In Radiator Specialty Co. v. Arrowood Indemnity Co., 881 S.E.2d 597 (N.C. 2022) the North Carolina Supreme Court adopted an exposure trigger, pro rata allocation and vertical exhaustion, in deciding a claim for benzene coverage dispute involving benzene.
The insured, Radiator Specialty Co. (RSC), produced and sold benzene containing products. RSC was named in hundreds of personal injury lawsuit seeking damages from bodily injury, wherein RSC incurred approximately $45 million in defense and settlement costs. During the period of its operation, RSC purchased more than 100 standard form liability policies from approximately 25 insurers. Most of the policies had a one year term for coverage. Some of the insurers provided primary coverage, while others provided excess coverage. RSC sought a declaratory judgment in North Carolina state court to establish the duties and obligations of the insurers.
The North Carolina Court of Appeals, in an unpublished opinion, affirmed the trial court’s ruling on the trigger of coverage and exhaustion. The trial court had ruled that the exposure trigger was appropriate in the context of long tail bodily injury claims, which meant that the beginning of the triggered policy period was the date on which the claimant was first exposed to the benzene and the end of the trigger policy period was the date on which the claimant was last exposed to the benzene. Regarding allocation, the trial court applied a pro rata allocation to both defense and indemnity payments based upon time on the risk over the RSC coverage block. Orphan shares in the timeline were the responsibility of RSC. The trial court then determined that vertical exhaustion applied to the duty to indemnify, but that horizontal exhaustion applied to the excess insurer’s duty to defend. The North Carolina Court of Appeals affirmed the trial court’s trigger of coverage and exhaustion rulings, but reversed the allocation ruling. Instead, the North Carolina Court of Appeals would have applied “all sums” allocation.
The North Carolina Supreme Court granted review and adopted the trial court’s rulings to the trigger of coverage and allocation, but reversed the trial court’s application of horizontal exhaustion in determining an excess insurer’s duty to defend. With respect to the trigger of coverage, the Court ruled that a claimant’s period of exposure to benzene was the appropriate reference point in determining which policies provided coverage for a benzene related injury. The Court found that the exposure to benzene constituted the injury fact.
In rejecting the “all sums” allocation approach, the Court reasoned that the policy language limiting coverage to injury “during the policy period” limited each insurance company’s coverage obligation to a pro rata share of damages, which reflected the percentage of overall exposure that occurred during the insurer’s time on the risk.
The Supreme Court ruled that the policy language justified vertical exhaustion for the duty to defend under the excess policies.