The opinion of the court was delivered by: SOFAER
Plaintiff American Home Products Corporation ("AHP"), a diversified company manufacturing drugs, foods, and household products, is the defendant in fifty-four products-liability suits arising from AHP's manufacture and sale of six pharmaceuticals: Ovral and L/Ovral (oral contraceptives), DES (Diethylstilbestrol), Mysoline, Atromid-S, Premarin, and Anacin. Defendant Liberty Mutual Insurance Company ("Liberty"), which provided AHP with insurance from 1944 until 1976, has refused to assume AHP's burden of defense or to indemnify AHP in those lawsuits, because in each case physical harm did not become manifest until after termination of the insurance policies. In this action AHP seeks a judgment declaring that Liberty is obliged to defend and to indemnify AHP in the underlying lawsuits because, regardless of when physical harm became manifest, exposure to the alleged agents of harm occurred during the policy periods, thereby triggering coverage.
Jurisdiction is based on diversity of citizenship, 28 U.S.C. § 1332 (1976), and New York law controls. AHP contends there are no disputed issues of material fact, and has moved for summary judgment awarding the declaration it seeks. Liberty opposes this motion, and has itself moved for partial summary judgment on the basis of a provision in the AHP policies which Liberty argues excludes coverage for all claims involving exposures to allegedly harmful substances after termination of Liberty's coverage on November 1, 1976.
Several courts have recently ruled on the scope of insurance policies covering liability for insidious diseases, which are illnesses that become manifest long after initial exposure to the substances believed to cause them. The policy provisions at issue in these cases were all variants of the Comprehensive General Liability Policy ("CGL"), a standard-form policy for liability coverage drafted during the 1960's by representatives of the insurance industry to deal with the problem of liability for injuries caused over a period of time. Instead of covering only "accidents", a word that connotes an event causing immediate or contemporaneous injury, the CGL was written to cover "occurrences", defined to include "an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury . . . neither expected nor intended from the standpoint of the insured." CGL, Pl. Ex. 22 at 12. This change in terminology made clear the intent of insurers to provide coverage for insidious diseases. But the new language provided no definition of "bodily injury" other than the words themselves, thereby creating a basis for disputes as to the trigger of coverage.
AHP's insurance policies with Liberty were "manuscript" policies written specifically for AHP. Like the 1966 version of the CGL, however, AHP's policies throughout the period relevant to this litigation provided liability coverage for "occurrences" that result in "personal injury, sickness or disease including death resulting therefrom . . . sustained by any person." An occurrence is defined by inference from Article IV: "This policy applies only to (1) personal injury, sickness or disease including death resulting therefrom . . . which occurs during the policy period." Pl. Ex. 20 at 3. The ultimate question under both the CGL language and the AHP policies at issue here is therefore the same: when does "injury, sickness or disease" occur? Under both policies, coverage exists only for injuries occurring during the policy period. Moreover, both the CGL and AHP's policies require the insurer to defend any suit against the insured that seeks damages for an injury alleged to have occurred under the policy, even if the suit is groundless or fraudulent. See CGL, Pl. Ex. 22 at 1; AHP Policy, Pl. Ex. 20 at 1.
One provision in AHP's policies after 1968 differs from anything in the CGL, however. The provision Liberty relies on in its motion for partial summary judgment states:
The policy does not apply to such injury, death or destruction caused by such continuous or repeated exposure any part of which occurs after the termination of the policy.
Liberty contends that this provision renders these policies inapplicable to twenty-eight specified cases. See Urmston Aff't, Ex. 1.
For the reasons that follow the policies in this case are construed as they are written -- to require a showing of actual injury, sickness or disease occurring during the policy period, based upon the facts proved in each particular case. Thus, an occurrence of "personal injury, sickness, or disease" is read to mean any point in time at which a finder of fact determines that the effects of exposure to a drug actually resulted in a diagnosable and compensable injury. Depending upon the facts of each case, the drug involved, the period and intensity of exposure, and the person affected, an injury may occur in this sense upon exposure, at some point in time after exposure but before manifestation of the injury, and at manifestation. This construction is supported by the policy's language and background, the intentions and expectations of the parties, and considerations of practicability and fairness. It provides liberal protection to the insured, without doing violence to the principle -- long a part of the law of New York -- that insurance policies are contracts under which insureds obtain all the protection for which they may reasonably be said to have paid, but not more.
