Insurance Companies Have the Right to Limit Coverage in any Manner Desired

Duty to Defend Limited to Time on Risk in Louisiana

When a defendant is uninsured for a particular risk and plaintiffs sue for injuries and illness allegedly incurred in periods of time when the defendant was uninsured and some where it was insured, insured sought defense for the entire period while insurer claimed it was only obligated to pay its pro-rata share of defense and indemnity costs, the Supreme Court of Louisiana was called upon to resolve the dispute in Daniel Arceneaux, Louis Daverede, Jr v. Amstar Corp., Amstar Sugar Corp., Tate And Lyle North American Sugars, Inc., And Domino Sugar Company, Et Al.,…, Supreme Court of Louisiana, — So.3d —-, 2016 WL 4699163 (09/07/2016).

FACTS

In the underlying suit, plaintiffs allege that they suffered hearing loss from exposure to unreasonably loud noise in the course of their work at American Sugar’s refinery in Arabi, Louisiana.

The plaintiffs, approximately 100 in number, allege that they worked at the refinery during various years ranging from 1941 to 2006. Continental issued eight general liability policies in effect from March 1, 1963 to March 1, 1978. Each of the policies contained exclusions for bodily injury to employees of the insured arising out of the course and scope of employment. However, in the last policy, the exclusion was deleted by special endorsement effective December 31, 1975. Thus, there was coverage for bodily injury that occurred from December 31, 1975 through March 1, 1978, a period of twenty-six months.

The policy defines bodily injury as “bodily injury, sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom.” (Emphasis added.)

American Sugar brought a third party demand against Continental alleging that Continental had issued policies that provide coverage for the underlying claims. Furthermore, American Sugar alleged that Continental had been put on notice of the litigation in June 2006 and that Continental breached its policy provisions by failing to provide a defense. American Sugar sought past defense costs, a complete defense going forward, and penalties and attorney fees.

Without offering reasons, the trial court granted American Sugar’s request for a complete defense going forward, but denied its summary judgment motion in all other respects, including the request for past defense costs. The Fourth Circuit affirmed the trial court’s ruling holding that an insurer’s duty to defend is not subject to proration.

LAW AND ANALYSIS

At the outset, we must note that an insurer’s duty to defend is distinct from its duty to indemnify. Generally, an insurer’s obligation to defend suits filed against an insured is broader than its obligation to provide coverage for damage claims. The insurer’s duty to defend is determined by the allegations of the plaintiff’s petition, and the insurer is obligated to furnish a defense unless the petition unambiguously excludes coverage. If, assuming all allegations of the petition to be true, there would be both coverage under the policy and liability of the insured to the plaintiff, the insurer must defend regardless of the outcome of the suit. In short, the duty to defend arises whenever the pleadings against the insured disclose even a possibility of liability under the policy.

As to an insurer’s duty to indemnify, liability is to be prorated among insurance carriers that were on the risk during periods of exposure to injurious conditions. That indemnification is allocated pro rata is based in large part on Louisiana’s adoption of the exposure theory in long latency disease cases. Long latency occupational disease cases are sui generis, not like anything else, in that a distinct body of jurisprudential law has been developed which applies solely to them.

Further, in cases when claims arise out of occurrences that take place during a period in which no insurer is on the risk, a liable entity is assigned a pro rata share for purposes of indemnification.

Nationwide, two general approaches to allocation of defense costs in long latency disease cases have emerged: the pro rata allocation method and the joint and several allocation method. Under pro rata allocation, insurance carriers of triggered policies are responsible for a share of defense costs based at least in part on the period of time they are on the risk. Defense costs are divided among insurers, and if the insured has periods of non-coverage, the insured is responsible for its pro rata share. The most significant difference between joint and several allocation and pro rata allocation is the treatment of uninsured time periods.

A leading decision in applying joint and several allocation is Keene Corp. v. Insurance Co. of North America. 667 F.2d 1034 (D.C. Cir. 1981), cert denied, 455 U.S. 1007 (1982). In this case, manufacturer Keene Corporation sought declaratory judgment of the rights and obligations of insurers under comprehensive general liability policies, specifically to what extent each policy covered Keene’s liability for asbestos-related diseases. The applicable insurance policies in Keene are substantially similar to the Continental policy at issue in this case. The appellate court in Keene adopted the continuous trigger theory in long latency disease cases, holding that each insurer on the risk between exposure to asbestos and manifestation of injury was liable to the insured, Keene Corporation.

Next, the court determined the extent of coverage for which each insurer was liable. The court noted that the policies provided that the insurer will pay on behalf of the insured “all sums” that the insured becomes legally obligated to pay as damages because of bodily injury during the policy period. The court reasoned that the policies issued to the insured relieved it of the risk of liability for latent injury of which the insured could not be aware when it purchased insurance.

As to allocation of liability, the court reasoned that in asbestos-related disease suits, it is likely that the coverage of more than one insurer will be triggered.

Other jurisdictions have concluded differently, although dealing with essentially the same policy language. The seminal case applying the pro rata allocation method is Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified on reh’g, 657 F.2d 814 (6th Cir. 1981).

In Forty-Eight Insulations, the insurer sought a declaratory judgment to establish that the insured was responsible for a portion of its defense costs and liability for an asbestos action brought against it because it had been self-insured for a period of time. The court reasoned that when there is no reasonable means of prorating defense costs between covered and non-covered claims, the insurer must bear the entire cost of defense. The court noted this scenario typically arises in suits brought as the result of a single accident, when only some of the damages sought are covered under a policy.

However, in the context of asbestos exposure cases and other long latency disease claims when coverage was triggered under the exposure theory, defense costs can be “readily apportioned.” The duty to defend arises solely under contract. An insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period. The insurer has not contracted to pay defense costs for occurrences which took place outside the policy period.

The Louisiana Supreme Court, therefore, was persuaded by the reasoning presented in Forty-Eight Insulations and its progeny to adopt the pro rata allocation method for defense costs in the case before us based on the policy language. The duty to defend arises solely under contract. According to those rules, it is the responsibility of the judiciary to determine the common intent of the parties. In this case, the words of the insurance contract at issue are clear and unambiguous.

Applying the pro rata method of allocation here does not violate the reasonable expectations of the insurer or the insured. Based on the policy language, neither party could reasonably expect that the insurer was liable for losses that occurred outside the policy coverage periods.

Subject to the rules on insurance contract interpretation, insurance companies have the right to limit coverage in any manner they desire, so long as the limitations do not conflict with statutory provisions or public policy. The policy language in this case supports a pro rata allocation of defense costs.

Additionally, as recognized by Forty-Eight Insulations and its progeny, the pro rata allocation scheme is an equitable system that can be readily used in long latency disease claims in Louisiana. Because the duty to defend in Louisiana is determined by consulting the allegations within the petition and the terms of the insurance policy, the pro-rata amounts can be determined from the pleadings.

American Sugar will be required to pay for its defense during years in which it did not acquire an insurance policy that would be triggered by the instant litigation. Continental is only liable, therefore, for its pro rata share of defense costs based on its policy periods as its pro rata share.

ZALMA OPINION

The Supreme Court of Louisiana did Equity—Fairness—by deciding that the insurer in long latency disease claims is only required to pay its pro rata share based on time on risk and that the insured—for the period it was uninsured—must pay its share of defense costs for the period it was uninsured. The insurer limited its liability and defense obligation to the period its policy was in effect and it would be unfair to make it pay for defense in periods it did not insure.