Cases involving insurance coverage for multiple claims arising out of bodily injury or property damage resulting from exposure to toxic substances or long-term environmental damage can present extremely complex coverage issues. In such cases, insureds may have insurance coverage spanning many decades under multiple policies issued by various insurers. In Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994), and Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), the New Jersey Supreme Court adopted a method for determining how losses should be allocated among the various insurers.
In deciding Owen-Illinois and Carter-Wallace, the New Jersey Supreme Court was trying to fashion a method for dealing with complex losses that were not contemplated by the parties to the insurance policies at the time they were issued. The method selected by the court was less than perfect. As new issues arise, the New Jersey courts try to mold the facts and policy language at issue to fit the Carter-Wallace/Owens-Illinois allocation methodology. When the policy language does not fit within the methodology adopted by the court, the policy language simply is not enforced.
Despite the fact that Owens-Illinois was decided over two decades ago, and Carter-Wallace was decided eighteen years ago, issues continue to arise concerning the Carter-Wallace/Owens-Illinois allocation methodology. In September 2014, the New Jersey Appellate Division issued a decision, IMO Indus. Inc. v. Transamerica Corp., 437 N.J. Super. 577 (App. Div. 2014), certif. denied, 222 N.J. 16 (2015), in which it addressed a number of outstanding issues. That decision was the subject of a prior blog post. See https://njinsuranceblog.com/owens-illinoiscarter-wallace-revisited-n-j-court-addresses-allocation-yet/
In July of this year, the Appellate Division once again had occasion to address allocation issues in Continental Ins. Co. v. Honeywell Int’l, Inc., 2016 WL 3909530 (App. Div. July 20, 2016). That case involved coverage for bodily injury claims arising out of exposure to asbestos-containing products. One of the issues addressed by the court was what happens if an insured is aware of the risks posed by its products, is unable to purchase insurance covering those risks, but decides to sell its products anyway. The Owens-Illinois court previously held that an insured is required to assume a portion of the risk during those periods when coverage was available but the insured chose not to purchase it. The situation in Continental was different, however, because insurance coverage was unavailable.
The insured was sued “in tens of thousands of [personal injury] actions” and the insured and its insurers “spent over $1 billion in defending, settling, and paying asbestos-related claims.” Id. at *1. After litigating with its insurers for thirteen years, all but two high-level excess insurance carriers settled with the insured. The Continental decision concerned only the claims against those two insurers.
Surprisingly, the court held that New Jersey law applied even though the polices at issue “were brokered, underwritten, issued and delivered to [the insured] in Michigan,” its principal place of business. Id. at *9. When it comes to choice-of-law issues, New Jersey courts apply the “dominant significant relationship” or “most significant relationship” test. Under that test, a court is supposed to apply the law of the state that “has the most meaningful connections with the interests in the transaction and the parties.” NL Indus., Inc. v. Commercial Union Ins. Co., 65 F.3d 314, 316 (3d Cir. 1995). Some of the factors to be considered by a court in making its determination include the principal place of business of the insured, the principal place of business of the insurance company, the location where the policy was negotiated, the location where the policy was issued, the location where the insurance broker is located (assuming there is one), the principal location of the risk, and the location where the injury took place. Based on those considerations, it appears that Michigan, and not New Jersey, had the most meaningful connections. However, the court obviously was mindful of the fact that applying New Jersey law would maximize the available insurance coverage.
The insured in Continental sold asbestos-containing brake and clutch pads over a period of several decades. Starting in 1986, its insurance policies contained asbestos exclusions. Yet, it continued to sell asbestos containing products until 2001. Some of the insurers argued that the insured effectively decided to self-insure during those years. The insurers took the position that the insured had “assumed the risk by continuing to manufacture and sell asbestos-containing products after 1987.” Id. at *11. The court rejected that argument:
No New Jersey case has adopted the concept of assumption of the risk as advocated for by [the excess insurers]. Instead, cases applying the Owens–Illinois rule have focused on the availability of insurance and have only found that the insured assumed the risk when insurance was available and the insured chose not to purchase coverage.
Given the facts of this case, we conclude that the correct focus was whether Honeywell could reasonably have purchased insurance for asbestos-related claims. In the context of this case, the assumption of the risk language in Owens–Illinois did not refer to when an insurer sells or manufacturers a product that might lead to a claim of exposure to asbestos. Instead, the assumption of the risk occurs when an insurer fails to purchase insurance that was reasonably available.
Id. (citations omitted). Because the evidence established that insurance coverage was not available after 1987, the court concluded that the insured did not assume the risk during that period.
The Appellate Division also held that, based on the particular language of the policies at issue, the excess insurers were not required to provide coverage for the payment of defense costs and that the insured was not entitled to recover the attorneys’ fees it incurred in the coverage action.
On December 12, 2016, the New Jersey Supreme Court granted certification in the Continental case. Interestingly, the Court declined to hear an appeal in the IMO case, which involved numerous novel and significant allocation issues. Presumably, the choice-of-law ruling caught the Court’s attention, although the assumption of risk argument also presents a novel issue. Regardless of why it granted certification, the Court will now have yet another opportunity to weigh in on the Owens-Illinois/Carter-Wallace allocation method.
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