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Many companies realize that they can be sued now for bodily injury and property damage that occurred decades ago. Certain claims, known in the insurance industry as "long-tail" claims (e.g., asbestos, pollution, and health hazard claims), often don't become known and reported as claims until many years after the alleged harm happened. Fortunately, old insurance policies (generally those issued prior to 1986) may provide coverage for today's long-tail claims. The organization with rights to those policies may have an extremely valuable asset.
Just what are those old policies worth? Many prospective financial transactions cannot be properly valued without answering this question. Determining the answer, however, is much more difficult than simply adding up the limits of the old policies at issue. While not exhaustive, what follows is an overview of 13 key issues that affect the value of historical insurance assets.
1. Proof of Coverage
The value of lost or missing policies may never be realized. Companies should attempt to establish their existence, since, as indicated above, they may apply if the injury (e.g., asbestos exposure) occurred during their effective periods. Specialists can assist with what is often referred to as an "archaeology" effort to track down old policies. Copies of policies can be derived from a number of sources including government records, insurance brokers, insurers, risk managers, attorneys, as well as current and former customers. Policies may also be found in claim and accounting files. If copies of policies can't be located, secondary evidence of coverage (e.g., correspondence from the underwriting process) is the next best thing. Generally, the burden is on the policyholder to establish the terms, conditions, effective period and limits of any lost policy by a preponderance of the evidence or, if a higher standard of proof is imposed, through clear and convincing evidence. If the policyholder meets its burden, the onus is then on the insurer to show any coverage restrictions. Before relying on secondary evidence, a policyholder must first show that it conducted a thorough but unsuccessful search for the original policy.
2. Insurer Solvency
When valuing an insurance asset, appropriate discounts need to be taken for insures that are insolvent, bankrupt or already in litigation and for the risk of future insolvencies. If an insurer is in liquidation and a claim was not submitted prior to the bar date, the insurer's estate will most likely not respond to the loss. Because certain claims are paid out over a long period of time, a carrier's future ability to pay claims can also influence an organization's insurance recovery strategy. For example, it may make sense to take fifty cents on the dollar today from a carrier that will probably not be around in three years. The issue of insurer solvency can also have a substantial impact on allocation issues (see "Loss Allocation," below). Its importance becomes clear when determining who will absorb the share of loss orphaned by insolvency. Also, when dealing with insurer insolvency, any potential recovery from a state guarantee fund must also be explored.
3. Choice of Law
The benefits provided under a given policy can vary greatly depending on which jurisdiction's law is applied to its interpretation. Sometimes the policyholder and its insurer will "race to the courthouse" to try to obtain the most favorable forum. If a policy contains a choice-of-law provision, courts will consider it controlling in most instances. Historically, where there isn't an express choice-of-law clause in a policy, the law of the place of contracting (i.e., where the policy was issued) would usually govern contractual disputes under that policy. This can mean the state of the insurer's underwriting department that accepted the applicant's offer to purchase insurance or the state in which the policy was delivered. In contrast, the current Restatement of Conflicts of Laws, which courts are not obligated to follow, considers the law of the principal location of the insured risk during the term of the policy to be controlling, unless some other state has a more significant relationship with regard to a particular issue.
4. Coverage Exclusions
Comprehensive General Liability (CGL) policies issued until the mid-1980s often provide at least some coverage for certain long-tail claims. That coverage is most likely to be affected by the three categories of exclusions outlined below:
- Asbestos or Asbestosis Exclusions
During the late 1970s, some carriers began to exclude coverage for liabilities arising out of exposure to asbestos. Some of these exclusions only preclude coverage for asbestosis claims, which arguably preserves coverage for mesothelioma or other asbestos-related cancers. Other asbestos exclusions are broader in scope, leaving virtually no room to argue for coverage.
- Pollution Exclusions:
- The Sudden and Accidental Pollution Exclusion
During the early 1970s, insurers began attempts to exclude coverage for pollution losses by incorporating this exclusion into CGL policies. The exclusion bars coverage for claims arising from the discharge of pollutants, unless that discharge was sudden and accidental. The common name for this exclusion actually references an exception that re-includes coverage. There have been a tremendous number of cases interpreting the phrase "sudden and accidental." Almost all those cases construe accidental to mean unexpected and unintended. The meaning of the word "sudden" has generated significantly more controversy. Many cases give the word a temporal meaning (e.g., abrupt) and exclude coverage for any pollution that occurred gradually. Other cases find coverage for gradual pollution by holding either that the term has no temporal meaning or that it is ambiguous because it can also mean unexpected or unintended.
