The Massachusetts Supreme Judicial Court recently held that where an insured “incurs covered costs as a result of ongoing environmental contamination occurring over more than one year and the insurer provided coverage for less than the full period of years in which contamination occurred,” the loss should be pro rated among all the insurers on the risk during the relevant period. The court further held that unless evidence permits a more accurate fact-based allocation of loss, the “time on the risk” method of allocation is most appropriate.
As discussed here, the court’s opinion was in response to the following questions that had been certified from the First Circuit last year in a case involving issues of coverage for pollution spread across several decades and multiple policies and insurers:
- “Where an insured protected by standard CGL policy language incurs covered costs as a result of ongoing environmental contamination occurring over more than one year and the insurer provided coverage for less than the full period of years in which contamination occurred, should the direct liability of the sued insurer be pro rated in some manner among all insurers ‘on the risk,’ limiting the direct liability of the sued insurer to its share but leaving the insured free to seek the balance from the other insurers?”
- “If some form of pro rata liability is called for in such circumstances, what allocation method or formula should be used?”
A third question was certified, but the court held that the “answers to the first two certfiied question obviated the need to answer the third certified question.”
On the first question, the court found that the most reasonable construction of the policies at issue compelled a pro rata allocation among all insurers on risk, as opposed to the joint and several liability proposed by the insured. The court focused on the policy as a whole, which provided that the insurer would indemnify the insured for the “ultimate net loss” that the insured was “legally obligated to pay as damages because of . . . property damage . . . to which this policy applies, caused by an occurrence.” Based on its reading of the policy, the court found that coverage was only afforded to the extent that the injury took place during the policy period, thus supporting pro rate allocation.
The court found support for pro rata allocation based upon the policy’s definition of “occurrence,” which included “an accident, including injurious exposure to conditions, which results during the policy period. Although the insured argued that the “ultimate net loss” phrase was key in supporting joint and several liability, the court interpreted the phrase “during the policy period” to be a limit on the “ultimate net loss” language in the insuring agreement. The court explained that its interpretation of the policy was in accordance with the well settled principal that an insurance contract should be interpreted as a whole, rather than focusing on individual phrases.
The court also explained that the policy provision, which stated that a continuous or repeated exposure would be deemed to have arisen out of one occurrence did not support the insured’s argument that the insurer was liable for all of the loss. The court found that this provision was added to the policy to limit the insurer’s liability, not to expand it.
The court’s ultimate decision on Question 1 was based on both the reasonable expectation of an insured that the policy would cover only the property damage that occurred during the policy period, as well as the fact that allowing the insured’s joint and several liability approach would simply postpone the allocation of liability among concurrent insurers. Furthermore, the court held that the pro rata approach avoided the undesirable result of holding only one insurer liable for the entire loss, and instead provided a more equitable allocation based upon actual liability.
Following this equitable logic, the court also determined that the proper method for applying the pro rata allocation among the multiple insurers was the “time on the risk” method, which holds insurers proportionately liable based upon the number of years that each was on risk. The court chose this method over the pro-ration by years and limits method, which essentially holds insurers with larger policy limits liable for a greater percentage of the damages where the time on risk is the same.
The court held that the “time on the risk” method was the most appropriate allocation method in the absence of a fact based allocation because it most closely resembles a fact-based allocation. Assuming that the damages occurred equally across the entire period in question, as the court must assume in the absence of evidence showing when the damage occurred, each insurer should pay only the amount of damages that occurred in its policy period(s), rather than being penalized for having provided a policy with larger limits.
The court’s response to these certified questions disregards prior Massachusetts Appeals Court decisions on these topics and adds Massachusetts to the growing number of jurisdictions that have held that a pro rata allocation, rather than joint and several liability, was the proper method for dealing with allocating damages that have occurred across multiple policy periods (or periods without coverage).