Insurers Must Pay Defense Costs Whether or Not Asbestos Claims Result in Indemnity Payments

The Court of Appeals of California, applying California law, rejected the insurers’ “covered claims” argument and held the insurers must pay defense costs in all asbestos claims – both those successfully defended and those resulting in an indemnity payment.

Deere & Company (“Deere”) has been sued by numerous individuals claiming personal injury as a result of exposure to a Deere product containing asbestos.  Deere filed a suit against its pre-1986 insurers seeking defense and indemnity coverage for the claims.  Certain umbrella and excess insurers argued their policies only required them to reimburse Deere for defense costs for claims that result in an indemnity payment.  Deere argued that the insurers had a duty to pay defense costs in all cases, including those that were successfully defended.   

The policies provided that the insurers would indemnify Deere “for all sums” Deere becomes obligated to pay “by reason of the liability: … imposed … by law … for damages, direct or consequential and expenses, all as more fully defined by the term ‘ultimate net loss’ on account of: … (i) Personal injuries … caused by or arising out of each occurrence ….”  (Emphasis added.)  The policies typically defined “ultimate net loss” as “the total sum” which Deere becomes “obligated to pay by reason of personal injury, property damage or advertising liability claims, either through adjudication or compromise, and shall also include … all sums paid as … expenses for doctors, lawyers, nurses and investigators and other persons, and for litigation, settlement, adjustment and investigation of claims and suits which are paid as a consequence of any occurrence covered hereunder ….”  (Emphasis added.)

The insurers made two main arguments.  First, the insurers argued that payment of defense costs is subject to an “adjudication or compromise” requirement that is missing when Deere prevails and the underlying action is dismissed without payment by Deere.  The appellate court rejected this argument, finding that “the policy provisions consistently differentiate between damages and expenses … The ‘ultimate net loss’ provision structurally consists of two provisions:  damages on the one hand, which arise through ‘adjudication [and] compromise’ of Deere’s liability and expenses on the other, which are paid in connection with ‘litigation … of claims and suits.’  Payment of expenses, unlike damages, does not require a determination of Deere’s liability.”

Next, the insurers argued that “occurrence covered hereunder” means an occurrence must result in an indemnity payment for defense costs to be covered.  The appellate court also rejected this argument, finding that “covered” as used in the policies refers to the scope of the insurance – not whether an indemnity payment is actually made:  “Here, the products-liability lawsuits filed against Deere, claiming personal injuries caused by continuous or repeated exposure to asbestos, fall squarely within the scope of coverage afforded by the excess policies; indeed, the asbestos suits are precisely the sort of products-liability claims the policies were designed to encompass.  Nothing in the plain language of the excess policies requires a determination that Deere must pay damages (as opposed to obtaining a dismissal without payment) before the insurers are obligated to pay the litigation expenses associated with Deere’s defense of the underlying asbestos actions.”

The appellate court also held that the “notice of occurrence” condition supports Deere’s argument.  The “notice of occurrence” provision required Deere to provide notice to the insurers “as soon as practicable” that an “occurrence covered hereunder” involves injuries or damages which is likely to result in a claim under the policy.  “In other words, Deere is required to provide notification of an occurrence within the scope of the policy, before any determination of liability.  Thus, ‘occurrence covered hereunder,’ as used in the ‘ultimate net loss’ definition, retains the same meaning when used in the ‘notice of occurrence’ condition:  in both provisions, an ‘occurrence covered hereunder’ is an occurrence of the type covered by the policy, irrespective of whether Deere is actually liable to pay damages in the underlying action.”  Deere & Co. v. Allstate Ins. Co., 32 Cal.App.5^th 499 (Feb. 25, 2019).