The United States Court of Appeals for the 11th Circuit, applying Illinois law in an unpublished decision, has held that Celotex's failure to provide its excess insurers notice of lawsuits claiming more than $2 billion in property damage until after Celotex entered bankruptcy precluded coverage for asbestos-related property damage under numerous policies. Asbestos Settlement Trust v. Cont'l Ins. Co. (in re Celotex Corp.), No. 06-15748, 2008 WL 2637094 (11th Cir. July 7, 2008).
Prior to entering bankruptcy, Celotex had been a manufacturer of building materials containing asbestos and faced, in the court's language, "a torrent" of asbestos-related lawsuits alleging bodily injury and property damage in the 1970s and 1980s. Celotex filed for bankruptcy in 1990 and thereafter assigned its insurance coverage rights to the Asbestos Settlement Trust. Celotex had multiple layers of liability insurance across many policy periods; only the excess policies from 1978 to 1984 were at issue in this coverage dispute. These excess policies contained an aggregate limit of liability for property damage and bodily injury claims and sat above primary policies that excluded coverage for asbestos-related bodily injury claims. The excess policies required the insured to give written notice "'as soon as practicable' in the event of an 'occurrence' 'reasonably likely' to implicate coverage" and to give notice of claims made on account of such occurrences.
In 1980, following a wave of asbestos-related bodily injury suits, the federal government issued a report naming Celotex as a possible defendant in asbestos-related property damage suits, and the insured anticipated a wave of asbestos-related property damage suits. Between 1981 and 1985, Celotex was named in numerous asbestos property damage suits that together sought approximately $2 billion in damages. In 1980, Celotex's in-house coverage counsel instructed its broker to begin to notify "all excess carriers which would have coverage applicable to asbestos-related coverage" after deciding that excess carriers would likely be involved in asbestos-related litigation. The lower court determined, however, that despite this request, the broker never notified the excess carriers of the property damage suits and that the excess carriers were not provided notice until after Celotex filed for bankruptcy in 1990. That court also concluded that notice was due in 1983 at the latest.
Addressing the timeliness of Celotex's notice, the court stated that under Illinois law an insured has some discretion in notifying excess insurers of claims or occurrences and the "critical question" is when the insured reasonably knew that its excess policies would be implicated. The court explained that it is to consider the totality of circumstances in determining whether an insured gave timely notice to excess insurers. In particular, it noted that a court will consider the damages sought in the underlying suits, an insured's investigation with regard to the merits of a claim, whether an occurrence or suit will likely implicate excess coverage, the sophistication of an insured, and prejudice to the insurer, although the court stated that prejudice is not required under Illinois law. The court further explained that an insured may not wait until the underlying coverage nears exhaustion to give notice to the excess insurers if it has already formed a reasonable belief that the excess policies will be implicated.
The court rejected the settlement trust's argument that notice was not due even as of 1990 because Celotex had not yet exhausted property damage coverage under its primary policies. The court noted that Celotex had determined as early as 1980 that all future asbestos litigation would likely reach its excess policies and concluded that "[w]hen an insured actually (and quite reasonably) concludes that all future claims will implicate excess coverage, it is a fortiori unreasonable to withhold notice of claims for years after the complaints are received." The court stated that the nationwide scope of the asbestos property damage suits and the billions of dollars in damages sought, in comparison to the possible $6.6 million of primary coverage the settlement trust asserted was still available for property damages claims, supported the determination that a reasonable insured would have notified its excess insurers of the suits. In addition, there was no evidence of an investigation and evaluation of the merits of the property damage claims that would lead Celotex or the settlement trust to conclude that the excess policies would not be implicated. Finally, the court noted that in 1983 the insured concluded that excess coverage existed for certain bodily injury claims, even though the policies excluded asbestosis claims. This conclusion would lead "a reasonable, sophisticated insured" to realize that the bodily injury claims would consume lower-level excess coverage and the aggregate limit of liability for bodily injury and property damage claims, which would in turn lead to the property damage claims reaching the excess policies and, as such, required notice to those excess carriers.
The court, therefore, held that Celotex's notice of the property damages claims in 1990, five to 10 years after the suits were filed, was unreasonable and that no excess coverage was available for those claims.