Marc I Bressman reviews the current status of asbestos litigation and recoveries, as impacted by the Wellington Agreement.
It has been 18 years since a significant number of asbestos manufacturers and suppliers and their insurers executed the Agreement Concerning Asbestos-Related Claims, commonly known as the 'Wellington Agreement'. Despite the radical nature of the agreement, its effects upon reinsurance recovery have been rather limited, at least as revealed in reported case law.
The asbestos problem does not seem to be ending. If anything, it seems to be getting worse. In an article published in 2001, Michael E Angelina, an actuary with Tillinghast-Towers Perrin, noted that past solutions for the problem, such as the Manville Trust, the Asbestos Claims Facility (ACF), and the Owens Corning National Settlement Program, appear not to have worked, and claims counts have actually increased.1 In a Rand study published in August 2001, the authors reported varying predictions of the number of claims yet to be filed from 500,000 to 2.5 million.2 In its 10-K filed 31 December 2002, Pfizer Inc, very much a peripheral player in the asbestos industry, reported approximately 128,000 pending claims against it and its wholly owned subsidiary, Quigley.3 In a recent article in The New York Times, the author reported on negotiations for a federal asbestos trust, which would be expected to pay out in excess of $100bn.4
There is sparse reported case law on Wellington issues in a reinsurance context. The first reported case, Hiscox v Outhwaite,5 which upheld a reinsurer's refusal to reimburse for 'voluntary' payments made under Wellington on behalf of non-insureds, led to a decision by the Center for Claims Resolution (CCR) to modify its allocation methodology, so that only producers who were actually named in the complaint contributed (or their insurers contributed) to the settlement or judgment. Previously, all CCR (and ACF) signatories contributed to all settlements and judgments.
In Unigard Security Ins Co v North River Ins Co,6 Unigard, the reinsurer, claimed that it was excused from payment because the cedant, North River, had signed the Wellington Agreement without providing notice to Unigard of its intent to do so. The District Court held that since North River's payments on behalf of its insured, Owens-Corning (OCF), were made after OCF withdrew from the ACF, they were not affected by Wellington, and therefore Unigard was not prejudiced by the late notice.7
On appeal, the Second Circuit first certified the question of whether a reinsurer must prove prejudice to prevail on a late notice defence to New York's Court of Appeals, which ruled in the affirmative.8 Thereafter, the Second Circuit held that the District Court incorrectly ruled that North River's payments were not affected by Wellington. The court pointed out that the Wellington Agreement was perpetual, and therefore its rules "were used to compute which insurance companies would pay and how much they would pay for each claim."9 Furthermore, since some of the ceded payments were for claims settled by the ACF prior to OCF's withdrawal, and since Wellington provided that the ACF had the 'exclusive' authority to settle its members' claims, Unigard lost its right to associate in the defence and settlement of those claims.
The Second Circuit found, therefore, that Unigard was entitled to notice of signing of the Wellington Agreement. But since Unigard conceded that it could not show an economic loss because of North River's failure to give timely notice, the court required Unigard to pay the reinsurance.
Unigard was not the only reinsurer to give North River a difficult time over Wellington. In North River Ins Co v Cigna Re,10 Cigna Re, the reinsurer, refused payment of defence costs in addition to limits because of North River's failure to comply with the coverage scheduling requirements of Appendix D of the Wellington Agreement. The Third Circuit found for the cedant, holding that its failure to properly schedule its allegedly 'cost-exclusive' policy was irrelevant, since the court decided the policy was 'cost in addition' anyway, wholly apart from the cedant's failure to object to the insured's having scheduled the policy as one which required the insurer to pay costs in addition to limits.
Unigard held that the Wellington Agreement had a sufficient effect upon the liability of the ceding company such that notice was required. According to the court, the effect upon the reinsured's liability because of the allocation formulas,11 and the loss of the reinsurer's right to associate, required a ceding company to provide notice to its reinsurers.
In North River, the reinsurer apparently never argued that the cedant's execution of Wellington substantially altered the terms of its reinsurance certificate.12 Had Cigna Re done so, we might have a definitive answer as to whether a cedant which, without notice to its reinsurers, executes Wellington, loses its rights to recover under its facultative certificates. The Second Circuit, in Unigard, held that an alteration of coverage took place without notice, but economic prejudice was not proven. The Third Circuit, in North River, did not have to decide the issue. Both courts, however, spoke favourably toward the Wellington Agreement, and therefore, absent other unusual circumstances, it is probable that a reinsured would not be adversely affected because it signed Wellington without notice to its reinsurers of course, it is interesting to speculate on what the outcome would have been in North River if the court had decided that the policy at issue had no expense requirement. Would the cedant's error in scheduling a 'cost exclusive' policy as a 'cost in addition' policy have been viewed by the court as ex gratia?
With the recent demise of the CCR, the organisation which in 1988 replaced the ACF as the claims handling body, the issue of the right to associate in the defence becomes of less importance, although it probably was never a genuine issue in any case.
