Gaps in Coverage After <i>Farmers Mutual </i>

In two state supreme court decisions in the 1990s, New Jersey adopted a version of pro rata allocation in so-called “continuous trigger” cases. Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116, 1123 (N.J. 1998); Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974, 983 (N.J. 1994). Pro rata is one of two methodologies employed by courts in addressing the scope of coverage afforded by multiple triggered policies in cases involving loss over time such as asbestos, environmental contamination, or toxic torts, when there is no determination of the specific degree of harm that occurred in any one policy period.

In Owens-Illinois, the New Jersey Supreme Court rejected joint-and-several allocation, in which any triggered policy must respond to the entirety of the claim, instead adopting a form of pro rata allocation “related to both the time on the risk and the degree of risk assumed.” 650 A.2d at 995. This allocation approach was reaffirmed and elaborated upon in the subsequent Carter-Wallace decision. As noted by the Owens-Illinois court, a feature of pro rata allocation is that the policyholder is responsible for indemnity and defense costs during periods when it was uninsured or self-insured. 650 A.2d at 980 (citing Gulf Chem. & Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d 365, 372 (5th Cir. 1993); Ins. Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified, 657 F.2d 814 (6th Cir. 1981), cert. denied , 454 U.S. 1109 (1981); Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 685 F. Supp. 621, 626 (E.D. Mich. 1987); N. States Power Co. v. Fid. & Cas. Co., 523 N.W.2d 657, 662 (Minn. 1994)).

Recently, the New Jersey Supreme Court addressed the question of the role of a state insurance guaranty fund within a pro rata allocation scheme. The court's opinion has called into question New Jersey's approach to allocation more generally.

Farmers Mutual Fire Insurance Co. of Salem v. New Jersey Property-Liability Insurance Guaranty Association , 74 A.3d 860 (N.J. 2013), involved the issue of whether a solvent insurer that paid the share of an insolvent insurance company could seek reimbursement from the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”) ' which provides funds to cover the liabilities of insolvent insurers, up to a $300,000 cap. In Farmers Mutual , the New Jersey Supreme Court effectively exempted PLIGA from the allocation framework of Owens-Illinois and Carter-Wallace, observing that the state legislature intended that PLIGA should be the insurer of last resort, and interpreting a 2004 amendment to the Act to require that all solvent insurance companies' policy limits must be exhausted before any PLIGA funds may be accessed. In so doing, the court rejected arguments by Farmers Mutual that PLIGA should be responsible for covering an insolvent insurer's pro rata share of responsibility, based on New Jersey's adoption of the pro rata approach to allocation. In Farmers Mutual's case, there were only two carriers on the risk, and Farmers Mutual was the only solvent carrier. Accordingly, it argued, a requirement that it exhaust its policy before PLIGA funds could be accessed amounted to holding Farmers Mutual responsible for 100% of the risk, even for years not covered by its policy.

Prior Guaranty Fund Precedent

Previously, in 1997, the Superior Court of New Jersey, Appellate Division, considered a case of “long tail” environmental contamination during which multiple solvent and insolvent insurers were on the risk, but in the context of the New Jersey Surplus Lines Insurance Guaranty Fund Act (“Surplus Lines Fund Act”). Sayre v. Ins. Co. of N. Am., 701 A.2d 1311, 1313 (N.J. Super. Ct. App. Div. 1997). Both the Surplus Lines Fund Act and PLIGA Act establish guaranty funds that take the place of certain insolvent carriers in responding to covered claims. In Sayre , the New Jersey Surplus Lines Fund argued that under the statute, a claimant should have to exercise its rights to coverage under all other solvent policies before it could receive any payments from the guaranty fund. N.J. Stat. Ann. ' 17:22-6.79b (West 1984). The appellate court disagreed, refusing to make the solvent insurers de facto “guarantors of their predecessors or successors on the risk, []or to require them to pay for periods of non-insurance.” Sayre, 701 A.2d at 1313. The court noted that Owens-Illinois was founded on notions of fairness, including a rejection of an increase to “an insurer's liability beyond what the insurer contracted for,” in contrast to joint and several liability. Id.

Several years after the Sayre decision, in 2004, the New Jersey legislature amended both the Surplus Lines Fund Act and the PLIGA Act to define the term “exhaustion.” The amended definition specifically provided that, in cases of continuous indivisible injury or damage over a period of years, exhaustion 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. Stat. Ann. ' 17:30A-5 (West 2004).

