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October 2013

New Jersey Supreme Court Rewrites Carter-Wallace Allocation Rules in Cases Involving the State Guaranty Association

In a critical insurance decision, the New Jersey Supreme Court ruled on Sept. 24 that liability insurers covering a long-tail loss cannot seek contribution from the New Jersey Property-Liability Insurance Guaranty Association for the Carter-Wallace shares of insolvent insurers. More importantly, while perhaps not a true holding, the court rebuffed an argument that the insured would have to bear the burden of the insolvent insurer’s Carter-Wallace allocation to the extent the Guaranty Association was not required to pay.

Farmers Mutual and Newark Insurance Co. insured two properties that suffered soil and groundwater contamination caused by underground storage tank leaks.  In both cases, the contamination began during the Newark policy years but was discovered less than eight months into the Farmers Mutual policy period.  Farmers Mutual paid 100 percent of the approximately $138,000 in costs to remediate both properties.  After Newark was declared insolvent in 2007, Farmers Mutual sued the Guaranty Association for Newark’s alleged Carter-Wallace share of the remediation costs. 

In Farmers Mut. Fire Ins. Co. v. New Jersey Property-Liability Ins. Guar. Assoc., the Guaranty Association argued that the New Jersey Property-Liability Insurance Guaranty Association Act (PLIGA Act) required exhaustion of all available solvent coverage before it had any payment obligation, and because the Farmers Mutual policies were not exhausted, Farmers Mutual had no right of contribution against the Guaranty Association for the policies issued by now-insolvent Newark.  The trial court rejected the Guaranty Association’s exhaustion argument and ruled in Farmers Mutual’s favor.

The Appellate Division reversed, agreeing with the Guaranty Association’s position that the PLIGA Act’s exhaustion provision – which “requires the exhaustion of all insurance benefits from solvent insurers on the risk before [the Guaranty Association], standing in the shoes of an insolvent insurer, must pay statutory benefits” (N.J.S.A. 17:30A-5) – barred Farmers Mutual from recovering Newark’s Carter-Wallace shares from the Guaranty Association.  The Supreme Court, which has “not had occasion to speak to the intersection of the PLIGA Act and the allocation scheme in long-tail environmental cases,” granted certification.  

Central to the Supreme Court’s analysis was the definition of “exhaust” added to the PLIGA Act in a 2004 amendment.  Specifically, the amendment stated that “in any case in which continuous indivisible injury or property damage occurs over a period of years as a result of exposure to injurious conditions, exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years has been applied[.]”  (N.J.S.A. 17:30A-5).  Under the Supreme Court’s plain reading of the PLIGA Act, “when one of several insurance carriers on the risk is insolvent in a continuous-trigger case, then the limits of the policies issued by solvent insurers ‘in all other years’ must first be exhausted before the Guaranty Association is obligated to pay statutory benefits.”  The Supreme Court also viewed the 2004 amendment as a direct response to Sayre v. Insurance Company of North America, a 1997 ruling in which the Appellate Division concluded that the Guaranty Fund (applicable to surplus lines insurers) did in fact have to participate in a Carter-Wallace allocation in a progressive environmental damage case.

The court rejected Farmers Mutual’s argument that the New Jersey insurance allocation rulings set forth in Owens-Illinois and Carter-Wallace take precedence over the PLIGA Act, holding that the common law is subservient to legislative enactments. 

The court rejected the insurer’s argument that the PLIGA Act’s exhaustion provision is an “unconstitutional impairment of existing contract rights.”  The court held that insurers should temper their “contractual expectation” in the highly regulated and “naturally fluid regulatory scheme” of the insurance industry.  Moreover, the court found that the allocation rule set forth in Owens-Illinois and Carter-Wallace was not intended as the “last word” on the subject.  The court also ruled that the 2004 amendment was not unconstitutional because it was motivated by significant and legitimate public policy goals – to protect insureds from insurer insolvencies – and the exhaustion requirement is a reasonable condition related to the preservation of the Guaranty Association’s limited resources. 

Finally, the court rejected an argument made by another insurer, appearing amicus curiae, that the PLIGA Act does not control allocation of loss as between insurers and the insured, and that the insured should bear responsibility for insolvent insurers and then seek reimbursement from the Guaranty Association.  The court, noting that, in its view, the insurers’ interpretation “would turn the PLIGA Act on its head,” stated that the aim of the PLIGA Act “would be defeated by making the insured bear the loss for the carrier’s insolvency before the insured received any statutory benefits from the Guaranty Association.”  The court essentially instructed that solvent insurers cannot assign responsibility to the Guaranty Association or the insured for the Carter-Wallace shares allocated to an insolvent insurer, thus shifting the burden of insolvencies squarely on solvent insurers.

Click here for the opinion in Farmers Mut. Fire Ins. Co. v. New Jersey Property-Liability Ins. Guar. Assoc. (September 24, 2013) 2013 N.J. LEXIS 902.

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