I. Meaning of The Policy Language
Whether the contract between AHP and Liberty is ambiguous is of central importance to this case, and particularly to the disposition of this motion. AHP argues that the policies supply an ambiguous definition of "occurrence" that is susceptible to at least two plausible constructions. Under one construction coverage would be triggered by every exposure to a harmful substance that could ultimately result in bodily injury. Another construction would trigger coverage only when injury became manifest, which has been defined to mean when the injury was diagnosed or when it produced symptoms that placed or should have placed the injured person on notice. Relying on these alleged ambiguities, AHP invokes the well established rule that resolves ambiguities in insurance contracts in favor of the insured and against the insurer. See, e.g., Breed v. Insurance Co. of North America, 46 N.Y.2d 351, 353, 385 N.E.2d 1280, 413 N.Y.S.2d 352, 354 (1978). AHP argues that, in this case, the governing rule of construction requires application of the exposure theory, which favors manufacturers, or perhaps an even broader construction providing coverage at any point from exposure to manifestation. An exposure theory makes sense, AHP contends, because it recognizes that manufacturers intend to protect themselves against the long-term risk of claims associated with insidious diseases; "personal injury, sickness or disease" should therefore be read to cover every potentially injurious exposure during the policy period that results at any future time in a claim for injury. If an exposure theory were applied, Liberty would be responsible to pay any liability AHP incurs in any suit against AHP where the plaintiff ingested the harmful product during the policy period, irrespective of how long after termination a diagnosable injury, sickness, or disease developed, or manifested itself.
Several courts have construed the CGL terms to provide coverage upon exposure. The Sixth Circuit, in Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212, 1222 (6th Cir.1980), reh'g granted in part and denied in part, 657 F.2d 814 (1981), cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L. Ed. 2d 650 (1981), found the terms "bodily injury" and "occurrence" inherently ambiguous as applied in the "progressive disease context." The Court, faced with determining an asbestos manufacturer's coverage under a CGL-derived policy, relied on that ambiguity, on medical testimony of the progressive nature of diseases caused by prolonged exposure to asbestos, and on the presumed intent of the parties, to read the contract as providing coverage for all potentially injurious exposures. See also Porter v. American Optical Corp., 641 F.2d 1128 (5th Cir.), cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L. Ed. 2d 650 (1981). In Keene v. Insurance Co. of North America, 215 U.S. App. D.C. 156, 667 F.2d 1034 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007, 71 L. Ed. 2d 875, 102 S. Ct. 1644, 102 S. Ct. 1645 (1982), the District of Columbia Circuit also found that exposure to asbestos triggered coverage under the "ambiguous" CGL terms. It concluded that an exposure theory most closely approximated the reasonable expectation of manufacturers, who purchase insurance in order to gain certainty and be free from all risk of liability arising out of products-liability suits. To protect this alleged expectation, the Court held that insurance coverage was triggered not only by every exposure, but by "exposure in residence" when asbestos fibers were present in the body and causing further injury, and by every manifestation of an injury, sickness, or disease. 667 F.2d at 1048.
Liberty counters with the claim that the relevant policy provisions unambiguously define manifestation as the trigger of insurance coverage. The average person, Liberty argues, would understand the terms "injury" and "disease" to mean an "abnormal condition" that "occurs" when it becomes manifest and is or should be discovered by the claimant. Thus Liberty argues that, under the policy, it incurs no duty to defend unless the claimant seeks recovery for an injury, sickness, or disease that allegedly became manifest while the policy was in effect, and that it has no duty to pay AHP sums for which AHP becomes liable unless the alleged injury became manifest during coverage.
