The Reinsurance Implications of the “All Sums”/J.H. France Allocation Decision
In 1993, the Pennsylvania Supreme Court issued a ruling concerning a variety of issues including jurisdiction, joinder of indispensable parties, bad faith, trigger, and most significantly, allocation. In the case entitled J.H. France v. Allstate (1), the highest court in Pennsylvania concluded that while multiple policies were triggered and were potentially liable for the losses which occurred over many years, the insured could choose which policies would have to respond to make payment of those losses. The J.H. France decision became the leading case for the implementation of a “pick & choose,” “all sums” allocation. This continues to be the law in several states including Pennsylvania. This article explores the issue of whether a Reinsurer may successfully challenge a reinsurance presentation based on a payment in accord with an “all sums” allocation by the Reinsured, where the Reinsured does not seek contribution from other available triggered policies, but rather submits a billing to a single reinsurance period. In certain factual circumstances, given that Reinsurers may vary from policy period to policy period, the result of an “all sums” allocation could result in a Reinsurer being asked to pay substantially more if contribution from the other triggered policy periods is not sought. Herein, we discuss the J.H. France ruling and the reinsurance implications of the reinsurance recovery based on that allocation decision.
J.H. France Refractories Company manufactured and marketed an asbestos containing products from approximately 1956 through 1972. J.H. France also marketed products which contained silica, which like asbestos, was claimed by thousands of plaintiffs to have caused bodily injury due to their exposure and inhalation of the products. J.H. France was insured by six different insurance companies during the 1967 through 1979. Those Insurers all disclaimed coverage. J.H. France filed a Declaratory Judgment Action in 1981 seeking a declaration that the Insurers all had a duty to defend and indemnify them. As additional plaintiffs began to file suit and claim injury throughout the 1980’s, additional insurers became allegedly involved in the potential loss liability. In 1984, Allstate filed a Declaratory Judgment Action naming the additional insurers, and shortly thereafter the Declaratory Judgment Actions were consolidated.
The main issue before the Pennsylvania Court of Common Pleas, and thereafter in the Pennsylvania Superior Court, was whether the various companies were liable for the defense and indemnification of J.H. France for claims based on exposure to its asbestos and silica products, and if they were liable, how liability was to be apportioned among the insurers. The court found that the various insurers were required to defend and indemnify J.H. France, and that the bodily injury occurred during all periods form date of first exposure, through manifestation or diagnosis of the injury. The court also concluded that the loss would be allocated on a pro-rata basis to all insurers on the risk, and J.H. France would assume its portion of liability for uninsured or self-insured periods.
After multiple appeals, the Supreme Court of Pennsylvania concluded that the lower court’s ruling was to be affirmed in part and reversed in part. The Supreme Court found that the coverage was triggered by bodily injury occurring during the policy period. Therefore, the court agreed with the lower court that all policies in effect from exposure to manifestation would be triggered. However, the Supreme Court reversed the lower court’s ruling on allocation. In analyzing the various policy’s insuring clause, the court focused on the “all sums” language which stated that the “insurer was obligated to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages….” Thus, the court ruled that the insured could pick any policy within the triggered coverage to respond to the losses, and found that no such obligation was attributable to the insured, J.H. France. The court also made a point to conclude that while each insurer is potentially liable for “all sums,” the allocation ruling would not serve to impair the ability of an insurer to seek contribution from any other insurers under the “other insurance” clause in the policies, or under the equitable doctrine of contribution.
The effect of the J.H. France decision was to allow an allocation of losses which triggered multiple policies to a single policy or policy period for all losses, and thereafter gave the insurers the right to then seek contribution. It is our understanding that there are two underlying reasons the court felt compelled to issue the “all sums” allocation ruling. First, the court wanted to accommodate the insured so they would be made whole without the inevitable delay of apportionment of liability, and second, the court wanted to support the conclusion that the insured itself would not be liable for a pro-rata share of the loss attributable to the uninsured or self-insured periods during which the bodily injury took place.
Although the allocation ruling benefitted the insureds, the effect of the “all sums” allocation became complicated as it was applied by insurers seeking reinsurance recovery. Disputes arose between insurers who relied on the “all sums” allocation ruling to make their reinsurance presentations, and Reinsurers who believed that the insurers must reallocate based upon an assessment of the actual liability. Insurers began to settle these long-tail matters with their insureds, and then place the entire settlement amount into one year, even if several years of coverage had been issued. Moreover, in many instances, when these settlements took place, it was the insurer and not the insured that would choose which policy to allocate the loss, even though the J.H. France decision gave the right specifically to the insured and not the insurer.
