Self-Insurance Obligations Under NJ Law: Forecasting the Future of Benjamin Moore

The NJ Supreme Court has recently elected to hear appeals in two coverage actions involving the same basic issue ' namely, reconciling the application of the Owens-Illinois “continuous trigger theory” with the application of specific policy provisions under New Jersey law. In the first of these two cases, Spaulding Composites Company, Inc. v. Aetna Casualty & Surety, the court strongly affirmed the viability of the continuous trigger theory, invalidating a clear and unambiguous non-cumulation clause that it found conflicted with this approach. Spaulding Composites Company, Inc. v. Aetna Casualty & Surety, 176 N.J. 25, 46 (2003). In the second case, Benjamin Moore & Company v. Aetna Casualty & Surety, which is pending, the court must now determine how to apply the continuous trigger theory to self-insurance features contained in a series of unambiguous policy endorsements which do not appear to conflict with a continuous trigger. No. A-4423-01T2F, 2003 WL 1904383 (App. Div., Jan. 14, 2003), appeal granted, 176 N.J. 70 (2003). Specifically, the court must consider whether the continuous trigger theory should be applied to deductibles in the same one-occurrence-per-year manner that it is applied to losses. The trial court and Appellate Division in Benjamin Moore have both concluded that the continuous trigger theory is properly applied to the calculation of deductibles. At this point, it is uncertain how the Supreme Court will resolve this issue, but the court may well have tipped its hand with the Spaulding decision.

Spaulding

The Spaulding case involves the application of the Owens-Illinois continuous trigger theory to a potentially conflicting policy provision that purports to prevent the “cumulation” of multiple policy limits with respect to a “single occurrence.”

In 1990, Spaulding Composites Company, Inc. (“Spaulding”) was identified by the U.S. Environmental Protection Agency (USEPA) as a potentially responsible party for contributing to environmental contamination at a Superfund site located in Fairfield Township, NJ (the “Fairfield Site”). In 1994, both the USEPA and a private trucking company filed federal court actions, alleging Spaulding's responsibility for cleanup costs at this site. By September 2002, those environmental actions had resulted in a judgment against Spaulding for more than $13 million.

While these environmental actions were pending in federal court, in 1995, Spaulding filed a state court declaratory judgment action against its insurers seeking reimbursement for defense and indemnity costs incurred in connection with the Fairfield Site. In this state court action, Spaulding sought coverage under various policies including a series of general liability policies issued by Liberty Mutual Insurance Company during the 9-year period from 1976 to 1984. Each of these policies contains an identical non-cumulation clause which provides, in relevant part, as follows:

“If the same occurrence gives rise to personal injury or property damage which occurs partly before and partly within the policy period, the 'each occurrence' limit and the applicable aggregate limit of this policy shall be reduced by the amount of each payment made by the company with respect to each occurrence under a previous policy of which this policy is a replacement.” (Emphasis in original.) 176 N.J. at 29.

In the state court, the trial judge granted summary judgment to Spaulding, finding the Liberty non-cumulation clause inconsistent with New Jersey's continuous trigger theory, as articulated in Owens-Illinois, Inc. v. United Ins. Co., 138 NJ. 437 (1994) and reaffirmed in Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), which theory mandates the “treatment of sequential environmental damage as a separate occurrence 'within each of the years of a CGL policy.'” However, the Appellate Division reversed this ruling declaring the Liberty non-cumulation clause both clear and effective and limiting the intended application of Owens-Illinois and Carter-Wallace to cases involving ambiguous policy language.

The Supreme Court began its analysis of this dispute by reaffirming the continuing viability of the trigger and allocation modalities established in Owens-Illinois and Carter-Wallace. Specifically, in those decisions, the court adopted a “continuous trigger theory,” which provides that: “when progressive indivisible injury or damage results from exposure to injurious conditions for which civil liability may be imposed, courts may reasonably treat the progressive injury or damage as an occurrence within each of the years of a CGL policy.” Id. at 33, quoting Owens-Illinois, 138 N.J. at 478 (emphasis added).

