Since June 1976 John has performed automotive repair work using brakes manufactured by X Corp. From its inception until 2001, X Corp's brake linings and clutches contained asbestos. On June 5 2016 John is diagnosed with mesothelioma, the debilitating disease caused by inhalation of asbestos fibres. After learning of his diagnosis, John sues X Corp for personal injury, strict liability and a string of other causes of action. X Corp then tenders the claim to its insurers. A Insurance Co provided insurance to X Corp from 1976 to 1979. B Insurance Co provided insurance to X Corp from 1980 to 1982. X Corp was self-insured in 1983. C Insurance Co provided insurance to X Corp in 1984 and 1985. From 1986 all insurance policies expressly excluded coverage for claims arising from asbestos exposure. John's case against X Corp eventually settles for $400,000 and X Corp now seeks indemnity from its insurers.
This scenario has become familiar to those that have become immersed in the greatest mass torts litigation in history; and yet courts are still grappling with the question of whether damages arising from asbestos claims should be allocated to the assured for periods when they were uninsured because insurance coverage was unavailable.
In light of recent opinions from various jurisdictions, this update examines the history of the unavailability exception and recent case law on the topic.
Nearly a quarter-century ago, New Jersey was one of the first jurisdictions to recognise the unavailability exception, albeit without going into detail. In Owens-Illinois Inc v United Insurance Co,(3) the New Jersey Supreme Court determined that a "fair method" for allocation was one that related to "both the time on the risk and the degree of the risk assumed".(4) However, the court held that "[w]hen periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable".(5) Therefore, the assured should be expected to share in the allocations only when it voluntary elected not to seek insurance, rather than when the insurance was unavailable.
The Second Circuit became the first court to consider and explore the unavailability exception in-depth in Stonewall Ins Co v Asbestos Claims Management, 73 F3d 1178 (2d Cir 1995). In its analysis, the Stonewall court found that the Owens-Illinois decision was based on an incentive to "increase[e] available resources and internaliz[e] costs".(6) The Stonewall court held that in the years where the assured "elected not to purchase insurance or purchased insufficient insurance", the loss should be allocated on a pro rata basis to the assured.(7) However, the Second Circuit found that the trial judge had erred in applying the pro rata allocation to the insured after 1985, when the first asbestos exclusions appeared in the policy.(8) The trial court judge had found that the National Gypsum Company (Asbestos Claims Management) had "bargained away coverage by accepting asbestos exclusion clauses".(9) The Second Circuit found this unpersuasive, deeming it an unrealistic view of the situation.(10) The court stated that there was no reason to believe that any bargaining had occurred regarding the asbestos exclusion clauses. Lastly, in allocating the loss to the parties, the court created an equation wherein:
- the denominator represented the number of years in which injury-in-fact was occurring and insurance was available; and
- the numerator represented the number of years for which a particular policy was in effect.(11)
Since Stonewall, most courts have rejected the unavailability exception.(12) When courts have applied the exception, it has been in limited cases where insurance was indeed unavailable, and not in circumstances where the insured was self-insured, had deductibles, obtained insurance from a now insolvent company or did not comply with relevant policy conditions.
In the past year, courts in Connecticut and New York have taken up the unavailability exception doctrine, coming out on opposite sides of the debate.
