Phantom Insurance Coverage in the New Underinsurance Gambit

Abstract

In Owens‐Illinois, Inc. v. United Ins. Co.,1 the New Jersey Supreme Court sought to instill elements of fairness and efficiency in allocation proceedings between policyholders and insurers involving long‐tail tort claims. Since issuance of this opinion in 1994, coverage cases in general, and allocation disputes in particular, have become unduly complex, with efficiency having given way to greater litigiousness. Ironically, Owens‐Illinois spawned a number of novel defenses pursued by the insurance industry. In this process, the focus of these environmental insurance coverage battles continues to evolve from disputes concerning the classic coverage defenses (pollution exclusion clause, owned property exclusion, etc.) to the allocation battleground. These new complexities associated with the allocation process may be attributed to attempts by the insurance industry to exceed the bounds of the Owens‐Illinois mandates and policies in disingenuous maneuvers to defeat valid coverage claims. One such theory, which seeks to shift liability back to the policyholder, is the “underinsurance”; defense. This article frames the Owens‐Illinois allocation issue, presents the simplicities and difficulties associated with the Owens‐Illinois allocation modeling methodology, and then focuses on the methods by which the insurance industry improperly seeks to extend the Owens‐Illinois allocation analysis. Finally, to the extent that new defenses such as underinsurance are asserted, suggestions are offered by which practitioners may respond to these tactics.