Fuller-Austin v. Fireman’s Fund et al.: The Story of What Happens When You Cross Asbestos Liabilities with Excess General Liability Policies and Bankruptcy Law1 Jason B. Komorsky and Michel Y. Horton In a decision that should cause excess insurance carriers to reevaluate the manner in which they treat their policyholders, a Los Angeles trial court ruled in favor of a policyholder in an insurance coverage action addressing excess insurance carriers’ obligations to a policyholder faced with substantial long-tail asbestos liabilities, both prior to and after the policyholder filed for bankruptcy protection. 1 The pro-policyholder decision found that a bankrupt policyholder’s confirmed plan of reorganization constitutes an adjudication and judgment of the policyholder’s liabilities -- in this case asbestos liabilities -- that is binding on the policyholder’s insurance carriers. On a broad canvass that covered and reconciled a panoply of insurance, bankruptcy, and asbestos issues, the Fuller-Austin trial court started with the application of the continuous trigger, implicating all of Fuller-Austin’s years of insurance coverage, and ended with a finding that Fuller-Austin’s excess insurance carriers have an obligation to pay the full value of a bankruptcy confirmation that adjudicated all of Fuller-Austin’s asbestos liabilities. Along the way, the trial court set out a legal roadmap that included rulings on the impact of insolvencies, drop down obligations, the interpretation of the policy term “paid or held liable to pay,” and the concept of exhaustion and allocation. This article focuses on the Fuller-Austin trial court legal rulings in the second legal phase (Phase IB) 2, wherein the court addressed the following seven specific issues: i) trigger of coverage; ii) the impact of insolvencies; iii) legal effect of drop down provisions; iv) legal effect of the “paid or held liable to pay” policy language; v) the concept of exhaustion as a matter of law and generally; vi) excess policy triggers; and vii) triggering events and dates. Fuller-Austin Factual Background Although the Phase IB trial lasted only three weeks, the story of Fuller-Austin that culminated in these rulings spans several decades. This story, with its interweaving threads of California insurance law, as applicable to the terms and conditions of Fuller-Austin’s insurance policies, and bankruptcy law, through which Fuller-Austin’s underlying asbestos liabilities were resolved, ultimately compelled the trial court to rule in Fuller-Austin’s favor.
Michel Y. Horton and Jason B. Komorsky are with the law firm of Zevnik Horton LLP and, along with co-counsel Robert Horkovich of Anderson Kill & Olick, were trial counsel representing Fuller-Austin. Messrs. Horton and Komorsky regularly represent policyholders in the procurement of insurance, advise clients on insurance aspects of transactions, analyze and assist clients in making insurance claims, and resolve insurance disputes through negotiation, mediation and, where appropriate, litigation.
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Formed in 1946, Fuller-Austin was an installer of insulation material, primarily in refineries and petrochemical facilities in Texas. Some of this insulation material contained asbestos. Fuller-Austin secured its own general liability insurance before being acquired by another company, DynCorp. It also became a named additional insured under certain policies of general liability insurance that respond to Asbestos Claims that were issued to DynCorp during periods after the Fuller-Austin acquisition in 1974 through 1986. The evolution of Fuller-Austin’s general liability insurance program over the decades is typical for such industrial concerns. In its early years, the program consisted of just two layers: a primary policy with an umbrella policy sitting above it in each year. In later years, Fuller-Austin increased its limits and purchased additional layers of excess coverage to sit above the primary and umbrella coverage in each policy period. The defining characteristic of Fuller-Austin’s primary policies is their embrace of all risks except those specifically excluded. Primary insurance also has the responsibility for defending claims and paying claims that are covered on behalf of the policyholder. The umbrella policies increase or provide limits in addition to the primary coverage, and may provide broader coverage than the primary insurance (hence the term “umbrella”). Most of the excess policies sitting above the “umbrella” policies are “follow form” policies designed to facilitate continuity and consistency in the coverage. The reason for having a “layer” of policies in a given year is based on many factors, including social and financial inflation, the capacity of the insurance companies, and the risk appetite of insurance companies. Beginning in 1990, after many of the manufacturers of asbestos-containing products had gone into bankruptcy or settled with asbestos claimants, Fuller-Austin, along with many of its competitor insulators, increasingly became a target of asbestos claimants alleging injury from exposure to products installed in industrial complexes. In recent years, claims against FullerAustin have mushroomed, with more than ninety percent arising after 1993. When these claims were tendered to Fuller-Austin’s primary carriers, only one agreed to pay without a reservation of rights. Given the growth in the number of claims, in March 1993, pursuant to the terms of its policies, Fuller-Austin began putting its excess carriers on notice. None of the excess carriers agreed to indemnify Fuller-Austin either with or without a reservation of rights. In an effort to eliminate reservations of rights and to provide for proper claims handling on a negotiated basis allowing the transition from one carrier to the next, as well as to remove any question regarding Fuller-Austin’s entitlement to full indemnity for the asbestos claims, Fuller-Austin diligently initiated and conducted discussions with its insurance carriers. These discussions were ultimately unsuccessful and, consequently, in November 1994, Fuller-Austin filed the coverage action that is the subject of the recent legal ruling. As for the underlying asbestos claims, after an initial strategy that saw FullerAustin settling pending asbestos claims, the primary carriers changed tactics and decided to force 2
