Tag Archives: insurance coverage attorney

New York Asbestos Ruling Could Change Insurers’ Approach

A version of this article originally ran on Law360 on July 2, 2021. All rights reserved.

Although many companies that historically used asbestos in their products have gone bankrupt, there are still many that have managed to survive. How? In some — perhaps many — cases, the answer may be due in no small part to insurance.

But insurers looking to reduce their asbestos coverage obligations by demanding that policyholders contribute to defense and settlement costs may be shooting themselves in the foot if their policyholders can’t handle the financial burden.

In Liberty Mutual Insurance Co. v. Jenkins Bros., the New York Supreme Court recently held that Liberty Mutual had to pay 100% of all settlements against its bankrupt and dissolved insured, Jenkins Bros., even though its policies were in force for only part of the asbestos exposure alleged in the relevant underlying asbestos lawsuits.

The court held that Liberty was a real party-in-interest in the asbestos lawsuits because it agreed to defend and indemnify Jenkins Bros. when it issued the relevant liability insurance policies, and it was Liberty that appeared and negotiated asbestos settlements on behalf of its bankrupt and dissolved insured in those lawsuits.

As the real party-in-interest, the court reasoned Liberty could not pay only a pro rata portion of settlements based on the time Liberty’s policies were on the risk, leaving the plaintiffs to swallow the orphan share. And, in any event it, it was estopped from doing so because it was the one that actually negotiated the settlements.

The court, however, did not stop there. Perhaps more importantly and of broader application, the court stated that regardless of whether Liberty was a real party-in-interest in the underlying asbestos lawsuits, the pro rata allocation methodology would never be appropriate when the allocation would result in an orphan share being allocated to a tort victim due to gaps in coverage and a bankrupt defendant.

In such instances the all-sums, or joint and several allocation, methodology would apply, which would also result in Liberty paying 100% of settlements for Jenkins Bros.’ asbestos liability.

Finally, and also noteworthy, the court adopted the 2000 ruling of the New York Appellate Division, First Department in In re: Liquidation of Midland Insurance Co., which held that the trigger of coverage in a long-tail asbestos claim is the inhalation of asbestos fibers, or exposure — not manifestation of the disease or exposure in-residence, e.g., the period between last exposure and manifestation of the disease.

Not all asbestos defendants are global corporations that can be viably reorganized in bankruptcy. The Jenkins Bros. decision sheds light on what might ultimately happen when an asbestos, or other long-tail tort, defendant goes out of business and is eventually dissolved and wound up, or becomes completely defunct.

Consider the situation where a manufacturer is sued hundreds of times per year for injuries allegedly caused by exposure to asbestos in products it made decades ago. The cost to defend these lawsuits is substantial, as is the cost to pay settlements or, in some cases, judgments.

But this manufacturer has insurance coverage under its old occurrence-based general liability policies and the issuing insurers have stepped up — as they should — to provide the manufacturer a full defense and indemnity. In turn, the manufacturer is able to stay in business.

What happens if the insurers grow weary of their coverage obligations and seek to shift a portion of the cost to defend and settle cases to the manufacturer?

For example, assume one of the participating insurers is ordered into liquidation or the insurers wish to capitalize on a perceived advantageous development in the applicable law addressing how to allocate defense and settlement costs when the alleged asbestos exposure occurs partly outside the insurers’ policy periods.

Now our manufacturer must either sue to maintain a full defense and indemnity or negotiate a cost sharing arrangement where it must contribute to some degree. Either scenario will be a material drain on its financial resources.

Focusing on New York law for the moment, insurers and policyholders tend to take a very different view of how to allocate legacy asbestos liabilities when the alleged exposure occurred partly within viable policy periods and partly without.

Insurers typically argue the pro rata allocation method applies to both the duties to defend and indemnify except in a relatively narrow set of circumstances, such as when a policy contains a noncumulation or prior insurance clause. That means the insurers would only have to pay their fractional share of a loss that occurs during their policy periods compared to the entire period of loss, which can be lengthy, and the policyholder must pay for the remainder.

On the other hand, policyholders typically argue the all-sums allocation method applies, which means if an insurer’s policy is triggered, it must fully defend and indemnify the insured for the entire loss until its policy is exhausted, with no contribution from the insured — though contribution may be available from other insurers.

At minimum, an insurer must fully defend asbestos lawsuits even if settlements or judgments can be allocated pro rata among insurers and the policyholder.

Given these differing viewpoints, one can easily see that in practice businesses with legacy asbestos liabilities are put in a tough financial position when their insurers don’t agree to provide full coverage.

