Resolving a conflict of laws, New Jersey’s Supreme Court has held that in environmental contamination cases, the deep pockets of all solvent insurance carriers must be exhausted before resorting to the state’s fund of last recourse.

At issue in the case, decided Sept. 24, was whether a 2004 legislative change, mandating policy exhaustion before seeking a payout from the Property-Liability Insurance Guaranty Association, superseded a 1997 ruling that required PLIGA to pay an insolvent insurer’s remediation share.

The court held that it did. “Since the Legislature is presumed to be aware of the decisional law of this State, it is reasonable to conclude that the 2004 amendment was intended to reverse the result,” Justice Barry Albin wrote for the court in Farmers Mutual Fire Insurance Co. of Salem v. N.J. Property-Liability Insurance Guaranty Association.

The case concerned two houses with leaking oil storage tanks, one in Asbury Park and one in Linden. The leaks developed while Newark Ins. Co. policies were in effect and continued after coverage was taken over by Farmers Mutual Fire Ins. Co. The contamination was discovered in 2003. Farmers Mutual paid the full cost of remediation at both houses: $25,958 on a $300,000 policy in Asbury Park and $112,165 on a $500,000 policy in Linden.

In 2007, Newark Ins. Co. became insolvent and PLIGA took over administration of its claims. In 2009, Farmers Mutual sought reimbursement from PLIGA for the two properties.

Superior Court Judge Ross Anzaldi denied PLIGA’s motion for summary judgment, finding the Spill Compensation and Control Act provided Farmers Mutual with a right to contribution from PLIGA.

Anzaldi ordered PLIGA to pay 81 percent of the Linden house remediation costs and 84 percent for those at the Asbury Park house.

PLIGA appealed, and the Appellate Division reversed, finding that since Farmers Mutual did not exhaust its policy limits, as required by a 2004 PLIGA act amendment, it could not seek contribution from PLIGA for the costs it expended cleaning up the properties.

The Appellate Division, in Sayre v. Insurance Co. of North America, 305 N.J. Super 209 (App. Div. 1997), ruled that then-extant case law required the N.J. Surplus Lines Insurance Guaranty Fund to pay an insolvent insurer’s remediation share without requiring exhaustion of claims through solvent insurers.

But in Farmers Mutual, the appeals court held that the 2004 PLIGA Act amendment superseded Sayre. The state Supreme Court agreed.

Farmers Mutual’s lawyer, Frederic Gallin of Methfessel & Werbel in Edison, says that as a result of the decision, “solvent insurance carriers are going to have to pay millions of dollars that would otherwise be paid by PLIGA. “It’s possible that an underwriter may think twice about taking over coverage when a carrier’s going insolvent,” he says.

PLIGA’s lawyer, Mark Tallmadege of Bressler, Amery & Ross in Florham Park, says the decision is consistent with the Legislature’s intent.

Louis Goldshore, a Princeton environmental lawyer, says the ruling reflects the court’s intention to construe the PLIGA Act narrowly, reflecting its role as a protector of insureds and not insurers.