Or, stated otherwise, “Owens-Illinois declared that long-tail environmental exposure injury and damage would no longer be treated as one continuous occurrence, … but would be treated as one occurrence per year triggering all applicable policies. … ” Id. at 40 (emphasis added). The court also confirmed a pro rata allocation scheme, described as a “pro-ration by years and limits method of allocation,” which allocates losses based on the extent of the risk assumed among the carriers and/or retained by the insured.

In employing the foregoing trigger and allocation theories, the court confirmed that it did not rely on policy ambiguity, or even policy language, but on public policy 'specifically, the importance of adopting a uniform methodology that “favors maximizing, in a fair and just manner, insurance coverage for cleanup of environmental disasters.” Reflecting on its decision in Owens-Illinois, the court openly acknowledged its disregard of “unhelpful” contract provisions, which it deemed unable to “produce a coherent result,” and touted its “watershed” decision to “look [ ] beyond contract language and traditional rules of insurance policy interpretation,” to create its own methodology and, thereby, “eliminate [ ] reliance on particular contract language (other than limits and exclusions) and on traditional rules of interpretation.” The court then applied this extended analysis to the specific non-cumulation clause at issue in Spaulding, with predictable results.

The court found that the Liberty non-cumulation clause conflicts with Owens-Illinois and Carter-Wallace and is therefore unenforceable. In so deciding, the court opined that, ”[a]t the heart of a non-cumulation clause is the notion of a 'single occurrence' with multiple year effects.” This concept conflicts with the fundamental basis of Owens-Illinois, which is that, under the continuous trigger theory:

“[P]rogressive indivisible property damage should be treated as an occurrence within each of the years of a CGL policy. On its face, this language appears to direct treatment of progressive property damage as distinct occurrences triggering per-occurrence limits in each year of a policy.” Id. at 44 (quoting Chemical Leaman Tank Lines v. Aetna Cas. & Sur. Co., 978 F.Supp. 589, 607 (D.N.J. 1997) (emphasis in original)).

Thus, the court found that the non-cumulation language is inapplicable, as environmental coverage claims, by virtue of Owens-Illinois, do not involve a “single occurrence,” but a single occurrence within each policy year. Alternatively, the clause is unenforceable “because it would thwart the Owens-Illinois pro-rata allocation modality.”

Benjamin Moore

In contrast, the Benjamin Moore case involves the application of the Owens-Illinois continuous trigger theory to nonconflicting (ie both operate on the same per-occurrence basis) policy provisions ' namely, deductible endorsements.

In Benjamin Moore, the insured sought coverage for lead paint liabilities under insurance policies issued by defendant Lumberman's Mutual Casualty Company (LMCC), which policies contained substantial deductibles resembling self-insurance mechanisims. Plaintiff argued that “it should not be required to pay a full deductible under each triggered policy before coverage must be provided for the asserted claims,” but “contends that the amount of the deductibles it must pay under each triggered policy should be prorated in the same manner that coverage is prorated.” LMCC sought a competing order “requiring plaintiff to satisfy each deductible in each triggered policy without proration.” Thus, the “precise issue presented [was] whether the full deductible must be paid in a continuing trigger case in each triggered year and for each triggered policy before coverage under the policies is available.” Both the trial court and the Appellate Division, citing the reasoning of the Special Master in Pfizer v. Employers Ins. of Wausau, No. MID-C-108-92 (Ch. Div., October 14, 1999), leave to appeal granted, 163 N.J. 391 (2000), concluded that it must.

In Pfizer, the Special Master determined that policy limits and deductibles must be applied consistently ' if a policy limit is implicated, the associated deductible is likewise implicated:

“The difficulty [with the policyholder's argument that it should be permitted to access multiple policy limits but be subject to less than the same number of deductibles], of course is that such policy limits and deductibles are stated on a per-occurrence basis, and “occurrence” cannot be read with a straight face to mean different things in two closely related contexts under a single policy definition.” See Pfizer, slip op., at p. 3 (January 18, 1999 decision of Special Master).

The trial court in Benjamin Moore found this reasoning persuasive and granted LMCC summary judgment as to the application of deductibles.

