In re Prudential Lines, Inc.

• Decision Date: 10 December 1992
• Docket Number: Adv. No. 90-6830A.,Bankruptcy No. 86-11773
• Citation: 148 BR 730
• Parties: In re PRUDENTIAL LINES, INC., Debtor. Lee DICOLA, Trustee of the PLI Disbursement Trust, Plaintiff, v. AMERICAN STEAMSHIP OWNERS MUTUAL PROTECTION AND INDEMNITY ASSOCIATION, INC., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

148 B.R. 730 (1992)

In re PRUDENTIAL LINES, INC., DebtorLee DICOLA, Trustee of the PLI Disbursement Trust, Plaintiff, v.AMERICAN STEAMSHIP OWNERS MUTUAL PROTECTION AND INDEMNITY ASSOCIATION, INC., Defendant.

Bankruptcy No. 86-11773, Adv. No. 90-6830A.

United States Bankruptcy Court, S.D. New York.

December 10, 1992.

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L.C. Jaques, and A. Kellman, The Maritime Asbestosis Legal Clinic, Detroit, MI, for plaintiff-intervenors Asbestosis claimants("Asbestosis claimants" or "claimants").

R.H. Brown, and J. Pratt, Kirlin, Campbell & Keating, New York City, for defendant American S.S. Owners Protection and Indem. Ass'n, Inc.("American Club" or "Club").

MEMORANDUM OF DECISION ON SUMMARY JUDGMENT AND 11 U.S.C. § 553

FRANCIS G. CONRAD, Bankruptcy Judge.^*

Trustee commenced this declaratory action¹ under 28 U.S.C. §§ 2201,2202andFederal Rules of Bankruptcy Procedure 7001(9) to determine coverage under various marine protection and indemnity insurance policies ("P & I policies").The defendant, American Club, issued numerous P & I policies to the debtor, Prudential Lines, Inc.("PLI"), during a business relationship that spanned more than forty years.Both parties have stipulated to the relevant facts and now move for summary judgment on all issues presented.

At least two issues presented here are of first impression in New York: whether injury-in-fact triggers coverage under a P & I policy in asbestos litigation and whether coverage under term P & I policies should be allocated pro rata among the various yearly insurance policies.We also address several other issues raised in the parties' motions for summary judgment: applicability of policy deductibles, Trustee's obligations under triggered P & I policies and the Plan's "Liman" provision to pay the Asbestosis Claimants before being indemnified by American Club, whether American Club is entitled to offset unpaid premiums against payments to the insured under different policies, and whether Trustee must pay interest accruing post-petition on prepetition past-due premiums and assessments.

In the Memorandum of Decision that follows, we award summary judgment in favor of Asbestosis Claimants concerning the number and applicability of policy deductibles, the enforceability of the Plan's "Liman" provision, and interest accrued on past-due policy premiums and assessments.We award partial summary judgment to American Club on the setoff issue.Regarding the trigger issue, we reaffirm New York law that injury-in-fact during the policy period triggers coverage.Finally, we deny summary judgment on the issue of whether policy coverage should be allocated in proportion to the length of asbestos exposure.

PROCEDURAL HISTORY

Creditors filed an involuntary petition against PLI under Chapter 11 of the Bankruptcy Code,11 U.S.C. § 1101 et seq.On November 4, 1986, PLI filed its consent to Entry of Order for Relief.

The Second Amended Joint Plan of Reorganization ("the Plan") was confirmed on October 4, 1990.The Plan created the PLI Disbursement Trust ("the Trust") under the PLI Disbursement Trust Agreement ("the Agreement").According to the Agreement, the Trust was established to liquidate asbestos-related personal injury claims and to enforce the Trust's interests under PLI's numerous insurance policies.The Plaintiff in this action, Lee J. Dicola, as Trustee of the PLI Trust, currently holds all rights and interests of PLI in the Trust assets.These assets include various P & I policies drafted and issued by the Defendant, American Club, to PLI and its predecessors, Grace Lines, Inc., Prudential-Grace Lines, Inc., and Prudential Steamship Company(collectively, "PLI").

On December 14, 1990, Trustee commenced an adversary proceeding against American Club, PLI's insurer.Trustee seeks a declaratory judgment concerning various aspects of P & I policies issued by American Club to PLI.On April 2, 1991, we signed an order declaring the adversary proceeding to be a core proceeding and denying American Club's motion to abstain.This order was upheld on appeal to the United States District Court for the Southern District of New York.

