In This Issue:

  • New York Court Strictly Applies Draconian Policy Language, Holding Excess Coverage Forfeited By Settling With Underlying Insurers For Less Than Policy Limits
  • Non-Settling Carriers Allowed Access To Settlement Agreements
  • Excess Insurer Lacked Standing To Object In Policyholder’s Bankruptcy Case
  • 8th Circuit: Although A Policyholder’s Sealant Constituted A Pollutant, An Absolute Pollution Exclusion Does Not Automatically Apply

New York Court Strictly Applies Draconian Policy Language, Holding Excess Coverage Forfeited By Settling With Underlying Insurers For Less Than Policy Limits

Why it matters
A New York appellate court has ruled that a policyholder that settled with two insurers for less than policy limits forfeited coverage from an insurer on the top of a policy tower. The policyholder was covered under an $80 million insurance tower, consisting of eight separate $10 million layers, with insurance company RSUI providing the “top” layer of coverage. RSUI’s policy did not attach until the underlying limits of coverage had been fully exhausted. The policyholder incurred more than $80 million in resolving the securities action but then settled with some insurers for less than their respective full $10 million policy limits. The decision to settle with the lower levels in the policy tower for less than the policy limits came back to haunt the policyholder. The court held that RSUI’s coverage was not triggered by the settlements, resulting in the policyholder’s forfeiture of the final layer of coverage. RSUI’s policy expressly stated that it would attach “solely as a result of actual payment of a covered claim” [emphasis added]. The court held that such language “unambiguously” required actual full payment by each underlying insurer.

Detailed Discussion
Several actions were filed in New York federal court against Forest Laboratories alleging securities fraud. After the cases were consolidated, Forest paid $65 million to settle the litigation. With defense costs, the total cost was about $84 million.

Forest had constructed an eight-level tower of insurance coverage. A primary layer was followed by seven excess layers, each with a limit of $10 million. After exhausting the primary level and four excess levels to pay defense costs and a portion of the settlement, Forest filed suit against the three remaining excess carriers: Arch Insurance Company (level five), Old Republic Insurance Company (level six), and RSUI (the seventh and final layer).

Arch and Old Republic settled for less than the $10 million policy limits, but Forest said it “filled in the gaps” to reach the mark for each policy. The insured filed an amended complaint against RSUI seeking contribution.

RSUI refused to pay – taking the position that because neither Arch nor Old Republic paid the entirety of their policy limits, the “attachment point” was not reached for RSUI’s policy and it owed nothing to Forest.

The trial court agreed with RSUI. The policy specifically provides that “RSUI will pay upon the exhaustion of the underlying policies ‘solely as a result of actual payment of a Covered Claim pursuant to the terms and conditions of the Underlying Insurance thereunder.’” The court held that such language was not ambiguous, and the policy “requires RSUI to pay only after the insurance has been paid under the provisions of the underlying policies (‘terms and conditions of the Underlying Insurance thereunder’), which provisions necessarily include their term limits. Thus, RSUI pays only after the underlying insurers pay up to their policy limits.”

Forest appealed, but to no avail. In a terse order, an appellate panel unanimously affirmed dismissal of its complaint against RSUI, with costs.

“The motion court properly determined that the express terms of RSUI’s policy providing excess coverage to plaintiff required the previous layer of excess coverage to be exhausted through actual payment of that policy’s limit prior to RSUI being required to pay,” the panel wrote.

To read the trial court’s decision in Forest Laboratories, Inc. v. Arch Insurance Co., click here

To read the New York Appellate Division’s order, click here

Non-Settling Carriers Allowed Access To Settlement Agreements

Why it matters
In a dispute over coverage for asbestos claims, a New York court ruled that non-settling carriers could review settlement agreements between Exxon Mobil Corp. and its other insurers. Facing litigation over asbestos-containing products, Exxon filed suit in Exxon Mobil Corp. v. Certain Underwriters at Lloyd’s, London seeking a determination of the rights and obligations of hundreds of primary and excess insurers. Some of the carriers settled with Exxon and the remaining insurers sought to review those agreements. At a hearing, a trial court judge disagreed with Exxon that access to the settlement agreements would give the non-settling carriers an advantage and allowed those insurers access to what Exxon contended were confidential settlement agreements. Over Exxon’s objection, the court found that the information was relevant to the issue of exhaustion and Exxon’s future liability.