- The Total or Absolute Pollution Exclusion
During the late 1970s and early 1980s, insurers began to insert a new type of exclusion into CGL policies, one without any exception or re-inclusion of coverage for sudden and accidental events. Coverage arguments involving these exclusions often focus on whether they apply to claims that are not traditional environmental losses. Also, many courts undertake a fact-sensitive analysis of the underlying claim and focus on whether the substance involved qualifies as a pollutant and, if required by the exclusion at issue, whether the release was into the atmosphere.
- The Owned-Property Exclusion
CGL policies typically exclude coverage for property that is owned by, used by, or in the care, custody or control of the policyholder. This exclusion recognizes the distinction between a CGL policy's protection against liability to third parties and the protection afforded by a first-party property policy against damage to a policyholder's own property.
In the environmental context, insurers argue that the owned-property exclusion precludes coverage for costs to clean up a policyholder's own property. Many courts have agreed with insurers, but a number of courts have held that the exclusion does not bar coverage for costs incurred to abate the flow of pollutants from a policyholder's property to neighboring third-party property. Most courts have held that groundwater is a natural resource that cannot be considered property of the policyholder and those courts allowed coverage for costs to remediate groundwater below the policyholder's property.
5. Trigger of Coverage
Coverage trigger is the event or series of events that activates the obligation of an insurer to provide the benefits promised in the policy issued. It defines the period to which losses may be allocated. If a policy is not triggered, its limit will never be available to offset liabilities. Older, pre-1985, CGL policies typically provide coverage on a per occurrence basis. These policies are designed to respond to losses that occur during the policy period. For this reason, occurrence based policies have the potential to maintain value until their limits have been exhausted.
There are four basic trigger theories used to analyze coverage under these policies. Each requires the court to engage in a highly fact-sensitive analysis. First, under the exposure trigger, only the policy or policies in force at the time of exposure to or introduction of a harm-causing agent may provide coverage. Second, the manifestation trigger implicates only the policy or policies in force at the time harm first manifests itself or is detected/detectable. Third, when using a continuous trigger, coverage may be provided by all policies in force from the first exposure to harm through its ultimate manifestation. Finally, under the injury-in-fact trigger, the policy or policies in force at the time of the onset of actual harm may provide coverage. Most courts apply either a continuous trigger or an injury-in-fact trigger when analyzing old occurrence-based policies.
Post-1985 coverage is sometimes written on a claims-made basis. In contrast to occurrence coverage, claims-made coverage is triggered when a claim is made against an insured and reported to the insurer during the policy period, even if the loss-causing event happened prior to the inception of that policy period.
6. Occurrences (and the Number of Occurrences)
Coverage written on a per-occurrence basis will generally respond to events during the policy period that cause bodily injury or property damage neither expected nor intended from the standpoint of the policyholder. With regard to the issue of whether the injury was expected or intended by the policyholder, the clear overall trend in the case law is toward the pro-policyholder subjective standard. This means that what matters is what the policyholder actually intended, not what it should have reasonably foreseen.
The number of occurrences involved in a matter can directly influence how many times a given policy is triggered, when that policy's limits have been exhausted and how many deductibles and/or self-insured retentions a policyholder must absorb. Courts generally apply either the cause or the effects test to determine the number of occurrences. The majority of jurisdictions apply the cause test, which focuses on the underlying circumstances that resulted in harm, rather than the number of persons or properties ultimately harmed.
The minority effects test focuses upon the resulting harm, rather than proximate causation. Some occurrence definitions contain lot or batch clauses that seek to clarify, often unsuccessfully, the number of occurrences issue in certain situations.
7. Policy Limits
In some situations, particularly in those discussed below, the limits available under a policy can become a point of argument.
a) Multi-year contracts
When an insurance contract is written on an occurrence basis with a multi-year policy period, there may be an issue concerning the limits available. If a three-year policy has $1 million per occurrence limit, the policyholder will most likely assert that three separate occurrence limits are available for a total of $3 million. However, the insurer may argue that only a single $1 million occurrence limit is available for the entire three-year period. The treatment of multi-year contracts varies based on the specific policy at issue and is an important variable to be considered.
b) Stub Policies
Insurance policies having effective periods of less than one year are often referred to as stub policies. While policyholders typically pay a pro-rated premium for such policies, they may have access to full policy limits. Insurers will likely assert that stub policy limits should be pro-rated or that there should be no additional limits for fractional periods, especially when supported by the contract language. The treatment of stub policies also varies based on the specifics of the situation at hand.
8. Loss Allocation
Loss allocation is the method by which defense costs and indemnity payments are spread over the triggered policies and, in some cases, over uninsured periods. The nuances of allocation law are outside the scope of this paper; however, the points discussed below provide an overview of critical areas.