the asbestos bodily injury claimants to take their cases to trial. This strategy failed. In total, Fuller-Austin lost five of the nine trials conducted in 1995 with cumulative verdicts exceeding $5,000,000. In 1996, after four years of paying asbestos bodily injury claims, one of FullerAustin’s three primary carriers announced that its policy limits were exhausted. Upon notification of exhaustion, the remaining primary carriers increased the percentage of each claim that they were paying to absorb the exhausted carrier’s share. Given the claim of exhaustion and the ebbing primary insurance, the primary carriers advised Fuller-Austin to begin tendering the claims that were on the trial docket to the two umbrella carriers, as these carriers would soon have to step in and pay claims. Some of Fuller-Austin’s umbrella carriers agreed to provide coverage, going so far as to begin negotiating cost share agreements with other low level excess carriers. But, despite acknowledgments that their coverage was triggered, early promises of payment by the umbrella carriers never materialized. Ultimately, none of the remaining carriers paid a single dime to Fuller-Austin. All reneged on promises to pay even though the primary coverage was exhausted and at least one primary carrier with umbrella coverage was paying Fuller-Austin out of its umbrella limits. One umbrella carrier went so far as to instruct Fuller-Austin not to forward any further claims information because the carrier would never pay the claims absent a ruling in the coverage litigation. In late 1997, with asbestos claims mounting and primary insurance dwindling, Fuller-Austin proposed global settlement discussions with the asbestos plaintiffs’ bar in hopes of resolving, once and for all, the asbestos claims against Fuller-Austin. On October 17, 1997, the offer to participate in global settlements was extended to all of the excess insurance companies with the sole caveat that they agree to a confidentiality provision. Alternatively, the excess carriers were given the opportunity to direct Fuller-Austin not to participate in the global settlement negotiations, but only if the carriers acknowledged coverage. No excess carrier availed itself of the opportunities. In conjunction with the global settlement negotiations, Fuller-Austin considered the possibility of filing for bankruptcy protection. At the same time that the insurance carriers were notified of the settlement negotiations, Fuller-Austin notified them of the probability of a bankruptcy filing. Representatives were retained to represent and speak for the various adverse interests, including future claimants. On September 4, 1998, Fuller-Austin filed in Delaware district court a pre-packaged voluntary petition under Chapter 11 with a plan of reorganization and disclosure statement. A trust under Section 524(g) 3 of the United States Bankruptcy Code was established to marshal Fuller-Austin’s assets and to channel all future claims towards the trust and away from, among others, settled insurer carriers. Fuller-Austin’s insurance carriers filed objections to the proposed plan. On November 13, 1998, a district court bankruptcy approved Fuller-Austin’s disclosure statement and confirmed its plan of reorganization. The district court entered findings of fact and conclusions of law. Certain carriers settled with Fuller-Austin before and during the bankruptcy. The confirmation order granted a channeling injunction prohibiting any claims against 3
those insurance carriers’ insurance policies. Ultimately, all of the primary carriers and certain umbrella and excess carriers that had settled received the benefits of Fuller-Austin’s bankruptcy and the channeling injunction. The remaining carriers were found to lack standing in FullerAustin’s bankruptcy, in part because they had not acknowledged coverage and, therefore, whether their policies would ultimately respond to the Fuller-Austin liabilities adjudicated in the bankruptcy would be resolved by the trial court in California. The remaining carriers did not contest the confirmation, nor did they contest the finding that they lacked standing. They allowed the confirmation to become a final judgment. The bankruptcy plan, as confirmed, resolved all of Fuller-Austin’s presently pending and projected asbestos litigation. The bankruptcy plan provided a matrix that set forth Fuller-Austin’s minimum liability (the “allowed liquidated value” or “ALV”) to each claimant. The bankruptcy matrix provided for liability, as follows: Pleural Disease, $5,500; Asbestosis, $10,500; Other Cancers, $15,500; Lung Cancer, $25,500; and Malignant Mesothelioma, $58,500. However, at the request of the excess carriers, Fuller-Austin removed the aggregate claims value contained in the bankruptcy plan of reorganization and agreed with the carriers to allow the California court to decide the aggregate value. The carriers argued that the aggregate value constituted future damages and, therefore, needed to be fixed by the California court. Accordingly, an aggregate value for all of the claims resolved through the bankruptcy was removed from the confirmed plan. In the coverage action, Fuller-Austin argued that it had a present liability to pay both presently pending and future claims in a like manner pursuant to matrix values approved by the district court, and that a jury should determine the aggregate value of Fuller-Austin’s damages. The Trial Court’s Legal Rulings While the above facts will form the basis of Fuller-Austin’s presentation to the jury in the next phase, it was incumbent upon the court to set the legal framework in which the jury trial would proceed. To that end, the court, at the insistence of the insurance companies, determined that certain legal issues must be resolved before the matter could be presented to the jury. Through months of argument and negotiations, a special master crafted the nine legal issues that framed the legal phase. The seven legal issues discussed below were the ones resolved by the court in Phase IB. The rulings are not only rooted in California law, they are mandated by the insurance policy language; the starting and ending point for the court’s analysis.4 In its ruling, the trial court examined the bankruptcy statute specifically designed to address asbestos liabilities,5 the ultimate net loss6 and bankruptcy provisions 7 found in general liability policies, and the basic obligations of an excess insurance carrier to its policyholder. The trial court reviewed these factors in the light of an ever increasing number of asbestos bodily injury claims flooding the court system and forcing companies, such as Fuller-Austin, to seek bankruptcy protection. 