Northbrook Excess and Surplus Ins. Co. v. Procter & Gamble Co.

• Decision Date: 15 February 1991
• Docket Number: Nos. 89-2506,89-3128,s. 89-2506
• Parties: NORTHBROOK EXCESS AND SURPLUS INSURANCE COMPANY, Plaintiff, v. PROCTER & GAMBLE COMPANY, Procter & Gamble Manufacturing Company and Procter & Gamble Distributing Company, Defendants-Counterclaimants-Appellants, v. COMMERCIAL UNION INSURANCE COMPANY and American Employers Insurance Company, Counterclaim Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 633

924 F.2d 633

NORTHBROOK EXCESS AND SURPLUS INSURANCE COMPANY, Plaintiff, v. PROCTER & GAMBLE COMPANY, Procter & Gamble Manufacturing

Company and Procter & Gamble Distributing Company, Defendants-Counterclaimants-Appellants, v. COMMERCIAL UNION INSURANCE COMPANY and American Employers

Insurance Company, Counterclaim Defendants-Appellees.

Nos. 89-2506, 89-3128.

United States Court of Appeals Seventh Circuit.

Argued April 17, 1990.

Decided Jan. 4, 1991.

As Corrected Feb. 14 and Feb. 15, 1991.

Paul E. Freehling, Patricia T. Bergeson, Diane D. Jones, Pope, Ballard, Shepard & Fowle, Chicago, Ill., and Robert J. Miller, Cincinnati, Ohio, for Procter & Gamble Co. and Procter & Gamble Mfg. Co.

Shaun McParland Baldwin, Robert S. Soderstrom, Daniel R. Formeller, Tressler, Soderstrom, Maloney & Priess, Chicago, Ill., and Bruce M. Allman, and Christopher M. Bechhold, Thompson, Hine & Flory, Cincinnati, Ohio, for Commercial Union Ins. Co. and American Employers Ins. Co.

Before FLAUM and RIPPLE, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

RIPPLE, Circuit Judge.

This diversity case presents a question of Ohio law. An insurance company and its insured dispute the amount of coverage afforded under an insurance policy. The controversy turns on whether the policy's deductible amount was $1 million or $10 million. A jury determined the deductible was $10 million. The district court entered judgment based on that verdict and awarded the insurance company costs as the prevailing party. The insured filed a timely appeal. For the following reasons, we affirm the judgment of the district court, except for its ruling that expenses incurred in producing the insurance company's computer data base were taxable costs. We remand that issue for further proceedings.

I BACKGROUND

The factual background and the procedural history are complex. In the following paragraphs, we shall present only those aspects necessary to orient the reader to the present appeal. More detailed factual information will be discussed with our consideration of various issues presented by the parties for our decision.

A. Facts

This case began as a dispute over responsibility for Procter and Gamble's (P & G) ¹ legal fees and settlement costs. These expenditures arose from more than one thousand injury and death claims brought against P & G since 1980 by users of P & G's Rely tampons (the so-called Toxic Shock Syndrome cases). ² The dispute involved P & G and several insurance companies that issued liability policies to P & G covering the period when injuries were allegedly sustained.

During the 1970s and early 1980s, P & G purchased "umbrella" liability insurance policies from several insurers. These policies included coverage for product liability claims. Unlike insurance policies that require the insurer to defend litigation against an insured, these policies were indemnity policies. They provided that P & G would defend itself and then would be In response to scientific reports linking P & G's Rely tampons to Toxic Shock Syndrome, P & G withdrew the tampons from the market in September 1980. At that time, the management of P & G realized that the company faced a serious product liability problem. The product had been manufactured and marketed from the mid-1970s to early 1980, and P & G eventually turned to the insurance companies that issued product liability policies during this period.

reimbursed for defense and settlement costs, as well as any judgments entered against the company. P & G's umbrella products liability insurers included American Employers Insurance Company (American) and Commercial Union Insurance Company (Commercial). American issued two umbrella liability policies to P & G, one for injuries sustained during the period July 1, 1972 to July 1, 1975, and one for injuries sustained during the period July 1, 1975 to July 1, 1978. Each American policy provided $50 million in coverage in excess of "underlying insurance" (primary insurance). The policies also were in excess of "underlying limits" (analogous to, and will be referred to as, a deductible) of $500,000 both per "occurrence" and in the aggregate. Commercial, an affiliate of American, issued an umbrella liability policy to P & G for injuries sustained during the period July 1, 1978 to July 1, 1979. For product liability, the policy provided $25 million in coverage in excess of primary insurance. The policy also was in excess of $1 million deductible subject to an aggregate annual deductible of $10 million.

