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How to Put a Policyholder Out of Business

by Gregory J. Schwartz, Esq. and Katherine Lyons, Esq.

Recent economic and legal developments in the area of insurance threaten small to mid-sized New Jersey policyholders like never before.  With the declared insolvency of The Home Insurance Company (“The Home”) on June 13, 2003, mounting New Jersey Supreme Court precedents and an aggressive stance by the New Jersey Guaranty Fund (the “Fund”), policyholders face a landscape that has the potential to force many into bankruptcy.

The Role of the Guaranty Fund

The Fund is not an insurer.  It is a private, non-profit entity created by the Legislature to administer and pay “covered claims” asserted against insolvent insurers and their policyholders.  Thomsen v. Mercer-Charles, 377 N.J. Super. 267, 273 (App. Div. 2005); see also New Jersey Property-Liability Insurance Guaranty Association Act (the “Act”),  N.J.S.A.  17:30A-1 et seq.

There are important differences between the Fund and the coverage afforded by the defunct policy.  The Legislature did not intend to “substitute the [Fund] for the defunct insurer so as to prevent all loss to affected parties.”  N.J. Guar. Ass’n. v. Ciani, 242 N.J. Super. 164, 169 (App. Div. 1990).  The Fund “was not designed to put a claimant in the same position as if there had been no insolvency.”  Thomsen, 377 N.J. Super. at 274.

For example, there are limits on the amount of the claim that the Fund can pay.  Indeed, the Fund is obligated to pay no more than $300,000 per “covered claim” regardless of the limits of the insolvent policy.  N.J.S.A. 17:30A-8a(1).  Similarly, the Fund will only respond to claims tendered to the Fund before the statutory or court-ordered “bar date.”  N.J.S.A. 17:30A-5.

Likewise, the Fund will not pay prejudgment interest on covered claims, N.J.S.A. 17:30A-5d, or counsel fees under Rule 4:42-9(a)(6).  Ciani, 242 N.J. Super. at 169.  Furthermore, where there is overlapping coverage provided by both a solvent and insolvent insurer, a policyholder first must exhaust coverage with the solvent insurer before the Fund has any statutory obligation to pay.  Harrow Stores, Inc. v. Hanover Ins. Co., 315 N.J. Super. 547, 555 (App. Div. 1998).

Although the Act is to be construed liberally to effect its purposes, conservation of resources remains a major, if not competing, goal.  Carpenter Technology Corp. v. Admiral Ins. Co., 172 N.J. 504, 516-517 (2002).  Toward that end, New Jersey courts seem to defer to the Fund’s interpretation of its statutory mission.  See, e.g., ArcNet Architects, Inc. v. NJPLIGA, 377 N.J. Super. 102 (App. Div. 2005); Thomsen, 377 N.J. Super. at 275.

The First Strike:  the Bar Date

With asbestos liabilities, the big question is whether insureds can tender notice to the Fund of the likelihood of future claims based upon past experience.  A typical mid-sized policyholder might consistently receive 25 to 50 new asbestos lawsuits per month.  The insured could notify the Fund before the bar date that it anticipates these claims will likely continue over the next several years.
The Act, however, is silent about contingent claims.  It defines a “covered claim” merely as an “unpaid claim” that is “within the coverage” of the applicable insurance policy.  N.J.S.A. 17:30A-5.  The Act excludes from the definition of “covered claim” any “claim” filed with the Fund after the bar date.  Id.  Contingent claims are not explicitly identified as a “covered claim,” nor are they specifically excluded.

What constitutes a “claim” remains unsettled.  Is it the insured’s asbestos liabilities as a whole, much like the “occurrence” under a general liability policy?  New Jersey treats asbestos liability as a separate “occurrence” in each policy year no matter how many “claims” may result.  Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 179 N.J. 87, 104 (2004)  Is the “claim” each individual lawsuit, as maintained by the Fund?  The Act provides no clear guidance.  By virtue of the Fund’s position on the bar date, the Act effectively takes the occurrence-based policy purchased by the insured and collapses it into a claims-made policy; there is no coverage for any lawsuit filed after the bar date.

With regard to The Home, the Fund regularly denies benefits for lawsuits filed after the bar date.  The Fund’s view is that the new lawsuit fails to qualify as a “covered claim” because it was not tendered to the Fund until after the bar date.  Consequently, even though the insured may have notified the Fund before the bar date of the likelihood of future claims, the Fund’s view is that the future “claim” is not covered.