Detailed Discussion
In 2012 Exxon Mobil filed suit in New York state court against hundreds of its primary and excess insurers to determine the “rights, duties and obligations” for defense and indemnification costs incurred as a result of asbestos claims. According to the complaint, thousands of plaintiffs making asbestos-related claims had already been “settled or otherwise disposed of,” but “thousands more remain pending . . . and Exxon Mobil expects many more to be filed in the future.”

Exxon reached settlements with several insurers. At a hearing to determine approval of the settlements, the New York Supreme Court had good news and bad news for the policyholder.

The good news: the court approved the settlements. The bad news: the non-settling carriers get to learn all about them.

An attorney for Exxon argued that such access would provide the other insurers with a “road map” on how to make a good deal with the company, according to Law360. “This will facilitate a tactical advantage . . . on the part of the non-settling defendants,” he told the court. “It would be unfair to Exxon Mobil.”

In contrast, a lawyer for some of the non-settling insurers contended that they needed the information about their potential liability and whether or not the underlying policies had been exhausted.

Siding with the insurers, the court ruled that the insurers would be allowed to review the settlement agreements.

Excess Insurer Lacked Standing To Object In Policyholder’s Bankruptcy Case

Why it matters
The Seventh U.S. Circuit Court of Appeals recently determined that an excess insurer of a bankrupt asbestos manufacturer lacked standing in bankruptcy court to challenge a settlement between the insured and a primary insurer. Although the excess insurer told the court it was concerned that the deal increased the likelihood that it would have to honor its obligation to the policyholder, the federal appellate panel ruled that such concern was not sufficient to create standing. Nothing in the record suggested that the excess insurer – which was not an official creditor – had the required interest in the bankruptcy proceeding entitling it to intervene, the court concluded. “Pecuniary interest is a necessary rather than a sufficient condition of such a right.” The court concluded however, that interest must be certain and not hypothetical. Columbia could not show that it would in fact benefit by a rejection of the disputed settlement.

Detailed Discussion
C.P. Hall Company, a former distributor of asbestos products, faced tens of thousands of asbestos claims and was eventually forced to file for bankruptcy protection in 2011.

At that time a $10 million policy remained with Hall’s primary insurer Integrity. But Integrity itself was bankrupt and disputed whether the policy actually covered the losses for which Hall sought indemnification. The parties agreed to a $4.125 million settlement and brought their agreement to the bankruptcy court for approval.

Columbia Casualty Company, an excess insurer for Hall, with a maximum coverage of $6 million, filed an objection to the settlement. Columbia argued that its chances of having to pay on its $6 million policy for Hall were increased by the Integrity settlement for less than the policy limits. The bankruptcy court refused to consider the objection, however, ruling that Columbia had no right to appear at the proceeding.

On appeal, a unanimous panel of the 7th Circuit agreed.

In describing the issue, the court stated that “Columbia is complaining about an imminent threat to its financial assets, a threat that is traceable to the settlement and could have been eliminated by the bankruptcy court’s enjoining the settlement.” The court rejected the premise of Columbia’s complaint, holding that “[t]he loss it fears is only probabilistic. For there can be no certainty that it would benefit from rejection of the settlement.”

Hall and Integrity could have continued to litigate, the court said, and Hall could have received more than $4.125 million – or “it might well have ended up with nothing.”

Although the panel noted that Columbia’s “desire to butt in is understandable,” the excess insurer lacked a right under the Bankruptcy Code to appear in the bankruptcy court.

Had Columbia wished to better protect itself, it could have. The court said that “[a]n excess insurer can write a policy that does not require it to pay until the coverage limit of the primary policy, $10 million in this case, has been reached.” The court also noted that Columbia could have provided that the excess policy would drop down if the primary insurer proved to be insolvent, like Integrity, giving it a “concrete stake” in the bankruptcy and enabling it to file an objection in the proceeding.

