Case Briefs

Louisiana Appellate Court Rejects 'All Sums'

In Norfolk Southern Corporation v. California Union Insurance Company, 2002-0369 c/w 2002-0371 c/w 2002-0372, (La. App. 1st Cir., 9/12/03) 2003 WL 22110450, ___ So.2d ___, cert. denied, Louisiana Supreme Court, Dec. 19, 2003, Norfolk Southern Corporation and certain affiliates (“Norfolk”) filed a declaratory judgment action against various members of Lloyd's of London and certain London Market Insurance Companies (collectively “London Insurers”) seeking coverage under several excess comprehensive general liability polices from 1969 to 1986 for the costs of environmental clean up at various sites throughout the United States including three sites in Louisiana. The environmental damages arose from long-term wood-preserving operations carried out at various Norfolk sites. The Louisiana First Circuit Court of Appeals made seven key holdings:

• In a long-term property damage suit attributable to numerous releases and discharges over extended periods of time, the “exposure theory” will be the applicable rule of trigger.
• The court expressly rejected the “all sums” theory of allocation and instead prorated losses across all policy periods and periods of self-insurance.
• The court deemed there to be a single “occurrence” in every policy period in which operations occurred.
• The policies did not provide coverage for damages that “occurred” prior to the inception of the policies.
• For any year in which the policyholder did not have insurance, the policyholder would be accountable for that year.
• A policyholder must meet self-insured retention (SIR) in every year.
• Groundwater is not owned by the landowner, and thus the “owned property exclusion” did not preclude coverage for the costs associated with remediating the groundwater.

The policy language provided that the London Insurers would indemnify Norfolk for the amounts Norfolk was legally liable to pay as damages due to “property damage … arising out of occurrences happening during the policy period.” The policies did not require the “property damage” to take place during the policy period; however, the court found that the unambiguous language of the policies clearly required the “occurrence” to have taken place during the policy period.

In the instant case, the property damage was not due to a single catastrophic event, but was due to numerous releases and discharges taking place over an extended period of time. The court noted that in these cases it was virtually impossible to determine the specific damage in existence at any given time or the specific cause of any particular damage. The court adopted the exposure theory, used in long-latency and occupational exposure cases, to determine which policies were triggered for cases involving long-term environmental damage. Applying the exposure theory to the facts of the case, the court found that coverage was triggered during each policy year in which wood-preserving operations occurred at each site. Furthermore, it found that after each facility was closed there were no new occurrences giving rise to relevant property damage. The court held that there was no coverage for property damage that existed prior to the effective date of the first policy. The court also determined based on the policy language that there was only one occurrence per policy period at each site.

The court also addressed the “owned property exclusion” that was asserted by the London Insurers. The policies defined property damage to exclude damage to property owned by Norfolk or to property that was in its care, custody or control. There was no dispute that Norfolk owned the Pearl River site during the applicable time period. The property damage at the site consisted primarily of soil and groundwater contamination. The ground water contamination extended beyond the boundaries of the property. Norfolk had removed contaminated soil from the property and installed monitoring wells, but had not treated the water. The court held that groundwater should be treated like a fugitive subsurface mineral, not owned by the owner of the land (and not subject to ownership until reduced to possession). Accordingly, costs associated with groundwater remediation were not excluded from coverage by the owned property exclusion. The court further found that the costs of removing the source of the groundwater contamination were covered because it was done in an effort to prevent future property damage from occurring. The court did not reach the issue of coverage where there is the mere threat of damage to third-party property.

The court rejected the trial court's use of the “all sums” method and held that both the policy language and Louisiana law required a pro rata approach to allocation. Applying well-established rules of contract interpretation the court held:

[T]he unambiguous language of the policies clearly demonstrates that the policies are triggered by an occurrence that causes property damage. Moreover, each policy triggered by an occurrence within its policy period covers only the property damage arising from that occurrence. An interpretation of the coverage grant that would require any of the policies to respond to property damage caused by occurrences happening outside the policy period would be an unreasonable enlargement of the terms of the policy. Slip Op., p. 22 (Emphasis in original).

Finding no relevant distinction between long-latency occupational diseases and long-term environmental contamination, the court adopted the rule of proration of liability for the insurance carriers on the risk during the periods of exposure to contaminating activities. The court allocated the loss based on the policy periods including all periods of self-insurance. The court reasoned:

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. To the extent Norfolk's damages arose out of occurrences taking place during a period in which no insurer is on the risk, the logical approach is to treat Norfolk as an insurer for that period and assign it a pro rata share. Slip Op., p. 24 (citation omitted).

After applying the exposure theory and allocating the “ultimate net loss” among all years, including self/uninsured years, the amount allocated to each policy was insufficient to exceed the SIR for each policy year. The London Insurers owed nothing. The court conducted a conflict of laws analysis and determined that Virginia law would apply to the late notice defense. The court applied Louisiana law to all other issues.

