N.J. Appeals Court Refuses to Allocate Payments Due from Insolvent Insurers to Solvent Primary and Excess Carriers

A New Jersey appeals court, affirming a trial court’s decision in an environmental contamination coverage case, has rejected the insured’s argument that payments due from its insolvent insurers should be reallocated among its solvent primary and excess insurers.

The Case

Beginning in 1970, Ward Sand and Materials Company accepted municipal waste from Pennsauken Township, New Jersey, at Ward’s sand mining property. Ward later sold the property to the township. In 1991, the township and the Pennsauken Solid Waste Management Authority, having entered into an administrative consent order with the New Jersey Department of Environmental Protection for cleanup of the site, sued numerous parties, including Ward, for contribution under the New Jersey law.

Ward notified its primary and excess insurers. The primary insurers agreed to defend Ward, subject to a reservation of rights. They shared costs on a pro-rata basis.

Five of Ward’s insurers became insolvent; two during the Pennsauken litigation, and three before.  Beginning in October 2003, the Property Liability Insurance Guaranty Association (“PLIGA”) contributed to defense costs on behalf of the insolvent insurers.

In January 2009, Ward settled the Pennsauken litigation for $5.5 million. Its insurers did not contribute to the settlement. In June 2009, one of Ward’s primary insurers settled with Ward by paying $1.5 million into escrow.

Ward then sued its other primary and excess insurers and PLIGA seeking, among other relief, an order allocating insurance coverage for the settlement.

In June 2011, Ward settled its claims against PLIGA for $1,228,500, plus $200,000 in legal fees and costs. PLIGA paid on behalf of four insolvent insurers. In August 2011, following argument on the parties’ cross-motions for summary judgment, the court decided that Ward had to bear the sums allocated to its insolvent insurers to the extent those sums exceeded PLIGA’s payments.

Ward appealed.

The New Jersey Appellate Court’s Decision

The appellate court affirmed.

It first reviewed New Jersey’s pro rata allocation principles, as set forth in Owens-Illinois and Carter-Wallace.  Those decisions, however, did not address the issues of insolvency presented here.

The court previously addressed one issue concerning insolvent insurers in its 1997 Sayre decision.  That case involved eleven years of insurance coverage for an environmental contamination claim where one insurer was insolvent.  The New Jersey Surplus Lines Guaranty Fund (the counterpart to PLIGA for surplus lines insurers) responded to claims concerning the insolvent insurer.  It argued that the Owens-Illinois allocation method should be applied in a manner such that all insurance provided by solvent carriers is to be exhausted before the Guaranty Fund must contribute.  The Sayre court disagreed and held that the Guaranty Fund was required to pay the share that would have been allocated to the insolvent insurer’s policy, up to the statutory $300,000 limit. In so holding, the court noted that the Guaranty Fund requirement that “an insured must exhaust all other applicable coverage available to it” was inapplicable because no other coverage was available for the period insured by the insolvent insurer.

Hence, under these principles, the appellate court observed that the insured is responsible for the insolvent insurer’s pro-rata share to the extent that it was not paid by PLIGA.

The appellate court then pointed out that this allocation scheme was changed by revisions the New Jersey Legislature made to the PLIGA Act and Guaranty Fund Act in 2004. The legislature redefined the word “exhaust” in the context of progressive injury cases.  As a consequence, in 2013, the New Jersey Supreme Court in Farmers explicitly rejected the argument that “for the years in which [PLIGA] is standing in the place of an insolvent carrier in a long-tail environmental contamination case, the insured – not the solvent insurer – is compelled to make payments.”

Ward sought to take advantage of the PLIGA amendments and the Farmers decision, but to no avail.  Because the statutory amendments were prospective only, the appellate court held that the changes did not apply to Ward’s action.  The five insurers were all insolvent by December 2004, before the amendments took place.  Therefore, Ward was responsible for the pro-rata payments of its insolvent insurers to the extent that they exceeded the PLIGA payments.

The case is Ward Sand and Materials Co. v. Transamerica Ins. Co., No. A-1479-13T1 (N.J. App. Div. Jan. 12, 2016).