Farmers Mutual Fire Insurance Company of Salem v. New Jersey Property-Liability Insurance Guaranty Association as Administrator of Claims Against Newark Insurance Company, A-42 September Term 2011; Supreme Court; opinion by Albin, J.; decided September 24, 2013. On certification to the Appellate Division. [Sat below: Judges Axelrad, R.B. Coleman and J.N. Harris in the Appellate Division; Judge + in the Law Division.] DDS No. 23-1-1423 [37 pp.]

In this appeal, the court considers the appropriate allocation of costs for environmental contamination property cleanup when one of two insurers on the risk has become insolvent.

For several years, Newark Insurance Company (Newark) issued homeowner’s insurance policies for two separate residential properties. Immediately following the cessation of Newark’s policies, both properties were insured by Farmers Mutual Fire Insurance Company of Salem (Farmers Mutual). Within the first year of coverage by Farmers Mutual, both properties were found to have soil and ground-water contamination caused by fuel oil leaks from underground storage tanks. Although it is undisputed that the environmental contamination on the properties began during periods insured by Newark, Farmers Mutual paid all remediation costs.

Newark was declared insolvent, and the New Jersey Property-Liability Insurance Guaranty Association (Guaranty Association) took over administration of Newark’s claims pursuant to the New Jersey Property-Liability Insurance Guaranty Association Act (PLIGA Act). Farmers Mutual filed civil complaints seeking reimbursement from the Guaranty Association for the remediation costs expended on the properties, claiming that, in accordance with the allocation scheme adopted in Owens-Illinois Inc. v. United Insurance Co., the Guaranty Association was responsible for Newark’s share of liability.

The Guaranty Association moved for summary judgment, arguing that the PLIGA Act required the insureds to exhaust their claims through solvent insurance companies prior to applying for statutory benefits. The trial court rejected that argument, finding that the Guaranty Association is subject to the Owens-Illinois allocation methodology. The Appellate Division reversed, finding that N.J.S.A. 17:30A-5 carves out an exception to Owens-Illinois and requires exhaustion of the solvent carrier’s policies before the Guaranty Association must pay statutory benefits. Since Farmers Mutual did not exhaust its policy limits, it could not seek contribution from the Guaranty Association for the remediation costs it expended cleaning up the properties.

The court granted Farmers Mutual’s petition for certification.

Held: In long-tail, continuous-trigger cases where an insolvent carrier is on the risk along with solvent carriers, the PLIGA Act’s exhaustion provision mandates that an insured first exhaust the policy limits of the solvent carriers prior to seeking statutory benefits from the Guaranty Association.

This case hinges on the effect of the 2004 PLIGA Act amendment to N.J.S.A. 17:30A-5 on New Jersey’s common-law jurisprudence, specifically the method established in Owens-Illinois for allocating liability among insurers in the context of ongoing environmental contamination occurring during successive policy periods. This methodology, known as the continuous-trigger doctrine, allows courts to treat progressive injury or damage occurring throughout the contamination period as an “occurrence” triggering every insurance policy on the risk.

In order to properly allocate remediation costs, the Owens-Illinois court adopted a proration scheme, which allocates losses among insurers on the basis of years of coverage and degree of risk assumed. The principles established in Owens-Illinois have been consistently reaffirmed and adapted to various circumstances. In Sayre v. Insurance Co. of North America, the Appellate Division determined that Owens-Illinois required the Guaranty Fund to pay the insolvent insurer’s remediation share without first requiring exhaustion of claims through the solvent insurers. Here, the Appellate Division found that the 2004 amendment to the PLIGA Act superseded the Sayre decision, requiring exhaustion of solvent insurers’ policy limits prior to seeking statutory benefits.

The PLIGA Act was passed in order to mitigate the financial distress to insureds and claimants resulting from an insurance company’s insolvency. It created the Guaranty Association to stand in the place of an insolvent insurer. In order to conserve resources and achieve the PLIGA Act’s core purposes, the Guaranty Association’s responsibility to pay insolvent insurers’ claims is limited. N.J.S.A. 17:30A-12b requires a claimant to exhaust the policy of a solvent insurer prior to seeking statutory benefits.

At the time of the Sayre decision, neither the PLIGA Act nor the Guaranty Fund Act defined exhaustion. In 2004, the Legislature amended both acts, defining “exhaust” in the context of continuous-trigger cases involving progressive injury and property damage. The PLIGA Act amendment to N.J.S.A. 17:30A-5 states that exhaustion occurs only after “a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years has been applied.” Under the most straightforward, plain reading of that provision, “other coverages” refers to policies issued by solvent insurers, thereby requiring exhaustion of the policy limits issued by solvent insurers before obliging the Guaranty Association to pay statutory benefits. It is reasonable to conclude that the 2004 amendment was intended to reverse Sayre.

The 2004 amendment to the PLIGA Act takes precedence over the common-law proration scheme enunciated in Owens-Illinois. The definition of “exhaust” in N.J.S.A. 17:30A-5 as applied to N.J.S.A. 17:30A-12b is clearly intended to make the Guaranty Association the insurer of last resort in continuous-trigger cases involving progressive injury and property damage arising from environmental contamination. Insureds must exhaust the policy limits of solvent insurers prior to applying to the Guaranty Association for statutory benefits.

The judgment of the Appellate Division is affirmed.

Chief Justice Rabner; Justices LaVecchia, Hoens and Patterson; and Judges Rodríguez and Cuff, both temporarily assigned, join in Justice Albin‘s opinion.

For appellant — Fredric P. Gallin (Methfessel & Werbel). For respondent — Mark M. Tallmadge (Bressler, Amery & Ross; Tallmadge and Richard J. Teer on the briefs). For respondent State Farm Fire & Casualty Co. — Paul R. Duffy (Kearns & Duffy). For amici curiae: Zurich American Insurance Company — Kevin T. Coughlin (Coughlin Duffy, Coughlin, Lorraine M. Armenti, Christopher S. Franges and Eduardo DeMarco on the brief); The Complex Insurance Claims Litigation Association — Wendy L. Mager and Thomas E. Hastings (Smith, Stratton, Wise, Heher & Brennan; Laura A. Foggan, of the D.C. bar, of counsel).