Fuller-Austin Insulation Company v. Highlands Ins.

• Decision Date: 19 January 2006
• Docket Number: No. B170079.,B170079.
• Citation: 135 Cal.App.4th 958,38 Cal.Rptr.3d 716
• Court: California Court of Appeals Court of Appeals
• Parties: FULLER-AUSTIN INSULATION COMPANY, Plaintiff and Respondent, v. HIGHLANDS INSURANCE COMPANY et al., Defendants and Appellants.

38 Cal.Rptr.3d 716

135 Cal.App.4th 958

FULLER-AUSTIN INSULATION COMPANY, Plaintiff and Respondent, v. HIGHLANDS INSURANCE COMPANY et al., Defendants and Appellants.

No. B170079.

Court of Appeal, Second District, Division 2.

January 19, 2006.

Certified for Partial Publication.^*

Alschuler Grossman Stein & Kahan, Frank Kaplan, Kenneth S. Meyers, Santa Monica; Spepanik Cortner McNaboe Colliau & Jordan and Michael T. Colliau for Defendants and Appellants Transcontinental Insurance Company and Columbia Casualty Company.

Hogan & Hartson, Kenneth D. Klein, David R. Singer, Los Angeles, William J. Bowman (pro hac vice), James P. Ruggeri (pro hac vice), Catherine E. Stetson (pro hac vice); Wilmer Cutler Pickering Hale and Dorr, Seth P. Waxman (pro hac vice), Jonathan E. Nuechterlein (pro hac vice), Craig T. Goldblatt (pro hac vice) and Todd Zubler (pro hac vice) for Defendants and Appellants First State Insurance Company, New England Reinsurance Corp., and Twin City Fire Insurance Company.

Berkes Crane Robinson & Seal, Steven M. Crane, Barbara S. Hodous; Munger, Tolles & Olson, Ronald L. Olson, Kelly M. Klaus, Paul J. Watford, Sarah E. Kurtin and Grant A. Davis-Denny, Los Angeles, for Defendant and Appellant Stonewall Insurance Company.

Hancock Rothert & Bunshoft, Patrick A. Cathcart, Los Angeles, William J. Baron, San Francisco; Wachtell, Lipton, Rosen & Katz, Michael W. Schwartz (pro hac vice), Douglas K. Mayer (pro hac vice), William Savitt (pro hac vice); Greines, Martin, Stein & Richland, Irving H. Greines, Robert A. Olson and Peter O. Israel, Los Angeles, for Defendants and Appellants Certain Underwriters at Lloyd's London and Certain London Market Insurance Companies.

Nancy F. Peters (pro hac vice); Thomas C. Sanford & Associates and Thomas C. Sanford, Pasadena, for Defendants and Appellants Tenecom Insurance Company (f/k/a Yasuda Fire & Marine Insurance Company (UK) Ltd.) and Winterthur Swiss Insurance Company.

Sonnenschein Nath & Rosenthal and Ronald D. Kent, Los Angeles, for Defendant

and Appellant International Insurance Company.

Morgan, Lewis & Bockius, Michel Y. Horton, Thomas M. Peterson, Jason B. Komorsky, Laura R. Ramos; Anderson Kill & Olick, Robert M. Horkovich (pro hac vice), Rhonda D. Orin (pro hac vice) and Robert Y. Chung (pro hac vice) for Plaintiff and Respondent.

Wiley Rein & Fielding, Laura A. Foggan, Karalee C. Morell; Sinnott, Dito, Moura & Puebla and John J. Moura, Counsel for Amicus Curiae Complex Insurance Claims Litigation Association.

DOI TODD, J.

Appellants Certain Underwriters at Lloyd's, London and Certain London Market Insurance Companies (collectively LMI); Stonewall Insurance Company (Stonewall); Transcontinental Insurance Company and Columbia Casualty Company (collectively CNA); First State Insurance Company, New England Reinsurance Corp., and Twin City Fire Insurance Company (collectively First State); and International Insurance Company (International) appeal from a judgment entered in favor of respondent Fuller-Austin Insulation Company (Fuller-Austin) following a phased bench and jury trial.

This action raises the issue of the effect of an insured's bankruptcy under 11 U.S.C. section 524(g) on an excess insurer's obligations. Fuller-Austin utilized the unique provisions of that statute to resolve its liability for present and future asbestos claims. The trial court ruled that those bankruptcy proceedings not only conclusively determined Fuller-Austin's liability but also provided a mechanism for determining the aggregate value of that liability for the purposes of indemnification. Thereafter, a jury calculated and found appellants liable for a fixed sum that constituted the amount of Fuller-Austin's aggregate liability to present and future asbestos claimants.