8 The decision, though criticized by insurance companies as revolutionary and contrary to California law, is, in fact, evolutionary in scope and consistent with well established 4
California principles, policy language, and bankruptcy law. For the most part, the decision clarifies and reconciles several legal issues that have caused great debate and much misinterpretation in the insurance coverage world. In brief, the trial court’s rulings can be summarized, as follows: Ë The trial court applied a continuous trigger, such that all policies in effect from exposure to asbestos to death or discovery are triggered, each triggered policy has an independent obligation to respond, and there is a rebuttable presumption that each asbestos claim falls within coverage. Insolvent coverage is not “other insurance” and, therefore, is not taken into account when allocating a loss on a given layer of insurance. Accordingly, Fuller-Austin, as in this case a bankruptcy policyholder, is not liable for paying a loss that might otherwise have been allocated to insolvent coverage. Applying horizontal allocation, there is sufficient solvent coverage in each layer such that no insurance company is being asked to “drop down” and respond below their stated attachment points. On the contrary, because the insurance companies get the benefit of other solvent insurance, their policies actually respond at a higher dollar amount than is stated in their policies. Accordingly, the concept of “drop down” was deemed moot. The “paid or held liable to pay” language reflects that Fuller-Austin’s policies are liability policies, not indemnity policies. Liability policies pay upon the imposition of a liability, such as a judgment within the dollar limits expressed in the policies and subject to any other insurance provision . Fuller-Austin’s or its underlying insurance company’s inability or failure to pay any share allocated to them is irrelevant. A carrier’s obligation to pay is triggered by a liability that exceeds the policy’s attachment point. Accordingly, exhaustion in the context of paying a liability, as opposed to in the context of transferring the duty to defend, is irrelevant. The dismissal of the primary carriers after settlement with the policyholder and without a cross-claim by the excess carriers constitutes exhaustion as a matter of law to the extent exhaustion is an issue. A dispute over whether a carrier has exhausted so as to trigger the next carrier’s obligation is between the carriers, not between the excess carrier and the policyholder. In other words, the excess carrier’s belief that underlying policies are not exhausted does not justify refusing to indemnify the policyholder, where the carrier has not asserted a cross-claim against the primary carrier. The confirmed plan of reorganization was a judgment establishing Fuller-Austin’s liability, thus triggering the insurance companies’ obligation to pay. The trial court further ruled that the Fuller-Austin bankruptcy constitutes an “adjudication” and 5
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therefore insurer consent to the bankruptcy was unnecessary. However, even if the bankruptcy were considered a “compromise,” the bankruptcy court’s independent findings regarding the good faith nature of the bankruptcy plan satisfied any “notice and consent” that may have been required under the insurance policies. Ë The bankruptcy judgment requires the insurance carriers to pay the full amount of Fuller-Austin’s liability to individual asbestos claimants, even though FullerAustin will only be able to pay a discounted percentage of the claims as a result of its bankrupt status. The bankruptcy judgment establishes a present liability of Fuller-Austin to the pending and future asbestos claimants. The amount of this “aggregate asbestos liability” will be determined in the next phase of the case -- a jury trial -- based on expert testimony regarding the statistical projections of asbestos claims that are anticipated to be brought against the Trust over the next 40 years. In large part, the trial court adopted the principles established by the Seventh Circuit in UNR.9 An excess carrier cannot bury its head in the ground, and require the policyholder to prove exhaustion to the insurance company’s satisfaction before providing coverage. California case law is clear that an excess carrier has many obligations that arise prior to, and irrespective of, exhaustion of underlying limits. These duties include: Ë Excess insurance carriers have a duty to accept reasonable settlements that affect their coverage layers, regardless of whether there has been “exhaustion” of underlying insurance. Excess insurance carriers may lose their rights to participate in settlement discussions if they fail to acknowledge coverage, thereby leaving the insured free to negotiate a reasonable settlement under the circumstances. Excess insurance carrier obligations are triggered by liabilities that penetrate their stated attachment point, regardless of whether actual payment of the liability has been made. Excess insurance carrier obligations to insureds do not end upon the filing of coverage litigation or upon the filing of a bankruptcy plan.
