Insureds Must Exhaust Coverage From Solvent Insurers Before Seeking Benefits From PLIGA

On September 24, 2013, the New Jersey Supreme Court ruled that policyholders must look to its solvent insurers before seeking benefits from the New Jersey Property-Liability Insurance Guaranty Association (“Guaranty Association”).  Farmers Mut. Fire Ins. Co. of Salem v. N.J. Property-Liability Ins. Guar. Ass’n involved two environmental cleanup cases that were consolidated.  In both cases, Farmers Mutual Fire Insurance Company of Salem (“Farmers Mutual”) and an insolvent insurer had issued general liability insurance policies for the property.  Farmers Mutual paid all the remediation costs and then sought reimbursement from the Guaranty Association for the Guaranty Association’s allocable share of such costs.  The Guaranty Association was created by the New Jersey Property-Liability Insurance Guaranty Act (“PLIGA Act”) to provide coverage when an insurer becomes insolvent.

The Guaranty Association moved for summary judgment arguing that pursuant to the PLIGA Act, it is not responsible to contribute to the cleanup until the policy limits of solvent insurers are exhausted.  The lower court rejected this argument.  On appeal, the Appellate Division reversed, agreeing with the Guaranty Association.  The New Jersey Supreme Court granted certification to hear the case.

Farmers Mutual argued, among other things, that the Appellate Division’s decision disrupts the allocation scheme established by the Court in Owens-Illinois and subsequent cases.  Those cases provided a mechanism for apportioning liability for environmental cleanups among multiple insurers.  Typically, all insurers that provided coverage from when the contamination occurred are required to provide coverage in an allocated amount based upon the amount of risk each insurer assumed. 

The Court reviewed Owens-Illinois and its progeny, as well as the statutory history and language of the PLIGA Act and concluded that insureds must first exhaust the limits of the policies issued by the solvent insurers before seeking benefits from the Guaranty Association.  The Court also found that the PLIGA Act takes precedent over the common law principles stated in Owens-Illinois in that the Guaranty Association was to be the insurer of last resort.

Zurich American Insurance Company (“Zurich”) in its amicus curiae brief contended that if the PLIGA Act prevented insureds from seeking benefits from the Guaranty Association before solvent insurers’ policy limits are exhausted, then the insured should be responsible for the time period when the insolvent insurers provided coverage.  The Court stated that such an interpretation conflicts with the purpose of the PLIGA Act, which was to minimize financial loss to policyholders because of insolvent insurers.  The Court held that Zurich’s position would defeat that purpose if the insured was required to pay the share of an insolvent insurer before receiving any benefits from the Guaranty Association.

While it remains to be seen how this case impacts coverage for insureds, this case will change how damages are allocated among policies where there is an insolvent insurer.  This case suggests that coverage provided by an insolvent insurer should not be included in the allocation process, which should benefit insureds seeking coverage for damages.