Though the judgment comports with the goals of 11 U.S.C. section 524(g) to ensure that all asbestos claimants are treated fairly and — to the extent possible — equally, it is inconsistent with the parties' contractual rights and obligations under their insurance policies. Accordingly, significant portions of both the trial court's statement of decision and the special verdict must be reversed. The bankruptcy confirmation proceedings were not an actual trial of Fuller-Austin's liability triggering appellants' indemnification obligations. Moreover, estimations of the individual and aggregate value of present and future asbestos claims served neither to affix nor to accelerate appellants' indemnification obligations, and did not provide a basis for coverage of those claims to be presumed. Rather, the bankruptcy confirmation constituted a settlement of Fuller-Austin's liability, the effect of which was subject to challenge by appellants. While we do not intend to undo the efficiencies afforded by 11 U.S.C. section 524(g), we cannot conclude that the statute was intended to eradicate appellants' rights under their insurance policies.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Parties and the Insurance Policies.

From the mid-1940's to the mid-1980's, Fuller-Austin was involved in the installation and removal of building materials containing asbestos. In 1974 DynCorp acquired Fuller-Austin, which continued to operate as a subsidiary until it ceased operations in 1987.

Several insurance companies, including appellants, issued excess insurance policies to Fuller-Austin or DynCorp that covered periods during which Fuller-Austin was in operation.¹ Five sets of policies are at issue in this appeal. LMI issued two categories of excess liability insurance comprised of five "London General" policies and four "Cities Service" policies covering the period from January 1966 to June 1971. Stonewall issued two excess policies covering the period from January 1973 to December 1975. CNA issued five excess or umbrella policies covering the periods from February 1977 to February 1978 and July 1981 to July 1985. First State issued three excess policies covering the period from February 1977 to February 1978 and July 1983 to July 1984. International issued one excess policy covering the period from July 1980 to July 1981.

The excess policies generally "follow form"; this means that they incorporate the provisions of the immediately underlying policies. Each of the excess policies incorporates substantially similar "loss payable provisions" that provide the excess insurer has no obligation to indemnify the insured until "after the Insured's liability shall have been fixed and rendered certain either by final judgment against the Insured after actual trial or by written agreement of the Insured, the claimant, and the Company." The excess policies allow but do not require appellants to defend Fuller-Austin against a claim. They similarly allow but do not require appellants to participate in the investigation, settlement or defense of any claim.

B. Fuller-Austin's Coverage Action.

At about the same time that Fuller-Austin discontinued operations in the late 1980's, it began to face thousands of personal injury complaints filed by individuals claiming to have been injured by exposure to its asbestos materials. Fuller-Austin tendered those claims to its primary general liability insurers; they defended Fuller-Austin until it filed for bankruptcy in 1998.

In the early 1990's, the number of complaints began to escalate dramatically. In March 1993, Fuller-Austin sent letters to its excess insurance carriers stating: "The insurers who provided primary general liability coverage have agreed to defend the claims brought against DynCorp. At this point, we are providing you with notice of those underlying claims because it appears possible that excess general liability coverage may be implicated by these or future claims upon exhaustion of the primary limits." In response, Stonewall issued a reservation of rights letter indicating that it did not have enough information to determine whether there was coverage for the asserted losses and setting forth several possible bases under which coverage could be denied. Other insurers responded with letters requesting additional information.

In November 1994, Fuller-Austin filed the instant coverage action against approximately 20 excess insurers, seeking to establish coverage for past, present and future asbestos bodily injury claims under multiple general liability, excess and umbrella policies.

C. Fuller-Austin's Bankruptcy.

1. Prebankruptcy negotiations.

In 1997, while the coverage action was pending, DynCorp and Fuller-Austin began to explore the possibility of Fuller-Austin's filing for bankruptcy in accordance with 11 U.S.C. section 524(g) (section 524(g)). Enacted in 1994, section 524(g) addresses the unique bankruptcy-related problems that arise in the context of asbestos mass tort litigation. The statute provides a mechanism by which an entity can transfer its assets to a trust, which is then responsible for paying asbestos claimants over time. (See § 524(g)(2)(B).) This procedure is intended to enhance the likelihood that present and future claimants will be treated equally. Once a bankruptcy plan is confirmed under section 524(g), a permanent injunction is issued barring any further asbestos-related lawsuits against the debtor, and present and future claimants must seek compensation for their asbestos-related injuries from the trust alone. (See § 524(g)(1).)

On October 2, 1997, Fuller-Austin invited attorneys representing asbestos claimants to a meeting scheduled on October 21, 1997. The purpose of the meeting was to explore the possibility of filing a "prepackaged" bankruptcy plan, which would require Fuller-Austin and at least 75 percent of its creditors to reach agreement on the terms of a proposed bankruptcy plan before jointly seeking court approval.² (See section 524(g)(2)(B)(ii)(V).) On October 17, 1997, Fuller-Austin notified appellants of the meeting. The letter invited them to "participat[e] in this settlement process in an appropriate manner" subject to the execution...