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Bankruptcy as A Judgment Unquestionably, the most significant ruling by the court was its holding regarding the effect of Fuller-Austin’s bankruptcy. The court ruled that the confirmation of Fuller-Austin’s bankruptcy plan was a judgment and an adjudication, thereby triggering Fuller-Austin’s policies. 6
In reaching this decision, the trial court relied on bankruptcy law and, in particular, Section 524(g) of the Bankruptcy Code, a provision established to address asbestos liabilities,10 as well as the lay definition of judgment and adjudication. Citing to numerous federal authorities, the trial court found that “[t]he confirmation of the plan of reorganization is, as a matter of law, a judgment.”11 The trial court also found that the confirmation of the bankruptcy plan was “an ‘adjudication’ of Fuller- Austin's liability and damages.”12 The trial court found that the dictionary definitions were in accord.13 While no published California case had ever opined directly on this subject matter, the result reached by the court was squarely mandated by recent California Supreme Court authority. In this regard, the decision is consistent with the recent holding in Powerine 14, a case championed by insurance companies. Powerine reinforces the holding first put forth in AIU,15 that all monies ordered by any court, be it a district court (sitting in bankruptcy) or state court, or be it for reimbursement of past expenditures (response costs) or for prospective costs (to comply with an injunction) or for damages, are covered liabilities under CGL policies.16 In other words, Powerine’s bright-line rule, that court imposed compensation is covered while administratively imposed liabilities are not, 17 required that Fuller-Austin be entitled to recover for the liabilities imposed by a District Court sitting in bankruptcy. In conjunction with its ruling that the confirmation of Fuller-Austin’s bankruptcy plan was a judgment, the trial court made two further significant rulings: i) that Fuller-Austin was entitled to the full amount of its legal obligation for each resolved asbestos claim, not merely the amount it was able to pay, and ii) the insurance companies were obligated to pay the aggregate value of all of the asbestos claims resolved by the bankruptcy confirmation. The support for these additional legal rulings comes both from the policy language that provides for payment of “all sums” that the policyholder becomes legally obligated to pay and the statutory provision required in all policies that the bankruptcy of the policyholder will not allow the insurance company to escape liability. 18 While the insurance companies have suggested that this portion of the decision is unreasoned and unsupported, the fact remains that this is not the first time a court has ruled this way and, under California law, these very same insurance companies have often collected the full amount of liability even where, as a result of their insolvency, they could only pay a fraction of the liability. For example, in Associated 19, the ninth circuit, applying California law, permitted an insurance company to recover from its reinsurer the full amount of a settlement with an asbestos manufacturer that involved structured payments by the insurer for pending and future claims. To say the least, it would be odd to allow the insurers to collect immediately for present and future resolved claims but, at the same time, deny such recourse to the policyholder. Likewise, the California Supreme Court rejected the argument put forth by the insurance companies that they are only responsible for the amount that Fuller-Austin is able to pay because of its lack of financial resources, as opposed to the amount Fuller-Austin is liable to pay as a result of the judgment. In Webster 20, the California Supreme Court recognized that in order to give meaning to the bankruptcy provision found in every insurance policy, the insurance company 7
must be liable for the full amount of the claim against the policyholder, and not merely that portion that the policyholder can pay as a result of its bankruptcy. As for determining the total aggregate value of damages that Fuller-Austin is obligated to pay in compensation to the asbestos victims, California courts have long approved the calculation of present and future damages in determining an award.21 Provided that there is a satisfactory method for calculating such damages, such damages may be awarded. Here, the court found that both the methodology and the ability to calculate such damages have been recognized by other courts sufficient to allow such calculation to be made in this action. 22 Finally, the trial court found misplaced the insurance companies’ argument that because they were denied standing in the bankruptcy, they cannot be bound by any determination made therein. Relying, in part, upon the holding in Tomassi,23 the court held that irrespective of standing, the bankruptcy judgment established Fuller-Austin’s liability and the amount of that liability. The bankruptcy court did not establish the insurance carriers’ obligations to this judgment. Rather, the trial court did. In Tomassi, a California appellate court held that an insurance company was not entitled to participate in a judicial proceeding resolving the underlying claim between the policyholder and claimant because the insurer was not an aggrieved party “whose rights or interests are injuriously affected by the judgment.”24 After denying coverage, the insurance company could not later challenge the policyholder’s judgment, but was limited to (i) a challenge as to whether the claim was covered, and (ii) a challenge as to fraud or collusion. 25 In short, an insurance company is not entitled to standing in a judicial proceeding that resolves the underlying claim when it coverage under its policies will not be established in that proceeding.
Policy Triggers Of almost equivalent significance, the court’s legal ruling on an excess insurance company’s obligation prior to, and irrespective of, exhaustion may prove to have a greater impact on the insurance industry. In recent years, excess carriers brought into declaratory relief actions with the primary carriers have used a claim of lack of “exhaustion” of the primary coverage to escape liability. Relying on Iolab 26, some excess carriers had been successful in extricating themselves from these litigations. While many policyholders argued that Iolab was poorly written and, as applied, wrongly decided, it was not until last year that a California court finally rejected the application of Iolab.27 While the word “exhaustion” is no longer the cure all to relieve excess carriers of their insuring obligations, it is still a shield upon which excess insurance companies rest their decisions to do nothing on behalf of a policyholder. In this ruling, the court finally laid bare the concept of exhaustion, and the inescapable fact that the term “exhaustion” has different meanings in different factual scenarios. For example, under the duty to defend, exhaustion requires a primary carrier to pay its limits in indemnity before the duty to defend passes to the umbrella carrier.28 However, the discussion of 8
