Recent Developments and Issues in Insurance Coverage for Asbestos Claims

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1 Recent Developments and Issues in Insurance Coverage for Asbestos Claims Presented by: Lawrence A. Hobel Linda Bondi Morrison Cutting-Edge Issues in Asbestos Litigation Conference March 17, 2014

2 Topics» Changes in Insurer Dynamics Consolidation of Claims Handling Reinsurer Insurer Disputes» Policy Rights and Obligations of Successor And Disappearing Asbestos Defendants Successor Issues and Henkel Claims Against Dissolved Entities» Allocations Between Insurer and Insured Retrospective Premiums SIR issues Operations v Products/Completed Operations Coverage 2

3 Changing Dynamic: Consolidation of Coverage and Claims Handling» Berkshire Hathaway retroactive reinsurance transactions Through National Indemnity Co (NICO) Requiring the ceding insurer to turn over control of claims handling to NICO Claims handling by Resolute Management, Inc. NICO received $22 billion in premiums and assumed liabilities under ~36 separate deals with ~29 billion originally in reserved liabilities AIG, Equitas, ACE, Continental Casualty, Employers Re, Liberty, Stonewall, among others Mostly asbestos and environmental liabilities 3

4 Consolidation has Generated Litigation» Policyholders Berkshire relies on float Resolute has engaged in inappropriate claims handling Lawsuits against NICO and Resolute as well as ceding insurer Claims against NICO have included breach of contract and bad faith (e.g., AT&T Corp complaint) and sometimes tortious interference Claims against Resolute have included tortious interference» Insurers Reinsurance is nothing new Has increased capacity in market and benefits all Eliminates insurer weakness that policyholders or claimants can exploit Berkshire Hathaway denies that it is engaged in any improper behavior Case law developing on claims that can be stated against NICO and Resolute. Tortious interference claims have received less favorable court treatment than bad faith claims because Resolute and NICO were considered to be in contractual relationship or acted with consent 4

5 Changing Dynamic: Insurer Reinsurer Disputes» Disputes arise as to whether reinsurer under follows the fortunes or follows the settlements clause is obligated to pay on settlements and liabilities that the insurer (cedent) paid.» Recent Decision NY Court of Appeals (2013) United States Fidelity & Guaranty v. American Re-Insurance Co. USF&G settled Western MacArthur for $975 million plus $12.3 million in fees to asbestos claimants counsel. Sought payment from treaty reinsurer. USF&G policies no aggregate limits and per person and per accident limits in varying amounts with highest per person of $200K. Reinsurance agreed to pay USF&G the amount of $100K of any loss. USF&G selected one policy for allocation of payment. Reinsurer disputed allocation 5

6 Insurer Reinsurer Disputes» Clause ordinarily bars challenge by a reinsurer of the cedent s decision whether and for how much to settle. Interests aligned.» Allocation Decisions: Interests not necessarily aligned Court confirms cedent s allocation decision entitled to deference When several reasonable allocations are possible, the law, as several courts have recognized, permits a cedent to choose the one most favorable to itself. [A] cedent s allocation of a settlement for reinsurance purposes will be binding on a reinsurer if, but only if, it is a reasonable allocation, and consistency with the allocation used in settling the underlying claim does not by itself establish reasonableness. bad faith claim and allocation value of lung cancer claims attributing payment to a single policy year 6

7 Sucessor and Disappearing Defendants 7

8 Successors and Coverage» Most policies contain an anti-assignment clause: no "assignment of interest under this policy" without the insurer's consent endorsed on the policy. Such clauses are generally valid and enforceable. (See Bergson v. Builders' Ins. Co. (1869) 38 Cal. 541, 545; Greco v. Oregon Mut. Fire Ins. Co. (1961) 191 Cal.App.2d 674, 682, 12 Cal.Rptr. 802.)» Two exceptions have been asserted by Policyholders Clause should not apply when liability is by operation of law where the transaction amounts to a consolidation or merger of the two entities where the purchasing corporation is a mere continuation of the seller the transfer of assets to the purchase is for the fraudulent purpose of escaping liability for the seller s debts. Clause should not apply because once the injury or damage insured against has taken place, a policyholder could freely assign its rights to defense and indemnity for claims arising out of that damage or injury.» Insurers Dispute Operation of Law Very few situations where true operation by law. Not applicable where any surviving corporation If law allows suit against dissolved company to extent of insurance assets, then potential multiple insureds Loss Exception Has not Occurred simply because claim has been made by some claimants Can create multiple companies claiming coverage for the same liability, when only one entity had been insured 8

