Aerojet-General Corp. v. Transport Indem. Co.
17 Cal. 4th 38, 70 Cal. Rptr. 2d 118, 948 P.2d 909 (1997)
The California Supreme Court adopted the “all sums” allocation approach in rejecting an allocation that would have required the policyholder to share in the defense costs incurred in an environmental claim simply because it was “self-insured” for certain years. Seeking to recover costs incurred in various administrative and other environmental proceedings, the policyholder, Aerojet-General Corp., had brought suit against multiple insurers that provided coverage over a 20-year period before it became self-insured.
The California Court of Appeal had, among other things, affirmed the trial court’s ruling that the policyholder must pay a pro rata portion of its defense costs based on the 8 years of “fronting” policies purchased from Insurance Company of North America (INA), which covered part of the period in which the environmental property damage took place. (Though issued by an insurance company, a “fronting” policy nonetheless makes the policyholder financially responsible for any payments under that policy.)
The California Supreme Court disagreed, ruling that such “fronting” policies need not contribute to the loss:
ALTHOUGH INSURERS MAY BE REQUIRED TO MAKE AN EQUITABLE CONTRIBUTION TO DEFENSE COSTS AMONG THEMSELVES, THAT IS ALL: AN INSURED IS NOT REQUIRED TO MAKE SUCH A CONTRIBUTION TOGETHER WITH INSURERS. EQUITABLE CONTRIBUTION APPLIES ONLY BETWEEN INSURERS, … AND ONLY IN THE ABSENCE OF CONTRACT.… IT THEREFORE HAS NO PLACE BETWEEN INSURER AND INSURED, WHICH HAVE CONTRACTED THE ONE WITH THE OTHER. NEITHER DOES IT HAVE ANY PLACE BETWEEN AN INSURER AND AN UNINSURED OR “SELF-INSURED” PARTY. (EMPHASIS ADDED.)
The supreme court reasoned that Aerojet’s decision to assume the risk of defending claims potentially covered by its fronting policies served to relieve other insurers of the duty to defend only to the extent particular claims involved harm potentially occurring solely after expiration of such insurers’ policy periods. Recognizing the distinction between trigger of coverage and scope of coverage commonly invoked by courts adopting the “all sums” approach, the California Supreme Court concluded that, while the trigger of the duty to defend is limited to the policy period, the extent of the duty to defend is not.
The court also rejected the court of appeal’s conclusion that “fairness” dictated that the policyholder should contribute for years of INA’s “fronting” coverage. The California Supreme Court emphatically directed that courts must refrain from rewriting policy language based on equitable considerations:
Beneath the court of appeal’s concern about “fairness” and “justice” is, apparently, a belief that, without an approach like the [pro-rata allocation] it adopted, [the policyholder] might get a windfall from the insurers. That is not the case. We shall assume for argument’s sake that [the policyholder] has enjoyed great good luck over against the insurers. But the pertinent policies provide what they provide. [The policyholder] and the insurers were generally free to contract as they pleased. They evidently did so. They thereby established what was “fair” and “just” inter se. We may not rewrite what they themselves wrote.… As a general matter at least, we do not add to, take away from, or otherwise modify a contract for “public policy considerations.”
Id. at 75–76 (citations omitted).
The California Supreme Court reversed the court of appeal’s decision, instead holding for the policyholder.
Recognizing the distinction between trigger of coverage and scope of coverage commonly invoked by courts adopting the “all sums” approach, the California Supreme Court concluded that, while the trigger of the duty to defend is limited to the policy period, the extent of the duty to defend is not.
by Helen K. Michael
In cases involving continuous or progressive injuries, courts have reached sharply differing conclusions about the principles that should govern the allocation of losses among multiple policies and policy periods. Two major competing theories have emerged: (1) the so-called all sums approach, which also has been described as the “joint and several,” “pick and choose,” or “vertical” allocation approach; and (2) the “pro rata” or “horizontal” allocation approach. When coverage is being sought for long-tail injuries, such as environmental contamination and other toxic tort claims, or construction defect claims that may run into many millions of dollars, the theory that is employed can have a profound impact on the policyholder’s total recovery and the amounts insurers are obligated to pay.
Policyholders favor the “all sums” approach because it enables them to choose which, among multiple triggered policies, will pay particular losses, and thereby to avoid periods in which they may have been uninsured, self-insured, or otherwise had gaps in their insurance coverage. After the policyholder has obtained reimbursement from the insurance policies of its choosing, this approach then shifts to the selected insurers the costs of obtaining contribution from nonselected insurers providing coverage in other policy years triggered by the loss.
Insurers generally favor the “pro rata” approach because it limits their exposure only to the proportional share of coverage sold by each triggered policy and because this method requires the policyholder to bear the costs of at least those periods in which the policyholder chose to go uninsured or failed to purchase adequate available insurance. This approach also reduces insurers’ transaction costs by requiring the policyholder to pursue each individual insurer on the risk for coverage.