Allocation: the distinction between liability and damages

Fecha de publicación

13/08/2020

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One of the key issues in environmental coverage disputes between insurers and policyholders is the question of allocation.  The two predominate applications concerning this issue involve determining whether the insurers will be allocated responsibility for payment of a claim on a pro rata basis or on an “all sums” basis.  While the majority of jurisdictions have followed the pro rata allocation rule in long-tail claims, some have adopted the “all sums” approach.  Recently, though, courts have considered a different allocation pathway in deciding insurance coverage disputes- allocation of underlying liability.  Put another way, courts have now considered and approved insurers’ efforts to establish at trial the divisible amount of disposal of pollutants which occurred over time.  In Northrop Grumman Guidance and Electronics Company, Inc. v. Employers Insurance Company of Wausau, (“Northrop Grumman”) the Missouri Court of Appeals recently affirmed a jury verdict in favor of the defendant insurers based on expert testimony establishing that the contamination at the sites at issue was divisible.    WD82615 *1, *16-19, 21 (Mo. Ct. App. Aug. 4, 2020).  In reaching its decision, the court made clear that “[a]llocation does not create legal liability (i.e., impose coverage) for divisible property damage where the fact-finder determined none existed.”  Id. at *21.

In Northrop Grumman, Northrop Grumman brought an environmental coverage action that arises out of its manufacturing operations at a facility in Springfield, Missouri.  Beginning in the mid-1960s, Northrop manufactured printed circuit boards at its Springfield facility.  It used the solvent trichloroethylene (“TCE”) in manufacturing its circuit boards and copper residue was generated during the manufacturing process.  Northrop managed its sludge containing TCE and waste water containing dissolved TCE and copper in various ponds, pits and lagoons at the site.  In total, there were five (5) separate areas at issue.  Id. at *3.  In 1993, the Missouri Department of Natural Resources (“MDNR”) asserted an administrative claim against Northrop, alleging that its manufacturing operations at the facility resulted in the release of hazardous substances that caused environmental contamination.  By December 2002, the hazardous substances had migrated off-site and was detected in underground springs and at the Springfield Airport.  Id. at *4.  In 2010, the State of Missouri sued Northrop  seeking responsive actions by Northrop under CERCLA.  Thereafter, Northrop and the State entered into a consent decree addressing remedial actions necessary both on and off-site.  While Northrop did not admit liability in the consent decree, it did agree to perform specified work to remediate the contamination.  Id. at *4-5.

Northrop sued its insurers in 2013.  The insurers issued coverage to Northrop beginning in 1964 and continuing until April 1, 1971 when Northrop made the decision to self insure its risks.  Id. at *3.  In the trial court proceedings, the court initially ruled that a pro rata time on the risk method of allocation of damages would be applied to the insurers.  However, after trial, the court reversed its ruling and found that the “all sums” method would be applicable.  In addition to the allocation ruling, the parties presented two experts at trial on the issue of whether the underlying pollution was divisible or indivisible in nature.  Northrop’s expert, Dr. Delaney opined that releases of TCE and copper into groundwater had commingled such that its source could not be attributable to any particular area of the five areas when sludge was disposed of on the site.  Conversely, the insurers offered the testimony of Robert Karls who testified that there was a scientifically recognized methodology to determine to a reasonable degree of scientific certainty the relative percentage of groundwater contamination attributable to each fo the five areas on the site.  Based on this methodology, called “Kriging,” Mr. Karls testified that the majority of the groundwater pollution at the site was attributable to the Original Acid Pits.  The insurers also proved at trial that the Original Acid Pits did not go into operation until March 1971, approximately ten days before Northrop became self-insured.  Id. at *6-7.  The jury returned verdicts in favor of two of the insurers, who insured Northrop prior to the March 1971 date and found Wausau liable for the damages arising from a location known as the Sanitary Lagoon only.

On appeal, Northrop argued that the trial court erred in admitting the testimony of Robert Karls arguing that his opinions on allocation of groundwater contamination were irrelevant under the “all sums” method.  Id. at *17-18.  The court rejected this argument reasoning that Northrop’s argument “rests on a mischaracterization of the testimony.”  Id. at *18.  The court noted that Mr. Karls’ opinions was not “allocation” evidence, but rather permissible “divisibility” evidence presented to show no covered property damage occurred during the insurers’ policy periods.  Id., citing State of California v. Allstate Insurance Co., 201 P.3d 1147, 1166-67 (Cal. 2009).  Based on this, the court held that Mr. Karls’ testimony regarding divisibility of groundwater contamination was relevant to the issue of whether the insurers were liable in the first instance and not the issue of allocation of damages.  Id. at *19.  The court noted that allocation of damages (the “all sums” method) only comes into play once liability is established.

This case is important because it provides guidance on the admissibility of expert opinions concerning divisibility of contamination and its sources.  It has long been assumed by policyholders in arguing that the “all sums” method applies any evidence of allocation is irrelevant.  This case draws the critical distinction between allocation of damages and allocation of as divisibility of injury used to determine an insurer’s liability under the policy.  Insurers facing long-tail exposures should investigate the underlying claims to determine whether the cause of injury is divisible.  If so, it may present a viable defense to coverage where it can be demonstrated that injury did not occur until after the insurer’s policy expired.