Policyholder not responsible in long-tail matters for periods when insurance was unavailable

The New Jersey Supreme Court, applying New Jersey law, upheld the “unavailability rule” under Owens-Illinois and held that the allocation of Honeywell’s costs relating to asbestos bodily injury claims must be limited to the period from the date of first exposure to 1987, the year in which Honeywell could no longer purchase insurance.  In reaching this decision, the Supreme Court rejected the insurer’s argument that the allocation period must include 1987 to 2001, the year Honeywell stopped manufacturing asbestos friction products, with Honeywell deemed self-insured from 1987 to 2001.  The Supreme Court held that Honeywell did not assume the risk of being self-insured from 1987 to 2001 by continuing to sell asbestos friction products.

Honeywell International, Inc.’s corporate predecessor, The Bendix Corporation,  manufactured and sold brake and clutch pads (i.e., friction products) containing asbestos for many years.  Bendix (hereinafter “Honeywell”) stopped selling asbestos in its friction products in 2001, having continued to manufacturer the product even after 1987 when Honeywell could no longer purchase asbestos insurance.

Since 1975, nearly 150,000 bodily injury suits have been filed against Honeywell, alleging injury due to exposure to asbestos-containing friction products.  In 2000, an excess insurer initiated a coverage action against Honeywell seeking declarations concerning the rights and obligations of the parties under the insurance policies regarding the underlying actions.  The case was eventually expanded to include numerous excess insurers.  Honeywell settled with all excess insurers except Travelers and St. Paul (collectively “Travelers”).  Travelers issued coverage to Honeywell from 1968 to 1970 and 1977 to 1983.

In Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (N.J. 1994), the New Jersey Supreme Court adopted the continuous trigger methodology, with allocation of costs spread pro rata among the policy periods in which asbestos insurance was reasonably available for purchase.  Thus, as applied to the facts in Honeywell, the coverage block for a particular claim would commence on the date of first exposure to asbestos and end in 1987 – the year in which Honeywell could no longer purchase asbestos insurance.  Each insurer whose policy was triggered from the date of first exposure to 1987 would be responsible for a pro rata share of the costs based on their coverage limits relative to each other.  The post-1987 period is not included in the allocation, because Honeywell did not “assume the risk” by failing to buy available asbestos coverage.  Exclusion of the post-1987 period due to the unavailability of insurance is referred to as the “unavailability rule.”

At issue in this case was whether the New Jersey Supreme Court should (1) abandon the unavailability rule and spread the loss from the date of first exposure to manifestation of disease, with Honeywell responsible for the post-1987 period; or (2) create an equitable exception to the unavailability rule based on Honeywell’s continued manufacture of asbestos friction products until 2001, with Honeywell responsible for the uninsured period from 1987 to 2001.

In the trial court, Travelers argued that Honeywell had “assumed the risk” for the post-1987 period under Owens-Illinois by maintaining corporate reserves relating to the underlying actions, and (2) continuing to manufacture asbestos friction products until 2001, even though asbestos coverage was unavailable after 1987.  Travelers argued that the continued manufacture of asbestos products until 2001 increased the number of pre-1987 exposure claims, increased the potential value of pre-1987 claims, and resulted in encouraging more people to file claims based on pre-1987 exposure.

Honeywell argued that maintaining reserves was not the equivalent of being self-insured.  In addition, Honeywell argued that there was no evidence that its continued sale of asbestos friction products resulted in more claims or higher claim values.  Regardless, the Owens-Illinois allocation methodology held policyholders accountable for assumption of insurance risk, not assumption of tort risk.  Ultimately, the trial court agreed with Honeywell, and the appellate court affirmed.

Before the Supreme Court, Travelers argued that Honeywell’s decision to continue to manufacture and sell asbestos products after insurance was no longer available should result in Honeywell being deemed self-insured from 1987 to 2001.  Otherwise, according to Travelers, “application of the unavailability rule will encourage manufacturers to behave irresponsibly.  Manufacturers … will be allowed to transfer the risk of that subsequent (post-insurance unavailability) conduct to their prior insurers.”

An insurance industry group, Complex Insurance Claims Litigation Association (“CICLA”), as amicus curiae, took Travelers’ argument farther and asked the Supreme Court to abandon the unavailability rule altogether, because it “encourages manufacturers to forego insurance while continuing to produce and sell potentially dangerous products” and “complicates insurance coverage litigation by creating additional issues requiring expanded discovery.”

Honeywell argued that insurance coverage was unavailable after 1987, and it is only seeking coverage for claims with a date of first exposure before 1987 – while Honeywell had insurance coverage.  In addition, Honeywell argued that its conduct after 1987 is not relevant because it does not affect the prior exposure for which they had purchased insurance.  Thus, Honeywell argued Owens-Illinois “was applied correctly and consistently with the policy objectives expressed in that opinion.

The Supreme Court sided with Honeywell:  “The assumption-of-risk language in Owens-Illinois, in context, addressed only assumption of an insurance risk for the existing claim periods when insurance was reasonably available but the insured elected not to purchase it.  That is not what has happened here.”  “[T]he basic policy objectives of Owens-Illinois – of maximizing insurance resources, encouraging the spreading of risk throughout the insurance industry, promoting the purchase of insurance when available, and of simple justice – are all served by affirming the judgment and moving to closure this mammoth allocation dispute….”

The Supreme Court went on to hold:  “This case simply does not present facts on which to consider abandoning the unavailability exception, let alone whether to create a novel equitable exception to that exception that would retroactively deprive parties of paid-for insurance coverage due to their post-coverage-period conduct.  The continued application of the unavailability rule supports the public policy objectives originally intended by our prorated allocation methodology.”  Continental Insurance Company v. Honeywell International, Inc., (A-21-16)(078152) (N.J. June 27, 2018).