The New Jersey Supreme Court interpreted these events as evidence that the legislature disagreed with the decision in Sayre and intended to correct it by way of the 2004 amendment to the PLIGA Act, noting that “[i]f the Legislature were content with the Sayre decision, ' there would have been little point to adding the 2004 amendments.” Farmers Mutual, 74 A.3d at 872. Having dispensed with Sayre as a precedent to the contrary, the supreme court went on to hold that Farmers Mutual, the lone solvent carrier, was responsible for all claims over the entire time period in question, up to the limits of its policy.

The Effect of Farmers Mutual on Pro Rata

The New Jersey Supreme Court could have ruled in favor of PLIGA on narrow grounds, holding that the 2004 amendment prohibited any contribution by PLIGA to payment of a continuous loss until the policies of solvent insurers were exhausted, without relieving the policyholder of its responsibility for any gap in coverage due to the insolvency of one of its insurers. Such a ruling, while giving effect to the legislature's action in 2004, would have preserved the much of the traditional pro rata framework.

In most jurisdictions that follow pro rata allocation, it typically falls to the insured to pick up any gaps in coverage, including gaps due to insolvency of an insurer ' e.g., AAA Disposal Sys., Inc. v. Aetna Cas. & Sur. Co., 821 N.E.2d 1278, 1290 (Ill. App. Ct. 2005) (“The risk of an insurance carrier becoming insolvent is placed on the insured rather than on another carrier that was a stranger to the selection process.”); Cont'l Cas. Co. v. Emp'rs Ins. Co. of Wausau , 865 N.Y.S.2d 855, 864 (App. Div. 2008) (holding that insurers “should not be forced to become a guarantor for the insolvent insurance company”). Indeed, the New Jersey Supreme Court has previously noted the same: that “policyholders are required to underwrite the risk of insurer insolvency or bankruptcy.” Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 843 A.2d 1094, 1102-03 (N.J. 2004); see also Spaulding Composites Co. v. Aetna Cas. & Sur. Co. , 819 A.2d 410, 417 (N.J. 2003) (“[T]he insured is required to pay its 'aliquot' share of both defense and indemnification on account of years in which it was uninsured, self-insured, or its coverage was exhausted or bankrupt.”).

Indeed, Zurich Insurance, as amicus curie in Farmers Mutual, argued that even if PLIGA was correct in its claim that the 2004 amendment prevented its funds from being accessed before all solvent policies were exhausted, the PLIGA Act did not control the question of the responsibility for the insolvent share as between the policyholder and any solvent carriers. Rather, Zurich argued that the policyholder remained responsible under ordinary principles of pro rata allocation. The New Jersey Supreme Court forcefully disagreed, albeit in a portion of the Farmers Mutual opinion that might be properly be considered dicta. Specifically, the court stated that the PLIGA Act was intended to “provid[e] benefits to insureds who, through no fault of their own, have lost coverage due to the insolvency of their carriers.” According to the court, it would defeat the stated purpose of the Act to “minimize financial loss to claimants or policyholders because of the insolvency of an insurer,” N.J. Stat. Ann. ' 17:30A-2 (West 2009), to make the policyholder bear the loss for a carrier's insolvency. Indeed, said the court, such an approach would “turn the PLIGA Act on its head.” Farmers Mutual, 74 A.3d at 873.

This resounding rejection of the concept of insured responsibility for insolvent coverage, at least where the loss of coverage was through no fault of their own, is a surprising result given the pro rata case law, both in New Jersey and elsewhere. As recognized in Owens-Illinois , the pro rata approach calls for the insured to participate in the allocation of loss, and the insured must generally cover any uninsured period, whether due to a decision to go without insurance or to an insolvent carrier. By contrast, it is the “all sums” approach that calls for insolvent shares to be absorbed by the other responsible insurance companies, with the insured on the sideline without responsibility. See EnergyNorth Nat'l Gas, Inc. v. Certain Underwriters at Lloyd's, 934 A.2d 517, 522-23 (N.H. 2007) (collecting cases). As noted, other New Jersey Supreme Court cases affirming the state's adherence to pro rata allocation have stated that insureds must bear the risk of insurer insolvency or bankruptcy. The Farmers Mutual decision, by declining to contemplate insured responsibility, is in tension with those prior cases and with cases from many other jurisdictions. The issue for future cases is what effect the decision will have going forward.

