National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Thorpe Insulation Company and its related companies distributed, installed and repaired asbestos insulation products.  There have been over 12,000 suits against Thorpe from claimants alleging injury from asbestos exposure. Thorpe’s insurers defended and settled many of the suits, paying more than $180 million in settlement before exhausting their policies’ aggregate limits. Thorpe then claimed the asbestos claims should implicate the insurers’ non-aggregate limits for “operations” claims.  Many insurers settled with Thorpe with the settlement proceeds being used to fund a trust established pursuant to 11 U.S.C. § 524(g).

Thorpe obtained bankruptcy court approval for its reorganization plan. Insurance companies that had not settled with Thorpe attempted to challenge the plan but were denied standing by the bankruptcy court.  Among other things, the plan purported to be insurance neutral and preserve all defenses of the non-settling insurers.  The non-settling insurers disagreed, alleging the plan economically impacted them and that, by allowing Thorpe to assign their policies to the trust, the plan violated anti-assignment provisions in the insurers’ polices. 

The district court confirmed the plan in September 2010.  The plan became effective and operational on October 22, 2010 and the trust began paying claims. 

The non-settling insurers sought an emergency stay challenging the plan which was denied.  The insurers appealed.  In this decision, the Ninth Circuit reversed and remanded.

Standing

To have standing in bankruptcy court, a party must meet three requirements: (1) be a “party in interest” under 11 U.S.C.§ 1109(b); (2) have a traceable interest in the outcome as required by Article III of the U.S. Constitution; and (3) meet the federal court’s prudential (“zone of interest”) test.

The Ninth Circuit found the insurers met the “party in interest” requirement, agreeing with the insurers that the plan could have a negative financial impact on non-settling insurers under several scenarios, including that the plan vests the trustee with power to make liability decisions without input from the insurers on the reasonableness of the trustee’s decision.  Further, the plan authorizes the trustee to order claim payments from the insurers that may be higher than what they would pay absent the plan.  In addition, the plan restricts the insurers’ contribution rights as well as contractual rights to seek reinsurance against settling insurers. It also impacts the insurers’ potential to recover in the event the plan’s trust were to become insufficiently funded.  Finally, the plan allows asbestos claimants to file suits against the insurers, which is direct evidence the insurers are a party in interest to the bankruptcy proceeding. 
 
The Ninth Circuit also found the insurers met the constitutional and prudential standing requirements because they were able to show: (1) an injury in fact traceable to the challenged action; and (2) that they were within the prudential zone of interest as they were subject to the plan’s payment structure.

Mootness

The Ninth Circuit rejected Thorpe’s argument that the appeal was moot since the plan was already operational and had begun to pay claims.  The Ninth Circuit held the appeal was not constitutionally moot because an appellate court was able to give effective relief to the insurers by reversing the plan confirmation or requiring modification of the plan to address the insurers’ legitimate economic and contractual concerns. 

The Ninth Circuit held the appeal was not equitably moot based on four factors: 1) the insurers had actively pursued their rights by seeking a stay that was refused by the Ninth Circuit and district court; 2) the plan had not been substantially consummated because only $135 million of the $600 million in settlement proceeds had been transferred to the trust with only a portion of trust proceeds distributed to claimants; 3) the bankruptcy court could fashion a remedy that adequately protects the rights of all parties; and 4) the bankruptcy court could also modify the plan and devise a remedy that addressed the relief sought by insurers.

Examples, according to the Ninth Circuit, of how the plan could be modified included the following.  First, Thorpe could be ordered to contribute more to the trust.  Second, the plan could be amended to make clear trust distribution procedures were not binding on direct suits filed against the non-settling insurers.  Third, the bankruptcy court could allow the non-settling insurers to present evidence and argue for modification of the trust distribution procedure.  Fourth, the bankruptcy court could place the trust under new governance if the non-settling insurers were able to show the trust was in the hands of biased parties.
 
