Emergence of the New Asbestos Coverage Litigation Wave: An Overview
I. THE NEW ASBESTOS TIDAL WAVE
Who in the 1990s would have thought that in 2005 asbestos coverage litigation would be back at the forefront of major complex insurance coverage cases? It is impossible to understand the renascence of asbestos coverage litigation without understanding the different characteristics of the underlying claims that are being filed against policyholders by plaintiffs who have allegedly been exposed to asbestos.
There was a period in the late 1980s through approximately 1996 when relative harmony among insurers and their policyholders existed through the use of programs to resolve coverage for asbestos claims, that were spawned by the Wellington Agreement and its progeny, the Asbestos Claims Facility and the Center for Claims Resolution. As will be explained in more detail below, the landscape of the underlying asbestos litigation has changed because the plaintiffs asbestos bar has bankrupted the principal industries involved in asbestos manufacturing and mining and has targeted other industries where asbestos was used in the workplace or in products. It is now apparent that virtually every sector of American industry is potentially at risk to some degree of asbestos exposure.
In the early 1980s, when asbestos litigation really jumped to the forefront of the tort litigation stage, and caused industry and academia to analyze its impact, the number of potential plaintiffs and the risks to industry, while significant, were not considered life-threatening, except for those industries directly involved in the production or installation of asbestos. This situation is reflected in an analysis published in 2002 by the Rand Institute for Civil Justice which published an analysis of the burgeoning asbestos crisis, entitled "Asbestos Litigation Costs and Comparison: An Interim Report" (the "Rand Report"). The chart below from the Rand Report reflects a snapshot of asbestos litigation in 1982.
B. The New Asbestos Litigation Landscape
The asbestos plaintiffs' bar learned some time in the early 1990s that the use of asbestos in American industry and the concomitant exposure to workers was much more widespread than initially expected. In fact, the plaintiffs' bar discovered that asbestos was nearly ubiquitous among all American industrial sectors. The following two charts from the Rand Report show, graphically, this new awareness.
This pervasive distribution of asbestos presented the asbestos plaintiffs' bar with an extraordinarily increased population who would be potential clients.
Thus, as of 2002, according to the best information available then to the Rand Institute, there were at least 27 million Americans who were potential plaintiffs, regardless of the degree of exposure of those workers to asbestos in amounts that could conceivably cause injury to them.
C. The Degree of Injury and Proof of Medical Causation
There is no question that exposure to asbestos in sufficient quantities does kill or can cause severe bodily injury to those persons who have been exposed.
However, studies show that the vast majority of plaintiffs in this second wave of asbestos cases are not currently functionally impaired. As will be explained below, this fact has become a principal source of contention between policyholders and their insurers as they proceed to analyze the coverage demands made by policyholders.
Plaintiffs' lawyers who represent workers with alleged asbestos exposure have responded to the position taken by industry and insurers on this point with evidence showing that asbestos typically can have a latency period of up to 40 years between exposure and manifestation, and that injury, in fact, can obviously occur during those years prior to manifestation. While this is certainly true, there is a problem in this argument in that there is no consensus within the medical community or the 50 state court systems as to what constitutes sufficient physical impairment to constitute an injury that would permit recovery for the allegedly injured plaintiff.
For example, the American Medical Association recognizes that a worker can have a scar on his or her lungs caused by exposure to asbestos, but if that scar does not impair the worker's ability to perform common activities of daily life, then there is a zero percent impairment rating given to that patient. In many states, the legal determination of whether an asbestos claimant can meet a threshold showing of injury to take his or her case to the jury is dependent on a so-called B or ILO reading, which is essentially an x-ray reading. However, the standards for B/ILO readings vary from state to state, and some states do not require a B/ILO reading as a threshold test if other admissible expert testimony demonstrates that the worker/plaintiff has been injured by exposure to asbestos. The import of this confusion concerning the standards as to medical impairment is that in some states it is virtually impossible to keep a case from going to a jury for resolution because those states require only very low B/ILO readings or no B/ILO readings at all.
