Reverses $36M Judgment for Policyholder

The Third Circuit, applying Pennsylvania law, overturned the district court’s $36 million judgment in favor of the policyholder and held that an asbestos exclusion barred coverage for thousands of underlying claims.  The exclusion at issue eliminated coverage for injuries or loss “arising out of asbestos.”  The Third Circuit held that whether “asbestos” was interpreted to mean a mineral in its raw form  or  interpreted as products which contain asbestos was immaterial because  “arising out of” unambiguously requires a “but for” causation and, therefore, because the underlying claims would not have occurred but for asbestos, the exclusion precluded coverage.

General Refractories Company (“GRC”), a manufacturer and supplier of refractory products, is a defendant in many asbestos-related suits.  GRC sued its insurance carriers for a declaration of excess insurance coverage for underlying asbestos-related lawsuits. Travelers Casualty and Surety Company, formerly known as the Aetna Casualty and Surety Company (“Travelers”), issued GRC two insurance policies from August 1, 1985 – August 1, 1986, each of which contained an asbestos exclusion. The exclusion eliminated coverage for sums that GRC becomes legally obligated to pay for injuries or loss “arising out of asbestos, including but not limited to bodily injury arising out of asbestosis or related diseases or to property damage.”  The terms “arising out of” and “asbestos” were not defined in the policies.

After a bench trial, the district court ruled that the exclusion contained a latent ambiguity based on the insured’s presentation of a reasonable interpretation of the exclusion that differed from the insurer’s interpretation.  According to GRC, “asbestos” plainly meant “the raw asbestos mineral that is ‘mined, milled, processed, produced, or manufactured for sale in its raw form.’”  GRC did not sell raw asbestos; instead, GRC sold refractory products that sometimes included asbestos components.  Travelers maintained that the exclusion was subject to only one reasonable interpretation: claims for injuries related to asbestos in any form are excluded.  Because the district court found that the exclusion was ambiguous, it held that the exclusion must be interpreted in favor of coverage.  Based on the district court’s ruling, the parties stipulated that Travelers must cover $21,000,000 of GRC’s losses.  The district court accepted the stipulation and also awarded GRC an additional $15,273,705 in pre-judgment interest and entered final judgment for GRC. Travelers appealed.

On appeal, the Third Circuit found that the district court wrongly focused on the meaning of “asbestos” when the phrase “arising out of” had “an unambiguous legal meaning that renders any uncertainty concerning the meaning of the word ‘asbestos’ immaterial.”   Under Pennsylvania law, the phrase “arising out of” when used in an insurance exclusion unambiguously requires a “but for” causation.  Thus, because the losses relating to the underlying suits would not have occurred but for asbestos, either raw or within finished products, the policy exclusion barred coverage.

The Third Circuit stated that evidence of industry custom or trade usage was relevant in construing the policy, even where it is determined to be clear and unambiguous.  Nevertheless, the court found GRC’s arguments relating to industry usage of the term “asbestos” were irrelevant:  “The application of ‘but for’ causation compels the conclusion that GRC’s losses are excluded under the policy as a matter of law.” General Refractories Co. v. First State Ins. Co., NO. 04-3509 (3rd Cir. Apr. 21, 2017).