In Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., No. A-4423-01T2F (App. Div. Jan. 14, 2002), the New Jersey Appellate Division issued a decision with adverse consequences to policyholders seeking coverage for delayed manifestation, long-tail claims triggering multiple policies. The decision requires policyholders to pay full rather than prorated deductibles in cases in which insurers need only pay a prorated share of their policy limits. The Court's decision means that policyholders must exhaust the entire deductible in each triggered policy year before obtaining coverage for loss allocated to that year.
To place the decision in context, one should recall that in Owens-Illinois v. United Insurance Co., 138 N.J. 437 (1994), the New Jersey Supreme Court addressed the issue of how to allocate damages over multiple policies triggered by injury due to exposure to asbestos. The Court rejected a straight pro-rata allocation in which total costs would be evenly divided over all triggered years. Under such an approach, if there were two policies, one in Year A with $1 million in limits and the other in Year B with $2 million in limits, a $1 million liability triggering both policies would be allocated $500,000 to each year. Instead, the Court adopted a "years and limits" approach, by which a greater portion of indemnity costs is assigned to years in which greater amounts of insurance were purchased. Thus, in the example above, 1/3rd of the $1 million liability would be allocated to Year A, and 2/3rds to Year B.
Benjamin Moore sought coverage under its liability policies for claims alleging bodily injuries arising from its lead paint products. The injuries continuously triggered successive policies over multiple policy years. Benjamin Moore's primary policies each provided liability limits of $1,000,000 with varying deductibles. Following the reasoning of Owens-Illinois and subsequent decisions, the policyholder argued that its deductibles should be prorated based upon the loss allocated to the particular policy period to which the deductible applied. Assume, for example, the policyholder's 1988 policy provided liability limits of $1,000,000 and a deductible of $250,000. Assume further that the 1988 policy bears $200,000 of the underlying loss. Benjamin Moore argued it need pay only a $50,000 deductible, an amount reached by dividing the total allocated to the 1988 policy year ($200,000) by the policy limits ($1,000,000) and multiplying the quotient (.20) by the deductible amount ($250,000).
The Appellate Division rejected the policyholder's position and concluded the policyholder must pay the entire policy deductible in every triggered policy year. The Court held: (1) because New Jersey's allocation approach does not reduce the liability limits available to the policyholder, allocation cannot reduce the deductibles borne by the policyholder; (2) the policies' "unambiguous terms" required the insurer to provide coverage only after exhaustion of the entire deductible; (3) because the policyholder "was not an unsophisticated insured," the Court could not ignore the "unambiguous terms of the policy"; and (4) the policyholder cannot avoid its decision to accept higher policy deductibles in exchange for lower policy premiums. Benjamin Moore has the potential to reduce significantly available coverage to policyholders confronting claims arising from progressive, long-tail injury or damage which continuously triggers successive policies containing significant deductibles.