exhaustion in those cases has no practical application in the context of the duty to indemnify. On the contrary, the primary carrier need not have paid anything under its policy for the umbrella policy’s duty to indemnify to be triggered. Rather, the amount of the liability, or the potential amount of the liability triggers an excess carrier’s obligations.29 The court made the following ruling regarding an excess carrier’s insuring obligations: i) The defendants insuring obligations were triggered by knowledge of asbestos liabilities potentially exceeding their attachment points and by Fuller-Austin’s request that excess insurance companies participate in the handling and settling of the asbestos lawsuits -- both prior to and after Fuller-Austin’s bankruptcy; ii) an excess insurance company has a duty to co-operate in the defense of an underlying claim when it appears reasonably likely to involve its coverage; iii) exhaustion of underlying coverage is not a “condition precedent” to triggering an excess insurance company’s obligations;30 iv) an excess insurance company has an obligation to evaluate proposed settlements, and to accept a reasonable settlement, where the liability penetrates, or potentially penetrates, the excess insurance company’s level of coverage;31 and v) an insurance company’s obligation to its policyholder does not end upon the filing of a lawsuit by the policyholder.32 Continuous Trigger In the first of the court’s rulings, the court mirrored the decision in Armstrong33 and Montrose,34 applying the continuous trigger such that “all [] policies that were in effect from the date of first exposure to any asbestos or asbestos-containing product until the date of death or claim, whichever occurs first, are triggered with respect to an asbestos bodily injury claim.” In addition, each of Fuller-Austin’s policies was deemed to have an independent obligation to respond. To this extent, the insurance companies did not dispute the application of the Armstrong decision. In fact, this holding is founded on the “all sums” language (or its equivalent) found in general liability policies. This language has been found to obligate “the insurers to pay on behalf of a policyholder ‘all sums’ that the policyholder becomes legally obligated to pay as damages because of bodily injury during the policy period,” and consistently has been interpreted to preclude requiring the policyholder to pay for periods where the policyholder is uninsured or insurance coverage is unavailable.35 However, the trial court also addressed three specific insurance company issues that often arise in these types of coverage disputes. The first focused on certain policies that the court previously had concluded were subject to Louisiana law. In recognition of Louisiana court’s principle of maximizing coverage, the trial court adopted the continuous trigger to those policies, as well. The only reported Louisiana case on the issue had applied the exposure trigger, but had not fully considered the continuous trigger because under the facts of the case it would not have provided greater coverage.36 The concurring opinion had noted that under the right circumstances the continuous trigger might be more appropriate. Second, the court found that site specific policies respond prior to general liability policies. In this case, Fuller-Austin had policies that covered a specific site, as well as policies that covered all of its operations. The court found that under Louisiana law the policies covering the specific sites would cover injuries arising from those site prior to the general liability policies.37 Finally, the court ruled on a claim by CNA that 9
its policies were subject to a different trigger based on an endorsement to their policy. CNA argued that the underlying policies could exhaust only as a result injuries that incept during the policy period. CNA’s argument was belied by its own internal claims handling manual that exposed CNA’s interpretation as false.38 In citing to this internal document, the court concluded that CNA’s policies respond in the same manner and at the same time as all of the other policies in this action. Impact of Insolvencies and the Concept of Drop Down Fuller-Austin, like many policyholders with a multi-year occurrence based program of insurance, found that certain of the insurance companies that issued coverage to it over the years were no longer solvent. The effect of the insolvent coverage depended in large part on how the court applied the concept of horizontal exhaustion. Often referred to as “filling the bathtub,” the question before the court was how Fuller-Austin’s bathtub of insurance would be filled by FullerAustin’s liabilities. Fuller-Austin’s concern was that it would have to fill in the gap in coverage caused by the insolvent insurers. The excess carrier’s concern is that it will have to drop down39 and respond below its attachment point. In a ruling that addressed, and reconciled, these two concerns, the court held that insolvent coverage was not “other insurance” and, therefore, none of the loss would be allocated to the insolvent coverage. Accordingly, the policyholder was not responsible for any of the insolvent coverage and, likewise, the excess insurers would receive no benefit from the insolvent coverage. The court’s decision was based on the policy language, as well as California case law, both of which required “other insurance” to be “valid and collectible.”40 While the insolvent insurance is valid, the court concluded that it was not collectible and, therefore, could not be deemed other insurance. Accordingly, under the court’s ruling, Fuller-Austin’s liability would be allocated to all solvent policies on the lowest level of coverage. If the liability exceeded that lowest level, the liability would be allocated to the solvent policies in the next layer of coverage, and so on, until the liability was fully allocated or until there was no further solvent insurance to pay the loss (i.e., the bathtub overflowed). In fashioning an allocation approach using the concept of horizontal exhaustion and only allocating to solvent coverage, the court concluded that given the amount of solvent coverage on each level of insurance, there was no possibility of any insurer “dropping down” below their stated attachment point. In other words, if an excess policy had a stated attachment point of $1,000,000, but there was $10,000,000 in solvent coverage at a lower layer of coverage, the excess policy would respond above the solvent coverage and, therefore, would never be asked to pay any portion of the liability below its stated attachment point. In so ruling, the court noted that the insurance policies specifically define “other insurance” and “underlying insurance” in this fashion, and under longstanding California law the court could not re-write the policies.41 10
