What is Long-Tail Liability?

Making sense of the confusion in New Jersey insurance law

Long-tail liability claims are some of the most complex types of insurance cases. As defined by the International Chamber of Commerce (ICC), long-tail liability is a term used to describe circumstances when there is a significant gap between the date of the act that created the underlying liability and the date at which the liability was reported and recognized. For a number of different reasons, long-tail insurance claims can cause a considerable amount of confusion.

Long-Tail Liability: Understanding the Basics

Simply put, a long-tail risk is one in which the manifestation of loss will occur far later than the behavior that led to the loss. In practice, long-tail liability claims can come in a wide range of different forms. Some of the most common examples of long-tail liability risks include:

  • Environmental lawsuits, including air and water pollution cases
  • Defective product and defective drug claims
  • Medical malpractice lawsuits
  • Employment law matters
  • Cyber-liability cases

As far as insurance law is concerned, the primary issue that must be resolved asks what percentage of the underlying loss each party bears and how exactly that percentage is to be determined.

Under both state law and federal law, there has been an increasing amount of uncertainty and confusion regarding how exactly long-tail risk/liability is handled. Indeed, states use different types of systems for apportioning long-tail liability. Notably, New Jersey is one of the states that uses a relatively unique system.

New Jersey Insurance Law and Long-Tail Risks

One of the primary challenges of handling a long-tail liability claim is that multiple parties are often liable. As such, multiple insurance policies are typically triggered when these types of claims are brought in state or federal courts.

For example, if a group of construction workers files a claim related to asbestos exposure that occurred decades ago, it is likely that multiple companies will bear at least some of the liability for their damages. The longer the gap between the triggering event and the assignment of liability, the more complicated the case is likely to get.

In the 1990s, New Jersey altered the state’s rules regarding long-tail liability. In two key legal cases, New Jersey courts shifted the state towards a so-called “pro rata by limits” system. In effect, New Jersey law makes insurance companies with higher limits responsible for a higher percentage of the losses. To be clear, New Jersey is a bit of an outlier when compared to other states. Other jurisdictions use different methods in long-tail liability cases.

If you have any specific questions about obtaining protection from long-tail risks or about long-tail liability, contact a New Jersey insurance law attorney who has experience handling these types of claims. Long-tail liability is a complicated issue. Businesses and insurance companies need representation from a qualified professional. For more information on this area, see our insurance coverage law overview.

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