Hancock Laboratories, Inc. v. Admiral Ins. Co.

• Decision Date: 02 December 1985
• Docket Number: No. 83-6255,83-6255
• Citation: 777 F.2d 520
• Parties: HANCOCK LABORATORIES, INC., Plaintiff, v. ADMIRAL INSURANCE CO. and Mutual Fire, Marine and Inland Insurance Company, Defendants. MUTUAL FIRE, MARINE AND INLAND INSURANCE COMPANY, Cross-Complainant and Appellee, v. ADMIRAL INSURANCE COMPANY, Cross-Defendant and Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 520

777 F.2d 520

HANCOCK LABORATORIES, INC., Plaintiff, v. ADMIRAL INSURANCE CO. and Mutual Fire, Marine and Inland

Insurance Company, Defendants.

MUTUAL FIRE, MARINE AND INLAND INSURANCE COMPANY, Cross-Complainant and Appellee, v. ADMIRAL INSURANCE COMPANY, Cross-Defendant and Appellant.

No. 83-6255.

United States Court of Appeals, Ninth Circuit.

Dec. 2, 1985.

As Amended March 11, 1986.

Roy G. Weatherup, Kim H. Collins, Charles B. Smith, Haight, Dickson, Brown & Bonesteel, Santa Moncia, Cal., for cross-complainant and appellee.

Gary L. Green, Hillsinger & Costanzo, Los Angeles, Cal., for cross-defendant and appellant.

Appeal from the United States District Court for the Central District of California.

Before CHAMBERS and PREGERSON, Circuit Judges, and REED, ^* District Judge.

EDWARD C. REED, Jr., District Judge:

Admiral Insurance Company (Admiral) appeals from the district court's judgment in favor of Mutual Fire, Marine and Inland Insurance Company (Mutual). A contaminated aortic heart valve, manufactured by Hancock Laboratories, Inc., (Hancock) was implanted in the heart of William Outlaw, Jr. The effects of the contamination were not immediately observed but eventually resulted in Mr. Outlaw undergoing a second operation for replacement of the contaminated valve. Mr. Outlaw brought suit for damages against Hancock Laboratories. Admiral insured Hancock for liability at the time of the implantation and for a period following this operation. Mutual insured Hancock for the remainder of the period following implantation until after the second implantation. The issue before the district court was whether Admiral or Mutual was obligated to provide Hancock with a defense in the Outlaw action. On appeal the issues are: (1) whether the district court's resolution of the dispute between Mutual and Admiral as to which company was obligated to provide a defense to Hancock in Outlaw's lawsuit for a negligently contaminated heart valve was correct; (2) whether the amount of attorneys' fees awarded by the district court was reasonable; and (3) whether settlement with the insured entitled the insurance company making such settlement to a credit in its obligation to the prevailing insurance company.

I. STATEMENT OF FACTS

Hancock filed the initial action in this case seeking a declaratory judgment construing the provisions of Hancock's insurance policies with Admiral and Mutual. Hancock Laboratories, Inc., v. Admiral Insurance Co., No. 79-3040-CBM (C.D.Calif. filed August 13, 1979). Mutual Insurance cross-complained against cross-defendant Admiral Insurance. Hancock's initial action was subsequently dismissed pursuant to stipulation. The cross-complaint, the case before this court, principally concerns a dispute between Mutual and Admiral as to which carrier or carriers were obligated as a matter of contract law under the insurance policies at issue to tender the defense of a negligence claim brought against Hancock. ¹ The district court entered judgment in favor of Mutual for the amount it paid in settlement of the negligence action and the costs of defense, including attorneys' fees.

Hancock manufactures various products, one of which is a porcine aortic heart valve. ² On December 15, 1976, one of Hancock's valves was implanted into Mr. Outlaw. The Hancock valve was contaminated at the time of implantation with mycobacterium chelonei, an atypical organism. ³ On June 21, 1977, Mr. Outlaw was required to undergo another operation for the removal of the contaminated heart valve and implantation of a replacement valve. Mr. Outlaw subsequently brought suit against Hancock seeking two million dollars in damages and alleging that the porcine valve was negligently designed, manufactured, sterilized, tested and packaged.

Prior to January 16, 1978, Hancock notified Admiral of Mr. Outlaw's lawsuit and requested that Admiral afford Hancock a defense. On January 17, 1978, Admiral refused to tender any defense in the Outlaw action.

Shortly after Admiral's refusal to tender a defense, Mutual accepted the defense of the Outlaw action under a reservation of rights. Subsequently, Mutual settled with Mr. Outlaw for $150,000. This settlement was apparently reached on the third day of the trial of the Outlaw action. The trial court in this case found that the Outlaw settlement was reached in good faith. Further, the trial court found that Mutual expended $264,416.96 in defense costs, including attorneys' fees, in defense of the Outlaw action.