In KeySpan Gas East Corp v Munich Reinsurance America Inc, the New York Appellate Division, First Department found that imposing the unavailability exception would "expose [insurers] to risks beyond those contemplated by the parties when the policies were purchased, as evidenced by the plain language of the policy".(13) In looking to the language of the policies, the court found that the insurers' obligations were limited to damages that resulted "during the policy period". The policies, the court held, did not require the insurers to cover periods outside those of the policies when insurance was unavailable to the assured.(14) Referring to the leading New York case on pro rata allocation, the court stated:
"The [New York] Court of Appeals in Con Edison…in considering essentially similar policy language, was able to interpret such policies as consistent with allocating risk to the insurer occurring within the policy period. These policies should be interpreted in an identical manner."(15)
Conversely, the Connecticut Appellate Court issued a 161-page decision confirming pro rata allocation and formally adopting the unavailability exception.(16) In Connecticut, the controlling case law was Security Ins Co of Hartford v Lumbermens Mutual Casualty Co,(17) which adopted a pro rata allocation for defence costs of long-tail asbestos claims. In Security, the Connecticut Supreme Court stated that "the pro rata method of allocating defense costs applies for purposes of allocating costs to the insured for periods during which it was uninsured or has 'lost or destroyed' its policies".(18) The appellate court was left to answer the question of when an assured is considered to be "uninsured".(19)
Analysing opinions from other jurisdictions, the Connecticut Appellate Court in Vanderbilt found three grounds that have been used to justify pro rata allocation to the assured:
- Policyholders should be obliged to accept a share of the risk that they consciously elect to assume by self-insuring;(20)
- Policyholders would receive an undeserved windfall if they were to reap the benefits of insurance coverage that they deliberately declined to purchase;(21) and
- Proration creates an incentive for policyholders to maintain an unbroken chain of adequate insurance coverage, which has the socially desirable benefits of:
- spreading risk;
- maximising the resources available to respond to injuries; and
- ensuring that no single policy or insurer is made to shoulder a disproportionate share of the costs of a long-tail injury.(22)
However, the Vanderbilt court found these rationales to be largely unsuitable in circumstances where the assured attempted to purchase coverage, but the market refused to cover the risk. Instead, it highlighted four reasons why the unavailability exception is considered to be efficient and reasonable:
- Holding the insurers on the risk collectively responsible for the full injury – up to the policy limits for which the insured has contracted – has the desirable effect of maximising the resources available to respond to the multitude of claims facing Vanderbilt and others similarly situated;
- Holding insurers responsible when unforeseen risks arise, and not permitting them simply to drop coverage and cut their losses, creates an incentive for insurers, as well as policyholders, to identify and investigate previously unknown risks associated with various materials and lines of business;
- An unavailability of insurance rule best comports with the reasonable expectations of the insured; and
- Insurers have a better ability to manage this sort of risk and continue to accept, pool and spread the risk – pricing coverage accordingly.(23)
While acknowledging that individual insurers "may end up bearing what appears to be a disproportionate share of the financial burden",(24) the court held that there should be no allocation to Vanderbilt for the post-1985 period because insurance for asbestos losses was unavailable during this period.
Lastly, some 23 years after Owens-Illinois, the unavailability exception has again made its way up through the New Jersey courts. The New Jersey Supreme Court recently granted review in Continental Insurance Co v Honeywell International Inc.(25) Excess insurer St Paul and Travelers contended that Honeywell was responsible for coverage post-1987 (when excess insurance became unavailable), because it knowingly continued to manufacture dangerous asbestos products without insurance, thereby assuming the risk. The New Jersey Appellate Division stated that no New Jersey court has adopted the insurers' theory of assumption of the risk. Rather, the courts have focused "on the availability of insurance and have only found that the insured assumed the risk when insurance was available and the insured chose not to purchase coverage".(26) The insurer asserted that Honeywell's conduct constituted "an exceptional circumstance" and violated the principles articulated in Owens-Illinois, including incentivising responsible conduct and discouraging irresponsible risk taking. The Continental court stated that "no New Jersey case has accepted the definition of 'exceptional circumstances'" and declined to create such an exception.(27) The New Jersey Supreme Court has yet to issue its decision.
