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MARYLAND CAS. CO. v. W.R. GRACE & CO.

March 6, 1991

THE MARYLAND CASUALTY COMPANY, PLAINTIFF,
v.
W.R. GRACE & COMPANY, CONTINENTAL CASUALTY COMPANY, ROYAL INDEMNITY COMPANY, AETNA CASUALTY AND SURETY COMPANY, AND GENERAL INSURANCE COMPANY OF AMERICA, DEFENDANTS.



The opinion of the court was delivered by: Bernikow, United States Magistrate Judge:

 
TABLE OF CONTENTS                                       PAGE
Background ............................................ 1209
Discussion
  Summary Judgment .................................... 1213
  Trigger of Coverage for Bodily Injury Claims ........ 1213
  Coverage for Knowing Misconduct ..................... 1217
  Punitive Damages .................................... 1219
  Duty to Defend Upon Exhaustion of Limits ............ 1220
  Limitation of Coverage to Sums Payable as
    Damages and Limitation of Coverage to
    Claims for Property Damage ........................ 1221
  Trigger of Coverage for Public Building
    and School Claims ................................. 1224
  Exclusion for Insured's Own Product ................. 1226
  Sistership .......................................... 1227
  Special Limits Provisions in Maryland's Policies .... 1228
  Proof of Existence of Terms of Policies ............. 1229
  Coverage for Subsequent Acquisitions ................ 1230
  Policies issued to predecessors
    (Identity of the insured) ......................... 1233
  Scope of "Accident" Policies Coverage ............... 1236

OPINION

This case, like many others across the country, involves a dispute between an insured and insurers concerning coverage for underlying asbestos personal injury and property damages cases.*fn1 The parties' motions for partial summary judgment are now before the court.*fn2

BACKGROUND

Maryland Casualty Company ("Maryland") initially brought this declaratory judgment action, based on diversity of citizenship, against W.R. Grace & Co. ("Grace") and CNA, concerning its obligations to defend and indemnify Grace under Maryland's comprehensive general liability ("CGL") insurance policies issued to Grace between 1955 and June 30, 1973, in regard to asbestos-related bodily injury and property damage lawsuits. These underlying lawsuits are "part of the national `asbestos scene, an unparalleled situation in American tort law,' in which many thousands of personal injury claims have been filed `against asbestos manufacturers and producers.'" Racich v. The Celotex Corp., 887 F.2d 393, 394 (2d Cir. 1989) (quoting In re School Asbestos Litigation, 789 F.2d 996, 1000 (3d Cir.), cert. denied, 479 U.S. 852, 107 S.Ct. 182, 93 L.Ed.2d 117 (1986)).

As of November 3, 1987, over 6,400 asbestos-related lawsuits have been filed against Grace for bodily injury arising out of exposure to asbestos or asbestos-containing products manufactured or sold by Grace or its predecessors. Posner November 13, 1987 affidavit at ¶ 19. Grace has also been sued in 134 cases that seek damages for property damage resulting from asbestos-containing products that were installed in various buildings throughout the country from the mid-1940's until the 1970's. Posner June 1, 1987 affidavit at ¶ 14.

Grace, a Connecticut corporation, with its principal place of business in New York, is primarily engaged in the chemical business on a worldwide basis and in energy-related natural resource activities. Posner 5-29-87 affidavit at ¶ 3. Maryland, a Maryland corporation, has its principal place of business in Baltimore, Maryland.

CNA, an Illinois corporation, has its principal place of business in Chicago, Illinois. Royal is a Delaware corporation, with its principal place of business in Charlotte, North Carolina. Aetna, a Connecticut corporation, has its principal place of business in Hartford, Connecticut. General is incorporated in the State of Washington and has its principal place of business in Seattle, Washington. Maryland, CNA, Royal, Aetna and General are engaged in the business of providing and underwriting insurance, including the extension of liability insurance coverage. Of the five insurers, only Maryland and CNA issued policies to Grace itself. The other carriers allegedly issued policies to companies subsequently acquired by Grace.

