LEGAL NEWSLINE

TRENTON, N.J. (Legal Newsline) – A New Jersey appeals court has affirmed a lower court’s judgments in a dispute over $1.85 billion in insurance coverage with respect to asbestos litigation, concluding that some policies had been exhausted and that an annual aggregate limit for each policy year is appropriate.

Judge Victor Ashrafi delivered the Sept. 30 opinion in the Superior Court of New Jersey’s Appellate Division, affirming the judgments of the lower court. Judges Joseph Yannotti and Jerome St. John concurred.

The action arises out of several appeals from the Superior Court of New Jersey disputing the final judgments regarding insurance coverage for plaintiff IMO Industries’ asbestos-related personal injury liability.

IMO is the successor to Delaval Steam Turbine Company, which was a manufacturer of asbestos-containing industrial products such as turbines, pumps and other machinery with industrial and military uses.

The suit names more than 50 defendants, which are all primary and excess liability insurers, as well as Transamerica Corporation, the former parent company of Delaval.

IMO alleges it purchased a total of $1.85 billion in insurance coverage from the defendant insurers over the years and filed this suit to claim its rights under those insurance policies and recover money damages.

The appeals court was tasked with deciding whether the trial court properly treated primary insurance policies that pay for the litigation defense costs in addition to the indemnification limits of the policies; how the coverage limits of excess multi-year policies must be treated in the allocation model outlined by Owens and Carter; whether IMO was entitled to a jury trial on its claims for money damages; and numerous challenges to the trial court’s interpretation of the insurance policies within the Owens and Carter allocation methodology.

The 1994 Owens-Illinois decision established the “continuous trigger” theory of insurance coverage for “long-tail” environmental losses, such as asbestos exposure.

The court determined that the term “occurrence” in liability policies means a “separate triggering event for insurance coverage in each year from the time a claimant alleging injury was first exposed to asbestos until manifestation of an asbestos-related disease or until insurance coverage became unavailable.”

The Owens court also established a pro-rated allocation model for coverage responsibilities among multiple insurers based on an insurer’s time on the loss and limits of risk coverage in the policies.

The 1998 Carter-Wallace decision further developed the allocation methodology, holding that excess insurers were included in the model. It also held that policies would be exhausted “vertically” in each year of coverage “rather than all primary insurance policies being exhausted “horizontally” first across the range of triggered coverage years before excess insurers’ policies would attach.”

Ashrafi said the exhaustion of defendant TIG’s fronting policies is the lead issue in this case. Transamerica Insurance Company became TIG Insurance Company when it was divested in 1993.

At the time of the 1986 divestiture, IMO was named as a third-party defendant in three asbestos lawsuits. TIG provided all of the funds to pay these claims, and Transamerica reimbursed TIG at least half that amount pursuant to their agreements.

TIG continued to defend IMO under its direct policies and its fronting policies in several additional asbestos cases.

The court was tasked with deciding “whether TIG must cover defense costs for an endless or indefinite time limit until it has actually paid the indemnification limits of its policies, or whether those policies were exhausted and TIG has no further obligations to IMO.”

According to TIG’s policies, it is not obligated to pay any asbestos award or defend a suit after the applicable limit of the company’s liability has been exhausted by paying previous judgments or settlements.

However, IMO argues that TIG’s policies can only be exhausted by formal payment, “not just by allocation of sufficient losses to the policies.”

“If, as IMO contends, the policies require that only actual payments for IMO’s losses can relieve TIG of its contractual obligation to pay for defense costs, total coverage of IMO’s losses and the attachment point for excess insurers will be affected,” Ashrafi wrote.

Judge Donald Coburn noted in the lower court that coverage for defense costs outside policy limits represented only $40.6 million of more than $1.85 billion of total coverage.

He further disagreed with IMO that the policy language requires exhaustion by formal payment and concluded that all of TIG’s payments would count to satisfy the limits of the fronting policies.

Relying on the Owens and Carter allocation methodology, the appeals court affirmed Coburn’s decision.

IMO further argued that the payments from TIG that were not reimbursed by Transamerica were paid out of the direct policies predating 1972 and should not be attributed to the fronting policies from 1977 to 1986.

Ashrafi rejected the argument, holding that there is no dispute that TIG’s payments exceeded the aggregate of its Owens and Carter allocations.

“So, we can say its policies were exhausted not just by allocation, but by allocation combined with payments that exceeded the total amount allocated to TIG,” he wrote.

