Gen. Refractories Co. v. First State Ins. Co.

• Decision Date: 21 April 2017
• Docket Number: No. 15-3409,15-3409
• Citation: 855 F.3d 152
• Parties: GENERAL REFRACTORIES COMPANY v. FIRST STATE INSURANCE CO; Westport Insurance Corporation, Successor to, or, f/k/a Puritan Insurance Company ; Lexington Insurance Company; Centennial Insurance Company; Hartford Accident and Indemnity Co; Government Employees Insurance Co; Republic Insurance Company; Sentry Insurance, Successor to, or, f/k/a Vanliner Insurance Company, f/k/a Great SW Fire Insurance Co; American International Ins. Co; AIU Insurance Company; Harbor Insurance Company; Travelers Casualty & Surety Co, Successor to, or, f/k/a Aetna Casualty & Surety Company ; American Empire Insurance Co; Westchester Fire Insurance Co Travelers Casualty and Surety Company (f/k/a The Aetna Casualty and Surety Company), Appellant
• Court: U.S. Court of Appeals — Third Circuit

855 F.3d 152

GENERAL REFRACTORIES COMPANY

v.FIRST STATE INSURANCE CO; Westport Insurance Corporation, Successor to, or, f/k/a Puritan Insurance Company ; Lexington Insurance Company; Centennial Insurance Company; Hartford Accident and Indemnity Co; Government Employees Insurance Co; Republic Insurance Company; Sentry Insurance, Successor to, or, f/k/a Vanliner Insurance Company, f/k/a Great SW Fire Insurance Co; American International Ins. Co; AIU Insurance Company; Harbor Insurance Company; Travelers Casualty & Surety Co, Successor to, or, f/k/a Aetna Casualty & Surety Company ; American Empire Insurance Co; Westchester Fire Insurance Co

Travelers Casualty and Surety Company (f/k/a The Aetna Casualty and Surety Company), Appellant

No. 15-3409

United States Court of Appeals, Third Circuit.

Argued September 9, 2016

Opinion Filed: April 21, 2017

Theodore J. Boutrous, Jr., [ARGUED], Richard J. Doren, Blaine H. Evanson GIBSON, DUNN & CRUTCHER, 333 South

Grand Avenue, Los Angeles, CA 90071, Samuel J. Arena, Jr., Daniel T. Fitch, William T. Mandia, STRADLEY, RONON, STEVENS & YOUNG, 2005 Market Street, Suite 2600, Philadelphia, PA 19103, Counsel for Appellant, Travelers Surety and Casualty Company

Michael Conley, [ARGUED], Meghan Finnerty, Mark. E. Gottlieb, William H. Pillsbury, OFFIT KURMAN, 1801 Market Street, 23rd Floor, Ten Penn Center, Philadelphia, PA 19103, Howard J. Bashman, Law Offices of Howard J. Bashman, 2300 Computer Avenue, Suite G-22, Willow Grove, PA 19090, Counsel for Appellee, General Refractories Company

Laura A. Foggan, Esq., CROWELL & MORING, 1001 Pennsylvania Avenue, N.W., Washington, DC 20004, Counsel for Amicus Appellant American Insurance Association and Complex Insurance Claims Litigation Association.

John N. Ellison, Esq., REED SMITH, 1717 Arch Street, Three Logan Square, Suite 3100, Philadelphia, PA 19103, Counsel for Amicus Appellant United Policyholders.

Before: JORDAN, VANASKIE and KRAUSE, Circuit Judges

OPINION

VANASKIE, Circuit Judge.

Decades of litigation over the effects of pervasive asbestos use have yielded a financial burden borne across an array of industries. Today we must decide which of two companies will bear costs associated with a staggering number of asbestos claims. These companies—a historical manufacturer of asbestos-containing products and its insurer—dispute the rightful allocation of asbestos-related losses under thirty-year-old excess insurance policies. While the policies are dated, the consequences of our interpretation are immediate both to the parties at hand and to those insurers and insureds whose relationships are similarly governed.

The chief issue on appeal is whether a policy exclusion that disclaims losses "arising out of asbestos" will prevent a manufacturer from obtaining indemnification for thousands of negotiated settlements with plaintiffs who have suffered adverse health effects from exposure to its asbestos-containing products. The answer hinges on whether the language of the exclusion is ambiguous. After a bench trial, the District Court found that the phrase "arising out of asbestos" contained latent ambiguity because the exclusion could reasonably be read to exclude only losses related to raw asbestos, as opposed to losses related to asbestos-containing products. We disagree. The phrase "arising out of," when used in a Pennsylvania insurance exclusion, unambiguously requires "but for" causation. Because the losses relating to the underlying asbestos suits would not have occurred but for asbestos, raw or within finished products, we will reverse the judgment of the District Court.

I.

Plaintiff-Appellee General Refractories Company ("GRC") is a manufacturer and supplier of refractory products that are designed to retain their strength when exposed to extreme heat. To serve this purpose, GRC previously included asbestos in some of its products. GRC's use of asbestos brought about approximately 31,440 lawsuits alleging injuries from "exposure to asbestos-containing products manufactured, sold, and distributed by GRC" dating back to 1978. (J.A. 199.)