Grace, in its own name, purchased policies from Maryland from 1955 to 1973, though Maryland denies that it provided continuous coverage for that period. Maryland notes that Grace has produced no primary policies in effect during the early years of the alleged period of coverage. The policies for the period from June 30, 1962 through June 30, 1970, Maryland asserts, are incomplete and, in some cases, fragmentary. Thus, Maryland has placed in issue the extent of its obligation to Grace for any asbestos-related claims arising before the periods for which any policies or policy fragments have been discovered and for the period as to which no complete policies have been discovered. Grace contends that it has located the originals of the policies, which include the missing pages, thus resolving Maryland's argument about missing pages.

Maryland also notes that its policies with Grace were negotiated in New York City between its own representatives and those of Grace. The policies, Maryland adds, were not the standard forms used in the insurance industry, but were individually tailored and negotiated "manuscript" policies, whose provisions were authored by Grace or by its brokers, and not by Maryland. Nonetheless, as Grace notes, a comparison of Maryland's policy language with the standard comprehensive general liability ("CGL") forms shows that the language is essentially the same.*fn3 Indeed, the managing director of the broker, Marsh & McLennan, Inc., involved in the negotiation and placement of the Maryland policies sold to Grace from at least June 30, 1961, through June 30, 1973, stated in an affidavit that the policies from June 30, 1961 to June 30, 1967 were standard form CGL policies, not drafted by Grace. See Keating November 16, 1987 affidavit at ¶ 3. He recognized that the policies from June 30, 1967 to June 30, 1973, were "manuscript" policies, but, he added, the language contained in them was taken from the standard form CGL policy.*fn4 Id. at ¶ 4.

With respect to the other insurers, Grace alleges that it, or various asbestos companies that it acquired, purchased CGL policies from Royal for all or part of the period from April 1, 1950 to April 1, 1963 and from May 26, 1967 to March 26, 1968. As for General, Grace alleges that General sold CGL coverage to Vermiculite Northwest, a company acquired by Grace in 1966, from June 1, 1961 to June 1, 1967. Grace also contends that Aetna sold CGL policies to companies acquired by Grace from January 31, 1951 until January 1, 1970. Grace does not possess copies of these policies, but asserts it has secondary evidence proving the existence of this coverage. Lastly, CNA directly sold CGL coverage to Grace from 1973 to the present.

In regard to the motions for partial summary judgment, Maryland requests relief in the form of a judgment declaring that:

    (i) Maryland Casualty has no duty to indemnify
  or defend Grace for periods as to which the
  existence and terms of Maryland Casualty-Grace
  policies have not been proven by clear and
  convincing evidence;
    (ii) Maryland Casualty has no duty to indemnify
  or defend Grace (a) under pre-1963 policies or
  (b) for liability involving products of any
  company acquired by or merged with Grace until
  after the date on which such company was acquired
  by or merged with Grace and insured under a
  Maryland Casualty policy;
    (iii) Maryland Casualty has no duty to
  indemnify or defend Grace for liability for
  asbestos-related bodily injury claims as to which
  injury in fact occurred outside Maryland
  Casualty's policy periods;
    (iv) Defense costs in each asbestos-related
  bodily injury case against Grace must be shared
  by all insurers as to which responsive policies
  have been proven except where it can determined
  that the injury in fact occurred outside of the
  policy period or periods of an insurer or that
  the claimed injury could not have resulted from
  exposure to a product manufactured by an insured
  under the relevant policy or policies;
    (v) Maryland Casualty has no duty to indemnify
  or defend Grace for liability for
  asbestos-related claims for equitable or
  declaratory relief or any relief other than the
  award of damages;
    (vi) Maryland Casualty has no duty to indemnify
  or defend Grace for liability for claims against
  Grace by school districts or other building
  owners ("school asbestos cases") seeking to
  recover the costs allegedly incurred, or to be
  incurred, by them in testing their buildings for
  the presence of asbestos insulation, and removing
  or encapsulating such insulation or taking other
  prophylactic or preventive measures with respect
  to such buildings and such claims do not seek
  compensation for property damage;
    (vii) Maryland Casualty has no duty to
  indemnify or defend Grace for liability for
  school asbestos cases to recover for strictly
  monetary injuries not constituting compensation
  for property damage;
    (viii) Maryland Casualty has no duty to
  indemnify or defend Grace for liability for
  school asbestos cases to recover for damage to
  Grace's products;
    (ix) Maryland Casualty has no duty to indemnify
  or defend Grace for liability for school asbestos
  cases because those cases seek to recover for
  hazards that were discovered or manifested
  subsequent to any Maryland Casualty policy
  periods;
    (x) Any duty of Maryland Casualty to indemnify
  Grace for any asbestos-related property damage
  claims that may be found by the Court is limited
  by policy endorsements restricting liability for
  "continuous discharge . . . of . . . materials";
    (xi) Maryland Casualty has no duty to indemnify
  Grace for liability for injuries that were not
  "unexpectedly," "unintentionally," or
  "accidentally" caused including, but not limited
  to, the City of Greenville case;
    (xii) Maryland Casualty has no duty to
  indemnify Grace for any award of punitive
  damages, sanctions, fines or penalties imposed
  upon Grace.