9 Successor Issues» Case Law Mixed on Assignability after loss The Henkel Rule (California Supreme Court) No assignable chose in action because the duty had not been reduced to a sum of money due or to become due under policy. Assignment without consent only where (i) the claim had been reduced to a monetary sum; or (ii) the insurer was in breach of the policy and the assignment transferred the right to recover damages. California Supreme Court in Fluor considering whether Insurance Code section 520 warrants a different result. [a]n Agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss. Some Courts have followed Henkel E.g., Indiana Supreme Court relying on reasoning of Henkel Other Courts have ignored or rejected Henkel E.g., Trial Court in Ohio noting that Henkel was in conflict with precedent of Pennsylvania, New York, Delaware, Ohio and Connecticut Generally on the basis that the loss has occurred before the claim is reduced to judgment or the insurer is in breach CNH American LLC v. American Cas. Co., No. 12C , 2014 Del. Super. LEXIS 31 (Jan. 6, 2014). CNH = corporate successor to insured Court found that anti-assignment clause does not prevent assignment of policy where the alleged loss occurred prior to assignment 9

10 Claims Against a Disappeared Entity» The case law continues to develop as to the rights of claimants to pursue dissolved entities to the extent of insurance coverage Issues respecting rights where corporation law of jurisdiction has a sunset provision. Issues respecting whether requires dissolved entity to come back to life in some way or simply allows suit be brought against insurer Issue respecting whether liability of successor for dissolved corporation 10

11 Recent Cases» In re Krafft-Murphy Co., 82 A.3d 696 (Del. Nov. 26, 2013). Insured dissolved and wound up business more than 10 years ago Lower court concluded insured immune from lawsuits and therefore insurance contracts worthless because judgment impossible. S.Ct. ruled that receiver must be appointed to defend asbestos suits» Germain v. A.O. Smith Water Prods. Co., 41 Misc. 3d 1228(A) ((N.Y. Sup. Ct. Oct. 23, 2013). Plaintiffs alleging asbestos injuries may sue dissolved/liquidated NJ corp. and may effect service by serving insurer Insured liquidated 16 years and dissolved 9 years prior to suit, and after winding up Court: substituted service may be effectuated on insurer if insurer is real party-in-interest and bound to defend and indemnify corp.» Bondex Int l, Inc. v. Hartford Accident & Indem. Co., 667 F.3d 669 (6th Cir. 2011) Bondex acquired assets and liabilities of Reardon Co.; insurers covered products claims under claims handling agreement and Reardon policies but Bondex later challenged insurer allocation Bondex claimed Reardon not a named insured; products coverage applies only to named insured Court disagreed because policy definition included companies under the control of Bondex at inception of policy even though Reardon no longer in existence, the same association of persons for carrying on a commercial enterprise continued as a division of Bondex 11

12 Allocation Between Insurers and Insureds» The case law continues to develop as to allocation of defense and indemnity amounts to policyholders» Recent cases address allocation of: SIRs Defense fees and costs When insured found not to have liability When amounts incurred without insurer consent Retrospectively rated premiums» Completed Operations and Premises Claims 12

13 Continuing Controversy How to Apply Self-Insured Retentions (SIRs) (Pt. One) Issue One: If a single occurrence spans multiple years, how many SIRs must the Policyholder satisfy before tapping its coverage one, or (applying horizontal exhaustion) one per triggered policy year? Deere & Co. v. Allstate Ins. Co., San Francisco Super. Ct., No. CGC (May 19, 2006)(Phase I) (only one, because SIRs are not insurance (following Montgomery Ward & Co. v. Imperial Cas. and Indem. Co., 81 Cal.App.4 th 356 (2000) Missouri Pacific R.R. v. International Ins. Co., 288 Ill. App. 3d 69 (1997) (SIRs constitute primary insurance; insured must satisfy one SIR per triggered policy period) 13