Some courts have indeed rejected the exposure theory and found that, properly construed, the CGL provisions support a manifestation theory. See, e.g., Eagle-Picher Industries, Inc. v. Liberty Mutual Insurance Co., 523 F. Supp. 110 (D. Mass. 1981), modified, 682 F.2d 12 (1st Cir.1982); American Motorists Insurance Co. v. E.R. Squibb & Sons, Inc., 95 Misc. 2d 222, 406 N.Y.S.2d 658 (N.Y. Sup. Ct. 1978). They reason that manufacturers and insurance companies intend to cover only risks that ripen into claims, and that "bodily injury" in the CGL cannot logically be read to mean injurious exposures that are not themselves injuries. Thus, District Judge Zobel, addressing policy coverage for asbestos related diseases, cogently reasoned:
All policies except the later group of those written by Liberty Mutual define occurrence as "an accident or a continuous or repeated exposure to conditions which results, during the policy period, in personal injury. . . ." This definition is broad and inclusive. Each "occurrence" is made up of two components, initial exposure or accident and resulting injury; neither one without the other would be sufficient. There can be no question but that the aspect of the occurrence which must take place within the policy period, however, is the "result", that is, the time when the accident or injurious exposure produces personal injury. The time-limiting phrase "during the policy period" always follows the word "results" and frequently is set off by commas, so that it can modify only the preceding verb "results". Thus, the definitional language explicitly focuses on the result rather than the cause as the component to which coverage is linked.
Eagle-Picher Industries, 523 F. Supp. at 114. On appeal, the First Circuit agreed that "the policies clearly distinguish between the event which causes injury -- the accident or exposure -- and the resulting injury or disease. Yet . . . it is the resulting injury, not the exposure, which must take place 'during the policy period' in order to trigger coverage . . . ." Eagle-Picher Industries, 682 F.2d at 17 (emphasis in original). Liberty relies on these cases in seeking denial of AHP's motion for summary judgment; it argues for partial summary judgment, moreover, based on the special limiting clause in its policies after 1968, which it claims incontrovertibly excludes coverage for several of the claims referred to in this action.
Insofar as AHP and Liberty attack each other's construction, both sides are correct: neither the exposure nor the manifestation theory can be wholly justified by the policy language.
A. Governing Legal Principles
AHP correctly argues that insurance contracts must be liberally construed, with ambiguities in the policy language resolved in favor of the insured. See Pan American World Airways, Inc. v. Aetna Casualty & Surety Co., 505 F.2d 989, 999 (2d Cir. 1974); Breed v. Insurance Co. of North America, 46 N.Y.2d 351, 353, 385 N.E.2d 1280, 1282, 413 N.Y.S.2d 352, 354 (1978). This rule of construction, in fact, appears to be the single factor that unifies the discordant opinions applying the CGL and its derivatives to insidious diseases. Whether or not explicitly finding ambiguities, and irrespective of the construction adopted, every court construing these provisions has reached the result that extended coverage to the insured. See, e.g., Eagle-Picher Industries, 682 F.2d at 17 (manifestation); Keene, 667 F.2d at 1041 (manifestation and exposure); Forty-Eight Insulations, 633 F.2d at 1223 (exposure).
Under New York law, however, a court should apply its own construction to a policy's terms only after it has exhausted every effort to derive the meaning of the terms that accurately reflects the intent of the parties. An insurance policy is a contract which, like any other contract, must be construed to effectuate the parties' intent as expressed by their words and purposes. McGrail v. Equitable Life Assurance Society, 292 N.Y. 419, 424, 55 N.E.2d 483, 486 (1944); MetPath Inc. v. Birmingham Fire Insurance Co., 86 A.D.2d 407, 449 N.Y.S.2d 986 (1st Dep't 1982). If the words of the contract are unambiguous, establishing only one meaning when read in the context of the entire policy, then a New York court must enforce the plain meaning of the words and refrain from making or varying "the contract of insurance to accomplish its notions of abstract justice or moral obligation." Breed, 46 N.Y.2d at 355, 385 N.E.2d at 1283, 413 N.Y.S.2d at 355; see Coppotelli v. Insurance Co. of North America, 484 F. Supp. 1327, 1329 (E.D.N.Y.1980).
