
Id. at P56.
Thus, not only does John Crane reaffirm the viability of Zurich, but it also makes clear beyond a shadow of doubt that insurers are responsible for uninsured years.
In conclusion, pro rata allocations of liability for defense and indemnity costs have been applied in Illinois only in limited situations involving the doctrine of horizontal exhaustion or where unique policy language limits the “all sums” application and where multiple occurrences, rather than a single, continuous occurrence, are the subject of the claim for coverage. Otherwise, the Illinois courts uniformly apply the holding of the Illinois Supreme Court in Zurich that the “all sums” language of the typical comprehensive general liability policy does not allow for proration. Finally, any notion that pro rata is not the accepted method of allocation at the primary level in Illinois has been dispelled in John Crane. Illinois now sits squarely amongst the majority-rule jurisdictions holding that insurers are forbidden from limiting their liability to a pro rata share unless the policy expressly allows it. The holding is applicable to any pollution or toxic-tort case involving a continuous trigger of coverage over a period of years.
Keywords: environmental litigation, all sums, pro rata, Zurich, John Crane
Kenneth Anspach is an attorney in Chicago, Illinois, and is cochair of the Insurance Subcommittee of the Environmental Litigation Committee of the Section and cochair of the Environmental Subcommittee of the Insurance Coverage Litigation Committee.
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