Allocation is a fundamental issue impacting every society and transcending virtually every major sector and function within a society. Economists sometimes describe this concept as society's allocation of its resources between guns and butter. In the world of insurance, the focus is on allocating losses between policyholders and their insurers. In the world of reinsurance, allocation issues involve cessions by ceding companies to their reinsurers.
In the old days of insurance and reinsurance (which, for present purposes, easily takes us through the mid-1970s), the allocation questions were usually easy and, indeed, rarely presented. But in these "golden ages" of the "coverage wars," allocation-related issues dominate both the direct insurance and the reinsurance arenas. This is a product of a myriad of factors, including large losses and draconian liabilities (e.g., product liability, environmental, and construction defect); complexities associated with long-tail environmental, mass-tort, and other coverage claims; the interplay of large and divergent insurance coverage programs; changing relationships in the corporate and insurance worlds; insurer insolvencies and increased insurance industry consolidation; sophisticated, well-funded policyholders; high caliber legal representation of insurers and policyholders alike; and a creative, resourceful, well-funded plaintiff's bar contributing to mass underlying liabilities.
Although (and in some ways because) more cases are subject to controlling authority on the fundamental issue of allocation methodology, the allocation issues in many cases are more complex and sophisticated today than they were a few years ago. The observation of the New Jersey Supreme Court regarding environmental coverage law remains particularly apt with respect to the topic of allocation: "[I]t sometimes appears that just as soon as one issue of importance is resolved, like Hydra, the many-headed serpent in Greek mythology, at least two new issues arise to replace it." General Accident Ins. Co. v. State of New Jersey, 627 A.2d 1154 (N.J. 1996).
Important decisions continue to be rendered, as noted by the New York Court of Appeals in its decision on allocation "we once again venture into the complex realm of long-tail insurance claims." Keyspan Gas E. Corp. v. Munich Reins. Am., 96 N.E.3d 209 (N.Y 2018).
A couple of 2024 United States Supreme Court cases addressing bankruptcy issues are relevant to insurers. In Truck Ins. Exchange v. Kaiser Gypsum Co. Inc., 602 U.S. 268 (2024), the Court held that an insurer with financial responsibility for bankruptcy claims is a "party in interest" under U.S.C. § 1109(b) and may raise and may appear and be heard on any issue in a Chapter 11 case. In Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), the Court ruled the bankruptcy code does not authorize a release and injunction as part of a plan of reorganization under Chapter 11 that effectively would have discharged claims against a non-debtor without the consent of affected claimants.
Developments in underlying tort liability have influenced policyholders, insurers, and reinsurers as well. The enactment of meaningful tort reform, an opinion rendered by Judge Janis Jack in remanding silica actions consolidated before her in an MDL proceeding in In re: Silica Products Liability Litigation, 398 F. Supp. 2d 563 (S.D. Tex. 2005), and other developments have caused policyholders, insurers, and reinsurers to re-examine global matrix settlements, claim settlement, and trial strategy and have resulted in increased scrutiny of fundamental issues such as product identification, medical evidence, and disease criteria, and the credentials of and methods used by doctors in the context of mass torts.
Social inflation has adversely impacted Insurers and corporate policyholders as it continues to increase underlying liabilities and defense costs. Various factors are fueling social inflation, including litigation funding; nuclear verdicts (verdicts in excess of $10 million); thermo-nuclear verdicts (verdicts in excess of $100 million); reptilian tactics; nuclear legislation and court rulings; anticorporate sentiment and challenges in having juries follow jury instructions and render verdicts based upon admissible evidence. These and other factors have resulted in a civil justice system that often appears to be out of control in coverage litigation.
For more information on the new Thirteenth Edition of the two-volume treatise Allocation of Losses in Complex Insurance Coverage Claims, which addresses these topics and much more, click here.
