The opinion of the court was delivered by: Sweet, District Judge.
CONCLUSIONS OF LAW ..................................... 586
1. Jurisdiction ..................................... 586
2. Unigard Must Follow the Fortunes of North River
on XS-3672 ................................. 586
3. North River's Consent to the Wellington Agreement
Did Not Implicate Any of the Provisions of the
Certificate ................................ 587
a. North River Was Not Required to Issue Notice
When It Signed the Wellington Agreement .... 588
b. North River's Failure to Notify Unigard of Its
Intent to Sign the Wellington Agreement Was
Not Intentional ............................ 588
c. Neither the Producer Allocation Scheme Nor the
Use of the Triple Trigger Altered the Risk
of the Certificate ......................... 589
4. Unigard Cannot Escape Liability on the Grounds
of Untimely Notice ......................... 590
a. Notice Was Not Required Prior to March,
1987 ....................................... 590
b. Notice Should Have Been Sent After the
Aetna Exhaustion ........................... 591
c. The Timeliness of Notice Must be Judged Under
an Objective Standard ...................... 591
d. Under an Objective Test, North River's Notice
was Untimely ............................... 591
e. Unigard's Inability to Show Prejudice from North
River's Late Notice Prevents it From Escaping
Liability .................................. 592
i. The "no prejudice" rule in the insurance
context .............................. 592
ii. The different needs of insurers
and reinsurers justify applying a
different rule in there
insurance context .................... 592
iii. Unigard has not shown prejudice from
North River's untimely notice ........ 593
5. Under the Following Form Clause Unigard Must Pay
Expenses in Excess of the Limits of the
Certificate .................................... 594
6. Unigard Owes the Full Payment for the Policy
Period on XS-3672(A) ........................... 595
CONCLUSION ............................................. 596
This diversity action involves a facultative reinsurance
certificate (the "Certificate") issued by plaintiff Unigard
Security Insurance Company ("Unigard") to defendant North River
Insurance Company ("North River"). Unigard seeks a declaratory
judgment relieving it of any obligation to indemnify North
River for losses paid by North River to its insured
Owens-Corning Fiberglass Corporation ("Owens-Corning"). North
River by way of counterclaim seeks to recover such
indemnification. Based upon the findings of fact and
conclusions of law set forth below, judgment will be entered
granting relief to North River on its counterclaims in
accordance with this opinion.
This action is significant not only because of North River's
counterclaim for over $15 million in indemnity and related
expenses but also because it raises, apparently for the first
time, significant issues concerning reinsurance for losses
suffered by a manufacturer of asbestos and its insurer. These
issues include the effect upon the "follow the fortunes" and
"right to associate" clauses of the Certificate and any Unigard
reinsurance obligations of the participation of Owens-Corning
and North River in the Asbestos Claims Facility (the
"Facility"), an instrumentality which sought on behalf of
insurers and manufacturers to handle asbestos bodily injuries
claims. In addition, determinations are required as to the
notice of coverage required to be given by the insurer North
River to its reinsurer Unigard and the timeliness of such
notice and the obligation of the reinsurer for defense costs
and the coverage for a stub period of the policy.
These issues are presented against the complicated factual
background arising out of the mass tort asbestos litigation,
which has to date defied the efforts of the courts to provide
a speedy and effective resolution of the hundreds of thousands
of claims brought to recover damages by injured plaintiffs and
their representatives against hundreds of manufacturers and
users of asbestos products throughout the nation. Traditional
litigation has been so far unsatisfactory in resolving this
mass tort dispute in an efficient, cost-effective and equitable
manner.*fn1 The potentially overwhelming nature of this
litigation is well-recognized, and the ultimate resolution of
the issues presented here has the potential to affect
obligations in the billions of dollars.
This action was filed by Unigard on February 3, 1988.
Discovery was had, and on July 12, 1990 an opinion was filed
denying the summary judgment sought by Unigard (the "July
Opinion"). That opinion described the parties and issues, and
the findings contained there remain unchanged but are
supplemented as set forth below.
Following the July Opinion, additional discovery was
conducted, and as if the action were not complicated enough,
the parties concluded that North River would assume the role of
plaintiff and Unigard the role of defendant for purposes of the
presentation of evidence. A bench trial was held from November
8, through November 27, 1990. Final arguments and briefs were
submitted on January 18, 1991.
Unigard is the successor to Unigard Mutual Insurance Company,
Inc. ("Unigard Mutual") and is a Washington corporation with
its principal place of business in Seattle. In 1984, it was
purchased by the John Hancock Mutual Life Insurance Company.
North River is a New Jersey corporation with its principal
place of business there and is a subsidiary of Crum and
Forster, Inc. ("Crum & Forster").
Owens-Corning is a Delaware corporation with its principal
place of business in Toledo, Ohio.
