New Jersey Supreme Court Holds That Claimants in Continuous-Trigger Environmental Coverage Cases Must Exhaust Policy Limits of Solvent Carriers Before Seeking Payment From Fund for Insolvent Carriers

Almost twenty years after establishing a methodology for allocating remediation costs among insurance policies in so-called “long-tail” cases, the New Jersey Supreme Court was faced with a new question: what happens when one of the insurers is insolvent? Applying a 2004 statutory amendment and interpreting it as reversing the result in a 1997 Appellate Division case, the Court held, in Farmers Mutual Fire Insurance Company of Salem v. New Jersey Property-Liability Insurance Guaranty Association that in such a case the policy limits of all solvent carriers must be exhausted before a claimant can recover any benefits from a special statutory fund created to stand in the place of insolvent insurers. The decision has important ramifications for corporations with complex insurance programs and potential environmental issues regarding sites where contamination may have been present over many years.

The Court’s 1994 decision in Owens-Illinois, Inc. v. United Insurance Company adopted the “continuous trigger” theory of progressive environmental harm, and laid down a rule for allocating remediation costs among policies according to each carrier’s time on the risk and the degree of risk assumed as measured by the coverage provided. In Farmers Mutual, the Court considered the claim of a solvent insurance carrier that had paid 100% of the remediation costs at two residential properties contaminated by leaking underground storage tanks. Because both properties had also been insured by a carrier that had since become insolvent, the carrier then sought reimbursement from the New Jersey Property-Liability Insurance Guaranty Association (PLIGA). The statute that created PLIGA had been amended in 2004 to define “exhaustion.”

The Court held that the amended PLIGA statute, as a legislative enactment, superseded the common law-based Owens-Illinois allocation scheme, and clearly required the exhaustion of the policy limits of all solvent carriers before PLIGA could be called upon to pay. In so doing, the Court held that the 2004 PLIGA amendment had also reversed the result in a 1997 Appellate Division decision that considered a similar claim in the context of a different insurance statute and reached the opposite conclusion.