Ashrafi also rejected IMO’s argument that shifting of payments across coverage years violates Carter’s holding prohibiting horizontal distribution of losses over several policy years.

“A contrary conclusion on shifting of payments among coverage years might provide an incentive for an insurer not to pay claims promptly on the chance that a future development in the law, or the discovery of additional policies and additional responsible insurers, results in a lesser obligation,” he wrote.

Ashrafi concluded that once the indemnity limits of the fronting policies were reached by allocation, and the prior aggregate payments from TIG exceeded those allocations, TIG's coverage was exhausted.

TIG’s overpayments resulted from “ongoing development of the law fixing the responsibilities of the many insurers on the risk.” In fact, TIG’s payments failed to coincide with loss allocations by accident because of the development of the law.

Furthermore, because IMO insisted TIG adhere to its obligations under the Indemnification Funding Agreements rather than determine its obligation pursuant to the Carter methodology, retired Judge Robert Muir, Jr., was called back to the bench to preside over this case and invoked the doctrine of unclean hands, which barred IMO from contesting the shifting of overpayments to TIG’s underpaid policies when IMO pursued a Carter allocation in this litigation.

Ultimately, Ashrafi agreed with Muir’s finding that payments by or on behalf of a single insurer could be shifted from one policy year to another to determine exhaustion, and that the TIG fronting policies were exhausted by the end of 2003.

Ashrafi also addressed a cross-appeal by ACE, LMI and TIG, alleging the multi-year policies in the allocation schedule were treated erroneously. ACE and LMI are various insurance companies that provided different levels of primary or excess liability insurance to either IMO or Transamerica.

They claim their multi-year policies mandate that a single coverage limit for the entire term of the policy should have been used in the allocation schedule rather than the full coverage limit for each year the policy was in effect.

IMO does not dispute this argument but did seek a blanket ruling that every year of a multi-year policy should be treated as if a separate annual limit is available for asbestos claims.

Ashrafi explained that the Owens decision classified all asbestos claims made in a year as a single occurrence; meaning if all three years were viewed as a single occurrence, the insured would be deprived of the annual aggregate limits of the policies.

However, TIG contends that the $2.5 million aggregate limit for asbestos liability should have been applied for the full three-year period, not separately for each policy year.

The trial court applied an annual aggregate limit for bodily injury to each year of TIG’s multi-year policy was consistent with the Owens and Carter allocation methodology. Ashrafi agreed.

Several excess insurers challenged Muir’s decision that coverage issues would not be re-litigated for each individual asbestos claim. The appeals court agreed.

“Allowing excess insurers to contest coverage is not feasible for long-tail, multi-claim coverage cases and would compromise the allocation methodology mandated by the Supreme Court,” Ashrafi wrote.

He added that excess insurers don’t typically have any duty to defend asbestos cases and may rely on the good faith of the primary insurer in settling claims against the insured.

Ashrafi concluded that according to the Owens framework, insurers who declined to defend claims against the insured may be precluded form later challenging coverage.

As for the insurance companies’ duty to defend uncovered claims, Ashrafi explained that both the excess policies and the underlying policies obligate the defendants to pay for damages arising out of an “occurrence.”

“The number of injuries or claims, even if temporarily removed from their causes, are irrelevant when determining the number of occurrences,” he wrote.

As compelled by the Owens decision, the appeals court concluded that defense costs are subject to allocation even if a portion of them were devoted to defending against claims that were not covered under the insurance policies.

The plaintiff also argued that the lower court erred when it denied IMO’s demand for a jury trial seeking compensatory and punitive damages.

Ashrafi explains that IMO’s original complaint focused on declaratory relief when it sought to fix the obligations of Transamerica and TIG in relation to the 1986 Distribution Agreement.

IMO’s primary pleadings sought declarations about the future obligations of defendants.

“Although additional causes of action for money damages may have arisen after the filing of the initial complaint, those claims are still intertwined with the primary events and the allegations presented in the original complaint,” Ashrafi wrote.

As a result, the appeals court concluded that IMO did not have a right to a jury trial.

“IMO's breach of contract and bad faith claims grew out of the same dispute and were intertwined with its equitable claims. They were based on the same facts and proofs as the claims for declaratory judgment and specific performance. They were properly and economically adjudicated within the equity court's ancillary jurisdiction,” Ashrafi wrote.

From Legal Newsline: Reach Heather Isringhausen Gvillo at asbestos@legalnewsline.com