To read the decision in In Re: C.P. Hall Co., click here.

8th Circuit: Although A Policyholder’s Sealant Constituted A Pollutant, An Absolute Pollution Exclusion Does Not Automatically Apply

Why it matters
A new opinion from a divided panel of the Eighth U.S. Circuit Court of Appeals asks the familiar question: What is a pollutant? Reviewing the absolute pollution exclusion of a commercial general liability policy for a company that provides construction cleanup services, in a 2-1 decision the court held that an acrylic concrete sealant product constituted a pollutant under the policy. The dissenting member of the panel reached a different conclusion, noting the nature of the insured’s business. “[A] reasonable policyholder would expect that a liability insurance policy issued to a contractor in the business of cleaning and sealing concrete floors would cover injuries suffered as a result of exposure to the products used in cleaning and sealing floors.” Significantly, although the majority reversed a district court order that the insurer must provide a defense, it remanded the case for consideration of whether the underlying complaint alleged the “discharge” or “release” as required by the policy and further whether the harm itself was in the nature of the alleged “pollutant” or some other form of harm.

Detailed Discussion
Titan Contractors Service provides construction cleanup services, including the cleaning and sealing of concrete floors. In 2009 the company was sued in Illinois state court. The plaintiffs claimed that Titan applied TIAH, an acrylic concrete sealant, to the floor in a portion of the office park where they worked and failed to properly ventilate the worksite. As a result, plaintiffs alleged they were exposed to TIAH and developed significant physical problems, such as chemically induced asthma and vocal cord dysfunction.

Titan notified insurer United Fire & Casualty Company of the suit. United commenced defense with a reservation of rights and then filed a declaratory action in federal court, arguing that an absolute pollution exclusion in the policy precluded coverage.

The policy defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Coverage is excluded for any bodily injury or property damage “which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.”

A federal district court sided with Titan, but a split panel of the 8th Circuit reversed and remanded to the court below for further proceedings.

The majority wrote, “This case turns . . . on whether an ordinary person of average understanding purchasing the policy would consider TIAH to fall unambiguously within the policy’s definition of ‘pollutant,’” and concluded such person would.

The definition included an “irritant,” and the court found “little doubt that TIAH falls within that definition.” The material safety data sheet for TIAH warns that the substance “may produce irritation to the nose, throat, respiratory tract, and other mucous membranes” and may be “irritating” to the eyes and skin. TIAH is toxic, and promotional materials from the manufacturer caution that vapors can “result in transient central nervous system depression.”

The majority limited its decision, noting that, even though the incident involved a “pollutant,” the exclusion would not apply if the alleged resulting harm was not pollution in nature. As applied here, although the TIAH technically fit the pollution definition encompassing “irritants,” the harm complained of was not itself necessarily an “irritant.” Further, the exclusion applies only to harm caused by the “discharge, dispersal, seepage, migration, release or escape” of a pollutant and will not apply if it did not propagate in one of those enumerated ways.

On remand, the court stated that the district court should consider whether the underlying state court case alleged the appropriate propagation. Titan claimed the complaint failed to do so, which would render the absolute pollution exclusion inapplicable.

The dissenting member of the panel emphasized that the TIAH was not a pollutant in Titan’s eyes. “Rather, TIAH ‘belongs in the environment in which [Titan] routinely works’ and ‘in that environment, [TIAH] is not a pollutant,’” he wrote. “Furthermore, in that environment, with ordinary ventilation, the product can be used safely. If any uncertainty exists as to whether the policy’s ‘pollution’ definition excludes TIAH, the policy must be ambiguous.”

To read the decision in United Fire & Casualty Co. v. Titan Contractors Service, click here.

Topics:  Appellate Rules, Discharge of Pollutants, Excess Policies, Exclusions, Exxon Mobil, Insurers, Judicial Settlement Agreements, Non-Judicial Settlement Agreements, Policy Exclusions

Published In: Bankruptcy Updates, Civil Procedure Updates, General Business Updates, Constitutional Law Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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