Allocation of indemnity among multiple insurance policies

Abstract

One of the most discussed topics in insurance coverage disputes today is the allocation of a single claim among policies in a multiyear period. Resolution of this issue was recently complicated by the New Jersey Supreme Court's suggestion in Owens‐Illinois that a portion of the liability claim be allocated to the policyholder in the limited circumstance where it is shown that the policyholder made a conscious decision to “assume or retain a risk, as opposed to periods when coverage for a risk is not available.... "Because the New Jersey court did not develop an allocation model, Professors J. David Cummins and Neil A. Doherty proposed one which they described in a recent article in this journal. Under their allocation model, a significant share of the claim is allocated to the policyholder primarily for fictitious “upper”; self‐insured retentions over periods of low limits. Their allocation model, however, is built on a number of faulty premises, most notably the New Jersey court's disregard of the express language of the insurance contract, which obligates an insurer whose policy is triggered to pay “all sums”; up to its policy limits regardless of whether periods of no or nonviable insurance were triggered. Furthermore, their model incorrectly assumes that policy holder demand is the sole determinant of the supply of general liability insurance, ignoring that the availability of coverage largely has been driven by insurance industry financial capacity and underwriting needs.