The Second Strike: the Statutory Cap

If the Fund’s interpretation of the statute is upheld, the Fund must pay $300,000 per claim for those claims that were filed before the bar date.  The economic reality in asbestos litigation is that while policyholders may face many individual claims, the amount paid to each claimant is relatively small.  The Fund is not likely to ever approach the statutory cap for any individual claim.
As a result, a policyholder is probably better off with $300,000 in coverage for all claims rather than no coverage for claims filed after the bar date.  The consequence of the Fund’s bar date and statutory cap is to leave the insured “bare” for periods covered by an insolvent insurer for claims filed after the bar date.

The Third Strike: Owens-Illinois

As if the Fund’s application of the statute were not bad enough, the New Jersey Supreme Court’s rules of insurance allocation disfavor small and mid-sized insureds.  To the extent the insured is “bare” because of insurer insolvency, the insured is obligated to pay the insolvent carrier’s portion of the loss.

In Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994), the Court considered which insurance policies must respond to long-tail claims like asbestos.  Because asbestos disease causes damage over many years, often decades, multiple insurance policies were potentially obligated to respond.  The Court ruled that every insurance policy on the risk from the moment of exposure up to the date the injury was diagnosed must respond to the loss.  Id. at 451.

In Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), the Court clarified the mathematics involved in determining how much each carrier must pay.  In essence, the Court ruled that each carrier’s percent contribution is determined by a ratio.  The sum of all triggered coverage provides the denominator and the amount of insurance (both primary and excess) in any particular year provides the numerator.  The resulting percentage is the amount the carrier for that particular year must pay toward each claim.  Id. at 326-27.

The Owens-Illinois Court also ruled that the insured must assume responsibility for periods in which it made a conscious decision to go “bare,” that is, to refrain from purchasing insurance to cover its estimated liabilities.  Owens-Illinois, 138 N.J. at 479.  Expanding on that concept, the Court later adopted the view that the insured is also responsible for coverage that is unavailable because of insurer insolvency.  Id., 179 N.J. at  99 (2004); Spaulding Composites Co., Inc. v. Aetna Cas. & Sur. Co., 176 N.J. 25, 36 (2003).

When stacked alongside the Fund’s view, the Court’s imposition of liability on a policyholder for an insolvent carrier’s share inflicts a potentially lethal blow.  Consider a 20-year trigger period where the insured purchased $1.0 million in coverage each year, 10 years of which were insured by The Home.  Under New Jersey allocation law, the policyholder would have to pick up The Home’s share, or half of each claim, to the extent the Fund did not cover the claim because it was first filed after the bar date.

The Proposed Solution

Many small to mid-sized policyholders face substantial liabilities for asbestos claims each year.  These policyholders simply do not have the cash flow to absorb the liability created by an insolvent carrier for a claim outside the bar date.

While the New Jersey Supreme Court has in the past refused to revisit its allocation rulings, see, e.g., Benjamin Moore, 179 N.J. at 104, it is time for the Court to reconsider the hardship inflicted on New Jersey businesses that results from its treatment of insolvent insurers.  Most policyholders do not make a conscious decision to purchase insurance from a financially shaky carrier.  Indeed, most insureds purchase insurance based on the advice and recommendations of their brokers and ultimately weigh the cost of insurance against the benefits.

Owens-Illinois sought to spread the risk of loss through an industry that is designed to absorb losses, the very essence of insurance, while encouraging responsible behavior.  Considering the process by which most policyholders purchase insurance, there is little incentive created by retroactively punishing those decisions through an allocation of an insolvent carrier’s liability share.  The end result could make many New Jersey policyholders insolvent as a result of a carrier’s insolvency.  It would be better to distribute the insolvent carrier’s share amongst the insured’s other viable insurers or eliminate the insolvent policy from the Carter-Wallace denominator altogether.

Conclusion

The only “guaranty” New Jersey insureds receive when faced with insurer insolvency is a hefty burden.  The triple combination of the bar date, statutory cap and New Jersey Supreme Court precedent carries a risk of putting policyholders out of business entirely.  The Court should revisit whether this makes good economic as well as practical sense.

Gregory J. Schwartz, Esq. is a partner at Schwartz Kelly, LLC in Annandale, New Jersey and regularly represents policyholders in disputes against their insurance companies.  Ms. Lyons is an Associate of the Firm.