SJC rejects selective tender doctrine in worker's comp cases and generally

As I posted here,, last June the First Circuit certified to the SJC the question of whether, when an insured has two primary worker's compensation insurance policies that cover the same loss, the insured can opt to have one insurer cover the entire loss or if either insurer can insist that both share equitably in covering the loss. 

In Ins. Co. of Penn. v. Great Northern Ins. Co., __ Mass. __, 2015 WL 10428274 (March 7, 2016), the SJC has answered no.  Rather, "the insurance company that pays the loss has a right of equitable contribution to ensure that the coinsurer pays its fair share of the loss.  The employer of the injured employee may not prevent the insurance company that pays the loss from exercising its right of equitable contribution by intentionally giving notice of the injury only to that insurer." 

 Progression had two worker's comp policies.  ISOP provided compulsory worker's comp coverage.  Great Northern provided worker's comp coverage for employees traveling outside the United States and Canada.  Both policies provided primary coverage. The dispute between the insurers arose after an employee of Progression was injured while traveling abroad for work. 

Progression gave notice of the worker's comp claim only to ISOP and did not notify Great Northern.  ISOP later learned of the Great Northern policy and requested contribution.  Great Northern declined, stating that it had learned from Progression that Progression had intended to tender the claim only to ISOP and had not authorized ISOP to report or tender the claim to Great Northern.

Under the doctrine of equitable contribution, where multiple insurers provide coverage for a loss to an insured, an insurer who pays more than its fair share of costs of defense and indemnity may require a proportionate contribution from the coinsurers. 

Great Northern did not challenge the equitable contribution doctrine generally; it argued that it does not apply because Progression purposely tendered the claim only to ISOP.  Without using the term, Great Northern asked that the court adopt the selective tender exception to the doctrine of equitable contribution, allowing an insured to choose whether or not to excuse an insurer from its duty to contribute to a claim. 

The court rejected that argument with respect to worker's compensation insurance.  The worker's compensation statute requires that an employee injured in the course of employment "shall be paid compensation by the insurer."  Therefore, although the employer purchases insurance, the insurer is directly liable to the employee.  Under the statutory scheme, Great Northern's obligation to defend and indemnify the claim was triggered by the notice given to  Progression of its injured employee, regardless of whether or not Progression gave notice of the injury to Great Northern.  Therefore, the language in the insurance policy providing that its duty of coverage is contingent on the employer providing notice of the injury to it is contrary to Massachusetts law and null and void with respect to a Massachusetts employee. 

The court also held that the selective tender exception to the doctrine of equitable contribution does not accord with Massachusetts law governing general liability insurance.  Under Massachusetts law an insurer's coverage obligation is triggered by notice regardless of the timing or source of such notice; late notice or notice from a third party does not preclude coverage unless the insurer is prejudiced. 

As I have previously noted, the selective tender doctrine typically pertains more to the issue of pro rata versus joint and several allocation in a long tail loss.  In a joint and several allocation scheme, an insured may choose (or selectively tender to) one insurer, who will be on the risk up to its policy limit.  The insurer will then have the right of equitable contribution against other insurers on the risk, but cannot recover for periods when the insured had no insurer on the risk or when the insurer on the risk is no longer in business.  The SJC has firmly rejected joint and several liability in favor of pro rata contribution. 

Thoughts on the upcoming Restatement of the Law of Liability Insurance

Last week I posted about the January 22 Insurance Law Symposium sponsored by the American College of Coverage and Extra-Contractual Counsel.  It was a great conference, with excellent panel discussions on emerging issues in coverage law and on ethical issues relating to the tripartite relationship. 

Several of the discussions were devoted to the Restatement of the Law of Liability Insurance, which is currently being completed.  Although I had been vaguely aware that the Restatement was in the works, it was fascinating to get the details. 

Restatements are books that provide guidance on a particular area of law.  They are published by the American Law Institute, and are highly regarded by judges.  Where an issue of law is undetermined in a particular state, judges will often turn to Restatements as at least a starting point (and not infrequently an end point) for their analysis.