In refusing to force the insured to bear the loss of the carrier's insolvency, the Farmers Mutual court emphasized the unfairness of a situation in which policyholders lose coverage “through no fault of their own.” 74 A.3d at 873. Though dicta, the court's focus on fault of the policyholder suggests that New Jersey may eventually distinguish between an insured that deliberately chooses to “go bare” and self-insure, as opposed to one who falls victim to a third party's bankruptcy through “no fault” of its own.

This possibility finds support in the Owens-Illinois decision itself. There, the court drew a distinction between “periods of no insurance [that] reflect a decision by an actor to assume or retain a risk,” and “periods when coverage for a risk is not available.” Owens-Illinois, 650 A.2d at 995. When the policyholder has made a decision to go without insurance, it is reasonable to “expect the risk-bearer to share in the allocation.” Id. Again, the court's focus is on the rational choice of the insured to bear a risk or to purchase insurance; if the former, then the insured will be liable when that risk materializes. The converse proposition, that an insured who is forced into self-insuring rather than voluntarily choosing to do so, was not endorsed by the court, but may follow logically from what the court did hold.

When Is Self-Insurance Voluntary?

Such an approach would raise another issue: What constitutes voluntary self-insurance? Certainly, the choice to forego insurance coverage for a period of time would qualify as voluntary self-insurance that should obligate the insured to bear the risk for that period. Similarly, periods of under-insurance may also be viewed as a rational cost-benefit assessment by the policyholder, such that it should have to bear any eventual costs. An insurer's insolvency is arguably properly construed as a risk that should be borne by the policyholder as well. Parties to a contract must generally bear the risk of a counterparty's bankruptcy. It seems fairer to put the onus on the policyholder to investigate its insurer's financial wherewithal than to require third parties (i.e., other insurance companies) to guarantee the obligations of other insurers. However, Farmers Mutual indicates that New Jersey disagrees, at least in certain circumstances.

There are the few instances where insurance coverage is truly not available for purchase in the marketplace. This type of situation most clearly represents involuntary action by the policyholder, which presumably would purchase coverage if it could. In such instances, courts have relieved policyholders of responsibility for insolvent shares. Olin Corp. v. Ins. Co. of N. Am., 986 F. Supp. 841, 844 (S.D.N.Y. 1997); see Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1203-04 (2d Cir. 1995). The “through no fault of their own” language in Farmers Mutual indicates that New Jersey may go farther than this narrow exception to pro rata allocation.

Such an outcome would represent a significant departure from the pro rata approach adopted elsewhere throughout the country. That said, neither Owens-Illinois nor Carter-Wallace even used the words “bankruptcy” or “insolvent” in affirming the pro rata allocation scheme, and other New Jersey cases such as Spaulding and Benjamin Moore did not actually involve insolvent carriers. These cases appeared to simply assume that the adoption of pro rata meant that a policyholder must bear the risk of insolvent insurers. Farmers Mutual pointed out that Benjamin Moore and Spaulding did not address the PLIGA Act, and therefore were not controlling.

Although also dicta, Farmers Mutual's answer to the question of policyholder responsibility for gaps in coverage due to insurer insolvency is precisely opposite of that suggested by the previous cases. Under the Farmers Mutual regime, pro rata allocation indeed would be eliminated in instances where there is only one remaining solvent carrier, by making a single insurer solely responsible for the loss up to its policy limits. In other instances with multiple solvent carriers, the effect of Farmers Mutual likely will be less stark, redistributing the insolvent share across the other carriers. The result is a version of pro rata, perhaps, but with fewer participants splitting the cost.

By both accepting PLIGA's position and rejecting that of Zurich, the court essentially let off the hook not only PLIGA ' pursuant to the court's interpretation of the legislature's 2004 amendment ' but also the policyholder itself.

Conclusion

Farmers Mutual may well represent an anomaly in the treatment of gaps in insurance coverage. Although many states have guaranty fund statutes that require “exhaustion” of solvent policies before payment by the fund, few if any have language similar to the “continuous indivisible injury” provision added by New Jersey's legislature in 2004. Because other state statutes more resemble the New Jersey Surplus Lines Fund Act at the time of the Sayre decision, any attempt by policyholders in other states to argue for the adoption of New Jersey's approach in Farmers Mutual may meet with limited success.

Robert D. Goodman , a member of this newsletter's Board of Editors, is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Miranda H. Turner is an associate in the firm.