Federal Court in Illinois Protects Claimants in Bankruptcy Case

In In re Allied Prods. Corp., 288 B.R. 533 (Bankr. N.D. Ill. 2003), the U.S. District Court for the Northern District of Illinois recently rejected a debtor's attempt to sell its liability insurance policies back to its insurers in order to obtain funds for the general use of the estate. The court held that the debtor could not do so unless it provided adequate protection to claimants who had protectable interests in the insurance policies' proceeds.

Allied Products had moved for approval under 11 U.S.C. '363 of a plan to sell most of its liability insurance policies back to its insurers for $3.5 million. The funds were to be maintained for the general use of the estate, rather than for payment of claims that were covered under the policies. The court ordered the debtor to give notice to potential policy claimants. In response, several claimants ' including ITT Industries, Inc. ' objected.

The court found that Illinois law and the insurance policies themselves conferred on the claimants a right to payment from the insurers. The court noted that public policy in Illinois, like most states, prohibits an injured party from recovering against an insurer without first proceeding to judgment against the policyholder. Id. at 536-37. However, once a judgment is obtained, an injured party can proceed directly against the insurer. Id. at 537. The court relied specifically on 215 ILCS '388 (2002), which provides, inter alia, that “no policy of insurance against liability … shall be issued … unless it contains … a provision that the insolvency or bankruptcy of the insured shall not release the company from the payment of damages for … loss … and stating that in case a certified copy of a judgment against the insured is returned unsatisfied … then an action may be maintained by the injured person … against such company under the terms of the policy. …” See also Home Ins. Co. v. Hooper, 294 Ill. App. 3d 626 (1998) (insurance company required to make direct payment to policy claimant where policyholder was in bankruptcy and could not pay self-insured retention). In addition, the court relied on several decisions by the U.S. Court of Appeals for the Seventh Circuit holding that a debtor discharged in bankruptcy is nevertheless subject to suit by claimants under liability insurance policies, for the purposes of obtaining a judgment that may be enforced against the insurer that issued the policy. 288 B.R. at 538.

Accordingly, because the claimants who objected to the debtor's sale of its liability insurance policies had a protectable interest in payment under the policies, and because the proposed sale did not adequately protect the claimants' interests, the court denied the debtor's motion to sell the policies.

Louisiana Appellate Court Rejects 'All Sums'

In Norfolk Southern Corporation v. California Union Insurance Company, 2002-0369 c/w 2002-0371 c/w 2002-0372, (La. App. 1st Cir., 9/12/03) 2003 WL 22110450, ___ So.2d ___, cert. denied, Louisiana Supreme Court, Dec. 19, 2003, Norfolk Southern Corporation and certain affiliates (“Norfolk”) filed a declaratory judgment action against various members of Lloyd's of London and certain London Market Insurance Companies (collectively “London Insurers”) seeking coverage under several excess comprehensive general liability polices from 1969 to 1986 for the costs of environmental clean up at various sites throughout the United States including three sites in Louisiana. The environmental damages arose from long-term wood-preserving operations carried out at various Norfolk sites. The Louisiana First Circuit Court of Appeals made seven key holdings:

• In a long-term property damage suit attributable to numerous releases and discharges over extended periods of time, the “exposure theory” will be the applicable rule of trigger.
• The court expressly rejected the “all sums” theory of allocation and instead prorated losses across all policy periods and periods of self-insurance.
• The court deemed there to be a single “occurrence” in every policy period in which operations occurred.
• The policies did not provide coverage for damages that “occurred” prior to the inception of the policies.
• For any year in which the policyholder did not have insurance, the policyholder would be accountable for that year.
• A policyholder must meet self-insured retention (SIR) in every year.
• Groundwater is not owned by the landowner, and thus the “owned property exclusion” did not preclude coverage for the costs associated with remediating the groundwater.

The policy language provided that the London Insurers would indemnify Norfolk for the amounts Norfolk was legally liable to pay as damages due to “property damage … arising out of occurrences happening during the policy period.” The policies did not require the “property damage” to take place during the policy period; however, the court found that the unambiguous language of the policies clearly required the “occurrence” to have taken place during the policy period.

In the instant case, the property damage was not due to a single catastrophic event, but was due to numerous releases and discharges taking place over an extended period of time. The court noted that in these cases it was virtually impossible to determine the specific damage in existence at any given time or the specific cause of any particular damage. The court adopted the exposure theory, used in long-latency and occupational exposure cases, to determine which policies were triggered for cases involving long-term environmental damage. Applying the exposure theory to the facts of the case, the court found that coverage was triggered during each policy year in which wood-preserving operations occurred at each site. Furthermore, it found that after each facility was closed there were no new occurrences giving rise to relevant property damage. The court held that there was no coverage for property damage that existed prior to the effective date of the first policy. The court also determined based on the policy language that there was only one occurrence per policy period at each site.