The court dockets in New York are replete with expensive, drawn-out fights between insurers and policyholders on these issues. On the other hand, if insurers contribute only a fraction to pay for asbestos liabilities, the business may not be able to afford the remainder.

The court’s ruling in Jenkins Bros. should make insurers think twice before looking to shed some of their asbestos coverage obligations.

If their policyholders go out of business, declare, or are forced into, bankruptcy, or eventually dissolve and wind up, the insurers may be left holding the bag — either as a real party-in-interest because orphan shares can’t be allocated to tort victims, or because the plaintiffs obtain an unsatisfied judgment against the defunct policyholder and sue directly under New York Insurance Law Section 3420.

Even worse, insurers could find themselves defending cases without the benefit and buffer of a viable business as the direct defendant — yikes.

The point is, even if there is a real dispute over how to allocate long-tail losses — and I favor the policyholder position — the Jenkins Bros. ruling should encourage insurers to meaningfully protect their policyholders and find a sustainable path forward — the way insurance is supposed to work.

As a corollary, the Jenkins Bros. decision may impact the mergers and acquisitions space for entities shouldered with legacy asbestos liabilities. Acquiring companies often see asbestos liability as anathema and may steer away from an otherwise strategic acquisition.

In short, they don’t want to be left answering the phone if the target goes belly up due to its asbestos liability — setting aside the actual likelihood and validity of this fear coming true. This sometimes knee-jerk reaction may be ameliorated if the entity that would ultimately be left answering the phone is the target’s old insurance company pursuant to Jenkins Bros.

However one chooses to view Jenkins Bros., it’s an interesting decision that could have far-reaching effects.

John G. Koch is a member of Flaster Greenberg’s Insurance Counseling and Recovery, Litigation and Environmental Practice Groups, focusing his practice on policyholder-side commercial insurance recovery and environmental law. His practice also includes commercial litigation, alternative dispute resolution, transactions counseling, contract indemnity disputes, supply chain disputes, and product recalls. He can be reached by emailing john.koch@flastergreenberg.com or calling 215.279.9916.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Business Interruption Insurance for COVID-19

Work InterruptionWith the government shutdown of businesses due to the COVID-19 virus, many business owners are wondering if there is insurance coverage for their revenue losses. As an insurance coverage lawyer who deals with these types of policies, here are some of my thoughts:

  1. Property policies vary widely in their language, and can be tailored to different kinds of businesses. For example, our firm’s policy is written on a form that is said to be tailored to lawyers. What is provided in one policy may not be provided in another.
  2. In order to obtain coverage under these policies, you normally need to show that the loss was due to “direct physical loss or damage” to the property. States construe that differently, but in New Jersey there are cases holding that as long as the insured is unable to use property because of a condition, there is direct physical loss or damage to the property even if there is no visible damage. In cases where a civil authority prohibits the business from being open, the argument may be strengthened. The question here is whether the virus makes the property in question unusable.
  3. Some, but not all property policies contain “virus” exclusions. Others may try to include this in the pollution exclusion, but in one version reviewed, those efforts may have rendered the policy language ambiguous and therefore ineffective. The New Jersey Legislature, and now the legislatures of other states, are considering whether to make these virus exclusions unenforceable. If enacted, the question would then be whether such laws would be constitutionally infirm for existing policies.
  4. If there is coverage for business interruption, it may be subject to sub-limits which in one sense favor the insurer, but also make it easier to establish coverage. If the insurer’s exposure is less, a court is more likely to side with an insured in a close case if there is a suit filed.
  5. There have already been suits filed concerning this issue. By no means is it clear that coverage will be afforded, but my suggestion generally is that, if in doubt, a claim should be made because unlike liability policies written on an occurrence basis, first party claims need to be filed promptly and procedures in the policy need to be timely followed.

Mitchell Kizner of Flaster Greenberg

Mitchell Kizner focuses his practice on environmental and insurance litigation. He represents clients in environmental, insurance and other commercial matters as part of his active litigation and commercial law practice. For more details on the legalities of Business Interruption Insurance, contact Mitchell or any member of Flaster Greenberg’s Insurance Coverage Practice Group.

 

 

To serve as a central repository of information and contributions from Flaster Greenberg attorneys on legal developments during the COVID-19 crisis, we have launched a COVID-19 Resource Page on our website.  Feel free to check back frequently for Flaster Greenberg’s ongoing analyses of important legal updates that may affect you or your business. 

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