- All Sums Approach
Based on the all sums language contained in the insuring agreement of many policies, some courts have held that a policyholder is permitted to pick and choose the insurance policy or policies required to pay the loss. These courts find each triggered policy to be jointly and severally liable for the entire loss. This method is sometimes referred to as a vertical spike because a policyholder may select a policy year and proceed vertically through each successive layer of coverage. Once that policy year is exhausted, a policyholder's ability to select another year is determined by the applicable jurisdiction's treatment of the stacking issue. In this context, "stacking" refers to a policyholder's ability to access the limits in more than one policy year in response to a given claim or claims. Some all-sums jurisdictions allow the targeted carrier to re-allocate the loss based on equitable contribution or based on the other-insurance clause.
- Pro Rata Allocation
Other courts consider the all-sums language in policies to be limited to damages to which the policy applies and that take place during the policy period. These courts are of the opinion that there should be a proportional sharing of loss accomplished through a number of methods (e.g., fact-based, policy limits, time on the risk, time and limits, and equal shares).
An important aspect of the pro-rata allocation is whether the policyholder must absorb the loss allocated to periods during which it had no insurance. The reason for the lack of insurance then becomes critical. Some courts allow pro-ration to the policyholder for years in which it elected not to purchase insurance or to purchase insufficient insurance, but not for the years in which the insurance was unavailable. There is a developing body of cases weighing in on the issue of what constitutes the unavailability of insurance.
9. Insurer Defense Obligation
This issue has a significant impact on both the value of a given policy and the rate at which it will exhaust. An unexhausted policy covering defense costs in addition to liability limits may have a real value that is a multiple of its original liability limit. If the defense obligation is within limits, then every dollar paid for defense reduces the amount of indemnity available by an equal amount. Some policies have no duty to defend, and the policyholder may be required to pay all defense costs. In rare instances, an underwriter may elect to defend at its option.
An insurer's duty to defend is broader than its duty to indemnify. Old CGL policies that include a defense obligation contain language requiring insurers to defend suits against the policyholder, assuming the potential for indemnity coverage exists. The fact that environmental regulatory agencies do not always file formal legal actions against policyholders creates controversy over just what gives rise to an insurer's duty to defend.
The court's analysis usually turns on whether the regulatory involvement is sufficiently adversarial to constitute a suit and trigger the duty to defend. Letters from governmental agencies are usually viewed on a continuum and weighed in terms of their relative coerciveness and the gravity of their consequences. Cases vary, with most courts expanding an insurer's duty to defend beyond formal legal proceedings.
10. Timely Notice
Most insurance policies require that a notice of a claim be given as soon as practicable and notice of a suit immediately or as soon as possible. Insurers may characterize defense costs incurred prior to the policyholder's tender of the suit to be non-covered voluntary payments. In some states, prompt notice is a prerequisite for obtaining coverage. Most states, however, require an insurer to prove it has been prejudiced - that is, suffered irreparable harm - due to the policyholder's failure to give timely notice before it can deny coverage on this basis.
11. Retros
Some policies are retrospectively rated (retros) meaning the premium a policyholder pays is based upon actual loss experience under that policy. The rating formula is specified in the contract, and the premium is subject to a minimum and maximum. When an insurer pays a loss under a retro policy, that payment may result in a sizeable premium adjustment being billed to the policyholder.
12. Shared Assets
Another factor to consider is that some insurance assets are shared assets, meaning other entities have rights to coverage under the same policies. The sufficiency of the assets to respond to one policyholder's losses has the potential to be compromised by another entity that is insured under these policies having an aggregate consuming-loss or losses. In many cases the policy limits are exposed to claims by sibling or parent entities.
13. Agreements with Insurers
Any existing settlement or cost-sharing agreements need to be scrutinized to determine their effects upon both the amount of limit available and how new losses are allocated. For example, prior settlements for less than policy limits may require the policyholder to contribute the balance of a policy's limit before it can access excess coverage above that policy. When dealing with pollution claims, insurers often want the finality of a policy buyback, a full site release, or a full environmental release.
Each of the issues enumerated above may affect the value of old liability policies in relation to today's claims. Any credible estimation of historical insurance asset size requires a thorough understanding of these issues and how they interrelate. Companies need to appreciate that what appears to be, for example, the $500 million historical insurance portfolio of an acquisition target may never be accessed to respond to liabilities if these issues are not analyzed and negotiated (or, if necessary, litigated) to a favorable resolution. Conversely, careful analysis may reveal that the true value of an insurance portfolio, if properly managed, may greatly exceed initial estimates.
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