New Jersey Insurance Coverage Alert - October, 2013 - Lewis Brisbois Bisgaard & Smith LLP

New Jersey Insurance Coverage Alert - October, 2013

The case, Farmers Mutual Fire Insurance Co. of Salem v. N.J. Property-Liability Guaranty Association, involved the allocation of costs for cleanup of environmental contamination of property where one of the insurance companies on the risk had become insolvent. Newark Insurance Company (Newark) issued insurance policies to two different homeowners from 1998 to 2002. Farmers Mutual then insured the two properties from 2002 to 2003. In 2003, soil and groundwater contamination was found on both properties, and there was no dispute that contamination began during the time the properties were insured by Newark and continued through the periods insured by Farmers Mutual. Newark was declared insolvent in 2007, at which point the Guaranty Association took over administration of Newark’s claims under its obligations of the PLIGA Act. Farmers Mutual paid all the remediation costs for both properties.

Farmers Mutual filed civil complaints in 2009, seeking reimbursement from the Guaranty Association for the portion of the remediation costs attributed to Newark. In Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994), the Supreme Court held that progressive damage in an environmental contamination case should be treated as an occurrence triggering the insurance policies in each applicable year on the risk, and the remediation costs should be divided pro rata amongst the insurance carriers. The trial court determined that Farmers Mutual was entitled to judgment in its favor. The Appellate Division reversed the trial court, holding that a 2004 amendment to the PLIGA Act required that a policyholder or claimant must exhaust the benefits from a solvent insurance carrier before attempting to collect benefits from the Guaranty Association.

The PLIGA Act was passed by the New Jersey legislature to protect claimants and policyholders from financial loss due to the insolvency of an insurance company. The PLIGA Act created the Guaranty Association to administer the claims of the insolvent insurer, and to pay certain claims on a policyholder’s contract. However, those claims are to be paid by the Guaranty Association only after the claimant exhausts the policy of the solvent insurer. In 2004, the PLIGA Act was amended to define “exhaust,” stating that a claimholder has exhausted the policy of the solvent insurer only when the maximum limit under the policy is reached. Therefore, the Guaranty Association is not obligated to pay any statutory benefits until the policy limits of all solvent insurers are reached.

The Court wrote that the part of the legislative purpose for the PLIGA Act and the Guaranty Association is that the Guaranty Association should be an insurer of last resort. By defining “exhaust” in the 2004 amendment, the legislature clearly intended to make the Guaranty Association the insurer of last resort. This follows the objectives of the PLIGA Act, one of which is to ensure that the Guaranty Association’s limited resources are available to help policyholders and claimants who might be hurt by an insurer’s insolvency.

The Court rejected the argument that the 2004 amendment impaired Farmers Mutual’s contractual rights. In heavily regulated industries like insurance, a business should not assume that regulatory schemes will remain the same. Farmers Mutual failed to show that the 2004 amendment caused a substantial impairment to its contractual rights because the PLIGA Act has a legitimate public policy goal and puts forth reasonable conditions related to legitimate government objectives.

Because an insured must exhaust the policy limits of all solvent carriers in long-tail, continuous-trigger cases before seeking benefits from the Guaranty Association, the Supreme Court affirmed the decision of the Appellate Division and dismissed Farmers Mutual’s complaint.