In two state supreme court decisions in the 1990s, New Jersey adopted a version of pro rata allocation in so-called “continuous trigger” cases. Carter-Wallace, Inc. v. Admiral Ins. Co. , 712 A.2d 1116, 1123 (N.J. 1998); Owens-Illinois, Inc. v. United Ins. Co. , 650 A.2d 974, 983 (N.J. 1994). Pro rata is one of two methodologies employed by courts in addressing the scope of coverage afforded by multiple triggered policies in cases involving loss over time such as asbestos, environmental contamination, or toxic torts, when there is no determination of the specific degree of harm that occurred in any one policy period.

In Owens-Illinois, the New Jersey Supreme Court rejected joint-and-several allocation, in which any triggered policy must respond to the entirety of the claim, instead adopting a form of pro rata allocation “related to both the time on the risk and the degree of risk assumed.” 650 A.2d at 995. This allocation approach was reaffirmed and elaborated upon in the subsequent Carter-Wallace decision. As noted by the Owens-Illinois court, a feature of pro rata allocation is that the policyholder is responsible for indemnity and defense costs during periods when it was uninsured or self-insured. 650 A.2d at 980 (citing Gulf Chem. & Metallurgical Corp. v. Associated Metals & Minerals Corp. , 1 F.3d 365, 372 (5th Cir. 1993); Ins. Co. of N. Am. v. Forty-Eight Insulations, Inc. , 633 F.2d 1212 (6th Cir. 1980), clarified, 657 F.2d 814 (6th Cir. 1981), cert. denied , 454 U.S. 1109 (1981); Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp. , 685 F. Supp. 621, 626 (E.D. Mich. 1987); N. States Power Co. v. Fid. & Cas. Co. , 523 N.W.2d 657, 662 (Minn. 1994)).

Recently, the New Jersey Supreme Court addressed the question of the role of a state insurance guaranty fund within a pro rata allocation scheme. The court's opinion has called into question New Jersey's approach to allocation more generally.

Farmers Mutual Fire Insurance Co. of Salem v. New Jersey Property-Liability Insurance Guaranty Association , 74 A.3d 860 (N.J. 2013), involved the issue of whether a solvent insurer that paid the share of an insolvent insurance company could seek reimbursement from the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”) ' which provides funds to cover the liabilities of insolvent insurers, up to a $300,000 cap. In Farmers Mutual , the New Jersey Supreme Court effectively exempted PLIGA from the allocation framework of Owens-Illinois and Carter-Wallace, observing that the state legislature intended that PLIGA should be the insurer of last resort, and interpreting a 2004 amendment to the Act to require that all solvent insurance companies' policy limits must be exhausted before any PLIGA funds may be accessed. In so doing, the court rejected arguments by Farmers Mutual that PLIGA should be responsible for covering an insolvent insurer's pro rata share of responsibility, based on New Jersey's adoption of the pro rata approach to allocation. In Farmers Mutual's case, there were only two carriers on the risk, and Farmers Mutual was the only solvent carrier. Accordingly, it argued, a requirement that it exhaust its policy before PLIGA funds could be accessed amounted to holding Farmers Mutual responsible for 100% of the risk, even for years not covered by its policy.

Prior Guaranty Fund Precedent

Previously, in 1997, the Superior Court of New Jersey, Appellate Division, considered a case of “long tail” environmental contamination during which multiple solvent and insolvent insurers were on the risk, but in the context of the New Jersey Surplus Lines Insurance Guaranty Fund Act (“Surplus Lines Fund Act”). Sayre v. Ins. Co. of N. Am. , 701 A.2d 1311, 1313 (N.J. Super. Ct. App. Div. 1997). Both the Surplus Lines Fund Act and PLIGA Act establish guaranty funds that take the place of certain insolvent carriers in responding to covered claims. In Sayre , the New Jersey Surplus Lines Fund argued that under the statute, a claimant should have to exercise its rights to coverage under all other solvent policies before it could receive any payments from the guaranty fund. N.J. Stat. Ann. ' 17:22-6.79b (West 1984). The appellate court disagreed, refusing to make the solvent insurers de facto “guarantors of their predecessors or successors on the risk, []or to require them to pay for periods of non-insurance.” Sayre, 701 A.2d at 1313. The court noted that Owens-Illinois was founded on notions of fairness, including a rejection of an increase to “an insurer's liability beyond what the insurer contracted for,” in contrast to joint and several liability. Id.

Several years after the Sayre decision, in 2004, the New Jersey legislature amended both the Surplus Lines Fund Act and the PLIGA Act to define the term “exhaustion.” The amended definition specifically provided that, in cases of continuous indivisible injury or damage over a period of years, exhaustion 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. Stat. Ann. ' 17:30A-5 (West 2004).