The Appellate Division began its analysis by revisiting the Owens-Illinois continuous trigger theory, which, again, treats “progressive injury or damage as an occurrence within each of the years of a CGL policy.” The court approvingly cites the decision of the Special Master in Pfizer, stating as follows:

“[U]nder the continuous trigger theory applied by our courts, the continuing and worsening injury suffered by the insured is deemed an occurrence within each policy year, and therefore triggers each policy and the terms of the coverage offered thereunder, including any liability limit such as deductibles. 'Triggering a policy does not disregard those terms, or guarantee that coverage will be afforded. Thus, on the basis of clear and unambiguous policy language, the inescapable conclusion is that every occurrence carries both the policy's per-occurrence liability limit, and the policy's per-occurrence deductible.'” Benjamin Moore at *4, quoting Pfizer at p. 4.

Thus, the Appellate Division rejected proration of the deductibles and ruled that “for each claim under a triggered policy, plaintiff must first pay the deductible.”

This decision was further supported by the court's reasoning that plaintiff had “agreed to accept the risk of high deductibles in exchange for significantly lower premiums” and that a contrary ruling would enable plaintiff “to unfairly mitigate its risk by avoiding its unambiguous obligation to pay the deductible amount before receiving coverage.”

The Future of Benjamin Moore

The court's decision in Spaulding, particularly its emphasis on the vitality and immutability of the Owens-Illinois trigger and allocation methodology, and its underlying premise 'that long-tail claims should be treated as an occurrence within each policy year ' suggests that Benjamin Moore will likely be upheld on appeal. Like Spaulding, the Appellate Division's ruling in Benjamin Moore derives directly from the application of Owens-Illinois and its respect for the one-occurrence-per-year framework.

Further, the insured's argument in Benjamin Moore that deductibles should be prorated in the same manner as coverage contradicts an important aspect of the Spaulding decision. Specifically, in elaborating on its decision to adopt a continuous trigger without reference to competing policy language, the court in Spaulding stated:

“In a word, Owens-Illinois eliminated reliance on particular contract language (other than limits and exclusions) and on traditional rules of interpretation, and set forth a uniform standard for resolving allocation issues in long-tail environmental exposure cases. Spaulding 176 N.J. at 41-42.

The negative implication of this holding is that, as they pertain to “limits and exclusions” ' a phrase that rightfully would include deductibles and, similarly, other self-insurance features such as retrospective premium programs and self-insured retentions that limit and/or exclude the amount of available coverage ' reliance on policy language is required and not subject to revision. The Appellate Division in Benjamin Moore echoed this view, citing with approval the Special Master's opinion that “the pro rata allocation process used in the State is 'always subject to policy limits.'”

Nonetheless, the court's allegiance to its stated policy goal of “maximizing, in a fair and just manner, insurance coverage for cleanup of environmental disasters,” may fortify the policyholder's counsel who is hoping for a reversal. In Spaulding, the court's application of the continuous trigger theory effectively increased the amount of coverage available to the insured. In the Benjamin Moore case, the result would be the opposite.

However, it is not the nature of the court to undertake a purely result-oriented approach and, in fact, such an approach directly conflicts with the court's stated position in Owens-Illinois. Specifically, in referencing a district court allocation decision that “relied on the presumption of maximizing coverage,” the court found that such an approach “appears an uneven principle in this setting,” noting that the adoption of any allocation method could produce varying results under different circumstances. The court then states, a “rule of law premised on nothing more than the result-oriented goal of maximizing coverage has been described as 'judicial legislation.' A more consistent principle is required.” Also, it seems unlikely that the court will find an occurrence per year, thereby exposing the liability limits on a one-per-year basis, but will simultaneously ignore this occurrence-per-year finding to prevent the application of the self-insurance features of the policies on the same one-per-year basis. Moreover, contrary to Benjamin Moore's argument, Owens-Illinois and Carter-Wallace prorate the damage or loss suffered, not the limits of liability. Indeed, the most likely outcome is that the court will be consistent ' if the liability limit is exposed, the appurtenant self-insurance, deductible and/or retrospective premium limit will be exposed. Thus, it is expected that the court will continue to pursue its policy goals, but only “in a fair and just manner,” consistent with its prior decisions.

Stephen Gimigliano is a partner and Dennis Monaghan is an associate at Graham Curtin & Sheridan in Morristown, NJ.

