American Special Risk Ins. Co. v. A-Best Products, 1:94CV0755.

• Decision Date: 09 July 1997
• Docket Number: No. 1:94CV0755.,1:94CV0755.
• Parties: AMERICAN SPECIAL RISK INSURANCE COMPANY, fka Cranford Insurance Company, Plaintiff, v. A-BEST PRODUCTS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Ohio

975 F.Supp. 1019

AMERICAN SPECIAL RISK INSURANCE COMPANY, fka Cranford Insurance Company, Plaintiff, v. A-BEST PRODUCTS, INC., et al., Defendants.

No. 1:94CV0755.

United States District Court, N.D. Ohio, Eastern Division.

July 9, 1997.

Ed E. Duncan, Arter & Hadden, Cleveland, OH, for Plaintiff.

Douglas P. Whipple, Elizabeth Anne McNellie, Baker & Hostetler, Cleveland, OH, for Defendant A-Best Products, Inc.

Ronald A. Rispo, David Clifford Lamb, II, Weston, Hurd, Fallon, Paisley & Howley, Cleveland, OH, for Defendant Cincinnati Ins. Co.

Gary D. Hermann, Hermann, Cahn & Schneider, Cleveland, OH, Robert P. Corbin, German, Gallagher & Murtagh, Philadelphia, PA, for Defendant Stonewall Ins.

Gary L. Nicholson, Forrest A. Norman, Gallagher, Sharp, Fulton & Norman, Cleveland, Robert D. Anderle, Porter, Wright, Morris & Arthur, Cleveland, OH, Randall E. Phillip, Deborah Molitz, Provizer, Lichtenstein & Phillips, Southfield, MI, for Defendant Safety Nat. Cas. Corp.

MEMORANDUM OF OPINION AND ORDER

NUGENT, District Judge.

This matter is before the Court upon a declaratory judgment action filed by Plaintiff American Special Risk Insurance Company (hereinafter American). American named as Defendants A-Best Products, Inc. (hereinafter A-Best), The Cincinnati Insurance Co. (hereinafter Cincinnati), Stonewall Insurance Company (hereinafter Stonewall), and Safety National Casualty Corporation (successor-in-interest to Safety Mutual Casualty Company)(hereinafter Safety National) and sought a declaration of the rights, duties, status and other legal relationships of the parties.

I. Factual Background

A-Best is a manufacturer of safety clothing and related products that are resistant to high heat. At various points during its existence, A-Best manufactured and sold protective clothing and specialty items made from asbestos-containing cloth, but it discontinued manufacturing and selling asbestos-containing products after December 31, 1984. As a result of these past business practices, however, numerous lawsuits have been filed against A-Best alleging bodily injury as a result of exposure to asbestos. In fact, there are approximately 13,450 lawsuits still pending against A-Best.

Asbestos litigation poses unique challenges to the courts and the parties, not only because of the widespread exposure to asbestos and the resulting thousands of cases, but also because of the nature of asbestos-related injuries. The manifestation of disease may not occur until many years after initial exposure to asbestos making it difficult to pinpoint the moment of causation. This determination of the time of injury is often critical in assessing liability because defendants frequently maintained insurance coverage with different carriers over a number of years. Consequently, courts have used different methods to pinpoint causation and apportion liability among multiple insurance companies. See, J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502, 507 (Pa.1993) (cataloguing cases using exposure theory, manifestation theory, or so-called multiple-trigger theory to trigger liability of the insurer).

Not unlike many defendants in asbestos litigation, A-Best maintained a number of different insurance policies with different companies during the period it manufactured products with asbestos material. Four different insurance companies provided primary insurance coverage successively from 1965 to 1985. Five different companies provided excess insurance coverage for the same period.¹

A-Best entered into a Claims Handling Agreement with its primary insurance carriers in 1987 to establish, inter alia, the allocation of defense expenses and indemnity between the primary carriers and A-Best for asbestos-related personal injury claims. Then, in November 1993, A-Best notified its excess insurers that its primary coverages were nearly exhausted. American then filed this declaratory judgment action seeking a declaration of the rights and obligations of the parties.

II. Procedural History

American filed its declaratory judgment action on April 8, 1994. It named A-Best, Cincinnati, Stonewall and Safety National as Defendants and sought a declaration of the rights, duties, status and other legal relationships of the insurers with A-Best under the excess policies. A-Best and Cincinnati each filed Counterclaims against American and Cross Claims against the other parties also seeking declarations relating to the coverages.