The New Jersey Supreme Court interpreted these events as evidence that the legislature disagreed with the decision in Sayre and intended to correct it by way of the 2004 amendment to the PLIGA Act, noting that “[i]f the Legislature were content with the Sayre decision, ' there would have been little point to adding the 2004 amendments.” Farmers Mutual, 74 A.3d at 872. Having dispensed with Sayre as a precedent to the contrary, the supreme court went on to hold that Farmers Mutual, the lone solvent carrier, was responsible for all claims over the entire time period in question, up to the limits of its policy.

The Effect of Farmers Mutual on Pro Rata

The New Jersey Supreme Court could have ruled in favor of PLIGA on narrow grounds, holding that the 2004 amendment prohibited any contribution by PLIGA to payment of a continuous loss until the policies of solvent insurers were exhausted, without relieving the policyholder of its responsibility for any gap in coverage due to the insolvency of one of its insurers. Such a ruling, while giving effect to the legislature's action in 2004, would have preserved the much of the traditional pro rata framework.

In most jurisdictions that follow pro rata allocation, it typically falls to the insured to pick up any gaps in coverage, including gaps due to insolvency of an insurer ' e.g., AAA Disposal Sys., Inc. v. Aetna Cas. & Sur. Co. , 821 N.E.2d 1278, 1290 (Ill. App. Ct. 2005) (“The risk of an insurance carrier becoming insolvent is placed on the insured rather than on another carrier that was a stranger to the selection process.”); Cont'l Cas. Co. v. Emp'rs Ins. Co. of Wausau , 865 N.Y.S.2d 855, 864 (App. Div. 2008) (holding that insurers “should not be forced to become a guarantor for the insolvent insurance company”). Indeed, the New Jersey Supreme Court has previously noted the same: that “policyholders are required to underwrite the risk of insurer insolvency or bankruptcy.” Benjamin Moore & Co. v. Aetna Cas. & Sur. Co. , 843 A.2d 1094, 1102-03 (N.J. 2004); see also Spaulding Composites Co. v. Aetna Cas. & Sur. Co. , 819 A.2d 410, 417 (N.J. 2003) (“[T]he insured is required to pay its 'aliquot' share of both defense and indemnification on account of years in which it was uninsured, self-insured, or its coverage was exhausted or bankrupt.”).

Indeed, Zurich Insurance, as amicus curie in Farmers Mutual, argued that even if PLIGA was correct in its claim that the 2004 amendment prevented its funds from being accessed before all solvent policies were exhausted, the PLIGA Act did not control the question of the responsibility for the insolvent share as between the policyholder and any solvent carriers. Rather, Zurich argued that the policyholder remained responsible under ordinary principles of pro rata allocation. The New Jersey Supreme Court forcefully disagreed, albeit in a portion of the Farmers Mutual opinion that might be properly be considered dicta. Specifically, the court stated that the PLIGA Act was intended to “provid[e] benefits to insureds who, through no fault of their own, have lost coverage due to the insolvency of their carriers.” According to the court, it would defeat the stated purpose of the Act to “minimize financial loss to claimants or policyholders because of the insolvency of an insurer,” N.J. Stat. Ann. ' 17:30A-2 (West 2009), to make the policyholder bear the loss for a carrier's insolvency. Indeed, said the court, such an approach would “turn the PLIGA Act on its head.” Farmers Mutual, 74 A.3d at 873.

This resounding rejection of the concept of insured responsibility for insolvent coverage, at least where the loss of coverage was through no fault of their own, is a surprising result given the pro rata case law, both in New Jersey and elsewhere. As recognized in Owens-Illinois , the pro rata approach calls for the insured to participate in the allocation of loss, and the insured must generally cover any uninsured period, whether due to a decision to go without insurance or to an insolvent carrier. By contrast, it is the “all sums” approach that calls for insolvent shares to be absorbed by the other responsible insurance companies, with the insured on the sideline without responsibility. See EnergyNorth Nat'l Gas, Inc. v. Certain Underwriters at Lloyd's , 934 A.2d 517, 522-23 (N.H. 2007) (collecting cases). As noted, other New Jersey Supreme Court cases affirming the state's adherence to pro rata allocation have stated that insureds must bear the risk of insurer insolvency or bankruptcy. The Farmers Mutual decision, by declining to contemplate insured responsibility, is in tension with those prior cases and with cases from many other jurisdictions. The issue for future cases is what effect the decision will have going forward.

