As asbestos litigation across the country winds down, insurers are facing the issue of how to fund settlements when the insured has gone out of business. In a recent case in New York involving Liberty Mutual, the State Supreme Court Justice ruled against the insurer’s attempt to use the rule of pro rata allocation to reduce its financial obligation to fund the settlement of several asbestos cases.
Liberty had issued several liability policies to its insured Jenkins Bros., a New Jersey valve manufacturer during a period that ended in 2004, when Jenkins ceased operations. Liberty appeared as the real party in interest in several cases in which Jenkins was a named defendant. Jenkins had no other insurers who could be expected to share coverage in the event of a settlement or adverse verdict.
Liberty filed an action in 2018 seeking a declaratory judgment that it was entitled to prorate its indemnity obligation over the time periods that it actually provided coverage to Jenkins. The requested proration of the obligation to indemnify would have reduced Liberty’s financial obligation to fund any settlement on Jenkins’ behalf.
The court’s ruling
The trial judge, Justice Arthur Engoron, ruled that the so-called “pro rata allocation” of liability applies only to insurers and their policy holders and not to insurers and plaintiffs. The judged held that the cases in which the pro rata rule had been applied involved only disputes between insurers and their policyholders involving the policyholders’ decisions to voluntarily to limit or reduce their insurance coverage. Such actions could not shift the burden to indemnify to the insurer for periods in which the insureds deliberately decided to forego or rely on limited insurance coverage. No such considerations were in play in a case where the plaintiffs, individual asbestos victims, were not in any decisions about when and how to purchase insurance.
While the number of plaintiffs and the amount of the settlements were relatively small, this decision can be expected to have significant impact in other cases still pending in New York courts. Anyone with questions about the extent of an insurer’s obligation to provide indemnity may wish to consult an attorney who is experienced in the law of insurance coverage.