D. The Uncertainties for Asbestos Defendants in the State and Federal Courts
In addition to the uncertainty facing asbestos defendants as to the proof of medical injury, they must also deal with the vagaries of the American judicial system. In 1991, the Federal courts sought to address the uncertainties created by the application of different rules in different venues. In an effort to streamline the processing of asbestos claims against defendants, a Federal multi-district class action was consolidated with the expectation that a global national settlement would be secured. That expectation failed because the interests of the plaintiffs and defendants were simply too diverse. Indeed, ultimately, the United States Supreme Court rejected the class action as an appropriate method for resolving the asbestos cases on a national basis. See Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997); Ortiz v. Fibreboard Corp., 527 U. S. 815 (1999). As these events transpired, the litigation moved from the federal arena to the state courts. By far, the prevailing trend for today and for the future is that state court filings will dominate the second wave of asbestos cases against defendants.
In addition to moving to the state courts, the cases have been concentrated in a relatively small number of states.
As the above chart from the Rand Report reflects, particularly during the period of 1994 to 1997, Texas was the jurisdiction of choice for the plaintiffs' bar for a number of reasons. First, Texas has a huge petrochemical industry in which asbestos was used in many forms; it is obviously a very large state; and there is, therefore, a huge plaintiff base. As a product of that huge plaintiff base, the firms that have become the dominant firms in the United States in representing plaintiffs in underlying asbestos actions include a disproportionate number of firms from the State of Texas. The chart from the Rand Report below reflects the fact that a significant number of cases have been filed by a limited number of law firms, and this phenomenon increased in the late 1990s and is continuing to some degree today. Many of these firms are in Texas.
In many respects, the Texas phenomenon is a paradigm for the other principal states in which asbestos litigation has been flourishing. Texas, like other states with huge asbestos caseloads, has not only a substantial population of individuals allegedly exposed to asbestos, but also has a court system that encourages plaintiffs to seek relief in that forum. The judicial system for handling mass tort claims in Texas is one that is very plaintiff-oriented, and some would argue that the Texas judicial system deprives commercial defendants of basic due process rights in asbestos litigation.
Typically, asbestos plaintiffs' counsel will file suits in various counties in Texas, often with as many as 50 plaintiffs or more, in each of the actions, all of which are individual actions, not class actions. The deadlines for the scheduling of trials in these cases are very short, and it is possible that an individual defendant on virtually a few weeks' or even days' notice could be expected to defend several of these cases on the first day of the week in as many as four or five different counties without knowing until that time the identity of the plaintiff who will actually be going to trial on that date. Not surprisingly, the plaintiff whom the asbestos plaintiffs' lawyers designate as the lead case for trial among the group of plaintiffs represented, usually has cancer, particularly mesothelioma. Not surprisingly, this procedural structure puts immense pressure on defendants to settle the entire group of claims brought against them in order to avoid a disastrously large judgment with respect to the one or two really serious cases among the groups of plaintiffs.
E. The Changing Complexion of the Plaintiffs Who are Suing in the Asbestos Cases
In no small part because of the success of the asbestos plaintiffs' bar in aggregating numerous plaintiffs with varying degrees of medical impairment, it is no surprise that a substantial number of the plaintiffs in each of these cases are non-malignants, notwithstanding alleged exposure to an asbestos product.
There are basically six categories of plaintiffs in the underlying asbestos tort suits. The most seriously impaired group consists of those who can show that they are suffering from mesothelioma. The other categories are lung cancer, other cancers, the so-called non-malignant conditions of asbestos and plural plaques, and those who have no medical showing of impairment at all.
From the underlying plaintiffs' perspective, the addition of huge numbers - in fact, grossly disproportionate numbers of non-malignant plaintiffs in this second wave of asbestos litigation - is legitimate because of the long period in which asbestos injury can be latent prior to manifestation, i.e. as much as 40 years. Thus, the toxic tort plaintiff in an asbestos case is usually able to take his or her case to the jury with a demonstration that the plaintiff has been exposed to an asbestos product or asbestos fibers and had some degree of bodily injury, and with the knowledge that even though there is no current manifestation of substantial injury, asbestos and its related diseases have a long latency period that could result in serious injury to the plaintiff. With these predicates, the typical asbestos defendant is faced with a Hobson's choice as to whether to settle all of the group of lower-value claims, along with the big-dollar claims, for an amount that would be substantially below what an adverse judgment in favor of one mesothelioma plaintiff could entail. For example, single mesothelioma verdicts range from six figures to as much as $250 million.
