New Jersey Supreme Court Rewrites Carter-Wallace Allocation Rules in Cases Involving State Guaranty Association

In a critical insurance decision, the New Jersey Supreme Court ruled on Sept. 24 that liability insurers covering a long-tail loss cannot seek contribution from the New Jersey Property-Liability Insurance Guaranty Association for the Carter-Wallace shares of insolvent insurers. More importantly, while perhaps not a true holding, the court rebuffed an argument that the insured would have to bear the burden of the insolvent insurer’s Carter-Wallace allocation to the extent the Guaranty Association was not required to pay.

In Farmers Mut. Fire Ins. Co. v. New Jersey Property-Liability Ins. Guar. Assoc., Farmers Mutual sued the Guaranty Association to recover a portion of environmental remediation costs that were allocable to Newark Insurance Company, which was declared insolvent in 2007.  The Guaranty Association argued that the New Jersey Property-Liability Insurance Guaranty Association Act (PLIGA Act) required exhaustion of all available solvent coverage before it had any payment obligation. The PLIGA Act’s exhaustion provision “requires the exhaustion of all insurance benefits from solvent insurers on the risk before [the Guaranty Association], standing in the shoes of an insolvent insurer, must pay statutory benefits.” (N.J.S.A. 17:30A-5).  The PLIGA Act was amended in 2004 to further define exhaustion: “[I]n any case in which continuous indivisible injury or property damage occurs over a period of years as a result of exposure to injurious conditions, exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years has been applied[.]”  (N.J.S.A. 17:30A-5)

The New Jersey Supreme Court affirmed the Appellate Division’s ruling in favor of the Guaranty Association, holding that “when one of several insurance carriers on the risk is insolvent in a continuous-trigger case, then the limits of the policies issued by solvent insurers ‘in all other years’ must first be exhausted before the Guaranty Association is obligated to pay statutory benefits.”  Because the Farmers policies were not fully exhausted, it could not tap the Guaranty Association for Newark’s Carter-Wallace share of remediation costs.

The court also rejected an argument made by another insurer, appearing amicus curiae, that the insured should bear responsibility for insolvent insurers and then seek reimbursement from the Guaranty Association.  The court, noting that, in its view, the insurers’ interpretation “would turn the PLIGA Act on its head,” stated that the aim of the PLIGA Act “would be defeated by making the insured bear the loss for the carrier’s insolvency before the insured received any statutory benefits from the Guaranty Association.”

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