Maryland Casualty further requests relief in the form of a judgment ordering Aetna, Royal and General, to the extent that Grace is able to establish that those insurers afforded responsive coverage, to reimburse Maryland Casualty for past costs of defending Grace in the asbestos-related bodily injury cases against Grace and to share with Maryland Casualty and CNA in those expenses in the future, except where it can be determined that the injury in fact occurred outside the policy period or periods of any insurer or that the claimed injury could not have resulted from exposure to a product manufactured by an insured under the relevant policy or policies.*fn5

Grace has moved for partial summary judgment seeking a declaration that each of the policies sold by Maryland, Royal and General is obligated to indemnify Grace for asbestos-related property damage claims if the policy was in effect during any portion of the continuous damage process, from the first installation of the asbestos products through containment or removal. Grace seeks a similar declaration from the same insurers concerning asbestos-related bodily injury claims if the policy was in effect during any portion of the continuous injury process from first inhalation of asbestos fibers through manifestation of the asbestos-related disease.

Grace also seeks summary judgment requiring the carriers to pay all past, present and future defense costs. Further, Grace seeks a declaration that any triggered policy provides full and complete defense and indemnity coverage. In addition, Grace requests judgment against Maryland, Royal and General, jointly and severally, for the monies already expended by Grace to defend the asbestos-related cases, and to satisfy any judgments or settlements in those cases. Grace has not filed any claims against CNA and its motion for summary judgment is not directed against CNA.

Royal seeks partial summary judgment, declaring that Grace is not entitled to any CGL coverage issued by Royal to one of Grace's predecessor companies, the Zonolite Company ("Zonolite"). Royal never issued any policies to Grace. Royal also moves for summary judgment declaring that its defense obligation will terminate upon the exhaustion of the limits of its pre-1966 policies. Should the court find that Royal owes Grace a defense, Royal seeks guidance concerning the proper trigger of coverage for the asbestos-bodily injury cases pending against Grace.

General seeks summary judgment on Grace's cross-claim, which asserts that General is obligated to fully defend and indemnify Grace under policies issued to General's former insured, Vermiculite-Northwest, Inc. ("Vermiculite Northwest"). Like Royal and Aetna, General seeks a declaration that it has no duty to Grace until Grace shows that the underlying claims implicate a product of Vermiculite-Northwest.

The insurers, other than CNA, also ask for a declaration that, to the extent the underlying suits do not seek damages, no coverage is afforded for them under the policies at issue. In other words, coverage does not apply, according to the insurers, to suits that seek other forms of relief, such as declaratory or equitable relief.