F. The Uncertainty Factor
The "uncertainty factor" is having a decided impact in this second wave of asbestos coverage litigation because a relatively larger group of non-traditional plaintiffs are filing actions and, as discussed above, many of the defendants who are being sued now are presented with new litigation challenges. These defendants are dealing in part with litigation issues that have been brought in the past; however, they also have to address different issues that flow from the different types of industries that are being selected now by the asbestos plaintiffs' bar. As indicated above, the Rand Report shows that the number of defendants has expanded exponentially from a group that originally was probably less than 300, i.e. the manufacturers, the mining operations, and the insulators who used asbestos. Of the 83 industry categories that are maintained for statistical purposes by the Department of Commerce, the Rand Report indicates that 75 of those categories have companies that have been sued for asbestos injuries. Thus, the second wave of asbestos litigation has made this particular litigation phenomenon almost universal throughout America's industrial and even service industries. That factor, translated into real numbers, is graphically shown in the Rand Report chart below.
The 600,000 claimants reflected in the above 2002 Rand Report chart has, of course, increased since 2002, and it is exponentially larger than the number of claimants in 1982 when the asbestos litigation phenomenon started in earnest.
The real uncertainty facing these new defendants, with a mountain of new claims, is that billions of dollars have been paid to plaintiffs and members of the plaintiffs' asbestos bar, and a not insubstantial amount of that payment has come from insurance companies of the asbestos defendants.
The above Rand Report chart reflects that as of the year 2000 - five years ago - asbestos defendants had paid $54 billion in judgments, settlements, and defense costs. Of that amount, the Rand Report estimates that approximately $34 billion has been paid by domestic and foreign insurance companies. These numbers continue to rise vertically, and this is, in part, why insurance companies are taking a different approach with respect to policyholders affected by this second wave of underlying toxic tort litigation relating to asbestos. From a policyholder's perspective, the different approach that insurers are now taking is unprincipled and in stark contrast to the position that insurers had taken when they paid approximately $34 billion in claims. Policyholders cannot find a reasonable basis for this different response from their insurers except for the simple fact that insurers seem to have made an economic decision to forestall or avoid the payment of their coverage obligations. Certainly, the language in the insurance policies that were sold to policyholders prior to 1985, when the asbestos exclusion began to appear in policies, has not been suddenly transmuted by the passage of time.
From the insurer's perspective, there has been a profound change with respect to the nature of the underlying asbestos claimants. As discussed above, to a much greater extent than before, the claimants are so-called non-malignants, i.e., they may be suffering from asbestosis, but have not yet developed cancer or mesothelioma. From the insurer's perspective, this makes a difference because the amount that should be paid to underlying claimants, in their view, should correspond to the medical evidence supporting their claims. However, this argument ignores the reality that juries are awarding non-malignant plaintiffs substantial sums without regard to the level of present medical harm in view of the potential for such bodily injury as time progresses and the disease worsens. The data collected in the Rand Report reflects that defendants are less willing to face the potential of huge judgments in cases where the lead plaintiff may have mesothelioma or some other cancer and instead are willing to enter group or matrix settlement agreements. As the chart below reflects, billions of dollars are being paid to asbestos plaintiffs through settlements, rather than through judgments.
As the above chart reflects, of the 600,000 claims that have been brought, well below one percent (1%) of those plaintiffs have actually had their case decided by a jury verdict. However, when a plaintiff did go to verdict, asbestos plaintiffs won two-thirds of the time. The factor that reduces the number of trials is the fact that awards to a successful plaintiff can vastly exceed the cost of settlement for an entire group of plaintiffs, including the most seriously injured plaintiffs. For example, quite recently, there have been judgments in excess of $250 million for plaintiffs who suffered from mesothelioma. The effect of this litigation phenomenon is that a substantial amount of the settlement monies paid to asbestos plaintiffs in this second wave of asbestos litigation go to those who are able to show only minimal evidence of injury.
