Louisiana: Supreme Court Decides That Duty to Defend Should Be Prorated by Time on the Risk

October 19, 2016 | Insurance Coverage

The Louisiana Supreme Court has ruled, in a “long latency disease” case, that defense costs under occurrence-based insurance policies should be prorated among insurers and the insured where there were periods of non-coverage.

The Case

Plaintiffs alleged that they had suffered hearing loss from exposure to unreasonably loud noise in the course of their work at a refinery in Arabi, Louisiana, operated by American Sugar Refining, Inc.

American Sugar brought a third-party demand against its insurance carrier, Continental Casualty Company, alleging that Continental had issued policies that provided coverage for the claims. American Sugar filed a motion for partial summary judgment seeking a declaration that Continental owed a duty to defend. The trial court granted its request for a complete defense going forward.

The insurer appealed, arguing that it should not be ordered to provide a complete defense given that its policies covered but 26 months of the approximately 60-year exposure period alleged by the plaintiffs.

An appellate court affirmed the trial court’s ruling, holding that the insurer’s duty to defend was not subject to proration. It opined that an insurer’s duty to defend arose when the pleadings disclosed even a possibility of liability under the policy, even if some of the claims fell outside the policy’s coverage.

The dispute reached the Louisiana Supreme Court.

The Louisiana Supreme Court’s Decision

The court reversed, adopting the pro rata allocation method for allocating defense costs. Under the pro rata approach, defense costs are divided among insurers of triggered policies. If the insured had periods of non-coverage, the insured was responsible for its pro rata share.

The court explained that the Continental policy language limited coverage for bodily injury to that which occurred “during the policy period.” Based on the policy language, it added, neither party could reasonably expect that Continental was liable for losses that occurred outside the policy coverage periods.

Although the duty to defend was broader than the duty to indemnify, the court continued, neither obligation was broader “than the policy’s coverage period” in the context of long latency disease cases that triggered occurrence-based policies. In the court’s view, pro rata allocation was “an equitable system” that could be “readily used in long latency disease claims in Louisiana.”

Therefore, the court concluded, American Sugar had to pay for its defense during years in which it had not acquired an insurance policy that had been triggered by the employees’ litigation, and defense costs had to be allocated to Continental based on its “time on the risk.”

The case is Arceneaux v. Amstar Corp., No. 2015-C-0588 (La. Sept. 7, 2016).

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