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Spaulding Composites Co., Inc. v. Aetna Casualty and Surety Company

176 N.J. 25, 819 A.2d 410 (2003)

ENVIRONMENTAL LIABILITY; INSURANCE—A non-cumulation clause in an insurance policy may violate New Jersey’s law on “continuous trigger” claims and will not be enforced because to do so would thwart New Jersey’s approach to prorating loss allocation for environmental claims.

A company purchased commercial general liability and excess liability insurance policies from an insurer for a nine year period. The policies contained a non-cumulation clause that stated that, for the purpose of determining the limit of the insurer’s liability, all personal injury and property damage arising out of a continuous or repeated exposure to the same general conditions were to be construed as arising out of one occurrence. The effect of the non-cumulation clause was that it limited the insurance company’s exposure for the entire nine year period to a single policy limit. The insured filed a complaint seeking a declaratory judgment ruling that the non-cumulation clause was inapplicable since it was inconsistent with the New Jersey Supreme Court’s “continuous trigger theory” outlined in Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994). The lower court agreed and granted summary judgment in favor of the insured. The Appellate Division reversed, finding that the non-cumulation clause in the insurance policies was clear and effective. It also found that the Supreme Court’s “continuous trigger theory” was an interpretative rationale in cases involving ambiguous insurance clauses.

On further appeal, the New Jersey Supreme Court reversed the Appellate Division and granted summary judgment in favor of the insured. It noted that the insurance clauses in Owens-Illinois and Carter-Wallace were not ambiguous. It found that the continuous trigger theory applied in this case and therefore the non-cumulation clauses in the insurance policies were invalid as a matter of law. The Court noted that in the earlier cases it recognized that, when dealing with long-tail environmental insurance policies, it was impossible to define the particular point that constitutes the “occurrence.” That is why the Court adopted the “continuous trigger theory” which sets forth that courts may treat progressive injury or damage as an occurrence within each of the years of a commercial general liability policy. The effect of the continuous trigger theory is that an insurance company is required to respond under each of the policies. In Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), the New Jersey Supreme Court adopted a “proration by years and limits” method of allocation. Losses are allocated among insurance carriers on the basis of the extent of risk assumed, pro rating the policy limits, and then multiplying by the years of coverage. For example, if the primary coverage for any given year was $100,000, first-level excess was $500,000, and second-level excess was $500,000 and the pro rata loss allocated to that year of the policy was $750,000, the insurers would be responsible to pay as follows: the primary insurer would be liable for its maximum limit of $100,000 for that year; the first-level excess insurer would be liable for the next $500,000; and the second-level excess insurer would be liable for the remaining $150,000 of damage allocated to that year.

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