Where is the future leading on this? According to the Rand Report, it is leading onward and upward, at least from the underlying plaintiffs' perspective, barring federal legislation.
As the Rand Report reflects, the number of claimants could be as high as 3,000,000 over the course of the next decade or so, and the total cost could be as much as $265 billion, which compares with the $54 billion which had been paid as of 2002. With another $200 billion at stake within the next decade, it is easy to comprehend why there has been a substantial increase - if not an explosion - of asbestos insurance coverage litigation around the country. Because the insurance industry, in the policyholder's view at least, has decided that it must make all efforts possible to delay, avoid or at least minimize the amount of this potential $200 billion for which they are obligated under the contracts they sold to their policyholders, asbestos coverage actions are naturally on the increase.
The principal hope that both policyholders and the insurance industry have with respect to this second wave of asbestos claims is federal legislation embodied in a bill that was originally introduced on April 8, 2004 by Senators Hatch, Frist and Miller entitled, the "Fairness in Asbestos Injury Resolution Act of 2004," or the "FAIR Act." The significance of the current wave of underlying asbestos litigation to policyholders and insurers is underscored by the introduction of this legislation. Although the FAIR Act did not become law before the 2004 general election, it has been resurrected and is currently under consideration by the Senate. In view of the increased Republican majorities in both Houses of Congress and the re-election of President Bush in 2004, the passage of some form of the FAIR Act appears far more likely in this session of Congress, although there are still impediments. For example, a new obstacle to passage of this legislation is the concern with underlying claims relating to silica exposure. The proponents of the FAIR Act from the industry and insurance side are suggesting that the legislation will be toothless if it does not also cover claims based on silica exposure because of the number of underlying plaintiffs who are claiming injury from both silica and asbestos. Insurers and industry defendants fear that the plaintiffs' bar will be able to recover for asbestos injuries from the FAIR Act's Trust Fund while maintaining separate claims for the same plaintiffs for silica exposure in the courts.
B. How the System Would Operate
In broadest terms, this legislation would create a fund of approximately $114 billion based upon payments by companies that have been sued in asbestos actions, insurers, bankrupt estates of asbestos defendants, and other private parties, but not, significantly, the American taxpayers. Under the terms of the FAIR Act, those businesses that have been sued for the manufacture, installation or production of asbestos products would contribute approximately $57.5 billion to this trust fund. The insurance companies would contribute approximately $46 billion to the trust fund. The balance of the funding would come from the debtor estates of companies engaged in the manufacture, installation or production of asbestos products and others.
The FAIR Act is designed to imitate, to some degree, the workers' compensation no-fault system, for payment to parties suffering from asbestos injuries who have not received complete compensation as of the date of the enactment of the legislation. The legislation would not cover the payment of asbestos bodily injury claims where payment is available under statutory workers' compensation or veterans' benefit programs.
The basic elements relating to the functioning of this system are as follows:
- Each plaintiff seeking compensation must satisfy certain medical, exposure and latency criteria.
- Plaintiffs or injured claimants will be permitted to come back and request additional payments from the Trust Fund if their injuries become more serious with a setoff for monies already received.
- Monetary compensation would range from $20,000 to $1 million per claimant, the latter being for claimants suffering from mesothelioma.
- Payouts would be structured over the course of three to four years.
- Even those persons without any indication of impairment may be entitled to medical monitoring.
- Smokers would receive less compensation than ex-smokers or non-smokers.
- There would be sanctions for fraud.
Of course, one of the principal benefits of this legislation from the perspective of policyholders and insurers is that it would remove underlying asbestos litigation from state courts, such as Texas. The FAIR Act would federalize the asbestos compensation system, removing it from the tort arena, and would preempt any private party agreements or state's laws relating to asbestos claims.
