Sybron Transition Corp. v. Security Insurance of Hartford, 00-1407

• Decision Date: 12 July 2001
• Docket Number: No. 00-1407,00-1407
• Parties: (7th Cir. 2001) Sybron Transition Corporation and Kerr Manufacturing Corporation, Plaintiffs-Appellants, v. Security Insurance of Hartford, Defendant-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 595

258 F.3d 595 (7th Cir. 2001)

Sybron Transition Corporation and Kerr Manufacturing Corporation, Plaintiffs-Appellants, v. Security Insurance of Hartford, Defendant-Appellee.

No. 00-1407

In the United States Court of Appeals For the Seventh Circuit

Argued October 27, 2000

Decided July 12, 2001

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 92-C-779--Lynn Adelman, Judge.

Before Easterbrook, Kanne, and Rovner, Circuit Judges.

Easterbrook, Circuit Judge.

This appeal concerns insurance for asbestos liabilities. The estate of Alan Press, a dentist who died in 1988 of mesothelioma, contended that his disease had been caused by exposure to asbestos during dental school from September 1969 through May 1973, and that the source of the asbestos was products made by Kerr Manufacturing Corporation. That suit was settled for $1.3 million, of which Security Insurance contributed $500,000 under a reservation of rights. Kerr and its parent Sybron Transition Corp. (collectively Sybron) contend in this suit under the diversity jurisdiction that Security must indemnify them for the entire settlement; Security replies that it is entitled to most of its $500,000 back. After a bench trial the district judge concluded that Security's share of the liability is $230,208, and he entered a judgment requiring Sybron to refund the excess. 2000 U.S. Dist. Lexis 19139 (E.D. Wis. Jan. 14, 2000).

Security underwrote Sybron's tort liability when Press arrived at dental school; its last policy expired at the end of January 1971, during his education. Mesothelioma was diagnosed in July 1987, Press died in April 1988, and his estate filed suit in 1989. By 1986 Sybron was self-insuring for most asbestos risks. One possible resolution of coverage disputes would have been to say that the responsibility for indemnity fell on Sybron's carrier in 1984, when (the district judge found) Press's tumor began growing, or on Sybron itself if 1987 marked the onset of the disease. But the parties agree that New York law, which governs the application of Security's policy, applies a time-on-the- risk approach to allocating insurance coverage for diseases with long latency periods (and similar matters such as pollution)--and that New York does this essentially no matter how the insurance policy defines the conditions of its own coverage. The parties have accordingly paid little attention to the language of the policies and a great deal of attention to Stonewall Insurance Co. v. Asbestos Claims Management Corp., 73 F.3d 1178 (2d Cir. 1995), and Olin Corp. v. Insurance Co. of North America, 221 F.3d 307 (2d Cir. 2000). These are the leading decisions about this aspect of New York insurance law--true, they are not decisions by New York courts, but the parties treat them as authentic expositions of New York law. So if in a usual diversity case the federal court acts as a ventriloquist's dummy for the state judiciary, we are playing this hand double dummy: the second circuit has interpreted New York law, and we are interpreting the work of the second circuit.

Time-on-the-risk means that each insurer's liability (up to its policy limit) is measured by the underlying loss multiplied by the ratio of time covered by the policy to the time subject to the risk. The denominator of this fraction, the total period of risk, was set by the district court after the bench trial at 96 months: the 45 months Press was in dental school (and exposed to asbestos) plus the 51 months during which cancerous cells were multiplying in Press's body. The numerator, according to the district court, is 17 months: the portion of Press's dental education during which Sybron had coverage from Security. Multiplying $1.3 million by the fraction 17/96 produced Security's share ($230,208), less than the $500,000 per- occurrence limit in Security's policies. Sybron contends that the district judge made three errors in working this out. Sybron contends first that the numerator should be 36 months rather than 17; second that the denominator should be 69 months rather than 96; and third that Security's three policies should be stacked to increase its maximum exposure to $1.5 million.