The NJ Supreme Court has recently elected to hear appeals in two coverage actions involving the same basic issue ' namely, reconciling the application of the Owens-Illinois “continuous trigger theory” with the application of specific policy provisions under New Jersey law. In the first of these two cases, Spaulding Composites Company, Inc. v. Aetna Casualty & Surety, the court strongly affirmed the viability of the continuous trigger theory, invalidating a clear and unambiguous non-cumulation clause that it found conflicted with this approach. Spaulding Composites Company, Inc. v. Aetna Casualty & Surety, 176 N.J. 25, 46 (2003). In the second case, Benjamin Moore & Company v. Aetna Casualty & Surety, which is pending, the court must now determine how to apply the continuous trigger theory to self-insurance features contained in a series of unambiguous policy endorsements which do not appear to conflict with a continuous trigger. No. A-4423-01T2F, 2003 WL 1904383 (App. Div., Jan. 14, 2003), appeal granted, 176 N.J. 70 (2003). Specifically, the court must consider whether the continuous trigger theory should be applied to deductibles in the same one-occurrence-per-year manner that it is applied to losses. The trial court and Appellate Division in Benjamin Moore have both concluded that the continuous trigger theory is properly applied to the calculation of deductibles. At this point, it is uncertain how the Supreme Court will resolve this issue, but the court may well have tipped its hand with the Spaulding decision.

Spaulding

The Spaulding case involves the application of the Owens-Illinois continuous trigger theory to a potentially conflicting policy provision that purports to prevent the “cumulation” of multiple policy limits with respect to a “single occurrence.”

In 1990, Spaulding Composites Company, Inc. (“Spaulding”) was identified by the U.S. Environmental Protection Agency (USEPA) as a potentially responsible party for contributing to environmental contamination at a Superfund site located in Fairfield Township, NJ (the “Fairfield Site”). In 1994, both the USEPA and a private trucking company filed federal court actions, alleging Spaulding's responsibility for cleanup costs at this site. By September 2002, those environmental actions had resulted in a judgment against Spaulding for more than $13 million.

While these environmental actions were pending in federal court, in 1995, Spaulding filed a state court declaratory judgment action against its insurers seeking reimbursement for defense and indemnity costs incurred in connection with the Fairfield Site. In this state court action, Spaulding sought coverage under various policies including a series of general liability policies issued by Liberty Mutual Insurance Company during the 9-year period from 1976 to 1984. Each of these policies contains an identical non-cumulation clause which provides, in relevant part, as follows:

“If the same occurrence gives rise to personal injury or property damage which occurs partly before and partly within the policy period, the 'each occurrence' limit and the applicable aggregate limit of this policy shall be reduced by the amount of each payment made by the company with respect to each occurrence under a previous policy of which this policy is a replacement.” (Emphasis in original.) 176 N.J. at 29.

In the state court, the trial judge granted summary judgment to Spaulding, finding the Liberty non-cumulation clause inconsistent with New Jersey's continuous trigger theory, as articulated in Owens-Illinois, Inc. v. United Ins. Co., 138 NJ. 437 (1994) and reaffirmed in Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), which theory mandates the “treatment of sequential environmental damage as a separate occurrence 'within each of the years of a CGL policy.'” However, the Appellate Division reversed this ruling declaring the Liberty non-cumulation clause both clear and effective and limiting the intended application of Owens-Illinois and Carter-Wallace to cases involving ambiguous policy language.

The Supreme Court began its analysis of this dispute by reaffirming the continuing viability of the trigger and allocation modalities established in Owens-Illinois and Carter-Wallace. Specifically, in those decisions, the court adopted a “continuous trigger theory,” which provides that: “when progressive indivisible injury or damage results from exposure to injurious conditions for which civil liability may be imposed, courts may reasonably treat the progressive injury or damage as an occurrence within each of the years of a CGL policy.” Id. at 33, quoting Owens-Illinois, 138 N.J. at 478 (emphasis added).

