(Article from Insurance Law Alert, January 2023)
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The North Carolina Supreme Court ruled that insurers’ coverage obligations were triggered when an underlying claimant was exposed to benzene, that defense and indemnity costs must be allocated among multiple insurers on a pro rata basis, and that vertical exhaustion applied for determining when umbrella or excess policies were implicated. Radiator Specialty Co. v. Arrowood Indem. Co., 2022 WL 17726535 (N.C. Dec. 16, 2022).
Radiator was named in hundreds of suits seeking damages for bodily injuries allegedly caused by exposure to benzene. The underlying claimants alleged that as a result of exposure to Radiator’s benzene-containing products over many years, they developed progressive diseases. Addressing the scope of liability coverage for these claims, the North Carolina Supreme Court issued the following rulings related to trigger, allocation and exhaustion.
Trigger: The court held that “a claimant’s period of exposure to benzene is the appropriate reference point in determining which policies provide coverage for a given benzene-related injury.” Ruling that exposure to benzene constitutes the injury-in-fact, the court explained that an “attempt to redefine ‘injury-in-fact’ as death, disease, or some other physical manifestation of the harm confuses the injury with its consequences. . . . [C]ancer is a manifestation of the injury that occurs upon benzene exposure that creates a compensable claim. It is not the injury itself.” Emphasizing the fact-intensive nature of its holding, the court noted that in other contexts (such as asbestos or environmental contamination), a multiple-trigger theory might be appropriate if, for example, new, distinct injury or damage occurs over multiple policy periods.
Allocation: The court ruled that insurers’ costs must be allocated on a pro rata time-on-the-risk basis. Rejecting Radiator’s “all sums” argument, the court explained that any references to “all sums” in the policies were limited by language referring to injuries that occurred “during the policy period.” The court noted that in other contexts, courts have endorsed an all sums approach when faced with similar “during the policy period” language, but distinguished those cases based on either a different factual record or the inclusion of other relevant policy provisions.
Exhaustion: The court ruled that policy language in a particular umbrella policy required vertical exhaustion (under which a policyholder may obtain coverage from an excess policy once the limits of the primary policies directly beneath it within the same policy period are exhausted) for purposes of the umbrella insurer’s duty to defend. The trial court had adopted a hybrid approach, applying horizontal exhaustion to the duty to defend and vertical exhaustion to the duty to indemnify, and the intermediate appellate court affirmed. Reversing, the North Carolina Supreme Court ruled that policy language justified vertical exhaustion for the duty to defend. In particular, the policy stated that the insurer had the right and duty to defend when: “a. The applicable limits of insurance of the ‘underlying insurance’ and other insurance have been used up in the payment of judgments or settlements; or b. No other valid and collectible insurance is available to the insured for damages covered by this policy.” The court concluded that under section b, the umbrella insurer’s duty to defend is triggered so long as no other valid insurance was available for damages covered by the policy, which was the case here because the policies covering the same periods as the umbrella policy did not cover the benzene actions.