Restatements provide general principals of law followed by comments that explain the principle more fully and give examples of how it is applied. 

One of the presenters at the conference, Kyle Logue of the University of Michigan Law School, is one of the two reporters for the Restatement of the Law of Liability Insurance.  That means that he is responsible for drafting, getting comments, redrafting, getting more comments, redrafting . . .  He discussed the history of the project and how the reporters make choices about the content of the Restatement.

When it is completed the Restatement will have four chapters:  Basic liability contract rules, management of potentially insured liability claims, general principals regarding the risks insured, and advanced contract issues.  The first three chapters are in close to final form.  The draft document is available on Westlaw (and maybe Lexis; I didn't quite catch it). 

By the end of Professor Logue's presentation I had the distinct idea that the existence of the Restatement will work in favor of insurers at the expense of insureds. 

The Restatement of the Law of Liability Insurance differs from other Restatements in an important manner: it sets forth principles that can easily be made inapplicable, without the intervention of legislation or judicial opinions.  And that action can be done in in response to the very principles set forth in the Restatement. 

According to Professor Logue, with the exception of rules with respect to contract interpretation and bad faith, any principle in the Restatement can be overcome by changing policy language. 

As an example, the Restatement provides that in long tail losses a pro rata time on the risk method of allocation should be used.  (A long tail loss is a loss, such as a hazardous waste site, that occurs over a number of years before being discovered.  Because of the length of the occurrence many annual insurance policies are triggered and the damages must be allocated among them.)  

While pro rata time on the risk allocation is the law in Massachusetts, many states use the all sums approach to allocation.  Pro rata allocation tends to favor insurers, because the insured is responsible for the percentage of loss allocated to periods of time when there is no coverage due to lost policies, insurers who have since gone out of business, or applicable exclusions in some policy years.  All sums allocation tends to favor insureds, because they can choose one insurer to bear the initial burden of paying the loss up to the policy limits; it is up that insurer to reallocate the loss among other insurers on the risk.

The reason the Restatement will benefit insurers at the expense of policy-holders is not because the particular allocation principle the drafters chose favors insurers; that's just an example of a split rule where the drafters chose one side.  The Restatement will benefit insurers because it provides that any rule it sets forth can be changed by new policy language.  So if a policy expressly states that an all sums method of allocation will be used, then the Restatement's principle of pro rata allocation will not apply.

Insurers, however, will not change policy language that favors them.  For example, they will not adopt policy language requiring all sums allocation. 

And, in general, it's insurers that write the policies.  ISO forms, standard forms used in many insurance policies, are developed by Verisk Analytics, a company that provides services to insurers, not policy-holders.

There is no ISO equivalent for policy-holders.  While some large entities can and do negotiate policy provisions with their insurers, such negotiations do not result in the issuance of standard forms used in many policies.  Smaller business and consumers very rarely negotiate terms.   

Insurers are repeat players in the industry and therefore have the incentive and the economic means to change policy terms that policy-holders simply do not have.  Homeowners insurers in Massachusetts probably adjusted tens of thousands of water dam claims last winter.  But each homeowner made only one claim.  An individual homeowner has no incentive to try to change policy terms that worked against him or her; new terms in a future policy will not affect the adjustment of a loss that has already happened.  But the insurance industry, in anticipation of more ice dam claims, has every reason, and the economic power, to change policy terms that don't favor it.

Therefore insurers will change the policy provisions where the Restatement principles favor the policy-holders, but the reverse is not true.  In time, the policy terms that the Restatement interprets in a manner that favors insurers will remain, while the policy terms that the Restatement interprets in a manner that favors policy-holders will be changed.

For that reason, regardless of whether the Restatement principles as written collectively favor insurers or policy-holders, or are overall neutral, the eventual net effect of the very existence of the Restatement will be to benefit insurers to the detriment of insureds. 