Paid or Held Liable to Pay Fuller-Austin’s insurance policies contained language to the effect that the carriers’ liability would only attach after the policyholder or the underlying insurers “have paid or have been held liable to pay the full amount of their respective ultimate net loss liability. . .” Leading up to the trial, the insurers argued that this provision required that Fuller-Austin or its underlying insurance companies have paid that portion of the liability attributable to the underlying insurance companies prior to triggering the excess insurance companies’ obligations. Relying solely on inapplicable duty to defend cases, the insurance companies argued that the duty to pay could not be transferred from the primary carrier to the excess carrier until, and unless, the primary carrier had paid its limits in full -- regardless of the amount of Fuller-Austin’s liability. 42 For example, if Fuller-Austin had an $100 million, the excess carriers attached at $10 million, and the primary carrier refused to pay the first $10 million, the excess carriers argued that their obligations would not arise. In other words, the insurance companies argued that they could rely on the intransigence of an underlying carrier to defeat coverage on their level. The court rejected this argument for the simple fact that the policies, by their very language, are triggered by either i) the payment of a liability (“paid”), or ii) the establishment of a liability (“held liable to pay”). Accordingly, once Fuller-Austin’s liability was established, if the liability exceeded the attachment point under the excess insurance carriers’ policies, those carriers had an immediate obligation to pay Fuller-Austin the liability regardless of whether the underlying carriers had paid any of the liability whatsoever. Remarkably, in opposing this proposition, the insurance companies relied, in part, on “drop down” case law that unequivocally required this same result. 43 For example, in Span the court, in concluding that an excess insurance company had no duty to “drop down” and “provide first dollar coverage upon the insolvency of Union,” nevertheless held that the excess insurance company remained liable “for that portion of the underlying judgment in excess of the Union policy limits.” Likewise, in Denny’s, the court held that if “the insured’s liability exceed[s] the underlying insurance limits . . . liability attaches to the excess insurer, whether or not the underlying insurer has actually paid out the policy limit”. Finally, in Vons the court held that is triggered under an excess policy for losses the policyholder is legally obligated to pay in excess of underlying coverage.44 Exhaustion as A Matter of Law Finally, the court provided some insight into the legal effect of the dismissal of a primary carrier on the primary carrier’s limits. Consistent with the holding in Phoenix45, the court held that the dismissal of the primary carrier without the excess carrier asserting a claim for contribution or indemnity constituted exhaustion, as a matter of law, of the primary coverage. In so ruling, the court sent a message that these types of claims regarding exhaustion were allocation disputes between the carriers and should not and could not be used to leave the policyholder without coverage. 11
In the instant action, Fuller-Austin had settled and dismissed the primary carriers and had also asserted that the primary carriers had paid their limits in coverage. At one point, certain excess carriers acknowledged that the primary carriers had paid their limits but, nevertheless, asserted that Fuller-Austin had not proven exhaustion. With its primary carriers no longer providing a defense or indemnity, and its excess carriers asserting that the primary coverage was not exhausted, Fuller-Austin faced a potential gap in coverage. The court ruled that Fuller-Austin should not be put in the position of going bare while the coverage litigation proceeded to conclusion. Rather, the excess insurer had an obligation to cover Fuller-Austin once the primary carriers were dismissed from the action. Conclusion The decision in Fuller-Austin echoes, in part, the recent holding in an unpublished California appellate decision. 46 There, the court noted that “[w]e have been directed to no authority holding that an excess carrier with notice of the progress of critical settlement proceedings involving its insured may stand mute during the proceedings and thereafter resist all responsibility on the basis of its own inaction.” Today, the excess carriers protest against being bound to this liability. The decision in Fuller-Austin, however, sends a clear message that where there is a tangible possibility of exposure well in excess of all available coverage, an excess carrier would be well advised to participate in, and contribute to, the resolution of its policyholder’s liability, rather than leave its policyholder to fend for itself. Here, after being presented with an opportunity to participate in settlement discussions, the excess carriers stood mute. Their inaction forced Fuller-Austin into bankruptcy and, instead of having its liabilities resolved by settlement, Fuller-Austin’s liabilities were adjudicated in the bankruptcy. As more and more companies with asbestos liabilities seek bankruptcy protection, the ruling by the trial court demonstrates how general liability policies will respond to this latest crisis. As a result of a policyholder’s bankruptcy, the insurance policies do not disappear or cease to apply, the insurance carriers are not relieved from their duties, and the policyholder is not left to fend for itself. Rather, an insurance carrier will be bound to a bankruptcy adjudication in the same manner as it would be bound to an underlying judgment rendered by a jury. Given the recent prediction that most, if not all, of the companies that manufactured or installed asbestos will seek bankruptcy protection, the decision in Fuller-Austin may provide policyholders the blueprint for navigating through bankruptcy court while securing insurance coverage to pay for their asbestos liabilities from otherwise intransigent insurance carriers. The decision also may provide incentive to insurance carriers to get involved early in the process and certainly prior to bankruptcy. Hopefully, it will foster an atmosphere of cooperation so that as primary carriers exhaust their limits or as liabilities impact the excess layer of coverage, excess carriers will be ready to assume their insuring obligations to provide the seamless coverage that the policyholder thought it had purchased. At the very least, it will prevent an excess carrier from basing its decision to withhold coverage on the conduct of an underlying carrier, and will force the excess carrier to evaluate its policyholder’s liability and acknowledge coverage when the liability exceeds or potentially exceeds the excess coverage attachment point. 12
