Claims Update: The Opioids Epidemic and “All Sums” Claims Presentations

The afternoon education program of the Spring Membership Meeting included a claims update on topics touched upon before but, nonetheless, remain significant issues impacting the insurance industry and beyond. A video replay of this two-part presentation is available in the AIRROC On Demand library.

Latest Developments in the Opioids Crisis 

Adam Berardi and Michael Kassak, Partners in White and Williams Insurance Coverage Group, presented “Covering an American Epidemic” – a survey of the latest developments in the opioids crisis and their impact on the insurance industry.  Coverage litigation has erupted as the cities and states struggling with the economic impact of abuse and addiction seek recovery from private companies alleged to have played a role in fueling the crisis. The CDC estimates the economic burden of opioids misuse in U.S. is now over $2 trillion per year.

While the claims being brought by public entities may be new, the key coverage issues are not: under CGL policies, the key disputes have been whether the claims constitute a covered accident/occurrence/bodily injury, as well as the application of product exclusions and the number of occurrences presented.  Case law is still developing, and the limited number of coverage decisions to date have yet to coalesce into a majority rule on the “no occurrence” and “no bodily injury” defenses. The Rite Aid decision from the Delaware Supreme Court, which found no coverage for economic losses, is making Delaware a key battleground jurisdiction going forward.

“All Sums” Claims Submissions to an Insolvent Insurer 

Andrew Costigan and Patrick Frye, Partners with Freeborn & Peters, gave a detailed presentation on the application of an “all sums” allocation against the liquidator of an insolvent insurer and the resulting impact on policyholders, the insolvent estate and reinsurers. After explaining the basic differences between an “all sums” and “pro rata” allocation, the panel outlined how the nature of these two allocation methodologies affects an insolvent insurer. Under a “pro rata” approach, the insured bears the risk of loss in periods in which no insurance was in force, whereas under the “all sums” approach, the insured bears no risk until coverage is wholly exhausted. Secondly, under a “pro rata” approach, the coverage obligations of triggered carriers are determined at the outset, whereas “all sums” decides one carrier’s obligations, and other carriers’ obligations are decided in subsequent contribution actions 

Policyholders recover less from an “all sums” allocation against a liquidator than against a solvent insurer and bear the burden of having to pursue other insurers for the difference. The insolvent estate incurs greater indemnity and transactional costs settling claims on an “all sums” instead of “pro rata” basis, and reinsurers might incur greater indemnity and transactional costs as a result of an “all sums” allocation.  

The panel discussed three cases that all involve an excess insurer in liquidation or receivership; an insured with long-tail asbestos liability and a decision between “all sums” and “pro rata” allocation that had significant consequences. The three cases discussed were: Viacom, Inc. v. Transit Cas. Co., 138 S.W.3d 723 (Mo. 2004); In re Liquidation of Integrity Ins. Co./Sepco Corp., 49 A.3d 428 

(N.J. Super. Ct. App. Div. 2012) and In re Liquidation of Midland Insurance Company, 98 N.Y.S.3d 195 (N.Y. App. Div. 2019). The choice of law question and the analysis each court undertook is relevant and instructional, because it is key to the determination of whether an “all-sums” or “pro rata” allocation methodology will apply. Both the Transit and Midland courts applied the law of the policyholder’s residence and allowed claims on an “all sums” basis. The Integrity court, however, applied forum law, in light of New Jersey’s compelling interest in applying a “pro rata” allocation methodology in order to treat the estate’s creditors equitably and avoid waste of resources.  

After nearly four decades, the states have sorted themselves out as to which methodology to adopt with “pro rata” winning out as the favorite by roughly a two to one margin. New York is a special case; it normally follows “pro rata” but if there is non-cumulation language in the policy, an “all sums” recovery is permitted for the policyholders.   

The potential problems with an “all sums” recovery against an insolvent estate are multiplied if reinsurance is involved. The source of the problem is the reinsurance insolvency clause, which provides that the reinsurance is recoverable on the basis of the insolvent insurer’s liability without diminution because of the insolvency. Thus, the amount “allowed” in the insolvency, and recoverable from the reinsurers, may be full policy limits, even if much less is actually paid out to the policyholder. This, in turn, may cause reinsurers to be more likely to exercise their rights to defend claims against the insolvent estate for which the reinsurers may be liable. Thus, the allowing of “all sums” recoveries against an insolvent insurer may increase both the indemnity and defense costs of the insolvent’s reinsurers. 

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