First Circuit holds that pro rata allocation does not apply to attorney's fees in long tail loss

In a case with odd facts, the United States Court of Appeals for the First Circuit has held that under Massachusetts law, in long tail losses attorney's fees are not subject to pro rata allocation. 


I'm not going to go into great detail of the facts of the case.  Suffice it to say that the First Circuit's recitation of those facts and the procedural history fairly drip with disdain for the insurer's actions and litigation strategy.  Rather than stating a straightforward prediction that the SJC would not apply pro rata allocation to defense costs (a subject of debate among insurance coverage attorneys), it chided the insurer for removing the case to federal court where new state law cannot be made. 


The reasoning of the First Circuit that the duty to defend is a broad duty that should not be subject to pro rata allocation is sound.  But in the context of the case the court has left room for insurers to argue that bad facts make bad law and that Massachusetts state courts should ignore the decision for that reason.




A substantial oil spill occurred on property owned by the Peabody-Essex Museum, and eventually migrated off-property to land owned by Heritage Plaza.  Heritage Plaza discovered the oil in 2003 and made a claim against the Museum.  The Massachusetts of Department of Environmental Protection issued a Notice of Responsibility to the museum.

The museum sought coverage from U.S. Fire Insurance Company, its insurer from December, 1983 to December, 1985.  U.S. Fire denied a duty to defend the private demand from Heritage Plaza, but accepted defense of the DEP claim with a reservation of rights.

The museum retained legal counsel and an environmental consultant and tendered the bills to U.S. Fire.  It received no payment for the defense of the public claim even though U.S. Fire had agreed to defend that claim.  It finally sent a payment totaling $611.41, which it calculated by unilaterally reducing the hourly rate of counsel to $200 per hour and unilaterally reducing the bills to what it considered to be the percent spent on the public claim.  It made no payment for the environmental consultant,

The museum sued U.S. Fire and, in 2013, was awarded judgment of over $1.5 million in the United States District Court for the District of Massachusetts. 

In Peabody Essex Museum,Inc. v. U.S. Fire Ins. Co., __ F.3d__, 2015 WL 5172841 (1st Cir. 2015), the United States Court of Appeals for the First Circuit held that US Fire's persistent failure to make any payment towards defense costs "despite having nominally accepted that duty may be treated as a wrongful refusal to defend upon receipt of notice of a claim." 

The court then turned to the issue of how the costs and fees should be divided between the insurer and insured. 

The court first held that the US District Court did not abuse its discretion in finding that the beginning of the 1983-1985 policy period was the start date for the allocation period even though that date "has a make believe quality." 

The District Court had applied a fact-based allocation rather than the default time on the risk method set forth in Boston Gas Co. v. Century Indem. Co., 454 Mass. 337 (2009).  In a fact based allocation, costs are attributed to a policy period based on the percentage of damage that occurred during that period.  Courts generally agree that a fact-based allocation is best, but it is often impossible to produce facts indicating how much damage occurred in one 12-month period versus another of a 30 year long undiscovered contamination.  Some courts have applied it in sexual abuse cases, where an institution allowed sexual abuse of many minors over a period of time, because in that instance it is possible to determine how many allegations of abuse occurred in one year over another.

The time on the risk method, as set forth in Boston Gas, allocates damages based on the percentage of time a particular insurer provided coverage out of the entire period of the loss.

The District Court apparently allocated loss based on a finding that 9,000 square feet of oil damage occurred during the two year policy period.  (The total square feet damaged is not clear from the opinion.)

The First Circuit affirmed the holding of the District Court that time on the risk proration of Boston Gas Co. v. Century Indem. Co., 454 Mass. 337 (2009) does not apply to defense costs.  It held that the arguments of U.S. Fire "appear diminutive next to the long-standing state precedent on the broad and formidable contractual duty to defend that heavily favors insureds and hat stands apart from indemnity obligations."    It tempered its holding by adding, "we have warned, time and again, that litigants who reject a state forum in favor of federal court under diversity jurisdiction cannot expect that new state-law trails will be blazed" by the federal court.


Thanks to Mike Tracy for bringing this case to my attention. 