Or, stated otherwise, “Owens-Illinois declared that long-tail environmental exposure injury and damage would no longer be treated as one continuous occurrence, … but would be treated as one occurrence per year triggering all applicable policies. … ” Id. at 40 (emphasis added). The court also confirmed a pro rata allocation scheme, described as a “pro-ration by years and limits method of allocation,” which allocates losses based on the extent of the risk assumed among the carriers and/or retained by the insured.

In employing the foregoing trigger and allocation theories, the court confirmed that it did not rely on policy ambiguity, or even policy language, but on public policy 'specifically, the importance of adopting a uniform methodology that “favors maximizing, in a fair and just manner, insurance coverage for cleanup of environmental disasters.” Reflecting on its decision in Owens-Illinois, the court openly acknowledged its disregard of “unhelpful” contract provisions, which it deemed unable to “produce a coherent result,” and touted its “watershed” decision to “look [ ] beyond contract language and traditional rules of insurance policy interpretation,” to create its own methodology and, thereby, “eliminate [ ] reliance on particular contract language (other than limits and exclusions) and on traditional rules of interpretation.” The court then applied this extended analysis to the specific non-cumulation clause at issue in Spaulding, with predictable results.

The court found that the Liberty non-cumulation clause conflicts with Owens-Illinois and Carter-Wallace and is therefore unenforceable. In so deciding, the court opined that, ”[a]t the heart of a non-cumulation clause is the notion of a 'single occurrence' with multiple year effects.” This concept conflicts with the fundamental basis of Owens-Illinois, which is that, under the continuous trigger theory:

“[P]rogressive indivisible property damage should be treated as an occurrence within each of the years of a CGL policy. On its face, this language appears to direct treatment of progressive property damage as distinct occurrences triggering per-occurrence limits in each year of a policy.” Id. at 44 (quoting Chemical Leaman Tank Lines v. Aetna Cas. & Sur. Co., 978 F.Supp. 589, 607 (D.N.J. 1997) (emphasis in original)).

Thus, the court found that the non-cumulation language is inapplicable, as environmental coverage claims, by virtue of Owens-Illinois, do not involve a “single occurrence,” but a single occurrence within each policy year. Alternatively, the clause is unenforceable “because it would thwart the Owens-Illinois pro-rata allocation modality.”

Benjamin Moore

In contrast, the Benjamin Moore case involves the application of the Owens-Illinois continuous trigger theory to nonconflicting (ie both operate on the same per-occurrence basis) policy provisions ' namely, deductible endorsements.

In Benjamin Moore, the insured sought coverage for lead paint liabilities under insurance policies issued by defendant Lumberman's Mutual Casualty Company (LMCC), which policies contained substantial deductibles resembling self-insurance mechanisims. Plaintiff argued that “it should not be required to pay a full deductible under each triggered policy before coverage must be provided for the asserted claims,” but “contends that the amount of the deductibles it must pay under each triggered policy should be prorated in the same manner that coverage is prorated.” LMCC sought a competing order “requiring plaintiff to satisfy each deductible in each triggered policy without proration.” Thus, the “precise issue presented [was] whether the full deductible must be paid in a continuing trigger case in each triggered year and for each triggered policy before coverage under the policies is available.” Both the trial court and the Appellate Division, citing the reasoning of the Special Master in Pfizer v. Employers Ins. of Wausau, No. MID-C-108-92 (Ch. Div., October 14, 1999), leave to appeal granted, 163 N.J. 391 (2000), concluded that it must.

In Pfizer, the Special Master determined that policy limits and deductibles must be applied consistently ' if a policy limit is implicated, the associated deductible is likewise implicated:

“The difficulty [with the policyholder's argument that it should be permitted to access multiple policy limits but be subject to less than the same number of deductibles], of course is that such policy limits and deductibles are stated on a per-occurrence basis, and “occurrence” cannot be read with a straight face to mean different things in two closely related contexts under a single policy definition.” See Pfizer, slip op., at p. 3 (January 18, 1999 decision of Special Master).

The trial court in Benjamin Moore found this reasoning persuasive and granted LMCC summary judgment as to the application of deductibles.

