On July 21, 2014, the Pennsylvania Supreme Court held, as a matter of first impression, that the Continuance of Coverage Provision of the Pennsylvania insurance insolvency statute, 40 P.S. § 221.21, precludes coverage for all “risks in effect” under an insurance policy, even when the policy was cancelled prior to liquidation.
In the underlying litigation, Warrantech Consumer Products Services, Inc., a company that marketed and administered extended warranties and service contracts for various products, sought coverage under two insurance policies issued by Reliance Insurance Company in 1999 and 2000. According to the court’s opinion, Warrantech had purchased insurance from Reliance to provide indemnification for all future liabilities arising under certain contracts Warrantech issued during the applicable policy periods.
“Risks in Effect” under § 221.21
In 2001, the Commonwealth Court placed Reliance in liquidation. Reliance thereafter stopped reimbursing Warrantech for claims insured under its policies as of November 2, 2001, the court’s designated statutory cancellation of coverage date. In the ensuing liquidation proceedings, Warrantech submitted proofs of claim seeking reimbursement for covered claims. The liquidator assigned a zero value to each of Warrantech’s proof of claims. In relevant part, the liquidator referred to § 221.21 to support its ruling that the claims had no value because they pertained to losses that occurred after the statutory cancellation of coverage date. Section 221.21 states, in part: “[a]ll insurance in effect at the time of issuance [of] an order of liquidation shall continue in force only with respect to the risks in effect, at that time (i) for a period of thirty days from the date of entry of the liquidation order …”
Warrantech filed an exception to the referee’s report and assigned a value to its claims in the amount of $11,900,499. The Commonwealth Court overruled Warrantech’s exception.
On appeal, Warrantech challenged the lower court’s interpretation of § 221.21 and argued that the statute did not relieve Reliance of its indemnification obligations. Specifically, Warrantech argued that the relevant policies were not “insurance in effect” at the time of the liquidation proceedings.
The court rejected Warrantech’s interpretation of the statute and affirmed the lower court’s ruling. Applying principles of statutory interpretation, the court reasoned:
Warrantech’s argument that Section 221.21 only applied to insurance policies with active policy periods based on the phrase “[a]ll insurance in effect” is incongruous with the overriding purpose of Sections 221.20(d) and 221.21, which is to provide a limited exception for insureds facing the otherwise harsh finality of standard liquidation proceedings … the better interpretation is to read the phrase as a reference to the same policyholders identified in Section 221.20(d) who face the unforeseen termination of their insurance coverage on account of their insurer’s liquidation.
Court Declines to Apply Multiple Trigger Outside Toxic Tort Realm
Warrantech further argued that even if § 221.21 applied, coverage was triggered when Warrantech issued the service contracts to consumers during the applicable policy periods, before liquidation. As support for its position, Warrantech noted that, in the asbestos context, Pennsylvania courts recognize a “multiple trigger” theory of liability that requires an insurer to respond to a loss if it is on the risk for exposure and manifestation of injury. In response, the insurance commissioner, acting as statutory liquidator of Reliance, argued that pursuant to § 221.21, the “risks in effect” were properly cancelled at the time the insurer entered liquidation. The insurance commissioner challenged Warrantech’s position on trigger of coverage and asserted that the insurer’s obligations are triggered when Warrantech pays for a product breakdown under one of its service contracts, and not when the contracts themselves are issued.
The court rejected Warrantech’s interpretation of the statute and affirmed the lower court’s ruling. The court held that the proper trigger of coverage is when a claim is made for product breakdown, as opposed to when the service contracts are issued, because Warrantech does not become “legally obligated to pay” any amount until a consumer seeks to recover for a product breakdown.
Notably, the court found that Warrantech provided no compelling reason to extend the “multiple trigger” theory beyond the toxic tort context, reasoning “[t]he insurance policies at issue merely involve claims arising from product breakdowns occurring under standard service contracts, which is entirely distinguishable from the unusual and prolonged etiology of asbestos-related diseases or similar toxic tort scenarios.”
The Significance of the Court’s Ruling
The court’s ruling is significant for two reasons. First, the court’s broad construction of § 221.21 confirms that this statute applies even to a policy that was cancelled prior to liquidation. Second, although the trigger of coverage analysis was not central to its analysis, this decision marks the first time that the Pennsylvania Supreme Court has commented on the scope of the multiple trigger theory and recognized that its application has been limited to the toxic tort context.