In Boston Gas Co. v. Century Indemnity Co., 529 F.3d 8 (1st Cir. 2008), the court was confronted with the allocation of losses among insurers under various liability policies from 1951-1969 in regard to the environmental remediation of a contaminated manufacturing site. Boston Gas had operated the facility from 1908 until 1969. In 1995, a routine investigation uncovered contamination at the site. Boston Gas purchased three CGL policies from Century covering the period from December 1, 1951 through December 1, 1969. Each policy defined an “occurrence” as “an accident, including injurious exposure to conditions, which results during the policy period, and property damage neither expected nor intended from the standpoint of the Insured.”
Century argued that its liability should have been limited by allocating Boston Gas’ liabilities among all insurers from whom Boston Gas had purchased general commercial liability insurance during the lifespan of the facility. Century contended that there should be a pro rata allocation among all insurers.
The court remarked that “this dispute commonly arises in the context of environmental damage and toxic exposure disputes – so-called ‘long-tail’ indivisible injuries attributable to ongoing events without a single clear ‘cause.’” Id. at 13. “The language of traditional comprehensive general liability policies – drafted before such lawsuits became common – does not neatly map on to these types of injuries.” Id.
The court explained that courts have adopted competing methodologies. “Some courts have deemed insurers fully liable – normally, jointly and severally – for all damages attributable to an occurrence, exposure or contamination that happened at least in part during the coverage period.” Id. “Others have pro rated an insurer’s liability largely, but not always exclusively, on the number of years during which coverage was offered.” Id. There is no “clear consensus among the states as to which method is preferable. A plurality had adopted some form of pro rata allocation, but a significant number of courts imposed joint and several allocation.” Id. at 13-14.
The court observed that there are policy considerations that weigh in favor of each approach:
At first blush it may seem illogical to hold a single insurer, who may have only covered the insured for a single year, fully liable for the cost of environmental damage that may have accrued over the course of a century. But that insurer can seek contribution from other insurers ‘on the risk’ during the contamination period. … and the alternative may force the insured to sue numerous companies in one suit, if this is possible at all, to avoid inconsistencies.
Either method forces courts to indulge in a probable fiction as to when the event triggering coverage occurred. The pro rata method assumes an ongoing occurrence causing stable amounts of damage over time; the joint and several method pretends, even less plausibly, that a single occurrence caused all the damage, and allows the insured effectively to choose the year in which that happened. Both accrued approximations made under conditions of uncertainty.
Pro rata allocation is generally favored by insurers; insureds usually prefer joint and several allocation as it alleviates the need for multiple defendants and possibly multiple lawsuits. … each method also has secondary implications which courts have variously viewed as more or less desirable. One example is so-called ‘orphan shares’ i.e., damages attributable to years during which the insured ‘went bare’ or purchased coverage from a now-insolvent insurer. Pro rata allocation usually (although not inevitably) treats the insured as self-insuring for those years, a result that some courts view (appropriately) as preventing a windfall … others as (inappropriately) depriving the insured of expected protection. … the two approaches also differ in the incentives they create for settlements, in their tendency vel non to consolidate litigation in one case, and in their treatment of policy deductibles and excess insurance policies.
For example, under pro rata allocation, the insured will seek coverage from each insurance policy in effect during the contamination period and is likely to absorb the self-insurance retentions of each policy … while excess insurance policies offering coverage only for damages above that pro rated amount will not be triggered. By contrast, under joint and several liability all damages are attributable to a single year; ordinarily the insured is responsible for a single deductible and, given the large sums ordinarily sought, it becomes more likely that excess insurance will be activated.
Id. at 14-15.
The court observed that the Massachusetts Supreme Judicial Court had not yet resolved this allocation question. Id. at 13. The court noted that simply because “a legal issue is close or difficult is not normally enough to warrant certification, or else diversity cases would regularly require appellate proceedings in two courts.” Id. at 15. Nonetheless, “the dollar amounts involved in this and the follow-on cases for other cites are very large… and the allocation method could easily matter in future cases not involving these parties.”
