October 28-29, 2013

Rob PfisterKlee, Tuchin, Bogdanoff & Stern LLP

Linda KornfeldKasowitz Benson Torres & Friedman LLP

Allocation Methods and Their Effect

Insured chooses which policies will pay among multiple triggered policies◦ Selected insurers then obtain contribution from

rest of insurers of triggered policies Also described as “joint and several,” “pick

and choose” and “vertical” allocation Rationale is that each policy states insurer

will defend “any suit” and pay “all sums”◦ Trigger of coverage (must the policy respond) v.

scope of coverage (how much must the policy pay)

Majority position adopted in:◦ California◦ Delaware◦ Hawaii◦ Illinois◦ Indiana◦ Massachusetts◦ Ohio◦ Pennsylvania◦ Texas◦ Washington◦ District of Columbia Circuit Court of Appeals (multiple

states’ law)

Insured’s loss is divided proportionately among all triggered policies based on the portion of loss that occurred during each policy◦ Requires insured to pursue coverage under each policy

Also described as “horizontal” allocation Rationale is that policy limits coverage to

“occurrences” that take place during the policy period◦ Also equity concerns regarding policyholder’s

assumption of risk when deciding not to purchase any, or insufficient amount of, insurance

“Time-On-The-Risk” Approach◦ Loss allocated among insurers based on the

proportional time that each insurer was on the risk

“Percentage of Limits” Approach◦ Loss is divided into shares across triggered period

with higher share given for years in which insured purchased more coverage

◦ Rationale was to balance the extremes of “all sums” and “pro rata/time-on-the-risk” approach

Minority position adopted in:◦ Colorado◦ Hawaii (adopted “all sums” in another case)◦ Minnesota◦ New Jersey◦ New York◦ Utah◦ Second Circuit Court of Appeals (New York and Texas

law)◦ Fourth Circuit Court of Appeals (South Carolina law)◦ Fifth Circuit Court of Appeals (Louisiana law)◦ Sixth Circuit Court of Appeals (Illinois and New Jersey

law)◦ Eleventh Circuit Court of Appeals

$2 Million Claim

Results Based on Type of Allocation:◦ “All Sums”◦ “Pro Rata”

What if one year of coverage has a fronting policy or a high self-insured retention?

What if one year has an insolvent insurer?

“All Sums”: Insured Preference◦ Allows insured to avoid periods when it was

uninsured, self-insured or had gaps in coverage◦ California Supreme Court rejected claim that

“because it was issued ‘fronting’ policies . . . [the insured] should be required to make such a contribution itself. 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.” Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 71-72 (1997).

“Pro Rata”: Insurer Preference◦ Insured contributes for periods when it did not

purchase insurance, was self-insured, lost its policies or had gaps in coverage (but not for periods when coverage for a risk was unavailable)

◦ Second Circuit stated fairness required “pro rata” allocations so that insured bore consequence of “risk that it elected to assume, either by declining to purchase available insurance or by purchasing what turned out to be an insufficient amount of insurance.” Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1204 (2d Cir. 1995).

$2 Million Claim

Results Based on Type of Allocation:◦ “All Sums”◦ “Pro Rata”

$2M ExcessPolicy

$2M ExcessPolicy

$2M ExcessPolicy

$500K Primary Policy

$500K Fronting

Policy

$500K Primary Policy

Year 1 Year 2 Year 3

Analogues, Mechanics & Deference

Bankruptcy Code – Default option, governing everyone and everything other than specifically enumerated exceptions in 11 U.SC. § 109 (e.g., Small Business Investment Companies)

“Only those entities [that] have a comprehensive scheme of liquidation provided for by other statutes or regulations should be excluded from eligibility under the Bankruptcy Code. [T]hose entities that do not enjoy such a scheme of liquidation should be able to avail themselves of the liquidation and reorganization provisions of the Bankruptcy Code.” In re Affiliated Food Stores, Inc. Group Ben. Trust, 134 B.R. 215, 222 (Bankr. N.D. Tex. 1991)

Bankruptcy Code – Default option, governing everyone and everything other than specifically enumerated exceptions in 11 U.SC. § 109 (e.g., Small Business Investment Companies)