1. Fuller-Austin v. Fireman’s Fund, et al., Case No. BC 116835, Statement of Decision dated February 26, 2002, published at 2002 WL 398672. 2. On September 1, 2000, the trial court ordered this action referred to the Honorable Frederick J. Lower (retired) pursuant to Section 639 of the California Code of Civil Procedure for purposes of fashioning a comprehensive trial management recommendation. In the course of the hearings, Judge Lower recommended that nine insurance-related legal issues be tried by the court prior to the jury trial. Two of these issues, incorporation and horizontal versus vertical allocation, were tried in the Phase IA trial conducted in December 2000. The remaining seven legal issues were addressed in the Phase IB trial, which began on September 10, 2001. 3. As stated by the trial court: “§ 524(g) was enacted to deal with unique bankruptcy related problems in the context of asbestos mass tort litigation. Traditional bankruptcy concepts require, simplistically stated, that the debts of a bankrupt be listed and the assets marshaled. Then the assets are divided up pro-rata among the creditors or classes of creditors, in a fashion consistent with legislatively established priorities, the goals of which are to equalize asset distribution among similarly situated creditors. That procedure obviously contemplates that creditors be identified either before or during the pendency of the bankruptcy proceedings. In the context of asbestos, that is not possible due to the latency period between exposure to asbestos and the manifestation of its ill effects. In the case of mesothelioma, for example, it is recognized that the latency period can be as much as 40 years. As such, people exposed to asbestos in 1980 may not suffer any effects from it until 2020. Thus, if all assets of a bankrupt are marshaled and distributed in 2000, the mesothelioma sufferer whose illness does not manifest itself until 2020 receives nothing, while a person similarly situated whose disease manifested itself in 1995 receives a recovery. One of the purposes of 524(g) was to establish a procedure that would enhance the likelihood that future claimants (people already exposed, but whose illness has not yet manifested itself) would be treated equally with present claimants. This is precisely the problem that confronted Fuller-Austin.” Statement of Decision, at p. 6, fn. 6. 4. 5. Vandenberg, et al. v. Superior Court, 21 Cal. 4th 815, 839 (1999). 11 U.S.C. §524(g).
6. The “ultimate net loss” language obligates “the insurers to pay on behalf of a policyholder 'all sums' that the policyholder becomes legally obligated to pay as damages because of bodily injury during the policy period,” and consistently has been interpreted to preclude requiring the policyholder to pay for periods where the policyholder is uninsured or insurance coverage is unavailable. Armstrong, 45 Cal.App.4th at 57, 52 Cal.Rptr.2d 690. 7. All of Fuller-Austin’s policies contained the following statutorily mandated language: “In the event of the bankruptcy or insolvency of the Insured, the Company shall not be relieved thereby of the payment of any claims hereunder because of such bankruptcy or insolvency.” 13
8. In fact, in the past two years several more companies have sought bankruptcy protection as a result of their asbestos liabilities, including Owens Corning, Babcock & Wilcox, W.R. Grace, Burns & Roe, Armstrong World Industries, Federal Mogul, and USG. 9. UNR Industries, Inc. v. Continental Ins. Co., 942 F.2d 1101 (7th Cir. 1991), cert. denied, 503 U.S. 971 (1992). 10. “Section 524(g), in conjunction with other bankruptcy provisions, provides framework for (i) resolving all present and future liabilities of a debtor, (ii) establishing the amount of the debtor's liability and the value of each claimant's claim in lawful U.S. currency, (iii) protecting present claims and future contingent claims and demands by appointing separate legal representatives for the present and future claimants, (iv) setting up a trust to pay all present and future asbestos claims and demands in a like manner, and, (v) creating an injunction barring any further legal action with respect to the asbestos claims and demands resolved in bankruptcy. 11 U.S.C. § 524(g).” Statement of Decision, at pp. 6-7. 11. Statement of Decision, at pp. 6-8, 28 citing 11 U.S.C. §§ 1141, 1142; Bankruptcy Rule 9001; see, 5 Moore's Federal Practice 3d § 131.23[5][b]; ("Many rulings and orders that occur under the umbrella of a bankruptcy proceeding are in the nature of final judgments.... Examples include confirming compositions, arrangements or reorganization plans."); Stoll v. Gottlieb, 305 U.S. 134, 59 S.Ct. 134, 83 L.Ed. 104 (1938); In re French Gardens, Ltd., 58 B.R. 959 (S.D.Tex.1986); In re Emmer Brothers Co., 52 B.R. 385 (D.Minn.1985); In re Economy Lodging Systems, Inc., 1999 WL 184058 (1999). 12. Statement of Decision, at pp. 6-8, 29 citing Federated Management Company v. Latham & Watkins, 138 Ohio App.3d 815, 742 N.E.2d 684 (2000) ("In the bankruptcy context, an order confirming a plan of reorganization constitutes a judgment and a final adjudication on the merits of a bankruptcy proceeding.") 13. Statement of Decision, at pp. 29-30 citing Webster's Ninth New Collegiate Dictionary, 1985, p. 56. ("adjudication" defined as "a decree in bankruptcy"); Random House Unabridged Dictionary, Second Edition, 1997, p. 25 ("adjudication" defined as "a court decree in bankruptcy"). 14. Certain Underwriters at Lloyd’s London v. Superior Court (“Powerine”), 24 Cal. 4th 945, 960 (2001). 15. 16. 17. 18. AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 822 (1990). Powerine, 24 Cal. 4th 966. Powerine, 24 Cal. 4th 966. Cal. Ins. Code §11580.
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19. Insurance Co. of the State of Pennsylvania v. Associated International Ins. Co., 922 F.2d 516 (9th Cir. 1991). 20. Webster v. Superior Court, 46 Cal. 3d 338 (1988).