What is more, “there are additional nuances complicating any prediction by us of Massachusetts law.” Id. “In joint and several allocation courts divide on whether an insured is allowed to ‘stack’ multiple policies to obtain coverage for all their damages; for pro rata allocation, some courts allocate damages based purely upon the number of years of coverage, while others allocate based on both years and amounts of coverage offered.” Id. The court thus certified the allocation issue to the Massachusetts Supreme Judicial Court.
On July 24, 2009, the Massachusetts Supreme Judicial Court responded that “liability should be pro rated” and that the form of pro rata liability should be “the time-on-the-risk method of pro rating liability in the absence of evidence more closely approximating the actual distribution of property damage.” Boston Gas Co. v. Century Indem. Co., No. SJC-10246, 2009 WL 2184647, at *1 (Mass. July 24, 2009). The court remarked that in a progressive injury environmental contamination case “it is both scientifically and administratively impossible to allocate to each policy the liability for injuries occurring only within its policy period.” Pro rata allocation “assigns a dual purpose to the phrase ‘during the policy period’ in the CGL policy’s definition of ‘occurrence,’ serving ‘both as a trigger of coverage and a limitation on the promised ‘all sums’ coverage.” 2009 WL 2184647, at *8.
In adopting the pro rata method, the court found material the language of the policies at issue:
In the XCP-3547 policy, Century promised to indemnify Boston Gas for the ‘ultimate net loss’ that it became ‘legally obligated to pay as damages because of … property damage … to which the policy applies, caused by an occurrence’ … the ‘Policy Period, Territory’ provision then explains that ‘this policy applies to property damage which occurs anywhere during the policy period.’ … in the XPL-5607 policy, Century promised to indemnify Boston Gas for the ‘ultimate net loss’ that it ‘may sustain by reason of the liability imposed upon it by law, or assumed by it under contract or agreement for damages because of injury to or destruction of property, including the loss of use thereof, caused by an occurrence as defined herein.’ The ‘Policy Period, Territory’ provision in that policy provides that ‘this policy applies only to occurrences which happen during the policy period.’ The policy defines an ‘occurrence,’ with respect to property damage, as ‘a continuous or repeated exposure to conditions which unexpectedly and unintentionally causes injury to or destruction of property during the policy period.’ In other words, that policy applies only to injury to or destruction of property taking place during the policy period. This conclusion is further supported by a clause in the XPL-5607 policy’s provisions limiting Century’s liability, which states that there is no limit to the number of occurrences for which Boston Gas can make claims ‘provided such occurrences happen during the policy period.’”
2009 WL 2184647, at *11 (internal punctuation omitted).
The court held that “the most reasonable reading of these provisions is that the Century policies provided coverage for the portion of Boston Gas’ liability attributable to the quantum of property damage occurring during a given policy period.” Id. “This policy language is consistent with that of other courts that have construed CGL policies with similar provisions limiting the applicability of a policy to property damage that occurs during the policy period.” Id. The court further concluded that “this limitation of coverage to liability resulting from property damage during the policy period derived from the definition of ‘occurrence’ in the Century policies.” Id. What is more, “this limitation makes sense: property damage during the policy period triggers the Century policies which then respond by providing coverage for liability attributable to the amount of property damage occurring during the policy period.” Id.
The court rejected Boston Gas’ contention that the clause in Century’s limits of liability that provides that “all damages arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence” contemplates that the losses covered by the policy may result from damage that takes place outside the policy period. “It is equally plausible to read these provisions as applying to ‘continuous or repeated exposure to substantially the same general conditions’ during the policy period.” What is more, “these provisions govern only the number of occurrences for purposes of determining the limit of Century’s liability; they do not expand coverage for damages occurring outside the policy period.” 2009 WL 2184647, at *12.
The court also rejected Boston Gas’ contention that the policies’ “other insurance” clauses reflected an intention to cover losses from damage outside the policy period. These clauses “simply reflect a recognition of the many situations which concurrent, not successive coverage would exist for the same loss.” 2009 WL 21846467, at *13.
