On January 24, 2014, the United States District Court for the District of Maryland held in AC&R Insulation Co., Inc. v. Pennsylvania Manufacturers’ Association Ins. Co., No. 12-3528 (D. Md. Jan. 14, 2014), that a policyholder engaged in the selling of insulation products was precluded from challenging the validity of asbestos exclusions in its primary and umbrella insurance policies because the policyholder did not bring its claims in a timely manner following the loss. The decision illustrates, therefore, the value that experienced coverage counsel can add if consulted at the outset of a claim.
AC&R Insulation Co., Inc. (“AC&R”), sought coverage under primary and umbrella insurance policies issued in 1986 for a series of underlying lawsuits arising out of its insulation products, which it sold to plumbing, heating and insulation contractors, among other trades. Beginning in 1985, AC&R purchased primary and umbrella insurance policies from Pennsylvania Manufacturers’ Association Insurance Company (“PMA”). Upon renewal in 1986, PMA issued insurance binders to AC&R, which served as temporary insurance contracts until the official policies could be issued.
The binders were replaced by two policies with an effective date of September 1, 1986. Both the primary and umbrella policies contained an asbestos exclusion endorsement. The primary policy also contained a “Reduction of Coverage” form, advising that coverage for asbestos claims would be eliminated from the 1986–1987 policies. The binders contained no reference to any such exclusion. Following the 1986 renewal, AC&R continued to renew its insurance with PMA annually until 1992, with the subsequent policies containing terms and conditions identical to those in the 1986 policies.
Following the issuance of the 1986 coverage, AC&R was named in hundreds of lawsuits as a result of alleged exposure to AC&R’s asbestos-containing products. AC&R tendered the claims to PMA and PMA undertook their defense. In 1988, and while PMA was paying for the defense and indemnity of AC&R’s asbestos claims under the 1985 primary and umbrella policies, PMA advised that coverage would eventually be barred based on the asbestos exclusions contained in the 1986 and 1987 policies. On November 30, 2012, AC&R filed suit against PMA seeking a declaration that AC&R had made a proper demand for coverage under the policies and that PMA had failed to tender its policy benefits. AC&R sought leave to amend its complaint to add factual allegations that the binders issued by PMA committed PMA to provide insurance without the asbestos exclusions and that inclusion of the exclusions was an impermissible and inequitable material change after the fact that required reformation of the policies. PMA opposed the amendment. The parties then cross-moved for summary judgment.
The district court granted PMA’s motion for summary judgment and held that AC&R’s claims were time-barred, both by the applicable statute of limitations as well as the equitable doctrine of laches.
In Maryland, the statute of limitations for civil actions is three years from the date the action accrues. PMA argued that AC&R’s claim for reformation accrued in 1987, when AC&R became aware that the 1986 policies contained an asbestos exclusion. AC&R argued that the cause of action did not accrue until 1988, after PMA actually relied on the asbestos exclusion as a basis to deny coverage.
The court held that where a dispute goes to the validity of an insurance policy provision — in this case whether the asbestos exclusions should be included in the policy at all — and not its scope, the statute of limitations begins to run immediately when the policyholder learns of the allegedly invalid provision. The court further noted that under Maryland law, a policyholder may be bound to the terms of its insurance, even where those terms are inconsistent with the policyholder’s expectations of coverage, so long as the policyholder accepted the policy and retained it long enough to effectively ratify it.
The court also found AC&R’s claims to be barred by the equitable doctrine of laches, which prohibits stale claims that are the product of an unjustifiable and prejudicial delay. The court found little doubt that AC&R knew that the 1986 policies contained the asbestos exclusion. The court also found that PMA had communicated in letters written in 1988 and 1990 that it would not defend asbestos suits under the 1986 policies. Finally, the court found AC&R unable to justify its substantial delay, which the court found to be prejudicial to PMA, since almost every witness with personal knowledge of the policy negotiations was now dead and any written documentation had been destroyed years earlier.
In AC&R, coverage was jeopardized because the policyholder failed to recognize early in the claim process that the policyholder's expectations of coverage were not accurately reflected in the written insurance policies. Had that inconsistency been recognized sooner, a timely claim to reform the policies could have been asserted. The AC&R decision underscores, therefore, the importance of evaluating the availability of insurance coverage for any potential liability as soon as the likelihood of a claim arises. When such a potential arises, policyholders must be proactive about securing insurance coverage. This includes conducting a timely evaluation of all known insurance policies to ensure familiarity and compliance with all pertinent terms and conditions to coverage. Use of skilled insurance coverage counsel early in the claim process will help to avoid oversights that could lead to a loss of coverage. This is especially important where, as in AC&R, a potential claim to reform the policies exists based on the presence (or absence) of a particular policy term that renders the written policy inconsistent with the policyholder’s expectations of coverage.