GRC's insurers initially fielded these claims. During the 1970s and ‘80s, GRC had entered into primary liability insurance policies with a number of different insurers. GRC also secured additional excess insurance policies to provide liability coverage beyond the limits of its primary insurance policies, including several excess policies issued by Defendant-Appellant Travelers Surety and Casualty Company, formerly known as the Aetna Casualty and Surety Company. As the number of asbestos-related injury claims against GRC began to grow, the primary insurers continued to defend and indemnify GRC. But this arrangement came to a halt in 1994 when GRC's liabilities from thousands of settled claims far exceeded the limits of its primary insurance coverage. In 2002, after years of continued settlements, GRC tendered the underlying claims to its excess insurance carriers, including Travelers, all of whom denied coverage on the basis of exclusions for asbestos claims.

GRC commenced this action against its excess insurers seeking a declaration of coverage for losses related to the underlying asbestos claims, as well as breach of contract damages. Gen. Refractories Co. v. First State Ins. Co. , 94 F.Supp.3d 649, 652 n.1 (E.D. Pa. 2015). GRC eventually settled with all of the excess insurance defendants—except Travelers—by means of a stipulated dismissal with prejudice. Id. Travelers is the only excess insurer remaining in this litigation.

Travelers' contractual relationship with GRC is governed by two substantively identical excess insurance policies providing coverage from 1985 to 1986. Each policy obliges Travelers to indemnify GRC "against EXCESS NET LOSS arising out of an accident or occurrence during the policy period" subject to the stated limits of liability and additional terms.¹ (J.A. 370, 381.) In maintaining that it need not compensate GRC for losses related to the underlying asbestos claims, Travelers relies on an "Asbestos Exclusion" contained within the excess insurance contracts, which reads:

It is agreed that this policy does not apply to EXCESS NET LOSS arising out of asbestos, including but not limited to bodily injury arising out of asbestosis

or related diseases or to property damage.

(J.A. 377, 388.) The policies do not define the terms "arising out of" or "asbestos." Gen. Refractories Co. , 94 F.Supp.3d at 654.

At its core, the parties dispute the meaning of four words within the Asbestos Exclusion: "arising out of asbestos." (J.A. 377, 388.) The District Court held a one-day bench trial specifically to interpret this language. GRC took the position that at the time the policies were drafted "arising out of asbestos" had a separate meaning than "arising out of asbestos-containing products." Gen. Refractories Co. , 94 F.Supp.3d at 653. In GRC's view, the term "asbestos" plainly referred to the raw asbestos mineral that is "mined, milled, processed, produced, or manufactured for sale in its raw form." Id. There is no dispute that GRC made and sold refractory products that sometimes contained asbestos components. But the parties also agree that GRC "never mined, milled, processed, produced, or manufactured raw mineral asbestos." Id. at 654. Thus, GRC argued that the exclusion did not encompass claims based on exposure to its finished asbestos-containing products.

To support its narrow interpretation of the Asbestos Exclusion, GRC presented several types of extrinsic evidence, including:

• examples of comparable insurance policies that other insurers had issued in the late 1970s through 1985, which explicitly excluded "asbestos" and products containing asbestos;

• examples of comparable insurance policies that explicitly defined the term "asbestos" broadly as "the mineral asbestos in any form";

• six consecutive policies sold by Travelers (as Aetna Casualty) to other policyholders from 1978 to 1985 which contained a more comprehensive and explicit asbestos exclusion² than the one included in the two policies sold to GRC;

• the Wellington Agreement,³ which defined "Asbestos-Related Claims" as "any claims or lawsuits ... alleged to have been caused in whole or in part by any asbestos or asbestos-containing product";

• the expert testimony of Gene Locks, a lawyer who represented over 15,000 asbestos claimants and was the lead negotiator at the Wellington meetings, in which Locks explained that the terms "asbestos" and "asbestos-containing product" had distinct meanings to the parties involved in asbestos litigation during the relevant timeframe.

Id. at 654–57.

On the other hand, Travelers contended that the only reasonable interpretation of the Asbestos Exclusion is that claims for injuries related to asbestos in any form were excluded. Travelers asserted that this is the "natural, plain, and ordinary meaning of the terms, ‘arising out of asbestos.’ " Id. at 652–53. Thus, Travelers asserted that GRC's losses associated with the underlying asbestos claims were precluded by the Asbestos Exclusion. For support, Travelers presented "GRC's corporate records, as well [as] its communications with Travelers and its own insurance broker," as evidence of "the parties' intent to exclude—or their awareness, belief, or knowledge that the purchased insurance did exclude—all injuries related to asbestos in any form." Id. at 656–57.

After weighing the evidence and arguments, the District Court issued a memorandum and order concluding that the Asbestos Exclusion contained a latent ambiguity "because the terms [were] reasonably capable of being understood in more than one sense." Id. at 660. The District Court agreed that GRC's interpretation of "asbestos" as referring only to the raw mineral asbestos rather than other finished products containing asbestos was "consistent with the plain meaning of the written policy," and therefore "objectively reasonable," and that Travelers had not met its burden of showing that GRC's interpretation was...