The Appellate Division began its analysis by revisiting the Owens-Illinois continuous trigger theory, which, again, treats “progressive injury or damage as an occurrence within each of the years of a CGL policy.” The court approvingly cites the decision of the Special Master in Pfizer, stating as follows:

“[U]nder the continuous trigger theory applied by our courts, the continuing and worsening injury suffered by the insured is deemed an occurrence within each policy year, and therefore triggers each policy and the terms of the coverage offered thereunder, including any liability limit such as deductibles. 'Triggering a policy does not disregard those terms, or guarantee that coverage will be afforded. Thus, on the basis of clear and unambiguous policy language, the inescapable conclusion is that every occurrence carries both the policy's per-occurrence liability limit, and the policy's per-occurrence deductible.'” Benjamin Moore at *4, quoting Pfizer at p. 4.

Thus, the Appellate Division rejected proration of the deductibles and ruled that “for each claim under a triggered policy, plaintiff must first pay the deductible.”

This decision was further supported by the court's reasoning that plaintiff had “agreed to accept the risk of high deductibles in exchange for significantly lower premiums” and that a contrary ruling would enable plaintiff “to unfairly mitigate its risk by avoiding its unambiguous obligation to pay the deductible amount before receiving coverage.”

The Future of Benjamin Moore

The court's decision in Spaulding, particularly its emphasis on the vitality and immutability of the Owens-Illinois trigger and allocation methodology, and its underlying premise 'that long-tail claims should be treated as an occurrence within each policy year ' suggests that Benjamin Moore will likely be upheld on appeal. Like Spaulding, the Appellate Division's ruling in Benjamin Moore derives directly from the application of Owens-Illinois and its respect for the one-occurrence-per-year framework.

Further, the insured's argument in Benjamin Moore that deductibles should be prorated in the same manner as coverage contradicts an important aspect of the Spaulding decision. Specifically, in elaborating on its decision to adopt a continuous trigger without reference to competing policy language, the court in Spaulding stated:

“In a word, Owens-Illinois eliminated reliance on particular contract language (other than limits and exclusions) and on traditional rules of interpretation, and set forth a uniform standard for resolving allocation issues in long-tail environmental exposure cases. Spaulding 176 N.J. at 41-42.

The negative implication of this holding is that, as they pertain to “limits and exclusions” ' a phrase that rightfully would include deductibles and, similarly, other self-insurance features such as retrospective premium programs and self-insured retentions that limit and/or exclude the amount of available coverage ' reliance on policy language is required and not subject to revision. The Appellate Division in Benjamin Moore echoed this view, citing with approval the Special Master's opinion that “the pro rata allocation process used in the State is 'always subject to policy limits.'”

Nonetheless, the court's allegiance to its stated policy goal of “maximizing, in a fair and just manner, insurance coverage for cleanup of environmental disasters,” may fortify the policyholder's counsel who is hoping for a reversal. In Spaulding, the court's application of the continuous trigger theory effectively increased the amount of coverage available to the insured. In the Benjamin Moore case, the result would be the opposite.

However, it is not the nature of the court to undertake a purely result-oriented approach and, in fact, such an approach directly conflicts with the court's stated position in Owens-Illinois. Specifically, in referencing a district court allocation decision that “relied on the presumption of maximizing coverage,” the court found that such an approach “appears an uneven principle in this setting,” noting that the adoption of any allocation method could produce varying results under different circumstances. The court then states, a “rule of law premised on nothing more than the result-oriented goal of maximizing coverage has been described as 'judicial legislation.' A more consistent principle is required.” Also, it seems unlikely that the court will find an occurrence per year, thereby exposing the liability limits on a one-per-year basis, but will simultaneously ignore this occurrence-per-year finding to prevent the application of the self-insurance features of the policies on the same one-per-year basis. Moreover, contrary to Benjamin Moore's argument, Owens-Illinois and Carter-Wallace prorate the damage or loss suffered, not the limits of liability. Indeed, the most likely outcome is that the court will be consistent ' if the liability limit is exposed, the appurtenant self-insurance, deductible and/or retrospective premium limit will be exposed. Thus, it is expected that the court will continue to pursue its policy goals, but only “in a fair and just manner,” consistent with its prior decisions.

Stephen Gimigliano is a partner and Dennis Monaghan is an associate at Graham Curtin & Sheridan in Morristown, NJ.