14 Continuing Controversy How to Apply SIRs (Part Two) Issue Two: Once a first-layer excess policy s aggregate limit has been exhausted, are the second- and higherlayer excess policies subject to a self-insured retention per occurrence for subsequent claims? Deere & Co. v. Allstate Ins. Co., San Francisco Super. Ct., No. CGC (Oct. 25, 2013) (Phase III) (yes; maintenance of underlying insurance provision in second-and-higher layers incorporate all but the premium, the amount and limits of liability from the first layer, and SIRs are not any of these) Kaiser Alum. & Chem. Corp. v. Certain Underwriters at Lloyd s London, San Francisco Super. Cot., No ( Oct. 11 & 31, 2001) (no, according to plain language in second-and-higher layers Limit of Liability provision; maintenance provision in those layers does not incorporate SIR contained in the first layer s Limit of Liability provision) 14

15 Continuing Controversy Who Pays Defense Costs on Claims Dismissed Without Payment Issue: Where ultimate net loss is defined as the total sum which the Assured... becomes obligated to pay..., either through adjudication or compromise, and shall also include... [legal fees], must Insurers pay defense costs for claims not resolved through adjudication or compromise?» Deere & Co. v. Allstate Ins. Co., San Francisco Super. Ct., No. CGC (Oct. 25, 2013) (Phase III) (no)» Certain Underwriters at Lloyd's, London v. Chicago Bridge & Iron Co., 406 S.W.3d 326 (Tex. App. 2013), review denied (Oct. 11, 2013) (yes)» Dana Cos., LLC v. American Employers Ins. Co., No. 49D PL , slip op. (Ind. Sup. Ct., May 8, 2013) (yes) 15

16 Retrospective Premium Obligation» What happens when the policy provides for payment of a retrospective premium and claims are made by entities other than the disappeared entity?» Transportation Ins. Co. v. Busy Beaver Building Centers, Inc., No , 2013 U.S. Dist. LEXIS (S.D. Ohio Aug. 27, 2013). Named insured had no duty to pay retros because parent co. was only party who paid premiums and insurer did not negotiate right to seek from subsidiaries Policy issued to Cyclops; BB a subsidiary which paid Cyclops for insurance coverage. BB later became stand-alone corp. and was sued for asbestosrelated claims. Insurer provided coverage; BB knew at time it submitted claims that it was no longer owned by Cyclops Court in SJ ruling: BB never bound by contract between insurer and Cyclops because BB not a successor Cyclops responsible for retros 16

17 Operations v. Completed Operations/Products Coverage» Typically, the products/completed operations coverage contains aggregate limits whereas general liability coverage may not be subject to aggregates Claimants may allege various theories of liability and may have been exposed (or claim exposure) during the period of installation or other action and before operations were completed (operations coverage) or possession of product relinquished Insureds have argued that the completed operations and product hazards apply only where the source or cause of the injury occurs after the operation has been completed or possession of the products relinquished. Insurers have argued that the products/completed operations hazardous applies where the bodily injury in a given policy period occurs after the operations have been completed or possession of the product has been relinquished. Essentially, they claim that it is the timing of the injury that is the determinative factor.» Recent case: Plant Insulation Co v. Fireman s Fund (SF Trial Court) (2013) Trial court concluded that it is the timing of the bodily injury during the policy period that determines whether the completed operations hazard applies. The source or cause of the injury is irrelevant. Trial Court concluded that the same rule applies as to products coverage. It is the timing of the bodily injury during the policy that was the operative event that controls the application of the products hazard, not the source or cause. Bystander exposure while operations continued were not products exposure. Court put burden on Insured to show claim not subject to aggregate limits. Court rejects argument that there needs to be both an injury causing event and exposure during the policy period Notes other Courts have also adopted approach. See In re Wallace & Gale Co (4 th Cir 2004)» Raises Significant Defense, Allocation and Exhaustion Issues 17

18 Thank you. Lawrence A. Hobel Linda Bondi Morrison One Front Street San Francisco, CA Von Karman Avenue Suite 800 Irvine, CA 92612