Onebeacon Ins. Co. v. Georgia-Pacific Corp., 06-1993.

• Decision Date: 18 January 2007
• Docket Number: No. 06-1993.,06-1993.
• Citation: 474 F.3d 6
• Parties: ONEBEACON INSURANCE COMPANY, Plaintiff, Appellant, v. GEORGIA-PACIFIC CORPORATION, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

474 F.3d 6

ONEBEACON INSURANCE COMPANY, Plaintiff, Appellant, v. GEORGIA-PACIFIC CORPORATION, Defendant, Appellee.

No. 06-1993.

United States Court of Appeals, First Circuit.

Heard December 6, 2006.

Decided January 18, 2007.

Joseph S. Sano with whom John E. Matosky and Prince, Lobel, Glovsky & Tye LLP were on brief for appellant.

Martin C. Pentz with whom Jeremy A.M. Evans and Foley Hoag LLP were on brief for appellee.

Before BOUDIN, Chief Judge, CYR, Senior Circuit Judge, and LIPEZ, Circuit Judge.

BOUDIN, Chief Judge.

In 1967, the Employers Surplus Lines Insurance Company ("Employers") issued a comprehensive general liability ("CGL") policy to Georgia-Pacific Corporation. The standard CGL policy is designed primarily to protect the insured from claims by third parties. 2 Stempel, Stempel on Insurance Contracts § 14.01 (3d ed.2006). The policy, whose coverage period was set at three years beginning on January 1, 1967, provided for a $10 million annual aggregate limit of liability as well as a $10 million per occurrence limit.¹

Shortly after the policy was issued, Georgia-Pacific found its interests better served by a new policy from the Insurance Company of the State of Pennsylvania ("ICSOP"). Georgia-Pacific therefore cancelled its Employers policy effective April 1, 1967, and replaced it with an ICSOP policy. Employers issued a cancellation endorsement that shortened the policy period, refunded $8,700 of Georgia-Pacific's $10,000 premium, and stated that "all other terms and conditions remain unchanged."

Decades later, Georgia-Pacific presented OneBeacon Insurance Company, the successor to Employers, with $10 million of asbestos product-liability losses allegedly covered by the Employers policy. OneBeacon maintained that its liability was capped at $2.5 million since the policy was only in effect for one-quarter of the year. It sued for a declaratory judgment to that effect. The district court granted summary judgment in Georgia-Pacific's favor, holding that the insurance contract nowhere contemplated proration of the annual aggregate limit.

OneBeacon now appeals. Our review, on the grant of summary judgment, is de novo. Iverson v. City of Boston, 452 F.3d 94, 98 (1st Cir.2006). The issue being one of contract interpretation, we look to language and other common indicia (e.g., context, inferred purpose); extrinsic evidence of commercial practice and negotiations between the parties might also be relevant if there were any, but nothing meaningful in these categories was tendered by the parties.

On language alone, looking at both the policy and the cancellation endorsement, Georgia-Pacific has the better case. The policy, although in effect for only three months, explicitly provides $10 million in both per occurrence and aggregate annual coverage. Further, the cancellation endorsement stated that the only consequences of the cancellation were the shortened period of coverage and the refund of part of the premium: it said nothing about modifying the aggregate limit of $10 million and substituting a $2.5 million figure.

OneBeacon's argument from language focuses on the sentence in the original policy describing the limit as $10 million "in the aggregate for each annual period during the currency of this policy." The most straightforward reading of this language is that the insured cannot collect from OneBeacon more than $10 million for any year. Consonantly, what Georgia-Pacific seeks is exactly $10 million for the period within 1967 in which the policy was in effect.

Nor is it possible to read the phrase "for each annual period" as implying that the aggregate limit should be mechanically prorated by the day, week, month or quarter. Counsel for OneBeacon has conceded that the insurer would be liable for $10 million — not $2.5 million — if a single catastrophic loss (say, a single explosion) had occurred on January 2, 1967. This is so even if the policy were cancelled a week after the event. The concession was inevitable since no one would want $10 million per occurrence coverage with an aggregate limit one quarter that size.

The present case differs from the hypothetical case of an explosion because the asbestos claims do not comprise a single loss caused by a single event. The asbestos injuries likely are continuing occurrences that straddle the effective periods of the Employers policy and the replacement ICSOP policy, probably extending to periods before and after both policies. But the problem of allocating a continuing loss among the many insurers who were on the risk for the loss is not peculiar to short term policies, nor is it an excuse for a court to alter express policy limits.

How to assign to coverage periods a claim for a slow acting disease, whose causes and effects play out over time, has bedeviled courts and produced a variety of solutions. OneBeacon has not sought a ruling as to which claims against Georgia-Pacific are covered by which policies; it has assumed at least arguendo that the losses attributable to the insured period exceed $2.5 million, and it has presented us only with the issue whether the policy's aggregate limit is $2.5 million or $10 million.

Where a claim is the responsibility of more than one company, sometimes policy language assigns primary responsibility; here, both the Employers' and ICSOP policies have an identical "prior insurance" and "non-cumulation" clause. Courts have also developed allocation rules of varying kinds.² Here, the parties rely on neither this clause nor this case law: the only issue before us is whether the Employers policy's annual aggregate limit should be prorated. The language of the policy says nothing about requiring proration.

OneBeacon's better argument for its position is that reading the policy literally will produce a windfall to Georgia-Pacific. Georgia-Pacific would in effect enjoy $20 million of total aggregate coverage against continuing occurrences that straddle 1967 periods: $10 million of coverage from the Employers policy and another $10 million from ICSOP. Yet, OneBeacon assumes, Georgia-Pacific would only have paid premiums for $10 million of aggregate coverage.

This argument looks to the reasonable expectations of the parties, which — absent extrinsic evidence of intent — means the help that context, inferred purpose and common sense may give in determining what the parties probably intended or would have been likely to intend if they had focused on the issue. See 16 Williston on Contracts § 49:20 (4th ed.2006). Courts, whatever tributes they may pay to plain language, tend to be interested in such arguments, although the weight accorded turns on the circumstances. Here, the circumstances are unhelpful to OneBeacon.

OneBeacon is arguing in effect that Georgia-Pacific seeks to reap a $10 million unjustified gain, $7.5 million of which would come at OneBeacon's expense. But Georgia-Pacific sought $10 million in per-occurrence and aggregate coverage from Employers and a smaller aggregate would have made no sense given the per-occurrence limit. The windfall argument therefore reduces to the question whether Employers would have charged Georgia-Pacific a higher monthly premium for such coverage had the policy been sought only for three months.

The decision as to how much of the premium to refund was within Employers' control, presumably governed by policy language which Employers drafted or adopted. In fact, the refund was not strictly pro rata; instead, the cancellation penalty amounted to 5 percent of the total premium paid. If Employers conferred any...