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If bad facts make bad law, it follows that complicated facts result in complicated law. That appears to be the case with the December 2020 NC Court of Appeals decision in Radiator Specialty Company v. Arrowood Indemnity Company – a case involving some rather esoteric concepts influencing the application of insurance law in North Carolina.
In today’s highly litigious and uncertain business environment, the ability to depend on affordable and reliable insurance policies is an essential factor enabling job creators to minimize risks and control costs. While the final decision in this case is still to be rendered – the NC Supreme Court has taken up the opinion as a discretionary appeal – developments so far have raised several potentially troubling legal questions that North Carolina employers should have on our collective radar.
The facts in Radiator v. Arrowood involve products manufactured by Radiator Specialty found to contain benzene and/or asbestos, which elicited multiple lawsuits from individuals exposed to one or the other, or both. Radiator Specialty reported the claims to their insurers, who numbered more than a dozen due to the multiple-year span over which the exposures occurred. Collectively, these insurers had issued 107 contracts of insurance to the company. Radiator Specialty brought the lawsuit in question after several of these insurers declined to defend and indemnify.
Three broad issues have been considered in this case, characterized as trigger, allocation, and exhaustion. The “trigger” issue asks which insurance policies were applicable to any particular claim by an injured person. “Allocation” involves an examination of how liability should be apportioned among different insurers where an injury triggers the insurance obligations of more than one policy over a number of years. Finally, “exhaustion” is an issue applicable to umbrella policies and asks whether and when the limits of liability of a primary insurance policy have been exhausted, giving rise to obligation under the umbrella policy. Developments in Radiator v. Arrowood create the potential for added uncertainty within each of these three areas, which we’ll tackle issue-by-issue.
Let’s start by examining the “trigger” issue. It is settled law in North Carolina that insurance obligations to defend or indemnify arise upon the occurrence of an “injury-in-fact.” The seminal case here involved the failure of a pressure vessel. Unlike the injuries resulting from the catastrophic failure of a boiler, however, injuries resulting from exposure to hazardous substances like benzene and asbestos may not manifest themselves for decades. Thus, in Radiator v. Arrowood, the Court of Appeals decided that the “trigger” for the insurance obligation was the date of initial exposure to the substances, not the discovery of disease or a condition caused by that exposure. A consequence of that ruling is that earlier insurance policies might be implicated. For insurance policies dating to the 1970s, for example, coverage limits might have been lower, or there may have been no umbrella policy in effect.
On the issue of “allocation,” the Superior Court had earlier ruled that the insurers’ obligation under their policies for the many claims against Radiator Specialty would be allocated pro rata. In other words, by taking into account the amount of the claim, the years over which the claim accrued, and the number of insurers for which an obligation was triggered, each liable insurer would be assigned only a portion of the total liability. The result, according to Radiator Specialty, would be an effective reduction in policy limits for the insurance purchased. As an example, Radiator Specialty might conceivably have paid more in premiums to a specific insurer than the prorated share assigned to that insurer. In that instance, the company argued that it would have been better off not to have purchased the insurance at all.
The Court of Appeals ruled the “allocation” issue mooted in this case, but nonetheless opined that the Superior Court erred in determining allocation on a prorated basis. This ruling of mootness has been appealed to the NC Supreme Court to get a definitive statement on allocation in the event that Radiator Specialty prevails on the other issues.
Finally, on the issue of “exhaustion,” two different types have been considered in this case. The Superior Court ruled initially that the umbrella insurers were obligated to indemnify when the policy limits of the underlying primary insurance policy were exceeded in the same policy period (known as “vertical exhaustion”). However, that court also ruled that the obligation to provide a defense did not arise until the policy limits of all triggered primary insurers were exhausted in all other policy periods (known as “horizontal exhaustion”).
If this decision stands in the NC Supreme Court – the Court of Appeals upheld the Superior Court’s ruling on horizontal exhaustion – it would likely mean expanded liability and higher litigation costs for many North Carolina employers. As far too many companies and organizations in our state are painfully aware, we’ve long been in an environment where the costs of defending a lawsuit frequently exceed the value of a potential judgment. Indeed, nuisance lawsuits are deemed nuisances precisely because these potentially exorbitant costs encourage defendants to settle out of court – even in instances where a strong legal defense might be counted upon to prevail.
Any resolution of the issues raised in Radiator v. Arrowood is likely to significantly impact manufacturers and other job creators throughout North Carolina. Insurance contracts may be notorious for impenetrable jargon, exclusions and limitations, and their sheer size. But let’s hope that legal decisions which further complicate the ability of employers to navigate these contracts can be avoided.
Here at the NC Chamber Legal Institute, we believe our state’s businesses deserve a healthy insurance industry and a dependable system of insurance law they can count on for clarity and predictability. To that end, we will keep a close watch on the NC Supreme Court’s handling of this important case.
NC Chamber Legal Institute