The principle that requires courts to resolve ambiguities in insurance contracts in favor of the insured, and against the insurer, is not a fundamental departure from established contract principles. Rather, it is one instance, albeit special and emphatic, of the widely recognized rule that resolves ambiguity in a contract against the contract's drafter. Greaves v. Public Service Mutual, Inc., 5 N.Y.2d 120, 155 N.E.2d 390, 181 N.Y.S.2d 489 (1959). Insurance contracts are usually contracts of adhesion in that their terms are generally dictated rather than negotiated. Courts therefore require insurance companies to be clear and unambiguous in creating limitations on coverage. "The insurer has the burden of establishing that 'the words and expressions used not only are susceptible of [the] construction [that the insurer advocates], but that it is the only construction that can fairly be placed thereon.'" Bronx Savings Bank v. Weigandt, 1 N.Y.2d 545, 552, 136 N.E.2d 848, 851, 154 N.Y.S.2d 878, 883 (1956) (quoting Hartol Products Corp. v. Prudential Insurance Co., 290 N.Y. 44, 49, 47 N.E.2d 687, 690 (1943)). Accord, Vargas v. Insurance Co. of North America, 651 F.2d 838, 839 (2d Cir.1981).
Nevertheless, intent remains controlling. No construction of an ambiguous provision is permitted that is inconsistent with the contract's plain meaning or with the parties' clear intentions. As the Second Circuit stated in Union Insurance Society of Canton, Ltd. v. William Gluckin & Co., 353 F.2d 946 (2d Cir.1965):
The terms of an insurance policy are usually what the insurance company chooses to make them. That is the rationale of the general rule that any ambiguity is to be resolved liberally in favor of the insured. However, this rule of construction "is applicable only where the ambiguity persists after all other aids to construction are used. It certainly does not foreclose the use of parol evidence initially to resolve such ambiguity." Aetna Ins. Co. v. Dickler, 100 F. Supp. 875, 878 (S.D.N.Y.1951). It is also true that there would be much less reason for applying such a rule if the clause in issue was drafted by, and put in the policy at the behest of, the named insured.
353 F.2d at 951 (citation omitted). To disregard express language in an insurance contract because of a claimed ambiguity "would violate the more fundamental rule of construction" that requires a court to construe the contract as a whole and, whenever possible, give effect to all of its parts. Spencer, White & Prentis, Inc. v. Pfizer, Inc., 498 F.2d 358, 363 n.23 (2d Cir. 1974). New York law therefore requires a construction of the CGL language based on the plain meaning of the words employed, read in the context of the policy as a whole, the purposes sought to be accomplished, and the relevant surrounding circumstances. See Murray Oil Products v. Royal Exchange Assurance Co., 21 N.Y.2d 440, 445, 235 N.E.2d 762, 288 N.Y.S.2d 618 (1968); Vanguard Insurance Co. v. Polchlopek, 18 N.Y.2d 376, 222 N.E.2d 383, 275 N.Y.S.2d 515 (1967).
B. Proposed Constructions of the Parties
Neither construction proffered by the parties is supported by the plain meaning of the terms employed.
1. The Exposure Theory. An exposure theory is inconsistent with the policies' plain meaning, and AHP has offered no evidence or explanation to demonstrate how an "occurrence" could logically include every exposure to the substances it manufactures. The policies require that the resulting injury and not the exposure occur "during the policy period." Moreover, the policies were designed to protect against liability from law suits brought because of compensable injuries. To that end they cover "occurrences" wherein both exposure and an injury take place.
