1. October 28-29, 2013

3. Linda Kornfeld
Kasowitz Benson Torres & Friedman LLP
Rob Pfister
Klee, Tuchin, Bogdanoff & Stern LLP

4. Allocation Methods and Their Effect

5. 
Insured chooses which policies will pay among
multiple triggered policies
◦ Selected insurers then obtain contribution from rest of
insurers of triggered policies
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
Also described as “joint and several,” “pick and
choose” and “vertical” allocation
Rationale is that each policy states insurer will
defend “any suit” and pay “all sums”
◦ Trigger of coverage (must the policy respond) v. scope of
coverage (how much must the policy pay)

6. 
Majority position adopted in:
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California
Delaware
Hawaii
Illinois
Indiana
Massachusetts
Ohio
Pennsylvania
Texas
Washington
District of Columbia Circuit Court of Appeals (multiple states’ law)

7. 
Insured’s loss is divided proportionately among all
triggered policies based on the portion of loss that
occurred during each policy
◦ Requires insured to pursue coverage under each policy

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Also described as “horizontal” allocation
Rationale is that policy limits coverage to
“occurrences” that take place during the policy period
◦ Also equity concerns regarding policyholder’s assumption of
risk when deciding not to purchase any, or insufficient amount
of, insurance

8. 
“Time-On-The-Risk” Approach
◦ Loss allocated among insurers based on the proportional
time that each insurer was on the risk

“Percentage of Limits” Approach
◦ Loss is divided into shares across triggered period with
higher share given for years in which insured purchased
more coverage
◦ Rationale was to balance the extremes of “all sums” and
“pro rata/time-on-the-risk” approach

9. 
Minority position adopted in:
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Colorado
Hawaii (adopted “all sums” in another case)
Minnesota
New Jersey
New York
Utah
Second Circuit Court of Appeals (New York and Texas law)
Fourth Circuit Court of Appeals (South Carolina law)
Fifth Circuit Court of Appeals (Louisiana law)
Sixth Circuit Court of Appeals (Illinois and New Jersey law)
Eleventh Circuit Court of Appeals

10. 
$2 Million Claim
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Results Based on Type of Allocation:
◦ “All Sums”
◦ “Pro Rata”

11. 
What if one year of coverage has a fronting policy
or a high self-insured retention?

What if one year has an insolvent insurer?

12. 
“All Sums”: Insured Preference
◦ Allows insured to avoid periods when it was uninsured,
self-insured or had gaps in coverage
◦ California Supreme Court rejected claim that “because it
was issued ‘fronting’ policies . . . [the insured] should be
required to make such a contribution itself. Although
insurers may be required to make an equitable contribution
to defense costs among themselves, that is all: An insured
is not required to make such a contribution together with
insurers.” Aerojet-General Corp. v. Transport Indem. Co. ,
17 Cal. 4th 38, 71-72 (1997).

13. 
“Pro Rata”: Insurer Preference
◦ Insured contributes for periods when it did not purchase
insurance, was self-insured, lost its policies or had gaps in
coverage (but not for periods when coverage for a risk was
unavailable)
◦ Second Circuit stated fairness required “pro rata” allocations so
that insured bore consequence of “risk that it elected to
assume, either by declining to purchase available insurance or
by purchasing what turned out to be an insufficient amount of
insurance.” Stonewall Ins. Co. v. Asbestos Claims Mgmt.
Corp., 73 F.3d 1178, 1204 (2d Cir. 1995).

14. 
$2 Million Claim
$2M Excess
Policy
$2M Excess
Policy
$500K Primary
Policy
$500K Fronting
Policy
$500K Primary
Policy
Year 1

$2M Excess
Policy
Year 2
Year 3
Results Based on Type of Allocation:
◦ “All Sums”
◦ “Pro Rata”

15. Analogues, Mechanics & Deference

16. Bankruptcy Code – Default option, governing everyone and everything
other than specifically enumerated exceptions in 11 U.SC. § 109
(e.g., Small Business Investment Companies)

17. 
“Only those entities [that] have a comprehensive
scheme of liquidation provided for by other
statutes or regulations should be excluded from
eligibility under the Bankruptcy Code. [T]hose
entities that do not enjoy such a scheme of
liquidation should be able to avail themselves of
the liquidation and reorganization provisions of the
Bankruptcy Code.” In re Affiliated Food Stores,
Inc. Group Ben. Trust, 134 B.R. 215, 222 (Bankr.
N.D. Tex. 1991)