The court reasoned that “pro rata allocation produces a more equitable result than joint and several allocation, which creates a false equivalence between an insured who has purchased insurance coverage continuously for many years and an insured who has purchased only one year of insurance coverage.” 2009 WL 2184647, at *15 (internal quotation marks and citation omitted). In the court’s view, “the pro rata allocation method promotes judicial efficiency, engenders stability and predictability in the insurance market, provides incentive for responsible commercial behavior, and produces inequitable results.” Id.
Turning to the method of pro rata allocation, the court remarked that “the ideal method is a ‘fact-based’ allocation, under which courts would determine precisely what injury or damage took place during each contract period where uninsured period and allocate the loss accordingly.” 2009 WL 2184647, at *16 (internal quotation marks and citation omitted). Nonetheless, because such an allocation is not possible in many cases, courts must “use various proxies for deriving fair apportionment.” Id.
There are “two primary means of apportioning liability on a pro rata basis where a fact-based allocation is not feasible.” Id. “The most common method of apportionment is what has become to be known as pro rata allocation by time on the risk.” Id. “Under this allocation method, each triggered policy bears a share of the total damages [up to its policy limit] proportionate to the number of years it was on the risk [the numerator], relative to the number of years triggered coverage [the denominator].” Id. “The time-on-the-risk method offers several policy advantages, including spreading the risk to the maximum number of carriers, easily identifying each insurer’s liability through a relatively simple calculation, and reducing the necessity for subsequent indemnification actions between and among insurers.” Id. (internal quotation marks and citations omitted).
The court explained that “the only principal method of apportionment involves pro rating losses by years and limits.” Id. Under this methodology, loss is allocated among policies based on both the number of years a policy is on the risk as well as that policy’s limits of liability. 2009 WL 2184547, at *17 (internal quotation marks and citations omitted). “An insurer’s proportionate share is established by dividing its aggregate policy limits for all the years it was on the risk for the single, continuing occurrence by the aggregate policy limits of all the available policies and then multiplying that percentage by the amount of indemnify costs.” Id. (internal quotation marks and citations omitted). This methodology ensures “that insurers who provided more coverage, that is, higher limits or lower deductibles, assumed more of the risk of liability than insurers who provided less coverage.” Id. (internal quotation marks and citations omitted).
Century argued that the court should adopt the time-on-the-risk method. The court concurred, citing that “its inherent simplicity promotes predictability, reduces incentives to litigate, and ultimately reduces premium rates.” Id. (internal quotation marks and citations omitted).
The court further concluded that where the policyholder is self-insured for any period of time on the risk, the policyholder bears responsibility for that portion of the total defense and indemnity costs over which it chose to assume the risk. 2009 WL 2184647, at *17. The commercial availability exception to this rule, pursuant to which losses should not be allocated to a policyholder for periods during which the policyholder was unable to obtain coverage in the marketplace for a particular risk and with respect to losses resulting from activities or products placed in to commerce before such time as coverage became unavailable due to pollution and asbestos exclusions. Id. The court explained that “an unavailability exception … would contravene the limitation of coverage in the Century policies to liability attributable to property damage during policy periods.” Id. The court found persuasive Century’s argument that “the unavailability exception effectively provides insurance where insurers made the calculated decision not to assume risk and not to accept premiums.” Id.
The court further concluded that Boston Gas “must satisfy only a pro rated amount of its per occurrence self-insured retention for each triggered policy period, to be pro rated on the same basis as Century’s liability.” 2009 WL 2184647, at *18. Thus, for example, “if the pollution in this case had occurred over the course of a decade, then one-tenth of the total clean up costs would be apportioned to each policy year and Boston Gas would be responsible for one-tenth of its applicable self-insurance retention for each year.” Id. This result “produces an equitable result in the face of policy language that is at best ambiguous as to what happens when the insurer is held liable for only part of a continuous occurrence.” Id.
