Carter‐Wallace explains application to excess liability policies of Owens‐Illinois methodology for allocating indivisible losses that trigger multiple coverage periods

Abstract

Four years after its landmark Owens‐Illinois decision on allocation of insurance coverage for indivisible losses that trigger multiple‐coverage periods, the New Jersey Supreme Court has reaffirmed and extended the principles of the 1994 Owens‐Illinois decision. The Court's new decision, in Carter‐Wallace v. Commercial Union Insurance Co., explains how Owens‐Illinois allocation principle applies when coverage purchased in a given period includes umbrella or other excess policies, as well as primary policies and self‐insured retentions. Under Owens‐Illinois, the total loss is divided into separate dollar shares for each triggered period, using two factors—relative time on the risk and relative total coverage purchased (or foregone)— to prorate these shares. Under Carter‐Wallace, the dollar share of the loss prorated to a given coverage period is charged against the policies covering that period, following the usual rules of coverage attachment and exhaustion based on liability limits and other applicable policy terms, just as if the prorated share of the total multiperiod coverage loss were a separate loss that took place solely within that coverage period. More particularly, a given period's share of the total loss is charged first against the remaining limits of that period's primary policy or self‐insured retention (SIR) until its applicable limits of liability are exhausted. Any portion of the period's pro rata share left unpaid is then charged against that period's next lowest (e.g., umbrella excess) policy, until that period's full share is satisfied or the next policy's applicable liability limits are exhausted. This process continues for each successive layer of coverage for the period in question until its full share is paid or all available coverage is exhausted. The Carter‐Wallace court rejected two other theories of allocation touted by Carter‐Wallace (pro rata by time on the risk and limits exposed to the total loss as viewed on a joint‐and‐several basis) and Commercial Union (pro rata by individual policy limits, applied layer by entire layer throughout the triggered coverage period.