In Asbestos Coverage Dispute, Court Applies Pro Rata Allocation and Decides That Insured Is Responsible for Insolvent Insurer’s Share

April 14, 2016 | Insurance Coverage

The U.S. District Court for the Southern District of New York, applying Georgia law in an asbestos coverage dispute, has adopted a “pro rata” approach to determining the responsibility of insurance carriers for indemnity and defense costs and has ruled that the insured – not the insurers – was responsible for an insolvent insurer’s obligations.

The Case

The Fairbanks Company, a Georgia corporation that manufactured valves, was sued in a number of asbestos-related personal injury actions (the “Asbestos Actions”). Between 2005 and 2013, the company’s insurers collectively paid Fairbanks’ defense costs and funded settlements. In May 2013, one of the insurers, Lumbermens Mutual Insurance Company, became insolvent.

The district court was asked to decide who should bear the share of liability and defense costs for Lumbermens’ “orphan share” and how to allocate indemnification responsibility and defense costs among Fairbanks’ insurers.

The District Court’s Decision

The district court first rejected Fairbanks’ contention that it should apply an “all sums” approach to allocate the insurers’ individual responsibility for indemnity and defense costs in connection with the Asbestos Actions. Instead, it decided that the proper method was a pro rata time on the risk allocation rule that spreads loss over the entire period that was triggered.

The district court explained that although Georgia’s appellate courts had not addressed the proper method of allocation between insurers for asbestos claims, much less the issue of proration to the insured, “well established principles of contract interpretation” supported applying a pro rata approach. It pointed out that the applicable policy language limited an insurer’s liability to sums arising from bodily injury that occurred “during the policy period.”

The district court rejected Fairbanks’ argument that the insolvent insurer’s indemnity share should be borne by solvent insurers rather than by Fairbanks. The district court reasoned that the shortfall arose from Lumbermens’ insolvency, not because insurance was unavailable to Fairbanks. If an insurer became insolvent, the insured had to be “saddled with the insurer’s share of liability.”

The district court noted that the Georgia insurer insolvency statute made clear that if a claim was covered by a policy issued by an insolvent insurer, and the claim was a “covered claim” and also was “a claim within the coverage of any policy issued by a solvent insurer,” then the solvent insurer was the primary insurer and the insolvent insurer was the excess insurer. The district court explained that, under the pro rata approach to insurance policies covering “progressive injuries” such as asbestos, insurers only were liable for their pro rata share based on their time on the risk.  An insurer that was never on the risk at the same time as an insolvent insurer could not be the primary insurer to the insolvent insurer’s “excess insurer” for any year under the Georgia statute. The Georgia statute, the district court ruled, did not overrule the pro rata approach.

Finally, the district court ruled that an asbestos exclusion in four excess insurance policies that carved out liability “arising, in whole or in part, out of or in any way related to asbestos” was enforceable under Georgia law. Therefore, the district court concluded that the excess insurer had no duty to indemnify or defend Fairbanks in the Asbestos Actions under the policies that excluded asbestos claims from coverage.

The case is Liberty Mutual Ins. Co. v. Fairbanks Co., Nos. 13-cv-3755 (JGK), 15-cv-1141 (JGK) (S.D.N.Y. March 22, 2016).  Michael Kotula and Michael Jones of Rivkin Radler LLP represented Fireman’s Fund Insurance Company in this case.

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  • Robert Tugander





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