2. The Underlying Insurance Involved
North River through its agent L.W. Biegler, Inc. ("Biegler")
issued two excess insurance policies to Owens-Corning in July
1974. Those policies were XS-3619, a second-layer excess
policy, and XS-3672, a third-layer excess policy. Unigard
reinsured XS-3672. Both policies provided coverage for, among
other things, claims for asbestos-related bodily injuries.
XS-3672 provided liability insurance to Owens-Corning during
each of the following policy periods: (a) July 9, 1974 to
October 22, 1974 ("XS-3672(A)"); (b) October 22, 1974 to
October 22, 1975 ("XS-3672(B)"); and (c) October 22, 1975 to
October 22, 1976 ("XS-3672(C)"). During the periods XS-3672(A)
and XS-3672(B), the policy provided excess liability insurance
coverage in the amount of $30 million, as part of a $50 million
coverage layer in excess of $75 million in underlying excess
insurance and $1 million in underlying primary insurance for
Owens-Corning losses. During XS-3672(C), the policy provided
$25 million in excess coverage, with similar underlying limits.
The coverage for the period XS-3672(C) is not at issue in this
For the policy period XS-3672(A), the underlying insurance
coverages consisted of: (a) Aetna Casualty & Surety Company
("Aetna") primary insurance in the amount of $1 million; (b)
The Home Insurance Company ("The Home") first-layer excess
insurance in the amount of $25 million; (c) First State
Insurance Company ("First State") second-layer excess insurance
in the amount of $15 million; (d) Midland Insurance Company
("Midland") second-layer excess insurance in the amount of $5
million; (e) National Union Fire Insurance Company ("National
Union") second-layer excess insurance in the amount of $5
million; and (f) North River second-layer excess insurance
policy number XS-3619 in the amount of $25 million.
For the policy period XS-3672(B), the underlying insurance
coverages consisted of: (a) Aetna primary insurance in the
amount of $1 million; (b) Aetna first-layer excess insurance in
the amount of $25 million; (c) First State second-layer excess
insurance in the amount of $15 million; (d) Midland
second-layer excess insurance in the amount of $5 million; (e)
National Union second-layer excess insurance in the amount of
$5 million; and (f) North River second-layer excess insurance
policy number XS-3619 in the amount of $25 million.
Overall, Crum & Forster wrote approximately $1 billion of
liability insurance for Owens-Corning, consisting of $710
million for indemnity and $300 million for defense costs.
3. The Reinsurance Certificate Issued by Unigard to North
Allen Miller and Associates, Inc. ("AMAI") was a managing
for Unigard Mutual. In July 1974, AMAI issued to North River,
on behalf of Unigard Mutual, a pre-printed, standard form
certificate of facultative reinsurance,*fn2 drafted by AMAI,
bearing policy number 1-5143, which has given rise to the
obligations at issue here. It provided reinsurance coverage to
North River in the principal amount of "$5,000,000 each
occurrence and in the aggregate part of" the $30 million
coverage under XS-3672 for the policy periods XS-3672(A) and
XS-3672(B). Originally, the Certificate also provided coverage
for XS-3672(C), but this coverage was cancelled by endorsement
effective October 22, 1975.
The terms of the coverage under the Certificate were printed
on the back of the form. The terms relevant to this dispute
provided as follows:
A. [T]he liability of [Unigard] shall follow that
of [North River] and, except as otherwise provided
in this Certificate, shall be subject in all
respects to the terms and conditions of [XS-3672]
except as such may purport to create a direct
obligation of [Unigard] to the original insured or
anyone other than [North River.]
C. Prompt notice shall be given by [North River]
to [AMAI] on behalf of [Unigard] of any occurrence
or accident which appears likely to involve this
reinsurance and . . . [AMAI], directly or through
its representatives and/or counsel, shall . . .
have the right and be given the opportunity to
associate with [North River] and its
representatives at [Unigard's] expense in the
defense and control of any claim, suit or
proceeding which may involve this reinsurance.
D. All claims covered by this reinsurance when
settled by [North River] shall be binding on
[Unigard,] who shall be bound to pay [its]
proportion of such settlements. In addition
thereto, [Unigard] shall be bound to pay (1) [its]
proportion of expenses . . . incurred by [North
River] in the investigation and settlement of
claims or suits, and (2) [its] proportion of court
costs, interest on any judgment or award and
litigation expenses . . . with respect to
reinsurance provided on an excess of loss basis,
in the ratio that [Unigard's] loss payment bears
to [North River's] gross loss payment. . . .
These provisions are generally referred to in the reinsurance
industry and this opinion as the "following form" clause (¶ A),
the "notice of loss" and "right to associate" clauses (¶ C),
and the "follow the fortunes" clause (¶ D).
