I’m not sure which is more grimly entertaining: watching old advertisements for cigarettes (see here), or watching old advertisements for asbestos products (see here). If you’re an executive in the front office of a company that acquired an asbestos manufacturer, however, you might fail to appreciate the dark humor. A few years back, RAND Corporation estimated the cost of asbestos-related liabilities to American companies at $265 billion. Transaction costs (including legal fees) have consumed half of that amount.
The amazing thing about asbestos litigation is that, much like the product that spawned it, it seems to be virtually indestructible. I was involved with it over 30 years ago as a summer associate at a major New Jersey law firm; and I’m still involved with it. The battle has shifted over the years from the question of whether asbestos liabilities are covered (under policies not containing an asbestos exclusion, and sometimes even then) to the question of how to allocate asbestos-related liability among insurance companies. The New Jersey Supreme Court has issued several major decisions on this issue, yet the issue seems never to be fully resolved. Two weeks ago (as I write this), the New Jersey Appellate Division handed down yet another decision trying to untangle the various questions raised by complex toxic tort insurance coverage cases. The decision was rendered in the case of Continental Insurance Co. v. Honeywell Corp., and you can obtain a full copy by clicking here.
In this post, I wanted to touch briefly upon two aspects of the decision. First, the fact that every excess and umbrella policy should be carefully examined when purchased, because these policies may provide significantly less coverage than you believe you’re getting. Second, the question of when a policyholder is entitled to recover its counsel fees from the insurance company when it has to sue to enforce coverage.
Honeywell’s corporate predecessor, Bendix, manufactured brake and clutch pads that contained asbestos. Honeywell has been sued in tens of thousands of cases alleging exposure to asbestos from Bendix products, and between Honeywell and its insurance companies, over $1 billion has been spent to resolve the claims. After 13 years of coverage litigation, Honeywell managed to settle with all of its insurance companies except for two high level excess carriers: St. Paul and Travelers.
The Honeywell case serves as a reminder that the language of excess and umbrella policies is not uniform and may represent a trap for the unwary policyholder. In this case, the relevant policies defined “loss” as “the sums paid in settlements of losses for which the Insured is liable after making deductions for all other recoveries, salvages and other insurances (other than recoveries under the policy/ies of the Primary Insurer), whether recoverable or not, and shall exclude all expense[s] and costs.” “Costs” was defined to include “interest on judgments, investigations, adjustments, and legal expense[s] (excluding, however, all expenses for salaried employees and retained counsel of and all office expenses of the Insured).” (Emphasis added.)
Honeywell raised a number of arguments as to why this (and similar) language in its excess policies did not negate the defense obligation. The Court, however, disagreed, finding that the language of the excess policies unambiguously excluded defense costs. So: When placing and reviewing excess or umbrella policies, pay close attention to the definition of “loss.” Is there a defense obligation, or not? If there isn’t, are you comfortable with assuming the costs of defense once the underlying policies are exhausted?
A more troubling aspect of the case, at least for those of us who do coverage work from the policyholder side, is the court’s denial of counsel fees to Honeywell. In New Jersey, under R. 4:42-9(a)(6), a “successful claimant” in “a liability or indemnity policy of insurance” is entitled to recover its attorneys’ fees. The Honeywell Court conceded that “[f]ee shifting…discourages insurance companies from attempting to avoid their contractual obligations and force their insureds to expend counsel fees to establish the coverage for which they have already contracted.” And, as the New Jersey Supreme Court ruled in Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994), “[i]nsurers whose policies are triggered by an injury during a policy period must respond to any claims presented to them and, if they deny full coverage, must initiate proceedings to determine the portion allocable for defense and indemnity costs. For failure to provide coverage, a policyholder may recover costs incurred under the provisions of Rule 4:42-9(a)(6).”
Here, Honeywell prevailed on several issues (such as on Travelers’ argument that numerous coverage years should be allocated to Honeywell, because Honeywell ostensibly had “self-insured” its risks for those years). Yet the Court refused to allow Honeywell to recover attorneys’ fees because, in part, “this is a case about nothing more than allocation…not a case about denial of coverage.” That language is extremely troubling, and, with all due respect to the esteemed Court, is something that only an “insurance dilettante” could write. As anyone experienced in mass tort coverage cases in New Jersey knows, “allocation” is the new denial of coverage. Carriers, in many cases, take the most expansive reading of Owens-Illinois (and its offspring, Carter-Wallace v. Admiral Ins. Co. 154 N.J. 312 (1998)) possible, often in an effort to shrink their coverage to as close to zero as possible. Policyholders are then forced to expend large sums of money on coverage litigation, in an effort to create a fair allocation.
In reaching its decision, the Court also seems to have fallen for the usual insurance company argument that larger corporations should somehow be afforded less coverage than smaller companies based upon the same policy language, writing: “[T]his is not a situation concerning a contract of adhesion. Honeywell is a large and sophisticated corporation with a knowledgeable risk management division. Accordingly, Honeywell and its predecessor Bendix, were on equal bargaining positions when they negotiated their insurance contracts with their insurers.”
That statement may be true in judge-world, but not in the real world. No matter how large a corporation is, it is never on an equal bargaining footing with an insurance company. Yes, corporate risk managers may be able to negotiate certain favorable endorsements or minor changes in policy language. But that’s about it. Trying to change language in a preprinted policy form has about the same chance of succeeding as Rutgers does of winning the National Division I Football Championship this year. (Calm down, Rutgers fans, I’m just keeping it real…)
Unfortunately, I expect that insurance companies will use the language in this unreported decision to argue that in any case involving allocation, the policyholder should not be allowed to recover its fees as a “successful claimant.” Hopefully, Courts won’t allow them to get away with it.