Anti-assignment

However, the Ninth Circuit upheld the district court’s ruling that federal bankruptcy law preempted state law on the insurers’ anti-assignment clause issue.  The bankruptcy code provides that a debtor’s property becomes the property of the estate notwithstanding a contract provision that restricts transfer of the debtor’s interest.  (11 U.S.C. § 541(c).)  This provision expressly contemplates the inclusion of a debtor’s insurance policy in the bankruptcy estate. 

Arbitration

In a decision the following week, the Ninth Circuit upheld the bankruptcy court’s and district court’s rulings that Continental could not compel arbitration. Continental had sought to enforce its agreement with Thorpe, pursuant to the Wellington Agreement of 1998 and a Settlement Agreement entered in 2003, that disputes would be arbitrated. Continental’s dispute with Thorpe related to that Thorpe had: 1) acquired settling insurers’ contribution, indemnity and subrogation rights against Continental; 2) assigned rights to the bankruptcy trust; and 3) negotiated, structured, and confirmed a plan for claimants to pursue direct actions against Continental. All of this was in contravention of the Settlement Agreement.  

The Ninth Circuit found the bankruptcy court was within its rights to deny the motion to compel arbitration because Continental’s claims were a core matter. According to the Ninth Circuit, Continental’s claims would have to be coordinated with the plan confirmation process, Continental’s challenges to Thorpe’s actions involved Thorpe’s exercise of rights in bankruptcy, and Continental’s claim could not stand alone.

Further, the Ninth Circuit held the bankruptcy court had discretion to decline to enforce an otherwise valid arbitration clause in order to further the purposes of the bankruptcy code.

Thorpe Insulation Company was a distributor and installer of asbestos insulation products. Thorpe was sued in thousands of personal injury lawsuits. Thorpe’s insurance policies covered both products/completed operations claims (“products claims”) and non-products claims (“operations claims”). All of its policies’ aggregate limits applied to products claims, but not to operations claims.

In 1978, Thorpe began tendering the asbestos lawsuits to its primary insurers. In 1984, Thorpe and ten of its primary insurers entered into a Claim Handling and Settlement Agreement (the “1984 Agreement”). The stated purpose of the 1984 Agreement was to “clarify among” the parties to the agreement “the apportionment of defense and indemnification of Thorpe[.]” The 1984 Agreement provided, among other things, that it should not be construed “as a policy interpretation, and shall not be used in any Court … to interpret the obligations under general liability or other policies” and was “without prejudice to later assertion by any such parties of claims against each other … pursuant to the several reservations of rights … contained in this Agreement.” 

Thorpe’s primary insurers charged all settlement payments against the policies’ aggregate limits, treating the claims as products claims. As the primary policies exhausted, Thorpe began tendering claims to its first level excess insurers. In 1998, seven of Thorpe’s first level excess insurers entered into an Interim Excess Insurance Claims Handling Agreement (the “1998 Agreement”). The stated purpose and terms of the 1998 Agreement were similar to those of the 1984 Agreement. The 1998 Agreement also considered an excess insurer’s policy to be implicated when the underlying primary policy is “contend[ed to] have been exhausted.” Thorpe was not a party to the 1998 Agreement, but received a copy and advised its first level excess layer insurers that it reserved all rights under their policies.  

Thorpe’s first level (and upper level) excess insurers charged payments under their policies against aggregate limits, again treating all claims as products claims. When Thorpe had nearly exhausted all of its $180 million in aggregate limits, it sued its insurers seeking a declaration that the insurers still owed defense and indemnity in connection with claims that Thorpe now contended were operations claims and not subject to aggregate limits.

The insurers argued that by accepting payment of the policies’ aggregate limits on a layer-by-layer basis over several decades, Thorpe understood that all of the underlying claims were products claims under the terms of the policies. Thorpe filed a motion in limine to exclude evidence of the parties’ post-policy course of performance. The trial court granted the motion on two grounds: (1) course of performance evidence is only relevant if it predates a controversy and the 1984 Agreement indicated the existence of a controversy, and (2) such evidence is relevant only if it sheds light on the intent of the parties at the time of contracting and the individuals who negotiated the subject policies were not the same as those who performed under the policies.

