(Article from Insurance Law Alert, June 2025)
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Holding
Following a remand order, an Oregon district court ruled that defense costs should be allocated on a time on the risk basis without regard to policy limits. National Surety Corp. v. TIG Insurance Co., 2025 U.S. Dist. LEXIS 86041 (D. Ore. May 6, 2025).
Background
McKay Investments, the owner of property on which a dry cleaner was located, faced enforcement action by the Oregon Department of Environmental Quality relating to environmental pollution. McKay tendered defense and indemnity of the claims to insurers which had issued policies during the relevant time frame. The policies at issue varied in policy limits and term length.
One insurer, National Surety, brought a declaratory judgment action against another insurer, TIG Insurance, seeking a determination as to the proper method of allocating defense and indemnity among the insurers. In 2022, the court ruled that the factors set forth in state statutory law (Or. Rev. Stat. § 465.480(5)) do not apply to the allocation of defense costs, policy limits are irrelevant in allocating defense costs in this action, and the most appropriate method for allocating defense costs is time on the risk (“TOR”). The Ninth Circuit reversed in part, finding that the district court erred in concluding that § 465.480(5) did not apply to the apportionment of defense costs. It then remanded the matter for consideration of the factors enumerated in that statute.
Section 465.480 creates a right to contribution for defense and indemnity costs and provides that allocation should be based on a number of factors, two of which are relevant here:
(a) The total period of time that each solvent insurer issued a general liability insurance policy to the insured applicable to the environmental claim;
(b) The policy limits, including any exclusions to coverage, of each of the general liability insurance policies that provide coverage or payment for the environmental claim for which the insured is liable or potentially liable.
Additionally, the statute gives courts “considerable discretion” in how to weigh the factors.
Decision
On remand, the district court ruled that TOR was the proper method for allocating defense costs among the insurers. The court rejected TIG Insurance’s contention that allocation should be based on the average of each insurer’s share of the aggregate TOR and aggregate policy limits. TIG Insurance argued that because the Ninth Circuit remanded the matter for consideration of the statutory factors, the policy limits “must be given some weight.”
The district court disagreed, noting that the Ninth Circuit did not direct that any specific weight be applied to any one factor and expressly acknowledged that “policy limits may have little, if any, relevance to the apportionment of defense costs,” which were not subject to policy limits.
Additionally, the court distinguished the Oregon Supreme Court’s ruling in Lamb-Weston, Inc. v. Oregon Auto. Ins. Co., 219 Or. 110 (1959) and its progeny, which applied an allocation method that included consideration of policy limits. The court emphasized that Lamb-Weston involved allocation of indemnity (settlement) costs, not defense costs, involved two insurers with concurrent, rather than consecutive, policies, and arose out of a single car incident rather than losses that extended over a continuous period of time.
Comments
The decision illustrates important differences between defense and indemnity in the context of allocation among insurers with consecutive policies covering an ongoing, continuous loss. While policy limits are likely to be relevant to each insurer’s portion of risk with respect to indemnity, they may be a less important factor where, as here, insurers’ defense obligations are not subject to policy limits. Courts in various other jurisdictions have also used a TOR method for apportioning defense costs among insurers for continuous losses that span multiple policy periods.