C. Effect of the FAIR Act on Insurance Policies Sold to Policyholders With Asbestos Claims
The payments by insurers to the FAIR Trust Fund would erode policyholders' aggregate "products" coverage limits. The erosion of policyholder aggregate limits would be based on a schedule that calculates erosion as a percentage of payments made by defendant policyholders. If seventy-five percent (75%) of an asbestos manufacturer's or producer's prior payments relate to "premises" exposure, then the erosion rules would not apply to the aggregate limits of the policy. Payments by asbestos defendants would also erode self-retentions and deductibles.
The Act would require that all insurance coverage claims be tolled. After the Trust Fund has been created, asbestos defendants, i.e. policyholders, cannot seek coverage from their insurers for amounts which they paid to the Trust Fund. However, a policyholder can continue to seek recovery from its insurers with respect to amounts paid to underlying plaintiffs prior to the enactment of the FAIR Act.
The FAIR Act has a sunset provision providing that after seven years, if the Fund has run out of money to pay all claims, then the Trust Fund will be terminated. However, asbestos defendants' and insurers' funding obligations will continue until the Trust Fund's outstanding obligations as of the termination point are satisfied. Upon the termination of the Trust Fund, underlying asbestos plaintiffs will again be permitted to seek tort remedies, but, significantly, only in the federal courts.
Underlying plaintiffs will have the right to return to the tort-based system after the sunset provision for the FAIR Act. Indeed, plaintiffs in underlying cases will have the right to return to the tort-based system for recovery with respect to malignant claims in instances in which the claimant had previously been paid under the FAIR Act for a non-malignant claim. Another feature of the FAIR Act that will limit forum shopping by the asbestos plaintiffs' bar is that the FAIR Act provides that, in the future, after the sunset provision for the FAIR Act has passed and tort-based remedies are revived, not only must suits be filed in Federal Court but the venue of any such actions is restricted to the state in which the claimant resides or where the exposure to the asbestos occurred. Lastly, the FAIR Act provides for enhanced enforcement for violations of law relating to asbestos use and exposure and, with certain minor exceptions, asbestos-containing products are banned from commerce.
III. THE INSURANCE COVERAGE ISSUES RAISED BY THE SECOND WAVE OF ASBESTOS INSURANCE COVERAGE CASES
A. Second-Guessing Policyholder Litigation and Settlement Decisions
The principal source of conflict between insurers and their policyholders with respect to the increased volume of asbestos claims that policyholders must either litigate or settle is the insurer's delay or denial of coverage because of alleged concerns that policyholders are settling claims that have no merit. This insurer position arises from the figures shown above as to the explosion of claims in which there is little or no evidence of physical injury to the plaintiffs, i.e., the non-malignant cases. From the policyholders' perspective, there are several flaws in this new insurer strategy for non-payment.
First, as discussed above, policyholders as defendants in asbestos litigation in the favored plaintiffs' fora, are facing cases in groups of scores to even thousands of plaintiffs in a particular case that is not a class action with the protections afforded by that process. Thus, policyholders face a very difficult choice. On the one hand, litigating these batch cases, all of which contain at least one mesothelioma claim, could yield a gargantuan judgment. Alternatively, the policyholder can reach an overall settlement with the plaintiff group at a value substantially less than possible recovery of the underlying plaintiff in the one mesothelioma case. Policyholders do not make the settlement decisions in an uninformed, rash fashion. Virtually any policyholder that has become a target in this second wave of asbestos litigation has access to an asbestos defense bar, the benefit of years of prior information and litigation strategy. Policyholders also routinely retain expert consultants both as to the substantive nature of the underlying plaintiffs' injuries and financial consultants that can advise them as to the utility or not of actually litigating a case versus avoiding a case by settlement.
As the Rand statistics above reflect, the policyholder community as a whole has found that it makes more economic sense to reach global settlements in these situations than to go to trial. Indeed, in states like Texas, where the procedural process and plaintiff-oriented juries limit a defendant policyholder's chances of success, there is no alternative but to settle claims, rather than to litigate them. Moreover, even if a policyholder were faced with only a batch of non-malignant claims, in virtually all states those cases would still go to trial to the extent that the underlying plaintiff can identify the policyholder's product and his or her exposure to asbestos fibers associated with that product, and some degree of injury. Indeed, policyholders that have taken non-malignant cases to trial, particularly in the most volatile jurisdictions, have ended up losing multi-million dollar judgments, notwithstanding the absence of the kind of compelling medical evidence that one would find in a mesothelioma case.