By order dated February 26, 1991, Asbestosis Claimants were given permission to intervene in Trustee's adversary proceeding as the real parties in interest.On November 20, 1991, Asbestosis Claimants filed a motion for summary judgment.American Club filed its motion for summary judgment on November 21, 1991.In reference to their cross motions for summary judgment, the parties filed an Agreed Statement of Facts on November 21, 1991.Both parties have submitted memoranda of law and reply memoranda regarding the issues presented in the adversary proceeding.

On November 28, 1991, American Club moved under Federal Rules of Bankruptcy Procedure 4001 and 9014 for relief from stay to permit setoff of its unpaid premiums and assessments.We consider this motion in our discussion of the setoff issue, infra.

FACTUAL BACKGROUND

PLI was a United States shipping company incorporated under Delaware law with its principal place of business in New York.PLI operated various shipping vessels and employed thousands of merchant marines during its years of operation.Following their employment on PLI vessels, a significant number of merchant marines developed asbestos-related diseases.These asbestotic injuries form the basis of the Asbestosis Claimants' personal injury action against PLI's insurer, American Club.²

American Club, a New York Corporation with its principle place of business in New York, is a nonprofit mutual insurance association of shipowners.American Club underwrote PLI's insurance policies from 1940 through 1970 and from 1975 through the early months of 1986.From 1971 through 1974, PLI belonged to another insurance club.

As insurer for PLI and other shipping companies, American Club issued yearly insurance policies to participating shipowners.According to the standard insurance agreement between American Club and participating shipping companies, each vessel was deemed to be a separate interest with separate insurance.Each vessel was insured by name according to tonnage and risk estimates.

American Club sold "assess" policies, meaning that the Club charged each participant its premium according to the amount necessary to cover claims and related expenses owed in the insurance year.After about ten years when it was assumed that the vast majority of claims were known and evaluated, the Club established a reserve to cover remaining unpaid claims.Once this reserve was created, the insurance year was officially closed and no further assessments were made.Unpaid reserve funds were distributed pro rata to American Club participants according to the premiums each participant paid in the relevant insurance year.

PLI failed to pay its insurance premiums to American Club during the 1979, 1983, 1984, and 1985 insurance years.In all other years in which PLI was a participant in American Club, PLI paid all premiums and assessments.For the purposes of the present declaratory judgment action, PLI and American Club have stipulated to the following amounts.First, the parties agree that the unpaid premiums, as reduced by refunds, equal a net principle balance of $1,270,980.82.Second, the accrued interest on this amount from the filing date of PLI's petition through June 15, 1991 is $350,814.94.The parties further stipulate that American Club owes Trustee $145,655.57, excluding interest, relating to other claims.Finally, Trustee contends that American Club owes an additional $216,304.62 relating to certain other claims.

The P & I policies at issue here contain standard terms and conditions which were identical in most respects from year to year.³The deductible amount under each of the P & I policies, varied, however, according to the year the policy was issued.In the 1940s and 1950s, deductibles ranged from $500 to $1,000 per occurrence.During the 1960s and 1970s, deductibles ranged from a low of $2,500 to a high of $100,000 per occurrence.Until 1989, it was American Club's practice to apply one deductible for each policy year.

Policy limits also varied in the applicable insurance years.Typically, policy limits were $2,000,000 in the 1940s and $5,000,000 in the 1950s.This amount increased throughout the 1960s and 1970s to $10,000,000.In the early 1980s, the stated policy limit was $100,000,000.

Asbestosis Claimants, composed of more than 5000 individuals, have filed more than 7000 claims in PLI's bankruptcy.The Asbestosis Claimants seek damages for their injuries on the grounds of negligence under the Jones Act, 46 U.S.C. § 688, et seq., and on the grounds of unseaworthiness under the General Maritime Law.Each claimant has alleged employment on one or more PLI shipping vessels at some time between 1940 and early 1986, when PLI left the American Club.Claimants contend that their exposure to asbestos on PLI ships has resulted in various forms of asbestotic disease.Most claimants also worked aboard non-PLI vessels during the time period above.

The negative health effects of asbestos exposure have been well documented for decades.The parties have stipulated in the Agreed Statement of Facts that inhaling asbestos causes physical injury.Once inhaled, asbestos causes a variety of respiratory diseases whose manifestations occur with the passage of time.These diseases include mesothelioma, pleural abnormalities, and interstitial fibrosis.

DISCUSSION

This declaratory judgment action seeks to resolve the legal uncertainties surrounding insurance coverage when a toxin previously assumed safe for use later proves harmful or fatal to humans.As in cases involving exposure to lead, Agent Orange, and PCBs, exposure to asbestos frequently predates manifestation of the resulting disease by more than a generation.With this in mind, we begin our analysis of...