NJ App. Ct. refuses to allocate to policies with asbestos exclusion; no duty to defend in certain pre-86 excess policies.

A New Jersey Appellate Court, applying New Jersey law, held that the “availability rule” in Owens-Illinois required no allocation of defense or indemnity costs to Honeywell International, Inc. (“Honeywell”) for the post-1986 period because asbestos-related coverage was not available, even though the policyholder continued to sell asbestos-containing clutch and brake components until 2001.  The court also held that various pre-1986 excess policies did not contain a duty to pay defense costs.

A Honeywell predecessor company sold brake and clutch pads that contained asbestos until 2001.  Honeywell and its insurers have spent over $1 billion in defending, settling, and paying asbestos-related claims.  Coverage litigation ensued to determine the rights and obligations among Honeywell and its insurers.  All of the insurers settled except two excess carriers, Travelers Casualty & Surety Company (“Travelers”) and St. Paul Fire and Marine Insurance Company (“St. Paul”).

The appeal addressed many issues, including the following:  (1) whether Honeywell “assumed the risk” of loss under Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994) for the period from 1986 to 2001, by continuing to sell asbestos-containing products during a time period when asbestos insurance was not available; and, (2) whether certain excess policies contained a duty to pay defense costs.

As to the first issue, under Owens-Illinois, the pro rata allocation of costs associated with asbestos-related claims begins with the date of first exposure and ends when insurance coverage for the claim is no longer available (the “availability rule”).  The Owens-Illinois court held that a policyholder is only liable for a pro rata share for periods when the policyholder “assumed the risk” by not buying available insurance.  Asbestos-related coverage was not available to Honeywell after 1986.  Thus, Honeywell argued that allocation of defense and indemnity should end in 1986, and Honeywell is not responsible for a pro rata share of defense costs for any post-1986 period.

Travelers and St. Paul argued that Honeywell had “assumed the risk” for the period from 1986 to 2001, by continuing to sell asbestos-containing products during a time period when asbestos insurance was not available.  The court disagreed.  The court noted that cases which have applied the “availability rule” under Owens-Illinois “have focused on the availability of insurance and have only found the insured assumed the risk when insurance was available and the insured chose not to purchase coverage.”  “[T]he assumption of the risk language in Owens-Illinois did not refer to when an insure[d] sells or manufactures a product that might lead to a claim of exposure to asbestos.  Instead, the assumption of the risk occurs when an insure[d] fails to purchase insurance that was reasonably available.”

The court likewise rejected the insurers’ argument that the continued sale of asbestos-containing products until 2001 constituted “an exceptional circumstance” requiring allocation to the post-1986 period.  The court also found there was no evidence supporting the insurers’ argument that Honeywell had enhanced the liability of the pre-1986 insurers by selling asbestos-containing products until 2001.

As to the second issue, the court addressed whether certain St. Paul excess policies contained a duty to pay defense costs.  The policies provided that St. Paul would indemnify the insured against “loss,” and the definition of “loss” excluded defense costs.  In another aspect of the policies, St. Paul agreed that, if it chose to participate in the defense of any claim, St. Paul would contribute to the costs of defense.  Honeywell asserted that this provision created a “mutual consent” obligation and that St. Paul could not unreasonably withhold consent without violating its implied duty of good faith and fair dealing.  The court disagreed:  “A plain reading of the St. Paul policies establishes that St. Paul is not obligated to pay defense costs for claims against Honeywell, unless, at its own option, St. Paul elects to participate in paying defense costs.”  Continental Ins. Co. v. Honeywell Int’l, Inc., No. A-1071 & A-1100 (NJ App. Ct. July 20, 2016).