In Long-Tail, Continuous-Trigger Cases, Solvent Carriers’ Policies Must Be Exhausted Before Guaranty Association Can Be Tapped, NJ Supreme Court Rules

The New Jersey Supreme Court has ruled that, in long-tail, continuous-trigger cases where an insolvent carrier is on the risk along with solvent carriers, an insured first must exhaust the policy limits of the solvent carriers before seeking statutory benefits from the New Jersey Property-Liability Insurance Guaranty Association.  

The Case 

In two consolidated cases involving remediation of contaminated properties, the New Jersey Property-Liability Insurance Guaranty Association took over the administration of the claims of an insolvent insurance carrier on the risk pursuant to the New Jersey Property-Liability Insurance Guaranty Association Act. The liable solvent insurance company paid the property damage claims in both cases and then sought reimbursement from the Guaranty Association. The Guaranty Association argued that it was not responsible for making any contribution until the policies of the solvent carrier were fully exhausted. 

The trial court ruled against the Guaranty Association but an intermediate appellate court reversed, finding that New Jersey law required exhaustion of the solvent carrier’s policies before the Guaranty Association’s reimbursement commitments were triggered. The dispute reached the New Jersey Supreme Court. 

The New Jersey Supreme Court’s Decision 

The court affirmed. 

The court explained that under the allocation scheme it adopted in 1994 in Owens-Illinois, Inc. v. United Insurance Co., the allocation of remediation costs among different insurers’ policies is based on an insurance carrier’s years on the risk and the degree of risk assumed as measured by the coverage provided. 

It then found that the legislature had designated the Guaranty Association as an insurer of last resort when substituting for an insolvent carrier. Thus, it reasoned, the Guaranty Association is statutorily exempt from the Owens-Illinois allocation scheme until all solvent insurance companies’ policy limits are exhausted. 

The court declared that the law that created the Guaranty Association was intended “to minimize financial loss to claimants or policyholders because of the insolvency of a property or casualty insurer.” In affirming the appellate court’s decision, it concluded: 

In long-tail, continuous-trigger cases where an insolvent carrier is on the risk along with solvent carriers, an insured must first exhaust the policy limits of the solvent carriers before seeking statutory benefits from the Guaranty Association. 

The case is Farmers Mut. Fire Ins. Co. of Salem v. New Jersey Property-Liability Ins. Guaranty Ass’n, No. A-42 (N.J. Sept. 24, 2013).