Insureds are now handling their own claims, and therefore not contributing by predetermined formula with other Wellington signatories. But signatories are still required to allocate liabilities under the Wellington allocation formula to their insurers which are also Wellington signatories. In addition, as evidenced by the complaint filed in the so-called 'shortfall' litigation,13 it appears that a large group of non-signatory insurers entered into settlement agreements with Wellington producers whereby those insurers agreed to fund asbestos-related bodily injury claims, by using a 'Wellington-type' allocation formula.
The shortfall litigation itself raises an issue with potentially serious effects upon reinsurance recoveries. The complaint seeks to recover from the defendant insurers those amounts which the remaining solvent producers may have to pay, or have already paid, to cover shortfalls in settlements made by the CCR on behalf of its members resulting from the bankruptcies of Armstrong World Industries, GAF, ACMC, US Gypsum and others. Insurers are being asked to contribute amounts in addition to those sums already paid on behalf of their insureds to cover the default of parties they did not insure. The sharing formula, where an insurer is required to pay for some non-insured's liabilities, discussed in Hiscox v Outhwaite,14 once again becomes an issue.
If a shortfall defendant insurer settles and agrees to cover a shortfall amount, will that be viewed as an ex gratia payment by its reinsurers, which will argue, as the reinsurer did in Hiscox v Outhwaite, that they never agreed to reinsure a non-insured's liability? But is it truly ex gratia if the original settlement agreement between the claimants' counsel and the CCR provides for joint and several liability, or is judicially determined to provide for joint and several liability, and therefore the insurer is paying liability imposed on its insured by law, rather than as a 'volunteer' for another insured's liability?
Can 're-settlement' by the remaining solvent CCR members be viewed merely as a reallocation of their liability and therefore required to be paid by their insurers which previously agreed to abide by the sharing formulas among producers under Section V2 of Wellington? Is there a difference between 'routine' adjustments to the producer sharing formula based upon shifting membership in the ACF or CCR, or being named (or not named) in a complaint, and an adjustment based on solvency of the members? Unless there is, reinsurers will be unable to successfully raise the ex gratia defence.
Related to the above is the issue of a Wellington signatory insurer, which, pursuant to Section X of the Agreement, pays in lieu of non-signatory and/or insolvent insurers. Are such payments ex gratia?
Section XVIII of the Wellington Agreement mandates that policies issued for a period of less than twelve months (so-called 'stub policies'), "carry full aggregate limits for the term" of the policy. If an insurer executes the Wellington Agreement, does that bind its reinsurers to coverage which was not previously intended to be reinsured? Or are stub policies routinely interpreted as carrying full limits in any case?
Insurers which issued policies without aggregates on their premises and operations coverages (so-called non-products coverage) - and that probably includes most policies until recently - receive a significant benefit from Section XVIII of Wellington, an imputed aggregate on those limits. That is clearly a benefit to cedants and their reinsurers. But what about a non-signatory insurer which sits directly above a primary insurer with a Wellington-imputed aggregate, where the insured has significant non-products exposure? The non-signatory insurer, and its reinsurers, discover that the 'protection' afforded by the circumstance that individual non-products claims ordinarily never reach the occurrence limit, and therefore the primary never exhausts, no longer exists as a result of the imputed aggregate provided by Wellington to the underlying coverage. Will the excess carrier face difficulties in recovering from its reinsurers, which may claim that the reinsured liability has been drastically altered by the primary insurer's acquisition of aggregate protection through Wellington? Since the ceding company certainly cannot, and could not ever, interfere with an agreement between its insured and its primary carrier to impute aggregate, to which it was not privy, there does not seem to be much the reinsurers can do either.
A related issue is the number of occurrences. The court in International Surplus Lines Ins Co v Certain Underwriters, 886 F Supp 917, 922-23 (SDOh 1994), was only technically correct when it stated that Wellington did not directly affect the issue of the number of occurrences, since there is no language in Wellington which directly addresses this issue. The manner in which Wellington operates, however, treats every claim as a separate occurrence. With respect to products claims, the aggregate products limits are reduced by each allocation for each settled claim. Of course, the result would be the same even if the insured's asbestos liability was treated as one occurrence, or just a few occurrences. In each case, the aggregate provisions applicable to products coverage would cap payment at the aggregate limit.15
What about the situation where the insured producer has non-products liability, either arising from its activities as an installer of its own or another manufacturer's asbestos-containing materials, or as the owner of premises potentially liable to non-employees who become exposed to asbestos while on the insured's premises?