For the Excess of Loss Reinsurer in the year that was chosen, the result often was a full limit loss to that Reinsurer, even if they would have incurred no loss or less of a loss if the settlement had been apportioned to all triggered policies that had liability. Some Reinsurers took the position that although the J.H. France ruling does not specifically require that contribution be sought, clearly the reinsurance presentation should reflect the true liability to the policies that were settled. In effect, it was intimated by Reinsurers that the insurers often conducted a cost/benefit analysis, whereby the insurers selected a policy or policy period that had the most favorable reinsurance program and provided for the greatest reinsurance recovery.
Reinsurers have contested the “all sums” pick and choose allocation in reinsurance presentations, claiming that the Reinsured must seek contribution even among its own coverage, or reallocate the loss to all available triggered policies to equitably reflect the liability. Reinsurers have argued that the actual Reinsurers on the risk may change from year to year, or the individual Reinsurers’ shares may change from year to year, and therefore it is inherently inequitable to allocate to a single period without seeking contribution. Selecting a single policy or policy period has the effect of requiring a reinsurer to reimburse a reinsured for a loss that but/for the spike allocation, its coverage would not have been impacted or would have been lessened, while other Reinsurers who should have some liability, escape without any payment.
In response, insurers typically put forth the argument that the Reinsurers agreed to provide reinsurance coverage to a policy that had “all sums” language, and the allocation is a reflection of the court’s interpretation of that language. Therefore, it is generally the insurer’s position that the “all sums” allocation was reasonable and thus is not subject to a challenge by Reinsurers. Moreover, the insurers further utilize follow the settlement clauses or follow the fortunes clauses to reinforce the argument that reallocation cannot be demanded by Reinsurers, and is not required.
Surprisingly, although the issue has been raised on many occasions by Reinsurers, there has been very little case law developed by the courts as to how this issue is to be resolved. As most of these matters are settled amicably, or are the subject of a confidential arbitration proceeding, there is little guidance by courts as to whether Reinsurers can successfully challenge the “all sums” allocation. Courts traditionally do not view a Reinsurers’ denial of a reinsurance claim on the basis of an allocation issue favorably, unless the Reinsurer can prove the allocation is unreasonable. Generally, courts will only deem an allocation unreasonable when it can be shown that the allocation by the reinsured was done to maximize reinsurance recovery. Most of the reinsurance case law concerning allocation disputes involve the court interpreting whether the follow the fortunes or follow the settlement clauses in the reinsurance contracts bind the Reinsurer to the Reinsured’s allocation of the loss. Once again, minus a showing that the allocation is inherently unreasonable, the courts will usually find in favor of the Reinsured.
Although it is difficult to prevail in a denial challenging the reasonableness of an allocation, in cases where the Reinsured has not sought contribution, Reinsurers should strongly consider raising the argument that allocation to a single period is unreasonable. Reinsurers should undertake an analysis as to whether the circumstances are such that it can be shown that the Insurer evaluated its available reinsurance, and made certain allocation decisions based on the applicable reinsurance, which ultimately resulted in the greatest possible recovery. Reinsurers should consider whether it can be proven that the inequity of not seeking contribution had a significant negative monetary impact on that Reinsurer, and a profitable outcome for the Reinsured. Reinsurers also must weigh the potential application of any follow the fortunes or follow the settlements clauses in the reinsurance contracts, as that will affect the potential for a favorable outcome in a dispute.
In the end, it does not appear that the court in J.H. France gave much consideration, if any, to the potential reinsurance implications of its “all sums” allocation ruling. The allocation ruling was based on a strict interpretation of the original policy language, and the ruling was intended to make certain that the policyholder would not have to incur delay in being provided with defense or indemnification, and to ensure the policyholder would not be liable for a portion of the loss. The court did however, specifically preserve the right to seek contribution. This is significant because from a Reinsurer’s perspective, enforcement of the contribution rights is the only way to equitably apportion ultimate liability prior to seeking reinsurance reimbursement. Reinsurers should insist that the Reinsureds engage in the exercise of seeking contribution to fairly apportion liability among Insurers and Reinsurers, as it is likely that the court in the J.H. France case envisioned that the contribution aspect was an essential consideration when applying the allocation ruling.
(1) 626 A.2d.502 (Pa. 1993)