II. STANDARD OF REVIEW

To determine which insurance company was obligated to provide a defense to Hancock for the Outlaw action, the district court correctly reviewed the pertinent insurance policies. The principles of contract interpretation to be applied are reviewed de novo. Operating Engineers Pension Trust v. Charles Minor Equipment Rental, Inc., 766 F.2d 1301, 1303 (9th Cir. 1985).

The trial court's award of attorneys' fees is reviewed for an abuse of discretion. See Diamond v. John Martin Co., 753 F.2d 1465, 1467 (9th Cir.1985).

III. ANALYSIS

A. WHETHER THE IMPLANTATION OF A CONTAMINATED HEART VALVE IS AN "OCCURRENCE" TO TRIGGER INSURANCE LIABILITY.

Admiral issued an insurance policy to Hancock for the period April 10, 1976, to April 10, 1977. Hancock's general liability policy with Admiral had a combined single limit of liability of $300,000 for each "occurrence as respects bodily injury liability or property damage liability or any combination thereof."

Mutual issued an insurance policy to Hancock for the period April 10, 1977, to April 10, 1978. Hancock's policy had a limit of $500,000 "for bodily injury or property damage caused by an occurrence provided such bodily injury or property damage arises out of the products [sic] hazard as defined herein and as specified in the Declarations and further provided that the occurrence takes place subsequent to the Retroactive Date [April 10, 1977] as stated in the Declarations." Thus, when Mr. Outlaw's valve was implanted on December 15, 1976, Admiral's policy was in effect and continued through April of 1977. From April of 1977 through the time the contaminated valve was removed in June of 1977, Mutual's policy was in effect.

The two policies issued varied in certain areas. Admiral's policy did not define the terms "occurrence" or "bodily injury." ⁴ Mutual's policy defined "occurrence" as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage sustained after the Retroactive Date in the Declarations, neither expected nor intended by the Insured." These terms trigger the time and circumstances when coverage is mandated under a particular insurance policy and generally cause little difficulty in construing the policy. ⁵ In the usual case of injury both the occurrence and injury transpire simultaneously, or, at least in close temporal proximity to one another. However, in this and other continuous exposure cases, the patient has been infected with the disease before external observations reveal its existence. Mr. Outlaw's condition continually deteriorated because of the presence of the contaminated heart valve.

We are called upon in this case to construe the pertinent provisions of the insurance policies outlined above. We must determine whether, as the district court found, the implantation of the contaminated heart valve triggered only Admiral's liability to tender a defense to Hancock for the Outlaw action or, as Admiral argues, whether Mutual shared liability on a pro rata basis with Admiral.

Because bacterial infections, like the one in this case, exist before external observations reveal the diseases, it is often difficult to determine what occurrence triggers liability under a particular policy. The basic theories advanced by the courts in similar cases are the "exposure" theory, the "manifestation" theory, and the "continuous exposure" theory. ⁶ These theories have generally been addressed by courts faced with determining the insurance liability coverage in asbestosis ⁷ cases. See e.g. Insurance Co. of North America v. Forty-Eight Insulations, 633 F.2d 1212 (6th Cir.1980) clarified in part, 657 F.2d 814, cert. denied, 455 U.S. 1099, 102 S.Ct. 1648, 71 L.Ed.2d 878 (1982); Porter v. American Optical Corp., 641 F.2d 1128 (5th Cir.), cert. denied, 454 U.S. 1109, 102 S.Ct. 686, 70 L.Ed.2d 650 (1981); Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034 (D.C.Cir.1981), cert. denied, 455 U.S. 1007, 102 S.Ct. 1644, 71 L.Ed.2d 875 (1982). ⁸

The Sixth Circuit follows the exposure theory and holds that the obligations imposed upon insurance companies by the standard comprehensive general liability policy are triggered by "exposure" to asbestos-containing products during the policy period. Insurance Co. of North America v. Forty-Eight Insulations, 633 F.2d at 1225. In accord Porter v. American Optical Corp., 641 F.2d 1128. Under the exposure theory, which applies to diseases that are cumulative and progressive, bodily injury occurs when an exposure causing tissue damage takes place and not when physical symptoms caused by the disease manifest themselves.

The District of Columbia Circuit, taking the exposure theory a step further, adopts the continuous exposure theory and holds that coverage is triggered by either exposure to asbestos products, i.e., injury suffered to the tissue after the asbestos fibers are imbedded in the tissue, or manifestation of asbestos-related disease during the policy period. Keene Corp. v. Insurance Co. of North America, 667 F.2d at 1047; A C and S, Inc. v. Aetna Casualty and Surety Co., 764 F.2d 968, (3rd Cir.1985).

The First Circuit adopts the manifestation theory and concludes that coverage under these types of insurance policies is triggered by a claim that an asbestos disease has manifested itself during the policy period. Eagle-Picher Industries, Inc. v. Liberty Mutual Insurance Co., 682 F.2d 12, 24 (1st Cir.1982), ...