Unigard received one-sixth of the premiums paid to North
River under both XS-3672(A) and XS-3672(B), less a standard
twenty-five percent reinsurance brokerage commission.
4. The Asbestos Injury Crisis
By the early 1980's, lawsuits alleging asbestos-related
bodily injuries were pending in state and federal courts in
virtually every state in the union. See I. Kakalik, P. Ebener,
W. Felstiner & M. Shanley, Costs of Asbestos Litigation, Pub.
No. R-3042-ICJ at 13-14 (The Rand Corp., Institute for Civil
Justice 1983). By the end of 1982, it was estimated that
approximately $1 billion had been spent in connection with
these actions, with less than 40% of the funds ever reaching
the injured victims.
Producers of asbestos-related products and their insurers
engaged in protracted
litigation over the scope and applicability of liability
insurance coverage for asbestos-related bodily injury claims.
These disputes involved, inter alia, the primary insurer's duty
to defend claims and whether that obligation continued after
the exhaustion of policy limits; the "trigger of coverage" for
asbestos-related bodily injury claims, i.e., which policy year
or years owed coverage, given the prolonged and continuous
nature of asbestos injury and the long latency period for the
manifestation of diseases; the ability of insureds to designate
from among all "triggered" policies a single insurer in a
single coverage period to pay all claims until exhaustion; the
application of "other insurance" clauses that govern how
policies contribute to losses when the insured has other
coverage available; the application of clauses that limit the
insured's recovery to a single aggregate limit, irrespective of
how many policies are triggered, where all losses arise from a
single cause or "occurrence"; and the issues of insurer bad
faith and punitive damages. See generally Commercial Union Ins.
Co. v. Pittsburgh Corning Corp., 789 F.2d 214 (3d Cir. 1986);
Keene Corp. v. Insurance Co. of N. Am., 667 F.2d 1034, 1050 n.
3 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007, 102 S.Ct.
1644, 71 L.Ed.2d 875 (1982) ("Keene"); Owens Illinois, Inc. v.
Aetna Cas. & Sur. Co., 597 F. Supp. 1515 (D.D.C. 1984).
By 1983, nearly 25,000 lawsuits had been filed against
asbestos producers and manufacturers. Kakalik et al., supra. A
group of asbestos producers began exploring ways to avoid the
extensive litigation which characterized their efforts to deal
with the asbestos problem. Realizing that any alternative
system of resolving claims would hinge on an acceptable
allocation of losses among themselves, the producers retained
the firm of Peterson Consulting Limited Partnership
("Peterson") to help them develop an allocation formula. After
exploring several possible methods for allocating liability,
such as one based on each producer's market share, the
producers agreed to develop a formula which reflected each
producer's history of settling and litigating asbestos claims.
The percentage allocation formula which was ultimately
developed was based upon the average amount that each producer
had paid to settle asbestos claims as of a date before the
negotiations had commenced.
In 1984, the participants in the Peterson negotiations began
to discuss the formation of a joint claims handling center for
all asbestos bodily injury claims. This center came to be known
as the Asbestos Claims Facility ("the Facility").
a. Owens-Corning's Situation
Owens-Corning's 1982 10-K report, released in March 1983,
reported that there were 15,615 asbestos bodily injury claims
pending against Owens-Corning, with an average settlement per
claim, based on those claims which had already been closed, of
$9,858. Following the release of this report, Biegler decided
not to renew North River's excess casualty insurance of
In early 1984, Owens-Corning's 1983 10-K report reported
17,468 pending asbestos bodily injury claims against it, with
an average settlement for all closed claims as of December 31,
1983 of $9,968.
By early 1985, Owens-Corning's 1984 10-K reported 19,131
asbestos-related bodily injury claims pending against it as of
December 31, 1984, with an average settlement for all closed
claims, including "no pay" claims, of $10,454 per claim.
Owens-Corning's 1985 10-K reported an average settlement of
$10,708 per claim as of December 31, 1985.
b. Crum & Forster's Situation
In 1983, Ian Heap ("Heap"), senior vice-president of Crum &
Forster participated in establishing the Crum & Forster
Environmental Claims Unit ("ECU") to take responsibility for
environmental claims for all of Crum & Forster's insurance
affiliates. One of the ECU's primary tasks was to monitor and
deal with the growing number of asbestos claims. Robert Clare
was assigned to organize the ECU, and James Meyers ("Meyers")
was hired as its first manager.
As the Peterson negotiations progressed and the concept of
the Facility became more developed, Crum & Forster asked its
reinsurance intermediaries to advise its reinsurers that it was
giving serious consideration to joining the Facility, and to
request that the reinsurers report their reactions to such a
In July, 1984, Meyers produced an ECU Status Report on
Asbestos-Related Claims (the "Status Report") for his
superiors, including Heap, in which he attempted to calculate
the exposure Crum & Forster faced on asbestos claims.
