Insured May Be Responsible for Pro Rata Share of Defense Costs in Long-Latency Cases
Defense costs may be prorated among insurers and the insured in long-latency disease cases, according to a recent decision by the Louisiana Supreme Court. This rule only applies in long-latency disease cases, the Court instructed, and was grounded in the language of the particular insurance policy at issue.
The case arose in the long-running Arceneaux v. Amstar Corp. litigation, which involves numerous occupational hearing loss claims. In the litigation before the Court, approximately 100 plaintiffs alleged hearing loss at American Sugar’s refinery in Arabi, Louisiana, between 1941 and 2006. Continental Casualty Company issued an insurance policy that covered bodily injury occurring in the course and scope of employment for 26 months of those years. The policy provided, in part, that Continental “will pay on behalf of the insured all sums which the insured … shall become legally obligated to pay as damages because of … bodily injury … caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury ….” The policy further defined “bodily injury” as “bodily injury, sickness or disease sustained by any person which occurs during the policy period ….”
In beginning its analysis, the Court noted that an insurer’s duty to indemnify an insured in long-latency disease cases, as opposed to the duty to defend, had already been established in Louisiana. The Court explained that liability for indemnity is prorated among insurance carriers on risk during periods of exposure to injurious conditions. According to the Court, this rule for indemnity resulted from the Court’s previous adoption of the exposure theory in long-latency disease cases. To explain this concept, the Court cited an earlier decision wherein it explained that the “exposure theory, upon which the Louisiana allocation approach is based, relies on the principle that an insurer will only be responsible within the terms of its policy for those damages arising out of the period the policy is in effect. In short, each insurer is responsible, up to the limits of its policy, for all damages emanating from occurrences taking place during the insurer’s policy period. All damages emanating from occurrences taking place outside the policy period are covered by the insurer on the risk at the time the occurrence took place.”
Finding no Louisiana precedent on the division of responsibility for defense costs, the Court noted the development nationwide of two approaches to the issue. Under the pro rata approach, insurers are responsible for a share of defense costs based in part on the time they are on the risk. Defense costs are divided among the insurers, and, if the insured lacked coverage at any relevant time, it also is responsible for its pro rata share of defense costs. The other approach is the joint and several allocation. Under this approach, an insured may select a single insurer on the risk and hold it liable for the entire loss up to the limits of the insurer’s policy. The insurer then must seek contribution from other insurers also on the risk. Most significantly, under the joint and several approach, defense costs are only allocated among insurers, even during periods when the insured had no insurance.
Based on the language of the Continental policy, the Court adopted the pro rata approach. The Court explained that the policy provides that Continental has the duty to defend any “bodily injury” lawsuit “which occurs during the policy period.” Further, the exposure theory applied in Louisiana to long-latency disease cases supports the pro rata approach because it provides a “clear way” to apportion defense costs, “as each year of alleged exposure will trigger the insurer’s duty to defend.” The Court further justified its decision by noting that, based on the “policy language, neither party could reasonably expect that the insurer was liable for losses that occurred outside the policy coverage periods.” To “hold otherwise,” the Court added, “would entitle an insured to receive coverage for a period in which it did not pay a premium.” The Court further observed that “the joint and several allocation approach provides a disincentive to insureds to purchase uninterrupted insurance coverage and provides a windfall to companies that fail to obtain continuous coverage. … The pro rata allocation method, by contrast, promotes risk spreading.”
Having adopted the pro rata approach, the Court indicated that it had a final issue to resolve, namely, the formula for allocation. The Court held that, in the case before it, “the amount of time an insurer was on the risk would seem to be the appropriate consideration.” This determination rejected the approach of cases from other jurisdictions which also consider the policy limits in allocating defense costs.
While the Louisiana Supreme Court strictly limited this decision to the particular facts and policy language of the instant case, this decision may ultimately find a wider application. As many liability policies are occurrence-based and are intended to only apply to occurrences arising during the policy period, the rationale of this decision may be extended to other situations, providing a favorable result for insurers.
Arceneaux v. Amstar Corp., 2015-C-0588 (La. 9/7/16)