N.J. Appellate Court rejects excess insurers’ attempt to relitigate claims to establish exhaustion and rejects insurers’ argument that they only pay defense costs for claims for which they make an indemnity payment.

First, a New Jersey appellate court, applying New Jersey law, rejected excess insurers’ attempt to force the policyholder, IMO Industries, Inc. (“IMO”). to re-litigate each settlement to establish coverage of each claim paid by the underlying insurers in order prove exhaustion of underlying policies, because evidence indicated the policyholder and primary insurers acted reasonably in settling claims.  The appellate court upheld the trial court’s ruling based on Owens-Illinois v. United Insurance Co., 138 N.J. 437 (1994). The appellate court found that IMO and the underlying insurers adopted reasonable procedures for only settling claims for which IMO potentially faced liability. IMO had promptly notified the excess insurers of the claims and offered to make its claim files available to them for inspection. However, the excess insurers declined to involve themselves in the defense of the claims. The court noted that the excess insurers chose not to be involved with the defense of the claims even though their policies allowed them to do so. Applying language used by the Supreme Court in Owens-Illinois, the trial court held: “[W]here insurers, primary or excess, ‘refused’ to avail themselves of the right to associate in defense of claims against the insured, they ‘should be bound by facts set forth in the insureds’ records with respect to amounts of settlements and defense costs’ and could not otherwise ‘relitigate the settled claims.’” The appellate court found that “the trial court appropriately gave effect to a plainly stated directive of Owens-Illinois – that insurers who have declined to associate in the defense of claims against the insured may be precluded from later challenging coverage.” The appellate court also stated:  “Allowing excess insurers to contest coverage is not feasible for long-tail, multi-claim coverage cases and would compromise the allocation methodology mandated by the Supreme Court.”

The appellate court also affirmed the trial court’s decision rejecting the insurers’ “covered claim” arguments and held that the insurers must reimburse for defense costs for all claims that arise from an occurrence, not just those that resulted in adjudication or settlement against IMO.  A majority of the policies at issue were “ultimate net loss” policies. The insurers argued that based on the “ultimate net loss” language, the duty to indemnify defense costs arises only where the costs are incurred in connection with covered claims, not a just a potentially covered claim. The excess insurers argued that the phrase “be [or becomes] obligated to pay” releases them of the duty to pay for defending against claims that are dismissed or adjudicated to be without merit. The appellate court rejected the insurers’ argument, finding that the policies obligate the insurers to pay for damages arising out of an “occurrence.” The court held that under Owens-Illinois, the “occurrence” covered in the underlying claims was the manufacture and sale of the asbestos-containing product. Therefore, the court found: “[t]he excess insurers’ obligation to cover IMO’s ultimate net losses, which include defense costs, was triggered when IMO manufactured and sold asbestos-containing products and claimants became injured by those products.” IMO Industries Inc. v. Transamerica Corp., No. A-6240-10T1 (N.J. Super. Ct. App. Div. Sept. 30, 2014).

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