18. Bankruptcy Code – Default option, governing everyone and everything
other than specifically enumerated exceptions in 11 U.SC. § 109
(e.g., Small Business Investment Companies)
Title 12 – FDIC as Receiver for failed financial institutions

19. Bankruptcy Code – Default option, governing everyone and everything
other than specifically enumerated exceptions in 11 U.SC. § 109
(e.g., Small Business Investment Companies)
Title 12 – FDIC as Receiver for failed financial institutions
Dodd-Frank Orderly Liquidation Authority for “Covered Financial
Companies” (including insurers – albeit with special rules)

20. Bankruptcy Code

21. Bankruptcy Code
Title 12 / Banks

22. Bankruptcy Code
Title 12 / Banks
Dodd-Frank

23. Financial Guaranty Insurance Company (FGIC) – Clash of the
competing comprehensive regimes, or How can two courts each
have exclusive jurisdiction over the same issues?

24. Financial Guaranty Insurance Company (FGIC) – Clash of the competing
comprehensive regimes, or How can two courts each have exclusive
jurisdiction over the same issues?
FGIC Plan of Rehabilitation:
“
Section 3.5 No Defaults Arising from Rehabilitation or
Rehabilitation Circumstances.
(a)
[F]rom and after the date of the Order of Rehabilitation, any default,
event of default or other event or circumstance relating to the FGIC Parties
then existing (or that would exist with the

25. passing of time or the giving of notice or both) under any FGIC
Contract or Transaction Document, as a result of (whether directly
or indirectly) the Rehabilitation or the Rehabilitation Circumstances
shall be deemed to be cured and not to have occurred
(including, for the avoidance of doubt, any default, event of default
or other event or circumstance that has arisen (or that may
otherwise arise with the passing of time or the giving of notice or
both) due to a lack of payment or performance of or by the FGIC
Parties under any FGIC Contract or Transaction Document).

26. (b) Neither the Rehabilitation nor the Rehabilitation Circumstances
shall ... cause to inure to any Person any greater right or Claim than
that which would have existed in the absence of the Rehabilitation and
the Rehabilitation Circumstances….”

27. 
Section 3.6(a): “Each reinsurer shall pay FGIC in full in
Cash for such reinsurer’s reinsured portion of the entire
amount of each Permitted Policy Claim (irrespective of
when such Policy Claim is submitted to FGIC, whether
before the date of the Order of Rehabilitation, during the
Rehabilitation Proceeding or after the Effective Date), in
each case without giving effect to the Policy
Restructuring and regardless of the amount paid
in Cash by FGIC on account of such Policy
Claim .”

28. 
“Consistent with the foregoing, the terms ‘Loss’ or ‘Losses’ (or
similar terms) used in the Reinsurance Agreements shall be
deemed to refer to the entire amount of Permitted Policy Claims
as and when such Permitted Policy Claims are Permitted by
FGIC, irrespective of (i) the amount and timing of any Cash
payments that FGIC may make with respect to any such
Permitted Policy Claims, (ii) the modification pursuant to the
Policy Restructuring of FGIC’s obligations to pay such Permitted
Policy Claims in Cash and (iii) any language in the Reinsurance
Agreements that contradicts this result.”

29. Farmers Mutual Fire Insurance Co. v. New Jersey Property-Liability
Insurance Guaranty Association, 74 A.3d 860 (N.J. 2013)
“The Owens–Illinois methodology is a product of this Court's
equitable powers to advance public policy within the realm of the
common law. The purpose of the methodology is to make
insurance coverage available, to the maximum extent possible, to
redress such matters as toxic contamination of property.

30. However, the Legislature has designated the Guaranty Association
as an insurer of last resort when substituting for an insolvent carrier.
[The statutes] specifically exempt the Guaranty Association from
the Owens–Illinois allocation scheme until all solvent insurance
companies' policy limits are exhausted. That statute also embodies
an important public policy. The common law must bow when in
conflict with a legislative scheme.”

32. Linda
Kornfeld
KASOWITZ BENSON TORRES & FRIEDMAN LLP
2029 Century Park East, Suite 750
Los Angeles, California 90067
(424) 288-7902
lkornfeld@kasowitz.com
Robert
J. Pfister
KLEE TUCHIN BOGDANOFF & STERN LLP
1999 Avenue of the Stars, 39th Floor
Los Angeles, California 90067
(310) 407-4065
rpfister@ktbslaw.com