In refusing to force the insured to bear the loss of the carrier's insolvency, the Farmers Mutual court emphasized the unfairness of a situation in which policyholders lose coverage “through no fault of their own.” 74 A.3d at 873. Though dicta, the court's focus on fault of the policyholder suggests that New Jersey may eventually distinguish between an insured that deliberately chooses to “go bare” and self-insure, as opposed to one who falls victim to a third party's bankruptcy through “no fault” of its own.

This possibility finds support in the Owens-Illinois decision itself. There, the court drew a distinction between “periods of no insurance [that] reflect a decision by an actor to assume or retain a risk,” and “periods when coverage for a risk is not available.” Owens-Illinois, 650 A.2d at 995. When the policyholder has made a decision to go without insurance, it is reasonable to “expect the risk-bearer to share in the allocation.” Id. Again, the court's focus is on the rational choice of the insured to bear a risk or to purchase insurance; if the former, then the insured will be liable when that risk materializes. The converse proposition, that an insured who is forced into self-insuring rather than voluntarily choosing to do so, was not endorsed by the court, but may follow logically from what the court did hold.

When Is Self-Insurance Voluntary?

Such an approach would raise another issue: What constitutes voluntary self-insurance? Certainly, the choice to forego insurance coverage for a period of time would qualify as voluntary self-insurance that should obligate the insured to bear the risk for that period. Similarly, periods of under-insurance may also be viewed as a rational cost-benefit assessment by the policyholder, such that it should have to bear any eventual costs. An insurer's insolvency is arguably properly construed as a risk that should be borne by the policyholder as well. Parties to a contract must generally bear the risk of a counterparty's bankruptcy. It seems fairer to put the onus on the policyholder to investigate its insurer's financial wherewithal than to require third parties (i.e., other insurance companies) to guarantee the obligations of other insurers. However, Farmers Mutual indicates that New Jersey disagrees, at least in certain circumstances.

There are the few instances where insurance coverage is truly not available for purchase in the marketplace. This type of situation most clearly represents involuntary action by the policyholder, which presumably would purchase coverage if it could. In such instances, courts have relieved policyholders of responsibility for insolvent shares. Olin Corp. v. Ins. Co. of N. Am. , 986 F. Supp. 841, 844 (S.D.N.Y. 1997); see Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp. , 73 F.3d 1178, 1203-04 (2d Cir. 1995). The “through no fault of their own” language in Farmers Mutual indicates that New Jersey may go farther than this narrow exception to pro rata allocation.

Such an outcome would represent a significant departure from the pro rata approach adopted elsewhere throughout the country. That said, neither Owens-Illinois nor Carter-Wallace even used the words “bankruptcy” or “insolvent” in affirming the pro rata allocation scheme, and other New Jersey cases such as Spaulding and Benjamin Moore did not actually involve insolvent carriers. These cases appeared to simply assume that the adoption of pro rata meant that a policyholder must bear the risk of insolvent insurers. Farmers Mutual pointed out that Benjamin Moore and Spaulding did not address the PLIGA Act, and therefore were not controlling.

Although also dicta, Farmers Mutual's answer to the question of policyholder responsibility for gaps in coverage due to insurer insolvency is precisely opposite of that suggested by the previous cases. Under the Farmers Mutual regime, pro rata allocation indeed would be eliminated in instances where there is only one remaining solvent carrier, by making a single insurer solely responsible for the loss up to its policy limits. In other instances with multiple solvent carriers, the effect of Farmers Mutual likely will be less stark, redistributing the insolvent share across the other carriers. The result is a version of pro rata, perhaps, but with fewer participants splitting the cost.

By both accepting PLIGA's position and rejecting that of Zurich, the court essentially let off the hook not only PLIGA ' pursuant to the court's interpretation of the legislature's 2004 amendment ' but also the policyholder itself.

Conclusion

Farmers Mutual may well represent an anomaly in the treatment of gaps in insurance coverage. Although many states have guaranty fund statutes that require “exhaustion” of solvent policies before payment by the fund, few if any have language similar to the “continuous indivisible injury” provision added by New Jersey's legislature in 2004. Because other state statutes more resemble the New Jersey Surplus Lines Fund Act at the time of the Sayre decision, any attempt by policyholders in other states to argue for the adoption of New Jersey's approach in Farmers Mutual may meet with limited success.

Robert D. Goodman , a member of this newsletter's Board of Editors, is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Miranda H. Turner is an associate in the firm.