The insurers filed a petition for writ of mandate. The court of appeal issued an order to show cause to consider whether the trial court erred in concluding the policies’ claims handling history was irrelevant to the issue of policy interpretation.  

Preliminarily, the appellate court concluded that course of performance evidence is generally admissible to interpret insurance policies, even standard form insurance policies. The court also concluded the admissibility of course of performance evidence does not require the individual performing under the contract to be the individual who negotiated the contract. 

However, the appellate court held course of performance evidence is only relevant to the issue of contract interpretation when the performance is attributable to the parties’ understanding of the contract. The court determined that in the case before it, the 1984 and 1998 Agreements, not the policies, governed the bulk of the parties’ performance. Among other things, the court found particularly relevant the fact that Thorpe obtained excess coverage proceeds because the insurers to the 1998 Agreement had agreed among themselves to make those payments while reserving rights to subsequently contend the payments were not, in fact, due under their policies. 

The court concluded the trial court did not err in excluding evidence of performance following the 1984 Agreement. But the court left open the possibility that pre-1984 course of performance evidence and course of performance evidence as to excess insurers not parties to the 1998 Agreement could still be admissible.

The California Court of Appeal (Second Appellate District [Los Angeles]) in 2007 ruled that Truck Insurance Exchange was wrong in asserting that its payment of claims had exhausted its policies’ occurrence limits because, the court held, the occurrence under Truck’s policies was the injurious exposure to asbestos, not the manufacture and distribution of products containing asbestos. London Market Insurers v. Superior Court (Truck Ins. Exchg.) (2007) 146 Cal.App.4th 648 (review denied). Truck’s position had been that all asbestos-related claims in any given year arose from a single occurrence because all the claims had the same underlying cause, i.e., “the design, manufacture and distribution by Kaiser and its subsidiaries of asbestos-bearing products.” The appellate court also concluded that, given its ruling, it could not make a decision on the number of occurrences based on the record before it and remanded the case to the trial court for further proceedings.

On remand, the trial court held that, based on the policies’ language and in light of the stipulated facts, Truck failed to prove the claims could be aggregated and, thus, each claim of asbestos bodily injury was a separate and distinct occurrence under Truck's 19 policies.

Truck’s policies had two different occurrence definitions and aggregating clauses. From 1964 to 1974 the policies had a “one lot” clause which provided that “all damages arising out of one prepared or acquired lot of goods or products” arose out of one occurrence. Truck argued that under this provision, claims from exposure to products produced at the same manufacturing facility should be deemed one occurrence. Based on the appellate court’s decision, the trial court held the focus had to be on the exposure rather than the manufacturing process. Truck had stipulated that the number of product lines was not known and that individual claims could not be connected with particular product lines. Therefore, Truck failed to meet its burden to demonstrate that the “one lot” clause aggregated particular claims.

From 1974 to 1983, the Truck policies had a “premises deemer” clause which provided that exposure to substantially the same general conditions “at or emanating from each premises location” was one occurrence. Truck argued all claims were one occurrence as they arose from exposure to products produced at the same Kaiser manufacturing facility or, alternatively, because them were due to the same corporate decision (or multiple corporate decisions from the same location) to place asbestos in products.  The trial court was not persuaded. Relying on Judge Ira Brown’s decisions from the coordinated asbestos proceedings in 1990, the court held that the premises location in a deemer clause could not refer to the plant from which the products were shipped or distributed since that is not where the exposure to asbestos occurred. Furthermore, Truck stipulated that it could not connect the claimant’s injuries to a particular plant. As to the corporate decision argument, the appellate court already decided that was not the correct focus, since it was not the exposure to asbestos. Besides, there was no evidence of one decision to incorporate asbestos into all Kaiser products.