Asbestos coverage cases continue to wend their way through the appellate courts. The Massachusetts Supreme Judicial Court recently weighed in on the question of trigger, nondisclosure, and the obligations of guaranty funds that back now-insolvent insurance companies. AW Chesterton Co. v. Massachusetts Insurers Insolvency Fund (Mass. Dec. 12, 2005).
The price of an insurance policy naturally includes a projection of future payouts under the policy plus a profit margin for the insurer. Rather than giving profit to an insurance company, sometimes corporate policyholders will elect to try to capture that profit by creating a “captive” insurance company. In this way, when the premium is paid to the captive insurance company, the “profit” component is retained on the corporation’s overall balance sheet. There are other reasons to establish a captive: a sense of greater control over the loss-adjustment process; greater certainty of performance; and opportunities for certain tax advantages (not so much from the deductibility of premium expenses as compared to the accrual of reserves but rather from obtaining investment income in a tax-advantaged manner on assets held by (or stuffed into) foreign-domiciled captives).
It is uncommon to find that a company only has a captive program: typically, there is commercial insurance market involvement through excess-layer insurance above the captive or through reinsurance of the captive. (Sometimes the reinsurance relationship is the converse where the insured has commercial insurance that is reinsured into the captive.) When a corporation taps reinsurance markets, what it wants most assuredly is the seamless flow of loss and coverage through the captive to the reinsurer once the retention is exceeded. In this regard, a recent High Court decision in London is important to note, because the decision creates a gap in this flow stemming from of all things a difference in “choice of law” as between the captive-issued policy and the reinsurance policy backing it.
Policyholders often assume they have a confidential relationship with their insurance brokers. Not so.
Communications with or by brokers can become unwelcome pieces of evidence in insurance-coverage cases. Brokers have not been schooled in the need to recognize that their communications constitute evidence, for good or ill. Broker communications often are unhelpful in coverage cases because (with due respect): (i) brokers are not lawyers and so sometimes make casual, overly broad or unduly fuzzy statements about what’s covered or not; (ii) brokers don’t keep up with changing insurance-coverage law in every jurisdiction and the cutting-edge of coverage disputes; and (iii) brokers suffer from bureaucratic capture (that is, bend toward the thinking of insurance carriers). Most courts hold that insurance brokers are agents of the insured, rather than being true neutrals in a transaction, so insurance-company lawyers will argue that infelicities in broker correspondence should be deemed agent-admissions against the insured.
One common area of discovery disputes in insurance-coverage cases concerns reserve information from carriers. The policyholder-side thinking goes that it is inconsistent with the insurer’s flat denial of coverage for it to accrue a reserve on the claim, especially a reserve at close to full value. There is some logical and emotional appeal to this “putting your money where your mouth is” discovery, that is, requiring that what the carrier says to the jury be consistent with where it is putting its money.
Courts continue to confront the question of the “number of occurrences” involved in mass-tort situations. The issue is important because policy limits are expressed in dollars per occurrence, with some policies having unlimited or uncapped retentions on a per-occurrence basis. For a policyholder with a large and uncapped per-occurrence retention, a ruling that each claim against the policyholder is a separate occurrence results in multiplying the amounts retained by the policyholder, oft times pushing insurance out of reach. On the other hand, for a policyholder with no or low retentions, a finding of multiple occurrences can multiply the available coverage.