The Status Report stated that "total unverified claims
reported by C & F insured accounts to one or more of the
insured's carriers approximates 257,807. Our records to date
indicate 69,631 claims of the 257,807 have been reported to C
& F companies." The Status Report listed the Owens-Corning
account underwritten by Biegler, which included XS-3672, with
an account rating of 2. Status Report Exhibit 1 at 6. That
rating was defined as:
Account is being actively followed as there is
either the probability of active participation in
the near future and/or critical information is
required which will either cause us to be involved
or absolved. This rating would be applied under,
but not limited to, the following circumstances:
1. The policy periods are current and there is a
question of the exposure date of the claimants.
2. The primary level below is basic and the
claimant population is minimal.
3. The claimant population volume is high
regardless of the level of the primary cover.
4. The claimant volume and the coverage limits
below are such that the probability of our
having to participate in the future appears
Status Report Exhibit 4 at 1 (emphasis in original).
The Status Report also summarized the amounts of coverage
written by the various Crum & Forster profit centers for
various producers at various layers, and contained a detailed
reinsurance treaty matrix with the amounts of asbestos coverage
retained by Crum & Forster companies net of reinsurance.
In the spring of 1985, a memo produced by the ECU stated:
a. Our 6/18/74 to 9/1/76 excess policies are
within the initial coverage block and could
possibly become attached, especially at the 2nd
excess levels if we deal with the claims within
b. Insured is also involved in P.D. and
c. Per Dan Phillips of Owens Corning, most of the
primary coverage has been exhausted although he
doesn't have the exact breakdown.
Three of our excess policies effective during
the initial block years are over $26 million and
stand a good chance of being attached if the
claims are handled in the Facility when the
payments previously made are reallocated from
the post block years. This would result in a
charge of about $7 million for each of the 24
years. Thus, our layers could be reached in 2 to
Those same policies would be reached in about 3
to 5 years if handled outside of the Facility.
This depends upon the [bodily injury] claim
volume and the exposure periods alleged and also
the impact of the P.D. and formaldehyde
litigation and the application of retention on
the primary level from 1977 and forward.
d. Whether in or out of the Facility, this account
has the potential for our policies to be
impacted at some time in the future.
In August 1985, Arthur P. Kirkner ("Kirkner") became
assistant vice-president of the ECU, and in September 1986
became vice-president and manager of the ECU. Kirkner was
responsible for handling claims paid by the Facility on behalf
of Owens-Corning, for monitoring certain files within the ECU
and for supervising all claims handling staff.
5. The Wellington Agreement
The discussions among insurers and manufacturers culminated
on June 19, 1985 with the execution of the Agreement Concerning
Asbestos-Related Claims (the "Wellington Agreement" or the
"Agreement"), to which Crum & Forster and its subsidiaries,
including North River, became signatories. In addition to Crum
& Forster, forty-nine other companies executed the Wellington
The producers of asbestos-containing products that executed
the Agreement (the "Subscribing Producers") included the
Armstrong World Industries, Inc.
Eagle-Picher Industries, Inc.
Pittsburgh Corning Corporation
United States Gypsum Company
In addition, many of the largest insurance companies executed
the Agreement (the "Subscribing Insurers"), including the
Cigna Property & Casualty Insurance Companies
The Continental Insurance Company
Employers Insurance of Wausau
Fireman's Fund Insurance Company
Liberty Mutual Insurance Company
Lloyd's of London and Certain London Companies
However, several major insurers never joined the Facility,
including The Travelers, AIG Companies, Commercial Union, The
Home, The Highlands, CNA, General Accident, and Allstate.
Heap, Crum & Forster's senior representative in the
Wellington negotiations, wrote a memorandum dated June 21,
It was not expected that there would be unanimity
by reinsurers in acceptance of the Agreement, nor
was it expected that any reinsurers would be
willing to sign a blank check for recoveries on
asbestos-related claims, but it was necessary that
insurers attain an acceptance by reinsurers of the
basic principles of the Agreement and agree that
payments made by the Facility would be seen to be
good payments for the purpose of reinsurance
recoveries. It was always understood that
reinsurance recoveries for [F]acility claim
payments would be subject to the terms and
conditions of the treaty or certificate language,
and it is understood that with or without the
Facility there will inevitably be differences of
opinion between insurers and reinsurers on such
matters as the definition of "occurrence" and
other coverage issues.
The Wellington Agreement resolved many of the disputes
between and among the Subscribing Producers and the Subscribing
Insurers and expressly preserved certain additional disputes to
be resolved by arbitration, thereby removing them from the
jurisdiction of the courts. These disputes included the
a) the existence of a defense obligation;
b) the effect of missing or cancelled policies;
c) misrepresentations in the underwriting process;
d) failure to pay premiums;
e) the application of asbestos and asbestosis