U.S. District Court applies continuous trigger, holds that under Boston Gas insured is responsible for proportionate share of defense costs

D.N. Lukens, Inc. was a a defendant in several suits alleging harm from exposure to toxic substances owned, supplied, sold or controlled by Lukens.  

While one of the suits, Mastrogiacomo, was pending, the Boston Gas decision was handed down.  In that decision, the Supreme Judicial Court of Massachusetts surprised everyone by holding that long-tail losses would be allocated on a pro rata time-on-the-risk method, instead of by a joint and several liability method.  The SJC also held that the insured will bear a proportionate share of the loss for any time period during the long-tail loss that no coverage is available. 

Utica Mutual Insurance Company, Lukens' insurer, informed Lukens that under Boston Gas Lukens was responsible for its pro rata share of any settlement or judgment because there were periods of time during the risk exposure that Lukens was uninsured.  Utica informed Lukens that it was conveying settlement authority to counsel in an effort to resolve the case prior to trial.

Lukens informed Utica that it believed it was insured for all relevant periods and asked for time to search for additional insurance coverage.  (Such a situation is not unusual in long-tail losses.  That's why everyone should keep copies of every liability policy ever issued to them, forever, in a place where they can be found.  Otherwise, after staff turnover and changes of location and changes of insurance agents and changes of insurers, how will they know what policy they had fifty years ago?)

Utica nevertheless settled the Mastrogiacomo lawsuit for $145,000, and calculated that $14,964 of that amount was attributable to Lukens.  That amount remains unpaid.

Lukens also sought coverage from Utica for asbestos claims filed against it.  Utica agreed to indemnify Lukens for its time on the risk and reserved the right to seek contribution from Lukens for uninsured periods.  Based on that reservation, Lukens sought to take control over the defense in the asbestos cases. 

In Graphic Arts Mut. Ins. Co. v. D.N. Lukens, Inc., 2013 WL 2384333 (D. Mass.), Utica sought summary judgment. 

The court held, first, unsurprisingly, that the injuries alleged were long-tail losses that came within the Boston Gas analysis. 

The court noted that Boston Gas did not resolve the issue of triggers of coverage.  Triggers of coverage determine which policy periods are triggered by a long-tail loss.  There are four basic theories of triggers of coverage: manifestation, injury-in-fact, exposure, and continuous.  Massachusetts courts have declined to adopt a single theory, holding that which trigger applies depends on the circumstances. 

The court held that the continuous trigger method most accurately reflects the reasonable expectations of the insured.  Under that method a loss occurs from the time of exposure to a hazardous substance to the time when physical harm from such exposure becomes manifest.  It also noted that in the case before it the continuous trigger would provide Lukens with the greatest amount of insurance coverage, and implied that that was one reason to apply  that trigger. 

The court then turned to whether Lukens must contribute its proportionate share to the settlement in the Mastrogiacomo suit.  "What is troublesome .. . is the fact that a settlement was reached without  the input or acceptance from Lukens."  The court held that in such circumstances Lukens was not required to contribute to the settlement.  It noted that Boston Gas contemplates the written consent of all parties to the settlement.  It declined to grant summary judgment to Utica on a 93A count arising its actions with respect to the settlement. 

Lukens argued that in the asbestos cases Utica was barred from disclaiming its duty to indemnify because it refused to relinquish to Lukens control over the litigation even though Lukens would be assigned over 60 percent of the indemnity allocation. The court's analysis of the issue was somewhat murky, but it appears to have held that Lukens was not entitled to control the defense but that it was responsible for its proportionate share of the costs of defense. 

The court denied summary judgment on the issue of the actual allocation of loss, on the ground that there was a material dispute of fact over the underlying claimants' exposure to asbestos. 

New York times discusses allocation of loss in football concussion lawsuits

The article, here, is a bit overwrought about possible difficulty that youth sports leagues might have in obtaining insurance in the future, but it does nicely describe the issues facing both insureds and insurers at the beginning of long-tail loss claims.