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Today's risk manager facing a bill for a retrospective premium on an old occurrence-based liability insurance policy may owe the insurer less than is being demanded. At the very least, a closer look at both the policy and the premium demand is warranted before payment.
During the 1970s and 1980s, the computation of the premium for various forms of liability insurance coverage sometimes included a component determined "retrospectively." Pursuant to premium plans accompanying those policies at the time of their issuance, a portion of the premium was paid in the traditional, up-front manner-the "advance premium"-and it was agreed that additional premium could be charged-that the premium would be subject to "adjustment"-on the basis of defense and indemnity claims made under the policies.
In many instances, the relevant retrospective-or "retro"-premium plan applies to a number of separate policies purchased by the policyholder-for example, policies covering workers compensation, automobile liability and general liability. Questions arising today concerning the policyholder's responsibility for retro premium under plans associated with policies issued in the `70s or '80s usually involve general liability policies.
The payment of premium pursuant to retro plans is far less common today than it was 25 years ago, so the terrain is relatively less familiar to today's risk manager. The matter of retro is so arcane that it has become somewhat intimidating. The temptation may be simply to pay the invoice, but that temptation should be resisted-at least until the basis of the retro claim has been examined. It may well be that the insurer is entitled to less retro premium than has been demanded. Indeed, the insurer may be entitled to no additional premium at all.
The relevant general liability policy's coverage is invariably afforded on an "occurrence" basis, meaning that the policy covering a 1975 policy period, say, can be required to respond to a toxic tort or environmental contamination claim (or other long-tail-type claim) asserted in more-recent years. The insurer's claim for retro premium may arise out of defense costs or indemnity that it has paid, or out of reserves against the insurer's estimate of potential future indemnity obligations. But need the policyholder pay those retro invoices?
The policyholder should request and review records maintained by the insurer and its own records, to ascertain the extent to which retro obligations have been satisfied by prior retro payments. Retro plans invariably establish the maximum amount of retro for which the policyholder can be liable, and the policyholder should determine if that maximum amount has already been paid.
Assuming that the retro maximum has not been satisfied, it is incumbent upon the policyholder to examine closely the amount of retro demanded by the insurer. To the extent the retro demanded reflects reserves against projected indemnity obligations, for example, it pays to determine whether the projections are overstated.
The harm (damage or injury) triggering an older policy subject to a retro plan often implicates more than one year. If and when a liability arises out of the relevant underlying claim, the insurer whose policy is subject to the retro plan will undoubtedly seek to allocate indemnity obligations to other insurers or to "self-insured" periods, if the jurisdiction whose law applies supports allocation. In determining the propriety of a retro adjustment based on the insurer's reserves against possible indemnity obligations, the policyholder should not only look at the amount of the projected liability but also should determine whether the adjustment reflects the manner in which actually imposed damages would likely be allocated.
Even if the retro maximum has not been satisfied by prior premium payments, there may well be an issue as to whether the relevant retro plan remains "open" at the time the policyholder is invoiced for a premium adjustment. The standard-form retro plan contains provisions whereunder an adjustment rendered relatively early after issuance of the relevant policy becomes "final," unless the insurer takes certain steps to secure authorization to render further adjustments. There is a good argument that it is not even theoretically possible for insurers to take those steps, consistent with standard-form plan terms, in respect of general liability policies.
Our firm has challenged insurers' right to collect retro premium from policyholder clients on the ground that adjustments rendered decades before recent retro demands were "final" and foreclosed the insurers' right to seek further retro premium under the relevant plans. In each of those cases the retro demand was settled on terms considered favorable by the policyholder. The pattern of settlements has persuaded our firm that insurers take the foregoing arguments seriously and are not sure of their legal footing in pressing their claims for retro premium.
In conclusion, our advice is that policyholders should take a hard look at insurers' demands for retro premium under old occurrence-based liability insurance policies. They may owe less than the insurer has demanded-and may, indeed, owe nothing at all.
Stephen A. Dvorkin is a member of Dickstein Shapiro Morin & Oshinsky L.L.P. Robert A. Friedman is an associate in the firm. Both are based in New York.