In some cases, the injury from being exposed to a harm does not occur until years later. These losses do not occur all at once; instead, they happen over time. The dilemma is that the insurance policy covering these losses may have expired, and the premiums were already paid by the time the damage is realized. At that point, there may be a new insurance carrier that had not been paid premiums during the time the harm occurred. Long-tail insurance claims present complex coverage issues both for insurance companies that may be responsible for paying claims concerning a high amount of damages and the insureds who may be legally liable for causing those damages.
The most common example of a long-tail insurance claim occurs when an employee or someone else was exposed to a toxic substance, such as asbestos. The person may not develop symptoms or an illness related to their exposure until years later. Another example of a long-tail insurance claim is when a company is liable for environmental damage and cleanup costs.
Other Insurance Carriers May Be Liable for A Claim Due to When the Harm Occurred
Companies may switch insurance carriers over time, with new policies taking effect each time. The problem then becomes determining who is responsible to pay the claim when someone files a lawsuit or when an employee files a workers’ compensation claim. The current insurance carrier is not expected to pay the entire claim, even though they are the ones who are presently assuming the risk.
Perhaps the most challenging aspect of long-tail insurance claims is allocating the payments among the insurance companies. A business entity may have had multiple insurance carriers over a long period of time. This question is answered by state law and the specific test a jurisdiction applies to these situations.
Approaches to Allocating Payment of a Long-Tail Insurance Claim
There are two possible tests for a long-tail insurance claim:
- The pro rata approach requires an insurance company to cover the part of the damages that represents the amount of time it insured the business entity. For example, if there was a three-year policy over a 30-year period of potential harm, the insurance carrier would be responsible for paying 10% of the claim.
- The all sums approach holds that each insurance carrier that provided coverage during the time period is jointly and severally liable for all of the damages. The policyholder can collect the full amount of damage from any of the carriers, and it is up to the insurance companies to figure it out amongst themselves who pays what.
All Sums Is More Advantageous for a Policyholder
For a policyholder, the all sums approach is the preferable one. This method produces the least amount of uncertainty and assures the policyholder that they will be paid in full without needing to track down different policies and coverage. The policyholder can select an insurance company that provided them coverage at any point during the time period in which the harm occurred and collect up to the policy maximum for that policy. The policyholder has the freedom to select the one policy during the applicable period that has the highest coverage and file a claim against that policy. Then, the insurance companies will need to allocate the loss amongst themselves.
Texas Relies on the All Sums Approach
In 2013, the Texas Supreme Court conclusively determined that the all sums approach, and not the pro rata approach, will be used in the state. In Lennar Corp. v. Markel Am. Ins. Co., the Court expressly declined to adopt the pro rata approach, even though it has been used in other states. In this particular case, the Court left it to the individual insurance companies to allocate the loss amongst each other based on their subrogation rights. Also important is the fact that the Texas Supreme Court stated that a policyholder cannot stack policies, meaning they cannot file multiple claims if one policy does not provide enough coverage.
How Policyholders Should Handle Long-Tail Claims
From a policyholder’s perspective, they should proactively locate every possible insurance carrier they have had over the relevant period of time that may be potentially responsible for paying claims. The insured should also review the relevant language of each policy to make sure future damage would be covered. They should provide notice of the potential claim to each of the insurance companies under the terms of their policies before selecting the policy that is the most advantageous for them to file a claim against.
However, there may be a dispute among carriers as to which insurer will foot the bill for the insurance claim defense costs. Some insurance carriers have tried to allocate some of the claim defense cost to the policyholder. However, courts have found that each insurance carrier has a full duty to defend against the claim. As far as the policyholder goes, they have the right to expect a full defense from each insurance company.
How Insurance Companies Should Handle Long-Tail Claims
From an insurance company’s perspective, it also needs to locate all of the other potential insurance companies that can help pay a long-tail claim. It should aggressively pursue all remedies under its subrogation rights so it is not the only one who is financially responsible for the damages. At the same time, an insurance company should also pay close attention to the amount that it is being asked to pay when it is not the one who received the claim. Another insurance company may try to allocate a larger portion of the damages. If an insurance company is not careful, it may need to dip into its reserves to pay for a liability that it did not anticipate. Finally, insurance companies also need to review exclusions to consider whether they should carve out certain types of coverage, keeping them from being exposed to liability in the future.