The only New York case on point also rejected the exposure theory as unsupported by the language of a policy that covered "an accident or injurious exposure to conditions which results, during the policy period, in bodily injury. . . ." The injured plaintiffs, who had sued the insured, were the daughters of women who had ingested DES while pregnant with the plaintiffs in 1952, 1953, and 1961 respectively; the plaintiffs thereafter developed cervical cancers that were discovered in 1970, 1971, and 1975. Justice Greenfield concentrated on the policy language:
A reading of the policy language would appear to indicate that coverage is predicated not on the act which might give rise to ultimate liability, but upon the result. It would be a strained interpretation to construe the occurrence clause as though it covered "exposure during the policy period which results in bodily injury." It is the result which is keyed to the policy period, and not the accident or exposure.
American Motorists Ins. v. E.R. Squibb & Sons, 95 Misc. 2d 222, 406 N.Y.S.2d 658, 659-60 (N.Y.Sup.Ct.1978) (emphasis in original).
A limited version of the exposure theory, adopted in some litigations, is at least linguistically respectable. Some courts, relying on medical evidence, have found that, on exposure, asbestos particles enter the body and cause discrete injuries to lung and other tissue, and that these injuries are sufficient to establish coverage under the CGL language, even though they must aggregate over time to cause diseases and sicknesses such as asbestosis, carcinoma, and mesothelioma. Keene, 667 F.2d at 1044; Insurance Co. of North America v. Forty-Eight Insulations, Inc., 451 F. Supp. 1230, 1239 (E.D. Mich. 1978), modified, 633 F.2d 1212, 1222-23 (6th Cir.1980), cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L. Ed. 2d 650 (1981). But see, e.g., Eagle-Picher, 523 F. Supp. at 115 & 682 F.2d at 17 (medical evidence establishes that (1) not every exposure to asbestos results in injury of any sort, since body's natural mechanisms often remove fibers before they become embedded; and (2) even when discrete injuries are caused, they frequently fail to lead to any compensable injury).
AHP cannot rely on the rationale of cases that have found immediate injury from the ingestion of asbestos fibers, because the drugs at issue in this case differ markedly from asbestos in the manner in which they are alleged to injure humans. AHP has failed to submit any proof with respect to the effects of any of the drugs involved, and has not claimed that any of them injures upon every exposure. The record establishes without material dispute, moreover, that at least two of the drugs at issue (Ovral and DES) do not injure upon every exposure. Flessa Aff't, Def. Ex. 35 (Feb. 14, 1982) (Ovral); Mattingly Aff't, Def. Ex. 36 (Feb. 10, 1982) (DES). As discussed below, a particular plaintiff might be able to establish, despite this evidence, that a particular exposure to one of the drugs at issue constituted an actual and compensable injury. No evidence has been presented, however, that could support a general declaration that every exposure to any of the drugs at issue in this case causes injury, and therefore triggers coverage, under the AHP policies.
Advocates of the exposure theory have suggested that it has some inferential support in the New York Court of Appeals' holdings that an injury occurs upon exposure for purposes of the statute of limitations. See, e.g., Steinhardt v. Johns-Manville Corp., 54 N.Y.2d 1008, 430 N.E.2d 1297, 446 N.Y.S.2d 244 (1981). This rule can be traced back to decisions that appear to have assumed that exposure to harmful chemicals does in fact injure bodily tissue. See, e.g., Thornton v. Roosevelt Hospital, 47 N.Y.2d 780, 781, 391 N.E.2d 1002, 1004, 417 N.Y.S.2d 920, 922 (1979). But these statute-of-limitation decisions do not in fact turn on the untenable proposition that actual injury always occurs upon the ingestion of asbestos fibers, or other bodily invasion. They rest, rather, on the costs and uncertainty that the Court of Appeals long ago concluded would be created by a general rule that only "discovery" triggers a statute of limitation, and on the state legislature's failure to amend the applicable New York statute to extend the time in which plaintiffs may bring suits for the consequences of insidious diseases, other than those caused by "Agent Orange." See Schwartz v. Heyden Newport Chemical Corp., 12 N.Y.2d 212, 218-19, 188 N.E.2d 142, 237 N.Y.S.2d 714, 718-19 (1963); N.Y.C.P.L.R. § 214-a (McKinney Supp. 1982). These policy considerations have no bearing on the construction of insurance contracts; indeed, every court that has examined CGL policies has refused to give weight to definitions of injury articulated in statute-of-limitation cases. See, e.g., Keene, 667 F.2d at 1043 & n.17; see generally Wrubel, Comment, Liability Insurance for Insidious Disease: Who Picks Up the Tab?, 48 Fordham L.Rev. 657, 669-70 (1980).
