NEW ORLEANS — Despite language contained in an insurance policy, the Louisiana Supreme Court has ruled in favor of a novel approach for prorating defense costs between a commercial insurer and the insured.

This first for the high court, pro rata allocation of defense funds, was decided after American Sugar Refining turned to its insurer, Confidential Casualty Company, to pay legal fees and indemnity related to a class-action levied against the commercial sugar refiner by employees who allegedly suffered hearing loss from decades of working noisy plants.

Confidential and American Sugar agreed that the class-action only triggered one of the refining company's policies, which spanned 26 months. American Sugar demanded that Confidential pay indemnity and defense costs to cover the suit in its entirety, which lasted 60 years.

Lower courts sided with American Sugar and held that Confidential, the most recent insurer, should bear the defense costs for the entire lawsuit. That includes costs that fell out of the policy period, covering the time American Sugar was self-insured as well.

The traditional rule, which was observed by the lower courts, charges insurers with covering defense cost when the possibility of liability arises.

The Supreme Court considered the traditional rule and it also weighed the "joint-and-several approach" in which the insured can appoint one insurer to bear all of the defense costs. Along with bearing the burden of those costs, it would fall upon the elected insurer to lobby other insurance companies to pitch in.

Ultimately, the Supreme Court chose a pro rata approach to allocating defense costs for American Sugar, accounting for the time the company was uninsured, and Confidential.

Abiding by the policy language, Confidential was responsible for covering all of American Sugar's defense costs. However, the Supreme Court looked at the extent of the cost for covering a 60-year-old complaint, along with a policy that covers approximately two of those years and acted out of equity, according to Harold J. Flanagan, founding partner of Flanagan Partners LLP and adjunct professor at Tulane University's law school.

"This decision is limited to its own facts," Flanagan told the Louisiana Record. "I wouldn't say it's odd, but it's a very narrow circumstance where this matters. The decision is based mainly on notions of equity and fairness, and less on the policy language."

The courts have long since concluded that it's fairest to allocate indemnity payments based on "time on the risk," so the justices decided to do the same with defense costs in this particular case. However, this decision "certainly doesn't disturb the traditional rule," Flanagan said.

"This decision is limited to situations we call long-term latency, bodily injury complaints," Flanagan said. "The court noted that specifically,  these kinds of claims, asbestos claims and long-term exposure claims, are [novel]. They are a thing unto themselves. So this is a special rule for a very special situation."

Policies pertaining to commercial general liability were drafted decades ago and they weren't written to accommodate long-term latency and personal injury claims, Flanagan said. So the courts are struggling to adapt the rules to "situations they weren't competent to handle."

"The notion of pro rata allocation of indemnity payments was the result of a lot of thought and some consideration of policy language, mainly the notion of fairness," Flanagan said.

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