In complex insurance claims, trigger and allocation theories affect the value of the claim. This article teaches what every corporate policyholder should know to maximize the value of their claim.
CGL policies require that some bodily injury or property damage alleged in the underlying claim occur during the policy period to trigger coverage under the policy. There are four trigger theories: (1) exposure – triggers coverage in effect during the period of exposure, beginning from a claimant’s first exposure to a harmful substance or first release of a contaminant into the environment; (2) injury-in-fact – triggers coverage during the period that injury or damage actually occurs, which in the case of latent injury claims may occur over several decades; (3) manifestation – triggers coverage only when damage is actually manifested or discovered; and (4) continuous trigger – triggers coverage under all policies in effect from first exposure through manifestation, including the injury-in-fact period.
There are two major allocations theories: vertical allocation and horizontal (pro-rata) allocation. Under a vertical allocation, the claim is allocated to any triggered year (from the primary layer to all applicable excess policies). Under a horizontal allocation, the claim is allocated to all or multiple triggered years. Courts have developed various formulas to use for the horizontal allocation method.
Numerous jurisdictions, including Ohio, Indiana, Pennsylvania, etc., follow the vertical allocation methodology. The courts rely on the “all sums” language in the policy that states that the policy responds to all sums the insured incurs by reason of bodily injury or property damage. That is, the policyholder and “pick and choose” which policy or policies will contribute to paying the claim.
After the policyholder exhausts the chosen primary policy, it can proceed against either an overlying policy or a primary policy in another triggered year. Other jurisdictions (New Jersey, New York, Colorado, etc.) support a horizontal allocation of the claim. With a horizontal allocation, courts apply several schemes to apportion the claim to the triggered policies. Some apportion the policyholder’s liability equally to each insurance company on the risk during the triggered policy periods. Others apportion the policyholder’s liability based on the time each insurance company is on the risk, while others apportion the liability based on the policy limits.
There are a number of factors that affect the allocation theory applied, whether it is a vertical or horizontal allocation. Those factors include:
- Deductibles, SIRs, retrospective rated policies
- Aggregate limits or no aggregate limits
- Self-insured periods and coverage gaps
- Defense costs separate from indemnity costs
- Choice of law uncertainties
- Exhaustion by other claims
- Attachment points
- Occurrence limits
- Policy exclusions
- Lost policies
When faced with a toxic tort or environmental claim, it is important to evaluate the trigger and allocation theories in the jurisdictions which may apply to your claim. These two theories can have a significant impact on the value of the claim and the possible recovery for the policyholder.