B. The Settlement Standards Controversy
Policyholders and insurers have been collaborating in the settlement of underlying product liability actions, including asbestos litigation, for decades. The standards under which an insurer is required to pay a policyholder for a settlement have also been established for many years. The current, substantial level of insurance coverage claims related to asbestos exposure to which the insurers are now exposed, has led them, in some instances, to attempt to rewrite these black-letter principles under which policyholders and insurers have worked together to settle claims
The legal standard for determining whether a compromise or settlement of an underlying action by a policyholder is proper for purposes of triggering its insurance coverage is simply whether the policyholder can demonstrate that its settlement was based on a "reasonable anticipation of liability" with respect to the allegations made in the underlying action. To impose some other standard on the policyholder would in effect require the policyholder to demonstrate its own liability to the insurer. There are any number of cases that have supported this sound approach to the settlement standard that will apply to trigger the insurer's obligation to pay for a settlement entered into by the policyholder, assuming that all other terms and conditions of the policy are satisfied. For example, in United States Gypsum Co. v. Admiral Insurance Co., 643 N.E.2d 1226 (Ill. App. Ct. 1994), the insurer argued that with respect to its payment obligations on settlements entered into by the policyholder, the policyholder had to offer actual facts showing that there was a release of asbestos fibers in each of the underlying cases that resulted in unreasonably dangerous levels of such fibers. The Illinois Court rejected that argument, stating:
The determination to be made in a coverage action which proceeds after the insured's liability has been conclusively determined by the underlying action is whether the type of injury claimed is within the policy's ambit of coverage, not whether any damage occurred in the underlying action below . . . . A policyholder, therefore, does not have to prove its actual liability as a prerequisite to obtaining coverage.
United States Gypsum, 643 N.E.2d at 1242-43. The logic of the decision in United States Gypsumhas been set forth in a host of other cases. See, e.g., Vitkus v. Beatrice Co., 127 F.3d 936, 944-45 (10th Cir. 1997); Luria Bros. & Co. v. Alliance Assurance Co., 780 F.2d 1082, 1091 (2nd Cir. 1986);Nordstrom, Inc. v. Chubb & Son, Inc., 820 F.Supp. 530, 535 (W.D. Wash. 1992), aff'd, 54 F.3d 1424 (9th Cir. 1995); Uniroyal, Inc. v. Home Ins. Co., 707 F.Supp. 1368, 1378 (E.D.N.Y. 1988).
The reasonable anticipation standard was at the heart of the administration of the Asbestos Claims Facility and the Center for Claims Resolution. Attacks by insurer non-signatories to those agreements on the basis that more evidence needed to be presented to establish their liability were consistently rejected by the Courts. See, e.g., Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 52 Cal. Rptr. 2d 690 (Cal. Ct. App. 1996).
C. Disputes as to Exhaustion of Underlying Coverage
Closely related to the dispute about the application of the proper settlement standard is whether certain insurers, usually excess insurers, have an obligation to begin paying when, in their view, the underlying coverage has not been exhausted or was improperly exhausted either by the policyholder or by the policyholder's insurers. This argument rests upon two principal aspects: (a) that the policyholder or its insurer have provided inadequate proof of exhaustion of underlying coverage, or (b) the proof offered by the policyholder or its insurer demonstrates, in the upper level insurer's view, that it was inappropriate for the policyholder and its lower-level insurers to settle underlying litigation with the underlying plaintiffs.
Not surprisingly, the above arguments made by insurers whose coverage has finally been implicated, has created a source of tension among insurers, with those insurers at lower levels that have paid claims, aligning themselves with policyholders to fight the assertions made by higher level insurers that exhaustion has not been adequately documented. To the extent that a primary insurer, or an umbrella insurer, has paid any significant amount in connection with underlying asbestos claims in the past, it is certainly not in that insurer's interest to have its collaborative decision with a policyholder second-guessed by an upper level excess insurer which has an agenda to force the primary or umbrella insurer to pay additional claims before satisfying the excess insurer's concept of proper exhaustion. This split between lower level and higher level insurers has engendered discovery disputes about settlement agreements between policyholders and those insurers that have paid their claims.
