Calling all Policies! N.J. Special Master Allocating Costs under Owens-Illinois Implicates Excess Before Primary Exhausts

In The Travelers Indemnity Company v. Thomas & Betts Corporation, No. 13-6187, 2017 WL 3187217 (D.N.J. July 26, 2017), New Jersey’s federal court offers a meaningful example of how trial courts can use a special master to help resolve the tricky issue of allocating defense and indemnity costs involving multiple policies, layers, and years.

In Owens-Illinois, Inc. v. United Ins. Co., the Supreme Court of New Jersey urged trial courts to use a special master with “a substantial measure of discretion” to develop an allocation formula for such a case “that fairly reflects the risks assumed or transferred.” Id., 650 A.2d 974, 994 (N.J. 1994). The Owens-Illinois court also recognized the challenge of “determining how primary and excess coverage is to be taken into account or the order in which policies are triggered” and that the best that can be achieved is an “imperfect resolution.” Id.

The parties to Thomas & Betts made thoughtful arguments to the special master, who drafted a report and recommendations for the Court. Plaintiff Travelers Indemnity Company argued that the share of risk for each policy year should account for excess and umbrella coverage during those years. Defendant Thomas & Betts Corporation argued that it would be inequitable to implicate excess and umbrella coverage when the primary policies in the triggered years were not going to be exhausted.

After carefully considering Owens-Illinois, the special master looked to Defendant Thomas & Betts’ patterns of purchasing coverage to determine that excess and umbrella policies should also respond in triggered policy years even though the primary policies in those years would not likely exhaust. The special master observed that when Thomas & Betts wanted to transfer more risk, it bought more excess and umbrella coverage, and did so over the span of decades. At the heart of it, the Thomas & Betts court agreed with the special master’s determination that

The case law makes clear that the coverage decisions made when the policies were purchased drive the allocation, not the probabilities of primary or excess policies answering for a claim.

There are other jurisdictions (for example, New York) that require each layer of insurance policies to be exhausted across all of the triggered policy years before the next layer would be allocated. But, the Thomas & Betts court and its special master agreed that New Jersey law looks to the degree of risk transferred as reflected by the purchase of insurance, regardless of the likelihood that the policy will answer a claim. Thus, the key takeaways from Thomas & Betts on allocation are that:

  • All layers of policies in a triggered policy year are in play when allocating costs across numerous years;
  • A special master can do the heavy lifting for a trial court on allocation; and
  • A trial court will apply the special master’s findings when they are legally and factually sound.

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