The Wellington Agreement contemplates non-products claims,16 but does not identify or distinguish how they are to be handled. All asbestos bodily injury claims, whether arising from products or non-products exposure, trigger allocation first to the producer and then to the insurer. The insurers' products coverage aggregate limit is eroded and exhausted without any guidance in the agreement as to what claims, or what percentage of payments, are to be allocated to the non-products coverage. From 1985, and at least until the recent demise of the CCR, all claims payments were allocated to the insurers' products aggregate limits, exhausting them. Upper layers then attached, and were themselves exhausted, until all of the products coverage was exhausted. The non-products coverage was left intact, unless the insured and its insurers made a side deal to charge some of the claims payments to non-products coverage.
Section XVII of the Wellington Agreement imputes an aggregate for the non-products liability coverage in primary and first layer excess policies. The obvious implication therefore is that, as to both products and non-products claims, each claim is a separate occurrence, and both the actual and the imputed aggregates operate to permit exhaustion.17 There would be no need for imputed aggregates if all of an insured's asbestos liability is treated as one occurrence. Wellington therefore operates to treat each claim as a separate occurrence, with two separate aggregate limits, the actual aggregate limit for products claims, and an imputed aggregate limit for non-products claims.18 This may not be inappropriate, since we are dealing with two separate coverages, products and non-products. Whether reinsurers thought they would pay two occurrence limits, one for products and another for non-products, is another unanswered question.
Whether or not the new Federal legislation is enacted, it seems clear that insurers are going to continue paying significant amounts to cover their insured's asbestos liabilities. Where those insurers are Wellington signatories, or have agreed to pay on a Wellington basis with insureds which are Wellington signatories, cedants and their reinsurers will continue to face issues with regard to 'follow the Wellington settlement', and whether and to what extent exceptions exist.
Table A: Wellington producer and insurer members
AP Green (late signatory)
Armstrong World Industries Inc
Carey Canada Inc
The Celotex Corp
Eagle-Picher Industries Inc
Flexitallic Gasket Co Inc
The Flintkote Co
GAF (late signatory)
National Gypsum Co
National Service Industries Inc,
d/b/a North Bros
Owens-Corning Fiberglas Corp
Pittsburgh Corning Corp
Porter Hayden (late signatory)
HK Porter Co Inc
Quigley Co Inc
Shook & Fletcher Insulation Co
Thorpe Insulation Co
CE Thurston & Sons Inc
Turner & Newall PLC
United States Gypsum Co
Aetna Life & Casualty Co
CIGNA Property and Casualty Insurance Cos
The Continental Insurance Co
and Certain London Companies
Bituminous Casualty Corp
Crum & Forster Corp
Employers Insurance of Wausau
Fireman's Fund Insurance Co
Hartford Insurance Group
Reliance Insurance Co
Royal Insurance Co
American Universal Insurance Co
1 "The 'Energizer Bunny' of Toxic Torts", Michael E Angelina (Emphasis, 2001/1)
2 Asbestos Litigation in the US: A New Look at an Old Issue, Rand Institute for Civil Justice, August 2001
3 Pfizer Inc, 10-K, 12/31/02, p147
4 "Asbestos Accord Said to Be Near", Alex Berenson (NY Times 24 April 2003)
5 UK High Court, 1990 Folio No 2491, reported in Mealey's Litigation Report: Asbestos, 19 July 1991
6 4 F3d 1049 (2d Cir 1993)
7 762 F Supp 566 (SDNY 1991)
8 79 NY 2d 576, 594 NE 2d 571 (1992)
9 4 F3d at 1064
10 52 F3d 1194 (3rd Cir 1995)
11 Wellington provides for two separate allocations. The first allocation divided payment responsibility among the producers based upon their pre-determined shares (Article VI). The second allocates the producer's share to its insurers, spreading responsibility from date of first exposure to date of diagnosis (Article IX).
12 52 F3d 1194, 1213 n26
13 Certainteed Corp et al v AIU Ins Co, et al, Delaware Superior Court, New Castle County, CA No 01C-02-007 HLA
14 See footnote 6
15 Appendix D to Wellington, the schedules of insurance which make up each insured's coverage block, controls allocation to the producer's insurance, and the erosion of coverage. Aggregates are eroded by payment of claims, and even if a particular policy did not have an aggregate for products claim, one is imputed by Section XVII of Wellington.
16 See eg, Section XVII, which imputes an aggregate to pre-date policies which provide 'non-products liability coverage', and Appendix D, which requires scheduling of information for each policy's 'Non-Products Coverage'.
17 What about a signatory insurer which has post-date coverage? Without an imputed aggregate, and in light of the Wellington-created "every claim is a separate occurrence", does the first post-date primary insurer become responsible for every single non-products claim thereafter, and can never exhaust?
18 The authors of Wellington seem to have correctly anticipated case law that each asbestos bodily injury claim is a separate occurrence. See Metropolitan Life Ins Co v Aetna Casualty and Surety Co, 765 A2d 891 (Conn 2001), and cases cited therein.
By Marc I Bressman
Marc I Bressman is an attorney with and the major shareholder of the Cherry Hill, New Jersey and Phildelphia offices of law firm Budd Larner Rosenbaum Greenberg & Sade PC.