The court also addressed the “owned property exclusion” that was asserted by the London Insurers. The policies defined property damage to exclude damage to property owned by Norfolk or to property that was in its care, custody or control. There was no dispute that Norfolk owned the Pearl River site during the applicable time period. The property damage at the site consisted primarily of soil and groundwater contamination. The ground water contamination extended beyond the boundaries of the property. Norfolk had removed contaminated soil from the property and installed monitoring wells, but had not treated the water. The court held that groundwater should be treated like a fugitive subsurface mineral, not owned by the owner of the land (and not subject to ownership until reduced to possession). Accordingly, costs associated with groundwater remediation were not excluded from coverage by the owned property exclusion. The court further found that the costs of removing the source of the groundwater contamination were covered because it was done in an effort to prevent future property damage from occurring. The court did not reach the issue of coverage where there is the mere threat of damage to third-party property.

The court rejected the trial court's use of the “all sums” method and held that both the policy language and Louisiana law required a pro rata approach to allocation. Applying well-established rules of contract interpretation the court held:

[T]he unambiguous language of the policies clearly demonstrates that the policies are triggered by an occurrence that causes property damage. Moreover, each policy triggered by an occurrence within its policy period covers only the property damage arising from that occurrence. An interpretation of the coverage grant that would require any of the policies to respond to property damage caused by occurrences happening outside the policy period would be an unreasonable enlargement of the terms of the policy. Slip Op., p. 22 (Emphasis in original).

Finding no relevant distinction between long-latency occupational diseases and long-term environmental contamination, the court adopted the rule of proration of liability for the insurance carriers on the risk during the periods of exposure to contaminating activities. The court allocated the loss based on the policy periods including all periods of self-insurance. The court reasoned:

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. To the extent Norfolk's damages arose out of occurrences taking place during a period in which no insurer is on the risk, the logical approach is to treat Norfolk as an insurer for that period and assign it a pro rata share. Slip Op., p. 24 (citation omitted).

After applying the exposure theory and allocating the “ultimate net loss” among all years, including self/uninsured years, the amount allocated to each policy was insufficient to exceed the SIR for each policy year. The London Insurers owed nothing. The court conducted a conflict of laws analysis and determined that Virginia law would apply to the late notice defense. The court applied Louisiana law to all other issues.

Federal Court in Illinois Protects Claimants in Bankruptcy Case

In In re Allied Prods. Corp., 288 B.R. 533 (Bankr. N.D. Ill. 2003), the U.S. District Court for the Northern District of Illinois recently rejected a debtor's attempt to sell its liability insurance policies back to its insurers in order to obtain funds for the general use of the estate. The court held that the debtor could not do so unless it provided adequate protection to claimants who had protectable interests in the insurance policies' proceeds.

Allied Products had moved for approval under 11 U.S.C. '363 of a plan to sell most of its liability insurance policies back to its insurers for $3.5 million. The funds were to be maintained for the general use of the estate, rather than for payment of claims that were covered under the policies. The court ordered the debtor to give notice to potential policy claimants. In response, several claimants ' including ITT Industries, Inc. ' objected.

The court found that Illinois law and the insurance policies themselves conferred on the claimants a right to payment from the insurers. The court noted that public policy in Illinois, like most states, prohibits an injured party from recovering against an insurer without first proceeding to judgment against the policyholder. Id. at 536-37. However, once a judgment is obtained, an injured party can proceed directly against the insurer. Id. at 537. The court relied specifically on 215 ILCS '388 (2002), which provides, inter alia , that “no policy of insurance against liability … shall be issued … unless it contains … a provision that the insolvency or bankruptcy of the insured shall not release the company from the payment of damages for … loss … and stating that in case a certified copy of a judgment against the insured is returned unsatisfied … then an action may be maintained by the injured person … against such company under the terms of the policy. …” See also Home Ins. Co. v. Hooper , 294 Ill. App. 3d 626 (1998) (insurance company required to make direct payment to policy claimant where policyholder was in bankruptcy and could not pay self-insured retention). In addition, the court relied on several decisions by the U.S. Court of Appeals for the Seventh Circuit holding that a debtor discharged in bankruptcy is nevertheless subject to suit by claimants under liability insurance policies, for the purposes of obtaining a judgment that may be enforced against the insurer that issued the policy. 288 B.R. at 538.

Accordingly, because the claimants who objected to the debtor's sale of its liability insurance policies had a protectable interest in payment under the policies, and because the proposed sale did not adequately protect the claimants' interests, the court denied the debtor's motion to sell the policies.