1. The numerator. Security wrote three policies that covered portions of the risk: one for calendar year 1969, a second for calendar year 1970, and a third for the month of January 1971, bridging a gap while Sybron arranged for coverage from another underwriter. Sybron contends that because three policies are at issue, it is entitled to have Security treated as covering three years of the risk. The year is the ordinary unit of insurance coverage Sybron observes, so it should be the unit of allocation for time-on-the-risk calculations too.

A year is the normal accounting period for financial reports and tax returns, but whether it is the right accounting period for insurance is something that parties can and do work out for themselves. Security wrote a one-month policy for 1971 (at Sybron's request) and presumably charged one-twelfth of its annual premium. Yet Sybron believes that it obtained the same coverage as a premium twelve times larger would have produced. That does not seem sensible and is not supported by anything in the policy's language. If one of Kerr's products had killed Press outright inJanuary 1971 then Security would have been responsible for up to $500,000; but a death in February 1971 would have been the responsibility of Security's successor. If liability for asbestos- related disease were allocated to a single policy-- say, the policy in force at first exposure, or the policy in force when the disease becomes manifest--again the single-month policy for January 1971 would subject Security to one month's actuarial risk. A twelfth of all initial exposures that happened anytime in a year would come in January, and a twelfth of all mesotheliomas would be discovered that month.

The same approach applies to a time-on- the-risk calculation: if the events are to be allocated among the underwriters according to total exposure (and manifestation) time, then a one-month policy covers one month's worth of exposure rather than a year's worth. Both Stonewall, 73 F.3d at 1204, 1217, and Olin, 221 F.3d at 327, support this conclusion. True, both opinions frequently refer to "years" in the numerator, but that is because they dealt with whole-year policies. When insured and insurer have elected to parcel out coverage by month rather than by year, the formula should use months rather than years. (And, we suppose, if coverage were measured in days, then days would be the right unit for the formula. Cf. National Casualty Insurance Co. v. Mt. Vernon, 128 A.D.2d 332, 515 N.Y.S.2d 267 (App. Div. 1987).) Otherwise the insured would receive coverage it did not pay for. That the underwriter covering the remainder of 1971 (American Mutual) became insolvent does not increase Security's liability; Sybron does not point to any provision of New York law making an insurer responsible for coverage its successor promised but failed to deliver.

2. The denominator. The district court included in the denominator all of the months that Press either was in dental school or suffered from cancer. Sybron contends that the denominator should include only the period during which it carried insurance that would have covered the loss. Sybron was not wholly self- insured; it carried insurance for risks exceeding $2 million per occurrence; but this coverage did not kick in until after the liability level of the Press litigation. Both Sybron and the district court call Sybron's strategy "self- insurance" and we will follow suit, though it would be more accurate to call it "insurance with a big deductible."

Sybron concedes that self-insurance is a form of insurance but contends that time during which it self-insured out of necessity should be excluded from the denominator. This legal proposition has the support of both Stonewall, 73 F.3d at 1204, and Olin, 221 F.3d at 325-27. The district court followed this approach but concluded that, even if asbestos coverage was unavailable (a subject on which the court reserved decision), this is irrelevant because Sybron had decided to self-insure come what may. To this Sybron responds that Stonewall determines that asbestos coverage is "unavailable" for its purposes whenever it cannot be obtained as an ordinary part of a comprehensive general liability policy-- and no one denies that by 1986 comprehensive general liability policies excluded injuries caused by exposure to asbestos. Thus it is entitled to have time after 1985 removed from the denominator no matter what other insurance may have been available, and no matter what its plans may have been.

Security was not a party to Stonewall, so we do not see how the second circuit's views about the availability of asbestos coverage can be conclusive against it. All Stonewall could do--all we can do--is predict how the courts of New York would handle a legal issue that has never been presented to them. We are not confident that Stonewall itself held that only comprehensive general coverage counts as "available" coverage for the purposes of New York law. That was not a subject debated by the parties or addressed squarely by Stonewall. Indeed, we do not know what it means (or could mean) to say that coverage for a particular risk is "unavailable." Unavailable at what price?

Underwriters cheerfully sell insurance policies even after a risk has come to pass and the obligation to pay is certain. What they then deliver on such retroactive policies is a claims- administration service rather than risk-...