Aggregate Limits: Addressing Arguments Advanced by Policyholders in Asbestos Claims

Few courts have addressed this argument. The only decision that has squarely addressed this issue, however, recognized that asbestos insulators and installers cannot avoid straightforward policy terms in an effort to obtain limitless coverage. In re Wallace & Gale Co., 275 B.R. 223 (Bankr. D. Md. 2002), on appeal, No. 02-2389 (4th Cir.). Rather, courts must give effect to the products/completed operations hazard and its applicable limits in any policy period after the policyholder's operations are completed. This article addresses that case law and some of the arguments that have been presented by policyholders and insurers on this issue.

The Language of General Liability Policies

Typically, claims involving a “products hazard” or “completed operations” are subject to limits for “each occurrence” and an aggregate limit. In contrast, claims that do not involve these exposures usually are subject to a limit for “each occurrence” but not aggregate limits. Accordingly, the classification of a claim as falling under the “products hazard” or the “completed operations” provisions is an important one.

Many of the policies issued in the 1960s and 1970s define “products hazard” as:

“Products Hazard” includes bodily injury and property damage arising out of the named insured's products or reliance upon a representation or warranty made at any time with respect thereto, but only if the bodily injury or property damage occurs away from the premises owned by or rented to the named insured and after physical possession of such products has been relinquished to others.

The policies define “completed operations hazard” as:

“Completed Operations Hazard” includes bodily injury and property damage arising out of operations or reliance upon a representation or warranty made at any time with respect thereto, but only if the bodily injury or property damage occurs after such operations have been completed or abandoned and occurs away from premises owned by or rented to the named insured. “Operations” include materials, parts or equipment furnished in connection therewith. Operations shall be deemed completed at the earliest of the following times:

(1) when all operations to be performed by or on behalf of the named insured under the contract have been completed,

(2)when all operations to be performed by or on behalf of the named insured at the site of the operations have been completed, or

(3) when the portion of the work out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project.

Operations which may require further service or maintenance work, or correction, repair or replacement because of any defect or deficiency, but which are otherwise complete, shall be deemed completed.

These provisions are terms of coverage. See Fibreboard Corp. v. Hartford Accident & Indem. Co., 20 Cal. Rptr. 2d 376 (Ct. App. 1993) (completed operations/products hazard clause was not “in the nature of an exclusion,” by virtue of its aggregate limit, but rather was a term of coverage). It is black letter law that the policyholder has the burden of proving the existence of coverage. See, e.g., New Castle County v. Hartford Accident & Indem. Co., 933 F.2d 1162, 1181 (3d Cir. 1991); Rhone-Poulenc Basic Chems. Co. v. American Motorists Ins. Co., 616 A.2d 1192, 1198 (Del. 1992); Miner v. Bray, 513 N.E.2d 580, 582 (Ill. App. Ct. 1987); John Hancock Mut. Life Ins. Co. v. Plummer, 28 A.2d 856, 858 (Md. 1942); Clark v. Hacker, 76 N.W.2d 806 (Mich. 1956); Munzer v. St. Paul Fire & Marine Ins. Co., 538 N.Y.S.2d 633, 636 (App. Div. 1989). Accordingly, the policyholder bears the burden of proving that its claims fall outside the scope of the completed operations/products hazard and are not subject to the aggregate limits applicable to them.

The policy language at issue clearly provides that injuries that occur after the policyholder's operations are complete are subject to an aggregate limit. Accordingly, a key question to be determined under each policy triggered in an asbestos claim is whether the policyholder was still undertaking operations at the time of the policy period. If the policyholder's operations were complete, then the claim would fall under the products/completed operations hazard.

Case Law and the Multiple Policies Trigger Theory

This issue has special importance when a court adopts a multiple trigger theory. Where there is a continuous injury that triggers multiple policies, courts are required to analyze the applicability of coverage anew under each policy. This is consistent with the plain language of the policy, the case law concerning continuous injury, the case law concerning the products/completed operations hazard, and fundamental principles of contract interpretation.

Most recently, a federal district court in Maryland addressed how to apply the terms of each policy to an asbestos claim against an installer where multiple policies were triggered over a period of years. Specifically, the court in Wallace & Gale held that any injury occurring after the policyholder completed its operations was subject to the completed operations hazard aggregate:

“[W]hatever injury ' theoretical or real ' is assumed to have occurred after [the policyholder's] operations were completed will always ' by definition ' be covered by the completed operations clause. The injury occurs after operations were completed. Nor does it matter whether an injury is viewed as occurring both upon initial exposure before operations are completed as well as thereafter. The portion of the injury extending beyond completion would still, by definition, occur post-operations and thus remain subject to the completed operations hazard aggregate limit.” Id.