B. Procedural Posture

1. The parties and their contentions

Commercial originally was brought into this litigation by another P & G insurer, Northbrook Excess and Surplus Insurance Company (Northbrook). In its amended complaint, Northbrook alleged that it had issued umbrella liability insurance policies to P & G for periods from July 1, 1979 to July 1, 1981, and that P & G had submitted to Northbrook claims for reimbursement of expenditures in defending and settling the Rely/Toxic cases. Northbrook denied liability coverage, but entered into a nonwaiver-interim agreement pursuant to which it had paid a portion of the P & G claims. The complaint asked the court for an order directing P & G to return all sums paid under that interim agreement and a declaration that Northbrook had no obligation to reimburse P & G for any Rely/Toxic defense claims in the future.

Northbrook named Commercial as a defendant in this litigation because of two previous primary insurance policies issued by Commercial to P & G, one in 1977 and one in 1980. ³ Northbrook contended that, even if P & G was entitled to reimbursements from Northbrook, P & G was first required to exhaust lower levels of insurance such as those primary policies provided by Commercial. Accordingly, Northbrook asserted that Commercial should indemnify Northbrook for any reimbursements it was required to pay P & G, up to the amount of Commercial's primary insurance coverage.

P & G answered Northbrook's amended complaint and asserted a counterclaim. Moreover, P & G advanced a crossclaim against Commercial and American. P & G alleged that Northbrook, Commercial, and American all had issued umbrella insurance policies, which insured P & G against product liability judgments and defense-related expenditures, and that the insurers were obligated to reimburse P & G for its insured losses. The present appeal deals with this crossclaim and focuses on the extent of Commercial's liability to P & G.

Approximately seventy-five to eighty claims fell within the Commercial umbrella policy period. However, only one of these cases exceeded $1 million. P & G and Commercial disagreed about the proper deductible amount under the Commercial policy: P & G claimed that there was a $1 million deductible per policy year; Commercial maintained that the applicable deductible was $10 million per policy year and $1 million "per occurrence." The parties'

                central disagreement concerned the proper definition of "occurrence."    Commercial contended that the Rely/Toxic claims and lawsuits constituted multiple occurrences, and the deductible of $10 million applied.  In contrast, P & G argued that the Rely/Toxic claims were a single occurrence, and the applicable deductible was $1 million. 4
                

2. The jury verdict

The jury returned a special verdict. It found that, under the Commercial and Northbrook umbrella policies, the Rely/Toxic lawsuits and claims involved multiple "occurrences." Consequently, P & G's deductible was $10 million per policy year. Based on that verdict, the district court entered judgment. It directed Northbrook to reimburse P & G over $2 million for certain Rely/Toxic defense expenditures recorded through June 1987. Neither Northbrook nor P & G has appealed that judgment. Because P & G's reimbursable expenses attributable to injuries sustained during the policy year covered by the Commercial policy were less than the $10 million aggregate deductible, Commercial was ordered to reimburse P & G $40,000, the amount attributable to the one injury which exceeded the $1 million per "occurrence" deductible. American was ordered to reimburse P & G $5,500 for expenses attributable to its policy years. The district court also dismissed Northbrook's complaint against Commercial. P & G filed a timely notice of appeal challenging the judgment of the district court in favor of Commercial.

II ANALYSIS

A. Jury Instruction

1.

Both P & G and Commercial agree that the central issue on appeal is the proper method of calculating P & G's deductible under the Commercial umbrella policy. Because our jurisdiction is based on diversity of citizenship, see 28 U.S.C. Sec. 1332, state substantive law must govern the rights and liabilities of the parties. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); see generally Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The parties agree that the applicable law is the law of Ohio. Therefore, we must apply Ohio rules of insurance contract construction.

The district court concluded that the policy terms were ambiguous. Having determined there were ambiguities, the district court properly left the issue of policy construction to the jury. See Apponi v. Sunshine Biscuits, Inc., 652 F.2d 643, 651 n. 12 (6th Cir.1981) (quoting the Supreme Court of Ohio, court noted that " 'it is the province of the jury to ascertain and determine the intent and meaning of the contracting parties in the use of uncertain or ambiguous language' "). The jury resolved the ambiguities (whether the deductible was $1 million or $10 million per policy year and how many "occurrences" were involved) in favor of Commercial.

P & G concedes that the district court properly submitted to the jury the question of ambiguities. However, it contends that the court committed reversible error when it refused to instruct the jury that P & G was entitled to have the policy construed in...