A thoughtful opinion concerning the allocation of indemnity obligations between an insurance company and a policyholder was rendered in Peabody Essex Museum, Inc. v. United States Fire Ins. Co., 2010 U.S. Dist. LEXIS 106275 (D. Mass. Sept. 30, 2010).
At some point over the last several decades, an oil tank on the insured Museum's property ruptured, and oil seeped over to the neighbor's property. The oil was discovered in May 2003. An investigation showed that the oil originated from the Museum's property. The neighbor submitted a demand letter for $400,000.
U.S. Fire issued a policy to the Museum in effect from December 19, 1983 to December 19, 1985. Although the policy was effective for another year, it had an absolute pollution exclusion precluding coverage, as did all subsequent policies. U.S. Fire refused to defend the Museum. The Museum settled with the neighbor for $300,000. U.S. Fire refused to indemnify for the settlement. The Museum then sued U.S. Fire for declaratory relief.
A prior ruling in the case determined that U.S. Fire breached its duty to defend. As a result, U.S. Fire now carried the burden of proof on the indemnity issue to show the oil damage was not covered. In a June 2009 trial, a jury found U.S. Fire had not met its burden to show damage only occurred after December 19, 1985, or subsequent to its policy period. Nor did U.S. Fire meet its burden to show the date on which the release of oil first caused property damage.
The current opinion addressed the impact of a recent case decided by the Massachusetts Supreme Judicial Court (SJC), Boston Gas v. Century Indemn. Co., 454 Mass. 337 (2009). There, the SJC held that liability among several insurers with triggered policies should be prorated where the insured incurs covered costs as a result of ongoing environmental contamination occurring over more than one year and the insurer provided coverage for less than the full period of years in which the contamination occurred. Further, the court held that a "time-on-the-risk" method for allocation of pro rated liability was applicable when available evidence did not allow a more accurate allocation of losses.
The court noted that Boston Gas presented the typical situation in which the insured must prove coverage. Here, the breach of the duty to defend shifted the burden of proof, which meant U.S. Fire had to prove noncoverage. At trial, U.S. Fire was unable to meet its burden as to when the property damage began. Therefore, the current dispute was whether U.S. Fire was responsible for paying the full indemnity pursuant to Boston Gas.
Since U.S. Fire failed to meet its burden, the court construed the jury's findings to mean that the allocation period began on the first day of U.S. Fire's policy. If the allocation period extended beyond U.S. Fire's coverage into periods when the Museum was uninsured, indemnity would be divided between the insured and uninsured periods in accordance with Boston Gas.
The appropriate end date was more difficult to determine, however. The issue was not addressed in the jury trial and U.S. Fire never had an opportunity to present evidence on when the oil stopped causing damage. Therefore, a new trial was ordered to determine when the spilled oil stopped causing additional property damage which would mark the end of the allocation period. The Museum could present evidence that the spilled oil stopped spreading at some point prior to 2003, and U.S. Fire could present evidence that it continued to spread after the discovery date.
Finally, the court could not determine whether the "time-on-the-risk" method of allocation was applicable. The ideal method of allocation was a "fact-based" allocation, in which loss was allocated based on the precise injury that took place during each policy or uninsured period. Therefore, at the trial, the Museum could present evidence for a "fact-based" allocation.