21. Cal Civ. Code § 3283; Noble v. Tweedy, 90 Cal. App. 2d 738 (1949) (future damages may be awarded where there is a satisfactory method for obtaining a reasonably proximate estimation; there is no requirement for mathematical precision); Stott v. Johnston, 30 Cal.2d 864 (1951). 22. In re Johns-Manville Corp., 830 F. Supp. 686 (S.D.N.Y. 1993); In re Eagle-Picher, 189 B.R. 681 (1995). 23. Tomassi v. Scarff, 85 Cal. App. 4th 1053, 1057 (2000) (“The judgment in the liability action collaterally estops the insurer only on issues necessarily adjudicated in the liability action, i.e.., the insured’s liability and the amount of the insured party’s damages. It does not bind the insurer on coverage issues.”). 24. 25. 26. 27. Tomassi, 85 Cal. App. 4th at 1057. Tomassi, 85 Cal. App. 4th at 1058. Iolab Corporation v. Seaboard Surety Company, 15 F.3d 1500 (9th Cir. 1994). Ludgate Ins. Co. v. Lockheed Martin Corp., 82 Cal.App.4th 592 (2000).
28. See Community Redevelopment of the City of Los Angeles v. Aetna Casualty & Surety Co., 50 Cal. App. 4th 329 (1996). 29. Span Inc. v. Associated Int’l Ins. Co., 227 Cal. App. 3d 463, 468 (1991); Denny’s, Inc. v. Chicago Ins. Co., 234 Cal. App. 3d 1786, 1794 (1991); Benroth v. Continental Casualty Co., 132 F. Supp. 270, 275-76 (W.D. La. 1955) (applying Louisiana law). 30. Schwartz, 88 Cal. App. 4th at 1335; Span Inc. v. Associated Int’l Ins. Co., 227 Cal. App. 3d 463, 468 (1991); Denny’s, Inc. v. Chicago Ins. Co., 234 Cal. App. 3d 1786, 1794 (1991); Benroth v. Continental Casualty Co., 132 F. Supp. 270, 275-76 (W.D. La. 1955) (applying Louisiana law). 31. Diamond Heights Homeowners v. Natl. American Ins. Co., 227 Cal. App. 3d 563, 578 (1991); Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. 45 Cal. App. 4th 1, 85 (1996); Kelley v. British Coml. Ins. Co., 221 Cal. App. 2d 554, 563 (1963). 32. 33. 34. White v. Western Title Ins. Co., 40 Cal. 3d 870, 885 (1985). Armstrong, 45 Cal. App. 4th 1. Montrose Chemical Corp. of Calif. v. Admiral Ins. Co., 10 C4th 645, 689 (1985). 15
35. 36. 37.
Armstrong, 45 Cal. App. 4th at 57. Cole v. Celotex Corp., 599 So.2d 1058, 1077, 1086 (La. 1992) Fasullo v. American Druggists’ Insurance, 262 So.2d 810 (La. 1972)
38. In an unpublished appellate opinion that was granted review by the California Supreme Court but subsequently withdrawn because the parties settled, a California appellate court also rejected this CNA argument. Alpha Therapeutic Corp. v. Home Insurance Co., et al., 2001 DAR 7731 (2d Dist. 2001). 39. Drop down has been defined as “the minimum threshold of the excess insurance company’s obligation is lowered in order to cover the gap in coverage resultant from the primary insurance company’s insolvency. Drop down coverage ‘occurs when an insurance carrier of a higher level of coverage is obligated to provide the coverage that the carrier of the immediately underlying level of coverage has agreed to provide.” Louisiana Insurance Guaranty Assoc. v. Interstate Fire & Cas. Co., 630 So. 2d 759, 761 fn. 1. 40. Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. 78 Cal. App. 4th 847, 899 (2000); Span, 227 Cal. App. 3d at 480 (quoting U.S. Fire Ins. v. Capital Ford Tr. Sales, 355 S.E.2d 428, 433 (1987) “it [the policy] repeatedly states that other insurance must be collectible, but does not so state with respect to the underlying insurance. . .”); McConnell v. Underwriters at Lloyd’s of London, 56 Cal. 2d 637 (1961) (distinction between “other insurance” and “underlying insurance”). Louisiana law, likewise, highlights the key distinction between “other insurance” and “underlying insurance.” Kelly v. Weil, 563 So. 2d 221 (La. 1990) (“Other insurance” is not the same as “underlying insurance.” Other insurance must be collectible.). 41. Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal.4th 38, 75 (1997).
42. The defendants cited to, among other cases, Signal Cos. Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 368 (1980) and Chubb-Pacific Indem. Group v. Insurance Co. of No. America, 188 Cal. App. 3d 691, 698 (1987). 43. Span, 227 Cal. App. 3d at 480 ; Denny’s, 234 Cal. App. 3d 1786; The Vons Companies, Inc. v. United States Fire Insurance Company, 78 Cal. App. 4th 52 (2000). 44. An excellent discussion of the interpretation of the “paid or held liable to pay” language can be found in Rummel v. Lexington Insurance Co., 123 N.M. 752, 948 P.2d 970 (N.M. 1997).. 45. Phoenix Ins. Co. v. U.S. Fire Ins. Co., 189 Cal. App. 3d 1511 (1987).
46. International Paper Co. v. Agricultural Excess & Surplus Ins. Co., 2001 WL 641781 (Cal.App. 1 Dist. 2001).
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