With the exception of one issue, all issues between the parties were resolved through settlement before trial. The parties agreed that after the exhaustion of primary insurance, and a contribution by A-Best, American, Cincinnati, Stonewall, and Safety National would each pay a percentage of indemnity and expense costs.

The unsettled issue among the parties involves the proper interpretation of the Stone-wall policy, specifically whether the defense of A-Best's asbestos claims are governed by Condition 8 in the main body of the Stonewall contract or an addendum referred to as the Defense Coverage Endorsement. The resolution of this issue will affect the amount of money Stonewall will pay out because under the provisions of the Defense Coverage Endorsement defense expenditures are no included in the calculation of net loss under the policy, whereas under Condition 8, defense expenses are included in net loss. The other excess insurance carriers took the same position as A-Best on this issue and were adverse to Stonewall. Accordingly, this issue was tried to the bench on February 5-6, 1997.²

III. Discussion

Types of Insurance Policies

In order to properly interpret the insurance contract at issue in this case, it is necessary to first discuss the meaning and purpose of excess insurance in general, as well as the nature of the Stonewall policy in particular. Primary insurance provides an initial layer of protection against liability or loss and its premiums are commensurate with the high degree of risk that the insurance covers. Revco D.S., Inc. v. Government Employees Ins. Co., 791 F.Supp. 1254 (N.D.Ohio 1991). "Excess or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted. A second insurer thus greatly reduces his risk of loss. This reduced risk is reflected in the cost of the policy." Continental Marble & Granite v. Canal Insurance Co., 785 F.2d 1258 (5th Cir.1986) (citation omitted).

In providing excess coverage, an insurance company may offer "umbrella policies" which differ from standard excess insurance policies in that they are designed to fill gaps in coverage both vertically (by providing excess coverage) and horizontally (by providing primary coverage). Commercial Union Insurance Co. v. Walbrook Insurance Co., Ltd., et al., 7 F.3d 1047, 1053 (1st Cir.1993) (Commercial Union I). The vertical coverage provides additional coverage above the limits of the insured's underlying primary insurance, whereas the horizontal coverage is said to "drop down" to provide primary coverage for situations where the underlying insurance provides no coverage at all. See Commercial Union Insurance Co. v. Walbrook Insurance Co., Ltd., 41 F.3d 764 (1st Cir.1994) (Commercial Union II). As succinctly stated by the Eleventh Circuit in Garmany v. Mission Insurance Co., 785 F.2d 941, 948 (11th Cir.1986), "umbrella policies have two functions: 1) to provide for a higher limit of liability for those losses typically covered by liability insurance — general liability ...; [and] 2) to provide for some coverage of those less common losses not typically covered by liability insurance — e.g., malpractice liability, advertiser's liability, blanket contractual liability, world-wide operations liability, etc." (citing Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026 (5th Cir.1978)).

Contract Provisions at Issue

Knowledge of the foregoing distinctions is helpful in examining the contract provisions at issue in this case, specifically Conditions 5 and 8 of the main body of the Stonewall contract, and the Defense Coverage Endorsement. Conditions 5 and 8 of the policy provide as follows:

5. Limits of Liability

(A) The Company shall only be liable for ultimate net loss in excess of either:

(i) the applicable limits of the policies of underlying insurance set forth in the Schedule of Underlying Insurance; or

(ii) as respect occurrences not covered by such underlying insurance, but covered under this policy, or where an occurrence is covered by such underlying insurance but in recoverable amounts less than the self-insured retention set forth in Item 3(c) of the Declarations, the amount of ultimate net loss set for in Item 3(c) of Declarations as "Self-Insured Retention."

* * * * * *

(C) In the event of reduction or exhaustion of the aggregate limits of liability under the policies of underlying insurance by reason of losses paid thereunder, this policy shall:

(i) in the event of reduction, pay excess of the reduced underlying insurance, and

(ii) in the event of exhaustion, continue in force as underlying insurance,

but nothing in this paragraph shall operate to increase the limits of the Company's liability. (Emphasis added).

8. Assistance and Cooperation of the Insured. Except when the aggregate limits of liability under the policies of underlying insurance set forth in the Schedule of Underlying Insurance have been exhausted, the Company shall not be called upon to assume charge of the settlement or defense of any claim made, suit brought or proceeding instituted against the insured, but the Company shall have the right and shall be given the opportunity to associate with the Insured or the Insured's underlying insurer(s), or both, in the proceeding relative to an occurrence where, in the judgment of the Company, the claim or suit involves or appears reasonably likely to result in liability for indemnity by the Company under this...