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

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.

ACE, having paid three $300,000 limits to settle silica cases against Flexo, claimed exhaustion and attempted to pass the baton to Cincinatti.  The excess insurer demurred and sued ACE for bad faith, claiming that it owed another $1.8 million.  The Hamilton Country trial court agreed and, on appeal, so did the First Appellate District.

As a preliminary matter, the Ohio Court of Appeals ruled that the ACE policies were ambiguous because, in the absence of an annualization clause or other clarifying clause, "aggregate" could be applied "per policy" or "per year."  As a result, the court held that the trial court had not erred in considering extrinsic evidence to clarify the issue (as with New York and a handful of other states, Ohio follows the rule that ambiguity will not automatically be construed against the drafter if it can be clarified by resort to extrinsic evidence).  In this case, the court held that the extrinsic evidence supported the excess insurer's contention that the aggregate limit applied annually.  In particular, the court took note of the fact that Aetna Property & Casualty had been a "Bureau company" and that during this pre-ISO period, the IRB policy manual provided that aggregate limits in multi-year policies apply annually.

The Court of Appeals also rejected ACE's argument that these claims all arose out a single "occurrence," that being the insured's manufacture and sale of a defective product.  The court observed that, unlike asbestos cases, there was nothing intrinsically harmful about a mask:  the mask did not harm anyone, it merely failed to protect them against silica exposures.   Far from accepting ACE's reliance on the "deemer" clause in its policies, the Court of Appeals ruled that the exposure to conditions language required that each claim be treated separately.  The court cautioned against the "blanket judicial application" of tests for numbering "occurrences," however.

While ruling in favor of Cincinatti, the court refused to find that ACE's coverage positions were adopted in bad faith given (while archly observing that it was "feckless").

This case illustrates the interesting interplay between "occurrence" and aggregate wordings.  Most later ISO CGL forms contain language stating that the aggregate applies on an annual basis but are silent with respect to whether the same is true of  the "occurrence" limit.  For the most part, courts have ruled that this reflects an intention to have the "per occurrence" limit apply to the policy as a whole.

This ruling is seemingly at odds with the view of most other courts that have addressed this issue.  For the most part, courts have ruled that in the absence of an "annualization" clause, limits  apply once per policy, not once per year. See Society of Roman Catholic Church of Diocese of Lafayette, Inc. v. Interstate Fire and Cas. Co., 126 F.3d 727, 742 (5th Cir. 1997); Diamond Shamrock Chemicals Company v. Aetna Cas. & Sur. Co., 609 A.2d 440 (N.J. App. 1992); Hercules, Inc. v. Aetna Cas. & Sur. Co., 748 A.2d 481, 495 (Del. 2001) and CSX Transportation, Inc. v. Commercial Union Ins. Co., 82 F.3d 478, 483 (D.C. Cir. 1996).  But see, Chemical Lehman Tank Lines v. Aetna Cas. & Sur. Co., 978 F. Supp. 589, 606 (D.N.J. 1997), rev'd on other grounds, 177 F.3d 210 (3d Cir. 1999).

This case is an interesting illustration of the dilemma that insurers face in missing policy cases wherein the very absence of policy documentation may rob the insurer of the ability to raise otherwise viable policy defenses based on exclusions or limitations to coverage.  If you can't prove what the limits of coverage are, how do you ever exhaust?  Nevertheless, some courts continue to hold that it is the insurer's burden in a missing policy case to prove the existence of exclusions or other limitations to coverage.

Finally, what's with all the crankiness ("gnashing of teeth"??) about having to decide hard cases.  Only two weeks ago, Justice Willets of the Texas Supreme Court grumbled in a concurring opinion in Mid-Continent v. Liberty Mutual about all the "fiendishly difficult" high stakes insurance issues that the Fifth Circuit was saddling them with.  This stuff must be harder than we thought.  I'm asking for a raise.