DISCUSSION

Summary Judgment

The general principles concerning summary judgment have become familiar. Fed.R.Civ.P. 56(c) authorizes summary judgment when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. The moving party bears the burden of showing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). And all factual inferences, and ambiguities, are drawn against the moving party. Ramseur v. Chase Manhattan Bank, 865 F.2d 460, 465 (2d Cir. 1989). The court's function on a motion for summary judgment is not to try issues of fact, but to determine whether there are any genuine issues of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986). Furthermore, under Rule 56(e), "[w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial."

Trigger of Coverage for Bodily Injury Claims

The first issue the parties raise concerns the trigger of coverage for bodily injury claims. The insurer "on the risk" at the triggering time must provide coverage. Eagle-Picher Industries v. Liberty Mutual Ins. Co., 523 F. Supp. 110, 111 (D.Mass. 1981), modified on other grounds, 682 F.2d 12 (1st Cir. 1982). This issue "usually arises when several different insurers have, in sequence, insured a company whose products caused injuries at different or uncertain times." Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp. 1368, 1387 (E.D.N.Y. 1988). Maryland argues that the bodily injury claims and, for that matter, the property damage claims, fall outside its policy periods and, thus, its policies are not triggered.

In American Home Products Corp. v. Liberty Mutual Ins. Co., 565 F. Supp. 1485 (S.D.N.Y. 1983), aff'd as modified, 748 F.2d 760 (2d Cir. 1984) ("AHP"), however, Judge Sofaer, applying New York law,*fn6 rejected the conclusions reached in Keene. Instead, Judge Sofaer determined that actual injury triggers coverage. Id. at 1489. Grace argues that AHP does not apply here because that case involved six different pharmaceutical products, not asbestos. See AHP, supra, 565 F. Supp. at 1490 n. 1. If any doubt existed as to AHP's applicability to asbestos in New York, Abex Corp. v. Maryland Casualty Co., 790 F.2d 119, 124-25 (D.C. Cir. 1986), put it to rest. The same court that decided Keene, after examining the applicable New York case law applied AHP to asbestos. Id. at 125. The court also noted that Keene did not purport to apply New York law. Id. at 124. Not only that, the Abex court's own reading of the policy language, which it termed unambiguous, agreed with the result in AHP. Still, Grace contends that Abex should have relied on New York state cases, and not on AHP.

Grace makes much of National Casualty Ins. Co. v. City of Mount Vernon, 128 A.D.2d 332, 515 N.Y.S.2d 267 (2d Dep't 1987), decided after Abex. Mount Vernon, Grace says, applied a continuous trigger, citing Keene. In Mount Vernon, a dispute about coverage, the underlying action concerned a suit against the city for false arrest and false imprisonment. The insurance company in that case denied coverage to the city because the arrest at issue occurred about a year and a half before the policy's effective date of January 1, 1983. The court found, however, that the insurance company had a duty to defend and indemnify the city for the damages sustained by the claimant in the underlying suit as a result of his incarceration on and after January 1, 1983 until his release, some seven days later. 515 N.Y.S.2d at 271. This finding by the Appellate Division modified the lower court's ruling that required the insurance company to defend and indemnify without regard to the policy date. What is more, the Appellate Division said: "the operative event triggering exposure, and thus resulting in coverage under the policy, is the sustaining of a specified injury during the policy period." Id. at 270.

The principal dispute in Mount Vernon concerned the meaning of the term "occurrence." The Appellate Division rejected the insurance company's position that the term refers to the precipitating event — the arrest — that gave rise to the injury. 515 N.Y.S.2d at 270. The Mount Vernon policy language, like the language here, said that occurrence means an event that results in personal injury sustained during the policy period. Id. Therefore, the court was not concerned with whether the causative event happened before or during the policy period. Id. The policy did not require that the injury resulting from that event occur at one fixed time. Id. Nor did the policy distinguish between injuries that are continuous and the more common type of injuries that are not. Id. See also Keene, 667 F.2d at 1049. The Appellate Division cited Keene — with a "cf." — for the proposition that the failure to distinguish between continuous and non-continuous injury has particular significance because of express policy language that injury can be caused by "`continuous or repeated exposure to conditions.'" Mount Vernon, 515 N.Y.S.2d at 270 (quoting policy); see also Keene, 667 F.2d at 1049 n. 31.

