News & Insights  |  Articles

Fourth Circuit, Citing Insurance Underwriting Considerations, Strongly Endorses Pro Rata Allocation

This article first appeared in the April 2012 issue of The Insurance Coverage Law Bulletin
April 2012

The United States Court of Appeals for the Fourth Circuit has issued an opinion forcefully adopting a pro rata time on the risk allocation method, holding that an insurer could be held liable only for periods of risk that it had contracted to cover, even if its policyholder was jointly and severally liable for harm sustained over a longer period.  Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, et al., Nos. 10-1987, 10-1988, 2012 WL 336150 (4th Cir. Feb. 3, 2012).  Applying Maryland law,  the Fourth Circuit stated that coverage was limited to bodily injury "occur[ing] during the policy period" and that to hold the insurer liable for any other period would "upend insurance underwriting."  The decision also addresses the implications of the allocation determination for insurance underwriting.

In 2005, a teenager sued the policyholder, a realty company, that had managed her home from her birth in January 1991 until November 1993, when the company sold the property, alleging the policyholder's negligence caused her to suffer lead poisoning.  The claimant had been diagnosed with the condition in September 1992, the plaintiff alleged, and continued to exhibit an elevated blood lead level until August 1995.  The policyholder tendered the claim to its insurer, which had issued liability insurance policies covering the period from January 1992 to January 1994.  The insurer agreed to defend the realty company subject to a reservation of its rights.  The case proceeded to trial and yielded an $850,000 judgment against the defendants, for which the policyholder and the property's subsequent purchaser were jointly and severally liable.

The insurer filed a declaratory judgment action against the policyholder and the underlying plaintiff, contending that it should be liable only for a 22-month portion of the entire period of the underlying plaintiff's exposure to the risk of lead poisoning: from January 1992, when the first policy period started, to November 1993, when the policyholder sold the property.  The underlying plaintiff countered that the insurer should be liable for the entire judgment "in light of 'the joint and several liability of [its] insured.'"

The district court calculated the period of the underlying plaintiff's injury to extend from her birth in January 1991 until August 1995, the month of her final elevated blood lead level—a total of 55 months.  It then held the insurer liable on a pro rata basis for 24 months, or 43.8 percent of the judgment, rejecting the insurer's argument that its policies did not cover the two-month period from November 1993 (when the policyholder sold the property) to January 1994 (when the policy period ended).  Penn. Nat'l Mut. Cas. Insurance Co. v. Attsgood Realty, et al., No. JFM-09-2650, 2010 WL 2998681 (D. Md. July 27, 2010).  Both parties appealed.

On appeal, the Fourth Circuit first concluded that the district court properly had allocated the judgment on a pro rata basis, and it rejected the underlying plaintiff's effort to impute the policyholder's joint and several liability to the insurer.  According to the court, the underlying plaintiff's position defied the contract, Maryland law, and fundamental insurance principles.  First, the court noted that the insurer had contracted to provide coverage only for damages "to which this insurance applies."  Because the policies covered only harm "occur[ing] during the policy period," the court affirmed that the insurer was not liable for harm sustained outside that period.  The court also emphasized that this approach also comported with Maryland's "pro rata by time-on-the-risk allocation of liability."  It held that, in contrast to the policyholder's joint and several liability, the question of an insurer's liability "can be answered only by reference to the insurance contract."

In addition, the Fourth Circuit recognized that adopting the underlying plaintiff's position by holding the insurer liable for the entire judgment "would upend insurance underwriting."  "[The underlying plaintiff's] approach would impose the same amount of liability on an insurance company whether it provided coverage for one month or for 10 years."  The court explained that, not only would such an approach yield higher costs and accompanying higher policyholder premiums, it also would "disincentize" tortfeasors from obtaining comprehensive insurance coverage.  It recognized that "the pro rata approach not only allocates liability across multiple insurers of a single tortfeasor, but also 'accommodates the need to hold liable those businesses that chose not to purchase insurance or coverage' by allocating liability to them for periods which they were uninsured."

The Fourth Circuit also rejected the underlying plaintiff's argument that the district court erred in calculating the commencement date of her exposure to lead poisoning.  According to the underlying plaintiff, the court should have used September 1992, the date of her first diagnosis, rather than January 1991, the date of her birth.  The Fourth Circuit upheld the district court's calculation, however, stating that the underlying plaintiff had presented extensive evidence at trial that her exposure had commenced at birth.

Finally, the court considered the insurer's contention that the district court erroneously imposed liability for the two-month period between the policyholder's sale of the property in November 1993 and the end of the policy period in January 1994.  Reversing the district court, the Fourth Circuit read the policies' coverage of "Premises You Own, Rent or Occupy" to preclude unambiguously coverage for property after its sale.  The policies' non-assignment clause provided further support for this position, the court maintained, recognizing that the assignment of an insurance contract can "'alter dramatically the insurer's exposure depending on the nature of the new insured.'"  The court concluded that "[w]e . . . cannot render the contract and its non-assignment clause a dead letter by holding [the insurer] liable for the conduct of a property owner from whom it had never received premiums and whom it never agreed to insure."