The determination of underlying exhaustion is based upon the application of one of two standards. First, to the extent that there is underlying insurance coverage and that insurance coverage has paid the policyholder's claims, then exhaustion is established, and the excess insurer must come forward and pay judgments or settlements in excess of that amount. Alternatively, some cases have held that even if the underlying insurer has not fully paid its coverage to the policyholder, there is still exhaustion of coverage to the extent the policyholder has liability that is equal or greater than the underlying policy limits. See, e.g., Stargatt v. Fidelity & Cas. Co., 67 F.R.D. 689 (D. Del. 1975), aff'd, 578 F.2d 1375 (3d Cir. 1978); see also Fuller-Austin Insulation Co. v. Fireman's Fund Ins. Co., 2002 WL 31005090 (Cal. Super. Ct.). The above courts, and others, have rejected the notion that the policyholder must carry a burden of proving the validity of the underlying claims which it settled before the exhaustion of the primary insurer's coverage is deemed to have occurred. See, e.g., Insurance Co. of North America v. Kayser-Roth, 770 A.2d 403 (R.I. 2001). Indeed, in Kayser-Roth, the court pointed out that to the extent the excess insurer disagreed with the decision of the primary insurance company as to its payment of a claim, that was a dispute to be resolved between those two insurers and not the policyholder.
Finally, in this context, some excess insurers have gone so far as to allege collusive conduct between primary insurers and their policyholders. This theory is usually predicated upon the undocumented assertion that because many of the primary or lower level policies at issue pay defense costs outside limits, there is an incentive on the part of primary insurers to pay questionable claims in order to avoid the payment of defense costs which would not erode the policy's limits.
D. The Documentation Requirements
Adding yet another layer of resistance to the payment of a policyholder's asbestos claims, certain insurers have attempted to impose so-called documentation requirements ("DRs") that they allege constitute conditions precedent to the payment of settlements made by the policyholder in underlying actions. There is no question that insurers have historically had the right under their policies to audit claims made by policyholders and settlements resulting therefrom, including claims in the asbestos litigation context. However, the language in the policies permitting insurers to audit or adjust claims, particularly in the commercial general liability coverage context, is quite vague and easily satisfied by the policyholder.
The policyholder can simply show:
Defense costs incurred in defending the underlying matter;Evidence of the settlement or judgment amount paid to the underlying asbestos plaintiffs; and
That settlements were made in reasonable anticipation of liability.
To the extent that insurers seek more information than this, their requests must be reasonable within the context of the nature of the claims that are being pursued. This is where an understanding of the nature of the underlying asbestos litigation, especially in its present form, is paramount. In states like Texas, where the procedural process is plaintiff-oriented, there is often little information that is available with respect to the individual plaintiffs because very little discovery is taken in cases where there are perhaps 100 plaintiffs and as many as 30 different defendants, and, most importantly, an extraordinarily short case schedule. However, most policyholders at least obtain information that reflects that their product or premises were sources as to which the settling asbestos plaintiffs had exposure, and medical evidence with respect to each plaintiff when available.
Certain insurers, for example the London Market Insurers and Mt. McKinley and Everest, apparently attempting to capitalize on the procedural difficulties faced by policyholders in underlying asbestos cases, have attempted to thwart the payment of claims or to contest the proper exhaustion of underlying coverage by promulgating these so-called documentation requirements. The documentation requirements seek to foist on policyholders informational requirements as conditions precedent to payment that are completely unprecedented in the context of traditional claims-handling in mass toxic tort cases.
Policyholders have voiced the following objections, among others, to these documentation requirements:
- The primary objection of policyholders to the post hoc imposition of the documentation requirements is that there is no basis in the insurance policies sold to them, many of which were issued decades ago, that would permit the insurers that have implemented the DRs to impose them retroactively.
- The documentation requirements seek to provide an excess insurer, which usually has no duty to defend, with the right to passively control the decisions made by the policyholder's counsel in the underlying action.