Thus, we do not read Mount Vernon's reference to Keene as an adoption of its continuous trigger theory. Moreover, Mount Vernon, as noted, held that a specified injury during the policy period triggers coverage, see W.R. Grace & Co. v. Continental Casualty Co., ("W.R. Grace & Co."), 896 F.2d 865, 876 (5th Cir.), reh'g. denied, (5th Cir. 1990) — a result consistent with AHP's injury-in-fact trigger.

Grace also argues that other New York State cases support a continuous trigger theory. Nevertheless, Abex considered most of the cases Grace cites*fn7 and found that, though these cases did not offer a "unambiguous embrace" of the injury-in-fact theory, they were far more consistent with that theory than with the continuous trigger. Abex, 790 F.2d at 126. Similarly, the court in Aetna Casualty & Surety Co. v. Abbott Laboratories, Inc., ("Abbott") 636 F. Supp. 546, 550 (D.Conn. 1986), a case involving the drug DES and some policies covered by New York law, applied AHP's injury-in-fact trigger. More recently, Judge Weinstein observed that the federal courts applying New York law adopt the injury-in-fact theory under a comprehensive general liability policy. Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp. 1368, 1387-88 (E.D.N.Y. 1988). And even more recently, the Fifth Circuit noted that New York follows the injury-in-fact theory. W.R. Grace & Co., 896 F.2d at 875-76. Accordingly, we find that injury-in-fact triggers coverage in New York.

Grace argues, however, that extrinsic evidence is necessary to interpret the policy language at issue. The disparate constructions placed by courts on the same policy language, according to Grace, shows ambiguity as a matter of law. Grace further notes that it did not draft the disputed language. Following Abex and AHP, however, we find the policy language is unambiguous. Grace maintains that AHP did not involve asbestos. Nevertheless, Abex involved asbestos and the court there said:

  The plain language of the definition of
  "occurrence" used in the CGL policy requires
  exposure that "results, during the policy period,
  in bodily injury" in order for an insurer to be
  obligated to indemnify the insured. The unambiguous
  meaning of these words is that an injury — and not
  mere exposure — must result during the policy
  period.

790 F.2d at 127 (emphasis in original);*fn8 see also AHP, 748 F.2d at 765. Thus, extrinsic evidence need not be considered.

On the question of when injury in fact occurs, Grace argues that the asbestos-related bodily injuries in the underlying cases are inherently continuous, and, thus, even under AHP, each carrier on the risk at any time between first exposure and manifestation has the duty to indemnify. Maryland, for its part, urges that we follow Judge Sofaer's approach of establishing the timing of injury in fact on a case-by-case basis in the underlying actions. See AHP, 565 F. Supp. at 1509. We agree with Maryland. Though Grace argues that the etiology of asbestos-induced diseases is well known, the issue, according to the Abex court, has split the circuits. Abex, 790 F.2d at 127 n. 36. Abex contrasted Insurance Co. of N.Am v. Forty-Eight Insulations, Inc., 633 F.2d 1212, 1218 (6th Cir. 1980), clarified, 657 F.2d 814, (6th Cir. 1981) cert. denied, 454 U.S. 1109, 102 S.Ct. 686, 70 L.Ed.2d 650 (1981), which observed that injury, in the sense of tissue damage, occurs shortly after the initial inhalation of asbestos fibers, with the view of Eagle-Picher Indus., Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12, 19 (1st Cir. 1982), cert. denied, 460 U.S. 1028, 103 S.Ct. 1279, 75 L.Ed.2d 500 (1983), that even sub-clinical injury to the lung does not occur simultaneously with the inhalation of asbestos. Id.