The unavailability exception imposes an unfair burden on insurers. In Stonewall, the insurers argued that the unavailability exception would allow the assured to "obtain a windfall that would treat it and other manufacturers that fail to purchase insurance in the same manner as manufacturers that purchase appropriate amounts of insurance".(28)
This point is illustrated by returning to the opening scenario. In a jurisdiction that applies pro rata allocation and a continuous trigger from date of first exposure to date of diagnosis, the potential allocation block is 40 years. First, consider a state that does not apply the unavailability exception. Under a pro rata allocation, $10,000 (one-fortieth of the total $400,000 settlement) is allocated to each year:
- A Insurance Co, which provided four years of coverage, would be responsible for $40,000 (four years of coverage divided by 40-years allocation times $400,000);
- B Insurance Co, which provided three years of coverage, would be responsible for $30,000;
- C Insurance Co, which provided two years of coverage, would be responsible for $20,000; and
- X Corp would be responsible for $310,000 ($10,000 in 1983 when it was self-insured and $300,000 from 1986 to 2016 when insurance was unavailable).
Now consider a jurisdiction that applies the unavailability exception. The original 40-year allocation block decreases to 10 years – the period when insurance was issued and when the insured chose not to be insured (ie, self-insured) – with $40,000 being allocated to each year. Under this allocation:
- A Insurance Co's share increases to $160,000 (from $40,000);
- B Insurance Co's share increases to $120,000 (from $30,000);
- C Insurance Co's share increases to $80,000 (from $20,000); and
- X Corp is on the risk for only one share of $40,000 (in 1983 when it was self-insured), not the 30 years when coverage was unavailable.(29)
X Corp, which continued to manufacture asbestos-containing products for 15 years after the policies introduced asbestos exclusions, is protected and indemnified by the insurers that expressly did not contract with the assured to cover the risks. The insurers are forced to cover under the unavailability exception. They are thus being penalised for making the strategic business decision to stop covering certain risks, rather than the assureds that knew about the risks and – in some instances – ignored those risks and continued to produce asbestos-containing products.
For this reason, it is of utmost importance that, should courts continue to adopt the unavailability exception, they recognise an equitable exception to the rule. In Vanderbilt, defendant Mt McKinley Insurance Company argued that since Vanderbilt continued to "engage in asbestos related business after 1985, when insurance coverage for third party asbestos claims became generally unavailable", it should not be able to benefit from this rule.(30) However, the court expressly rejected this argument. It is thus promoting the reckless behaviour of assureds that have continued to mine and manufacture harmful products, rather than reward or at least recognise the sound business judgement of the insurance market to decline coverage for that particular risk.
In Owen-Illinois, the New Jersey Supreme Court framed the issue as "periods of no insurance [that] reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable".(31) The assureds that continued to mine and manufacture asbestos-containing products after the first exclusion date can be said to have assumed the risk. The assureds knew the products were harmful ? so much so that the insurers deemed this too much of a risk to insure. Therefore, courts should find in these circumstances that the assureds constructively assumed the risks and bar the application of the unavailability exception.
In determining the application of the unavailability exception, courts must take into account the business decisions of the insurers, along with the assureds, and create an equitable rule that does not unduly burden the insurers.
For further information on this topic please contact Michael J Pinto or Alexander Mueller at Mendes & Mount LLP by telephone (+1 212 261 8000) or email (email@example.com or firstname.lastname@example.org). The Mendes & Mount LLP website can be accessed at www.mendes.com.
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(19) The Vanderbilt court posed the question of "whether costs should be prorated to the insured for periods when it was uninsured not by choice or negligence but because insurance coverage was unavailable".
(22) United States Fidelity & Guaranty Co v Treadwell Corp, 58 F Supp 2d 77, 105 (SDNY 1999); Owens-Illinois, Inc v United Ins Co, supra 138 NJ 472–73; Crossmann Communities of North Carolina, Inc v Harleysville Mutual Ins Co, 395 SC 40, 63, 717 SE2d 589 (2011).
(29) Taking this scenario to its extreme, assume that the date of first exposure is now 1985; under these facts, in an unavailability exception jurisdiction, the insurer is liable for the entire $400,000 settlement, as opposed to its pro rata share under a continuous trigger theory.