- The DRs interfere with the policyholder's ability to deal with its primary insurers.
- In essence, the DR insurers reserve the right to second-guess the settlements made by the policyholders, either on their own or in concert with primary insurers.
- The documentation requirements seek to establish a uniform system for evaluating asbestos claims that is completely at odds with the varying standards for liability in the 50 state jurisdictions.
- Indeed, in those states that have a lower threshold standard by which an underlying plaintiff can establish liability for exposure to asbestos, it would require the policyholder, in order to obtain coverage, to actually assist the underlying plaintiff in enhancing the credibility of the plaintiff's case.
- In some states, the "B/ILO" reading that will permit the case to go to the jury can be as low as onezero and, in some jurisdictions, no "B" reading or "ILO" reading is even required to get to the jury. However, the documentation requirements require a minimum "B" reading of oneone, although there is wording in the documentation requirements that that issue "may" be negotiable.
Even if the policyholder complies with the DRs and provides all of the requested information sought by the insurers that impose DR requirements, those insurers still reserve the right to challenge the reasonableness of the settlement that was reached by the policyholder, notwithstanding compliance with those documentation requirements. Finally, the documentation requirements can be changed at the whim of the DR insurers. The insurers that have promulgated these requirements reserve the right to add further conditions that the policyholder must satisfy in order to obtain coverage.
For their part, the insurers that are attempting to employ documentation requirements argue that they are necessary for a number of reasons. It is their position that the DRs do no more than require that the policyholder satisfy certain minimal standards:
- That the coverage that the insurers are being asked to pay relates to covered claims and covered losses;
- That the coverage relates only to claims involving an identified product of the policyholder in a documented asbestos-related injury; and
- That the claims for which coverage is sought were not arbitrarily or inadvertently assigned to the wrong years, the wrong policies or the wrong aggregate limits.
In attempting to implement these requirements, the insurers argue that the underlying files maintained by policyholders do not contain the quantity of records that are more typical in non-asbestos products cases in other jurisdictions than those that are the epicenter, or favored jurisdictions, for the plaintiffs' asbestos bar. For example, as to the DRs, insurers complain that many of the files do not reflect much substantive analysis of the claim by the lawyers involved.
With the emergence of an even more conservative Congress after the 2004 general election, asbestos litigation reform would certainly seem to have a greater chance of passage. However, one of the problems with passing the legislation in the prior session of Congress was the conflict between the insurance industry and policyholders as to their respective shares that are to be contributed to the Trust Fund and the size of the Trust Fund. In the next few months, as new legislations winds its way through Congress, the dimensions of cooperation among the principal beneficiaries of the system will become clear.
To the extent that there is no immediate resolution of the new wave of underlying asbestos litigation through legislation, the courts will have to grapple with the fundamental legal concepts discussed above relating to the right of policyholders to settle underlying asbestos cases in good faith, and, concomitantly, the alleged right of insurance companies to challenge the bases for those settlements through the use of documentation requirements or other means. Fortunately, for policyholders, the playing field for combating insurers' resistance to the payment of legitimate product liabilities for asbestos damages is much more level than was the case when policyholders faced huge environmental liabilities in the 1980s and 1990s, which provoked a massive amount of insurance coverage litigation. In the environmental context, the insurers were possessed with a much larger arsenal of weapons to oppose coverage and while they did pay billions of dollars in claims, their exposure was significantly less than has been and will be the case with respect to asbestos coverage claims.
The very fact that the insurance industry paid, with very little dispute, hundreds of billions of dollars of asbestos claims with respect to the first wave of asbestos coverage, even cooperating in organizations such as the Asbestos Claims Facility and the Center for Claims Resolution is clear evidence of their awareness that their policies sold before the implementation of the asbestos products exclusion will make them vulnerable to judgments for coverage to the extent litigation proceeds to trial. To a great extent, insurers, while fighting a rear guard action on asbestos coverage, have entered into enormous settlements with policyholders with respect to asbestos coverage liabilities incurred under the new wave of asbestos litigation. That they have done so is a clear message that policyholders' coverage claims for asbestos liabilities in this second wave are as meritorious as in the first wave.