In AHP, Judge Sofaer also recognized the difficulty in determining the onset date of asbestos injury. Commenting about the usefulness of collateral estoppel on medical issues to prove when injury occurred, Judge Sofaer excluded asbestos from the operation of that doctrine. See 565 F. Supp. at 1509. He said: "Unlike the variable manner in which injuries are caused by asbestos fibres, other products may produce specific consequences at particular times." Id. Accordingly, summary judgment is inappropriate on this issue, the resolution of which is better left to the underlying cases. See AHP, 565 F. Supp. at 1509; Abbott, Civil No. H-82-843 (JAC) slip op. at 2 (D.Conn. September 11, 1987); Abbott, 636 F. Supp. at 551. In those cases the courts will likely address related factual issues concerning the injuries at issue. Abbott, slip op. at 2.

With regard to those cases that have settled, the court hearing the coverage dispute — this court — should determine the date of the injury in fact. Abbott, 636 F. Supp. at 551-52. In Abbott, the court directed the parties confer to develop a procedure for resolution of the settled cases. Id. at 551. The present parties should do the same. The fact of settlement, though, does not create coverage. In other words, an insurer has no duty to indemnify a settled claim excluded by the policy. Uniroyal, 707 F. Supp. at 1379. The duty to indemnify requires a covered loss under the policy. Servidone Construction Corp. v. Security Insurance Co., 64 N.Y.2d 419, 423, 488 N.Y.S.2d 139, 143, 477 N.E.2d 441, 445 (1985); see W.R. Grace & Co., 896 F.2d at 874 (citing Servidone); Uniroyal, 707 F. Supp. at 1379 (citing Servidone). In determining whether a settled claim involves a covered loss — from the actual facts, not the pleadings — the burden rests with the insurer to show that the claim was not within the policy coverage. Servidone, 488 N.Y.S.2d at 143, 477 N.E.2d 445; Burroughs Wellcome Co. v. Commercial Union Ins. Co., 713 F. Supp. 694, 699 (S.D.N.Y. 1989). An argument can be made that placing the burden on the insurer only applies to cases, like Servidone, involving a policy exclusion. 488 N.Y.S.2d at 143, 477 N.E.2d at 445. But the first paragraph of the Servidone opinion, which summarizes the court's holding, imposes no such limitation. 488 N YS.2d at 140, 477 N.E.2d at 442. Burroughs Wellcome, too, did not limit its finding. 713 F. Supp. at 699; see also Uniroyal (Servidone "never held that an otherwise covered claim, once settled, must be proven anew by the insured.") 707 F. Supp. at 1379.

On the duty to defend, the insured's burden is not great. Grace is entitled to a defense if the complaints in the underlying actions "'permit proof' of the facts establishing coverage, or if the complaints do not exclude the possibility that injury-in-fact occurred during the policy period. Only if the insurers establish, `as a matter of law, that there is no possible factual or legal basis on which the insurer might eventually be obligated to indemnify,' would they escape their duty defend [Grace]." Abex, 790 F.2d at 129 (footnotes omitted) (emphasis in original); see also Avondale Indus. Inc. v. Travelers Indemn. Co., 887 F.2d 1200, 1205 (2d Cir. 1989), reh'g denied, 894 F.2d 498 (2d Cir.) (per curiam), cert. denied, 496 U.S. 906, 110 S.Ct. 2588, 110 L.Ed.2d 269 (1990). Thus, the insurers must satisfy their obligation to defend Grace. Id. "This obligation will continue until the insurers establish that, as a matter of law, there is no possibility that they will have to indemnify [Grace]." Id. For those policies, then, that Grace has proven, or will prove, Maryland must provide a defense, see Abex Corp. v. Maryland Casualty Co., No 82-2098, slip op. at 2 (D.D.C. April 6, 1990), provided those policies have been triggered applying the injury in fact trigger.

As for allocating defense costs among the insurers, which Maryland urges, those costs should be apportioned equally. Federal Insurance Co. v. Cablevision Systems Development Co., 836 F.2d 54, 57 (2d Cir. 1987); Abex Corp. v. Maryland Casualty Co., No. 82-2098, slip op. at 3 (D.D.C. April 5, 1990). Nonetheless, summary judgment appears premature because the existence of coverage ...


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