Finally, the exposure theory is made particularly untenable in this case by the special limitation added to the AHP-Liberty policies since at least 1968, which excludes coverage for injuries "caused by continuous or repeated exposure, any part of which occurred after termination of the policy." If every exposure were an occurrence under the policies, the limitation would have no meaning; it can have meaning only if the occurrences insured against are the injuries, diseases, or sicknesses caused by exposures, and not the exposures themselves.
2. The Manifestation Theory. Liberty contends that the policy words "injury", and "disease" or "sickness" are ordinary words which the average person would understand respectively to mean "damage" and an "abnormal condition," and that the average person would think of these consequences as having occurred when they take place or are discovered. The First Circuit accepted this view in extending coverage to the claims at issue in Eagle-Picher:
We agree with the district court that the common, ordinary meaning of the policy language supports the manifestation theory. An individual with tiny sub-clinical insults to her lungs would not say that she had any injury or disease, given one expert's testimony that "over 90% of all urban city dwellers have asbestos-related scarring." Rather, she would say that a disease resulted when she had symptoms which impaired her sense of well-being, or when a doctor was able to detect sufficient scarring to make a prognosis that the onset of manifested disease was inevitable. "Injury" is defined by Webster as "hurt, damage, or loss sustained"; it is a broad term which covers the "result of inflicting on a person or thing something that causes loss, pain, distress, or impairment." As sweeping as this definition is, it is difficult to consider sub-clinical insults to the lung to constitute an "injury" when these insults do not cause "loss, pain, distress, or impairment" until, if ever, they accumulate to become clinically evident or manifest.
682 F.2d at 19 (footnote omitted).
The "manifestation" theory adopted in Eagle-Picher, and now advanced by Liberty, is in part a departure from what has conventionally been understood as the manifestation approach. The meaning of manifestation proposed in prior cases is that an injury, sickness, or disease becomes manifest only when symptoms become noticeable or a diagnosis is made. "The manifestation theorists contend that the date of manifestation is 'the date on which the condition became known or should have become known to plaintiff or the date on which plaintiff's condition was medically diagnosed, whichever comes first.'" Wrubel, supra, 48 Fordham L. Rev. at 668 n.58 (quoting Forty-Eight Insulations, 451 F. Supp. at 1238). Thus stated, the manifestation theory refuses to recognize that any bodily injury may have existed prior to the appearance of symptoms or an actual diagnosis. Under this construction, the manifestation theory would be convenient to apply, but it is inconsistent with the policy language.
The ordinary person may construe an "occurrence" of injury to mean manifestation in the sense of discovery. Discovery of an injury or disease is a truly significant event which makes the victim aware of what had theretofore been only a latent, medical problem without conscious significance. The plain meaning of the policy language is not measured, however, by the understanding of a lay person, but by the understanding of a person engaged in the insured's course of business. See Champion International Corp. v. Continental Casualty Co., 546 F.2d 502, 505-06 (2d Cir.1976); McGrail v. Equitable Life Assurance Society, 292 N.Y. 419, 424-25, 55 N.E.2d 483, 486 (1944); Loblaw, Inc. v. Employers' Liability Assurance Corp., 85 A.D.2d 880, 446 N.Y.S.2d 743, 745 (4th Dep't 1981). From the point of view of a drug manufacturer, familiar with the potential development ...