Why it matters
In the latest ruling in the long running asbestos litigation involving pump manufacturers in Delaware, the state's highest court declared, among other important holdings, that because asbestos-related disease results from gradual and continuous injurious processes, a claimant's first significant exposure to asbestos is not the only trigger for insurance coverage purposes. Instead, under New York law, bodily injury occurs not only upon initial exposure but continues afterwards, the court said. Thus, the trial court erred when it held that only those excess policies in place during a claimant's significant exposure to asbestos were on the hook.
In the 1980s, Viking Pump and Warren Pumps acquired pump manufacturing businesses from Houdaille Industries. As a result, the companies were forced to deal with potential liability from bodily injury claims made by plaintiffs alleging damages in connection with asbestos exposure claims dating back to Houdaille's ownership days.
Each year from 1972 through 1985, Houdaille purchased occurrence-based primary and umbrella general insurance from Liberty Mutual Insurance Company. Above the umbrella layer, Houdaille purchased various layers of excess insurance—a total of 35 excess policies through 20 different carriers. The insurance tower over that time period provided $17.5 million in primary coverage, $42 million in umbrella coverage, and $427.5 million in excess coverage.
Viking and Warren sought coverage for the Houdaille claims using the policies purchased by their predecessor. While Liberty stepped up, the excess insurers argued that Viking and Warren were not entitled to access the excess policies and disputed the extent of any coverage available, particularly with respect to defense costs.
Viking and Warren filed a coverage action in 2005 in Delaware state court. In the ensuing decade, the litigation moved up and down the Delaware court system. Ultimately, the trial jury returned a verdict largely in favor of Viking and Warren, and the excess insurers appealed. While the appeal was pending, New York's highest court answered certified questions from the Delaware Supreme Court, including that the proper method of allocation for the claims against Viking and Warren was "all sums," and that the excess policies were triggered by vertical exhaustion of the underlying available coverage within the same policy period.
Back in Delaware, the parties identified five issues for that state's highest court to decide: whether Warren and Viking obtained valid assignments of insurance rights; whether the aggregate product liability limits of certain Liberty primary policies were exhausted; whether the excess policies at issue provided coverage for defense costs and if some of the excess policies could count defense costs towards the reduction of their policy limits; and whether only those policies in place during a claimant's significant exposure to asbestos were triggered.
Considering each issue in the course of its 83-page opinion, the Delaware Supreme Court sided largely with Viking and Warren.
First, the court ruled that the lower court correctly held that Houdaille effectively assigned its rights in the policies to Viking and Warren, rejecting the excess insurers' argument that the transfer was invalid because the excess insurers did not consent.
The agreement between Warren and Houdaille explicitly assigned "the insurance coverage in excess of the primary casualty limits," the court said, and contained no language indicating that the parties intended the assignment be limited to the Liberty policies. As for Viking, the agreement employed "broad contractual language" to assign all assets (tangible and intangible) and liabilities, including "all outstanding contracts." This sweeping language manifested Houdaille's intent to transfer the excess policies, the court found.
A failure to obtain the consent of the insurer in advance of assigning coverage rights did not invalidate the efficacy of the transfer, the court said, because the anti-assignment provisions in the policy pertained only to pre-assignment losses. "Here, at the time of the assignment, the losses triggering the Excess Insurers' potential liability had already occurred within the policy periods," the court explained. "Warren and Viking therefore received Houdaille's accrued payment rights, which had vested in Houdaille prior to the assignments. Further, Houdaille's policies provided occurrence-based coverage, such that its claim to payment rights arose at the time of the injurious exposure to conditions that resulted in personal injury. Houdaille's insurance rights accrued once parties were injured by significant exposure to asbestos during the operative policy periods and prior to the assignments to Warren and Viking."
That the precise amount of liability was not identifiable at the time of assignment did not alter the excess insurers' obligation to insure the risks for which they contracted, the court added.
Next, the court agreed with the policyholders that the 1980-1985 Liberty primary policies were exhausted (the excess insurers did not challenge the years between 1972 and 1980). According to the excess insurers, Warren and Viking failed to pay the required $100,000 per-occurrence deductibles during those years by separately entering into multi-million dollar settlements with Liberty. But the court agreed with the insureds that, under the policy language, exhaustion did not depend on who paid the deductible. Liberty reached an agreement with Warren and Viking whereby Liberty retroactively billed the policyholders for the deductibles and collected the amounts as an adjusted premium, the court said, so the insureds fulfilled their obligations under the policies.
Turning to the matter of defense costs, the unanimous court affirmed in part and reversed in part the rulings from the lower court. Dividing the excess insurers into four groups, the court determined that some of the excess policies contained a duty to pay for Viking and Warren's defense costs, while others made the duty contingent upon consent of the insurer.
Finally, the court considered whether the final judgment from the trial court erred with respect to the trigger of coverage. Specifically, the trial court opined that, "[a]s to a person who ultimately develops lung cancer, mesothelioma or non-malignant asbestos-related disease, bodily injury first occurs, for policy purposes, upon cellular and molecular damage caused by asbestos inhalation, and such cellular and molecular damage occurs during each and every period of asbestos claimant's significant exposure to asbestos. The duty to defend is based on the possibility of coverage, reflected in the pleadings' allegations. The duty to indemnify derives from whether the basis for Warren or Viking's liability to the injured claimant is actually covered by the policy."
At least arguably, the trial court's ruling meant that the excess policies were triggered only by injury during periods of significant exposure (as opposed injury during the policy period), effectively negating much of the coverage awarded by the jury. Warren and Viking argued that the trial court should have held that bodily injury occurs upon significant exposure to asbestos—and continues thereafter consistent with expert testimony presented at trial.
The Delaware Supreme Court agreed. "The record supports Warren's contention that this case was presented to the jury with the understanding that resolution of the issue of when bodily injury first occurred was all that was necessary because the parties agreed that bodily injury would continue until diagnosis," the court wrote.
Both sides' experts testified that "a person who ultimately develops asbestosis has undergone a continuous process from a person's first significant exposure to asbestos that continued until diagnosis." At trial, the parties only differed as to when bodily injury first occurs. "This dispute was resolved by the jury in Warren's favor, and the Excess Insurers did not appeal that factual finding by the jury," the court noted.
The excess insurers had adopted an inconsistent position on appeal by contending that only those policies in place while the claimant was actually exposed to asbestos were triggered, the court said, rejecting their argument that the insureds were essentially seeking a "continuous trigger."
"Plaintiffs did not rely on a presumption that asbestos-related injuries take place from exposure through manifestation," the court wrote. "Rather, they presented to the jury expert medical testimony that the cellular and molecular damage that leads to asbestos-related disease is a continuous process that is triggered after there is an injury-in-fact, i.e., the claimant's first significant exposure to asbestos."
At oral argument, both parties acknowledged that every asbestos claim involves a claimant who ultimately developed an asbestos-related disease and that asbestos-related diseases result from gradual and continuous injurious processes.
Accordingly, the court revised the final judgment to read: "As to a person who ultimately develops lung cancer, mesothelioma or non-malignant asbestos-related disease, bodily injury first occurs, for policy purposes, upon cellular and molecular damage caused by every asbestos inhalation, and such cellular and molecular damage occurs during each and every period of asbestos claimant's significant exposure to asbestos and continues thereafter. The duty to defend is based on the possibility of coverage, reflected in the pleadings' allegations. The duty to indemnify derives from whether the basis for Warren or Viking's liability to the injured claimant is actually covered by the policy."
To read the opinion in In re Viking Pump, Inc., click here.