Title 12 – FDIC as Receiver for failed financial institutions

Bankruptcy Code – Default option, governing everyone and everything other than specifically enumerated exceptions in 11 U.SC. § 109 (e.g., Small Business Investment Companies)

Title 12 – FDIC as Receiver for failed financial institutions

Dodd-Frank Orderly Liquidation Authority for “Covered Financial Companies” (including insurers – albeit with special rules)

Bankruptcy Code

Bankruptcy Code

Title 12 / Banks

Bankruptcy Code

Title 12 / Banks

Dodd-Frank

Financial Guaranty Insurance Company (FGIC) – Clash of the competing comprehensive regimes, or How can two courts each have exclusive jurisdiction over the same issues?

Financial Guaranty Insurance Company (FGIC) – Clash of the competing comprehensive regimes, or How can two courts each have exclusive jurisdiction over the same issues?

FGIC Plan of Rehabilitation:

“Section 3.5 No Defaults Arising from Rehabilitation or

Rehabilitation Circumstances.

(a) [F]rom and after the date of the Order of Rehabilitation,

any default, event of default or other event or circumstance

relating to the FGIC Parties then existing (or that would exist

with the

passing of time or the giving of notice or both) under any

FGIC Contract or Transaction Document, as a result of

(whether directly or indirectly) the Rehabilitation or the

Rehabilitation Circumstances shall be deemed to be cured

and not to have occurred (including, for the avoidance of

doubt, any default, event of default or other event or

circumstance that has arisen (or that may otherwise arise

with the passing of time or the giving of notice or both) due

to a lack of payment or performance of or by the FGIC Parties

under any FGIC Contract or Transaction Document).

(b) Neither the Rehabilitation nor the Rehabilitation

Circumstances shall ... cause to inure to any Person any

greater right or Claim than that which would have existed in

the absence of the Rehabilitation and the Rehabilitation

Circumstances….”

Section 3.6(a): “Each reinsurer shall pay FGIC in

full in Cash for such reinsurer’s reinsured portion of

the entire amount of each Permitted Policy Claim

(irrespective of when such Policy Claim is submitted

to FGIC, whether before the date of the Order of

Rehabilitation, during the Rehabilitation Proceeding

or after the Effective Date), in each case without

giving effect to the Policy Restructuring and

regardless of the amount paid in Cash by

FGIC on account of such Policy Claim.”

“Consistent with the foregoing, the terms ‘Loss’ or

‘Losses’ (or similar terms) used in the Reinsurance

Agreements shall be deemed to refer to the entire

amount of Permitted Policy Claims as and when such

Permitted Policy Claims are Permitted by FGIC,

irrespective of (i) the amount and timing of any Cash

payments that FGIC may make with respect to any such

Permitted Policy Claims, (ii) the modification pursuant to

the Policy Restructuring of FGIC’s obligations to pay such

Permitted Policy Claims in Cash and (iii) any language in

the Reinsurance Agreements that contradicts this result.”

Farmers Mutual Fire Insurance Co. v. New Jersey Property-Liability Insurance Guaranty Association, 74 A.3d 860 (N.J. 2013)

“The Owens–Illinois methodology is a product of this Court's

equitable powers to advance public policy within the realm

of the common law. The purpose of the methodology is to

make insurance coverage available, to the maximum

extent possible, to redress such matters as toxic

contamination of property.

However, the Legislature has designated the Guaranty

Association as an insurer of last resort when substituting for

an insolvent carrier. [The statutes] specifically exempt the

Guaranty Association from the Owens–Illinois allocation

scheme until all solvent insurance companies' policy limits

are exhausted. That statute also embodies an important

public policy. The common law must bow when in conflict

with a legislative scheme.”

Linda KornfeldKASOWITZ BENSON TORRES & FRIEDMAN LLP2029 Century Park East, Suite 750Los Angeles, California 90067(424) 288-7902lkornfeld@kasowitz.com

Robert J. PfisterKLEE TUCHIN BOGDANOFF & STERN LLP1999 Avenue of the Stars, 39th FloorLos Angeles, California 90067(310) 407-4065rpfister@ktbslaw.com