The court adopted a single, bright-line test for determining whether a claim fell under the products hazard provision of a particular policy:

“If a claimant's initial exposure occurred while [the policyholder] was still conducting operations, policies in effect at that time will not be subject to any aggregate limit. If, however, initial exposure is shown to have occurred after operations were concluded or if exposure that began during operations continued after operations were complete, then the aggregate limits of any policy that came into effect after operations were complete will apply.” Id. at 241.

Other courts agree. In Johnson v. Studyvin, 828 F. Supp. 877 (D. Kan. 1993), which involved property damage arising from the policyholder's application of asbestos-containing ceiling texturing material, the court determined that the seven policies that were issued after the installation of the asbestos were triggered. Four of those seven policies contained exclusions for claims falling under the completed operations hazard. Id. at 884. The court concluded that those policies provided no coverage. Thus, rather than finding that all seven triggered policies provided coverage because injury first occurred during a policy that did not have an exclusion, the court concluded that it was appropriate to apply the products/completed operation hazard provision applicable to each individual policy at issue.

In sum, if “bodily injury” occurs after the policyholder has completed its operations, the products/completed operations hazard provision should apply regardless of the fact that “bodily injury” first occurred while the policyholder's operations were underway. This is consistent with any multiple trigger theory of liability, the policy language at issue, and the case law addressing bodily injury that is held to trigger multiple policies.

Policyholder Arguments Concerning the Continuous Nature of Asbestos Injuries

Policyholders also frequently argue that, when courts have held that asbestos injuries are continuous, they are likewise indivisible. Accordingly, policyholders contend that such injuries are incapable of simply being general liability claims under one policy and falling under theproducts/completed operations hazard under another. Through this argument, policyholders seek to categorize the claims as outside the products/completed operations hazard under all of the applicable policies, even though only a fraction of the bodily injury occurred while the policyholder was conducting its operations. The policyholders then argue that insurers are somehow “morphing” a claim to change it into one involving products/completed operations.

This argument fails to appreciate the relationship between the actual work done by the insulators and the trigger theories developed by courts. Typically, an insulator will complete its work within a short period of time ' eg, one policy period. At the insistence of policyholders, courts have sometimes adopted a multiple trigger, whereby they conclude that a claimant suffers asbestos-related injuries not only during the first policy period, but for many years thereafter. Successive policies issued after the insulator has completed its work are then triggered.

The “morphing” arguments made by policyholders actually contradict their justification for a multiple trigger. Policyholders seek to recover under multiples policies on the basis that the injury occurs over multiple periods. At the same time, they seek to avoid the clear limits of coverage available under later policies by arguing that analysis of the injury should be frozen in time as one that takes place when operations are ongoing. If accepted, this argument would unjustly reward policyholders with unlimited coverage under each triggered policy, in spite of the fact that the policyholder had completed its operations by the time the subsequent policies were triggered and under those policies the aggregate limit for completed operations exposures should apply.

A policyholder cannot benefit from a multiple policy trigger without being subjected to the limitations on coverage that may appear in each applicable policy. To obtain a multiple trigger, the policyholder must argue that injury took place during successive policy periods. The logical corollary is that coverage for that injury must be analyzed independently under each triggered policy.

Conclusion

The products/completed operations hazard and the aggregate limits applicable to claims falling under them are important components of insurance policies and reflect limitations on which coverage is based. By seeking to evade the aggregate limits applicable to products/completed operations hazards, policyholders seek to make insurers' obligations for asbestos claims limitless. So far, courts have rejected the policyholders' arguments, but these theories will be tested in important cases in the upcoming months.

Now entering its third decade, asbestos exposures threaten the financial stability of numerous commercial entities. Asbestos manufacturers, distributors and installers have been forced to declare bankruptcy because of these exposures. RAND Institute for Civil Justice, “Asbestos Litigation in the U.S.A.: A New Look at an Old Issue” (Aug. 2001). Even companies with only a peripheral connection to asbestos ' eg, car manufacturers that used asbestos-lined brakes ' have been sued. Asbestos claimants continue to aggressively pursue any entity that had any involvement with asbestos. Indeed, the backlog of asbestos suits in the federal and state courts doubled from about 100,000 in 1990 to 200,000 in 1999. Asbestos Compensation Act of 2000, H.R. Rep. No. 106-782, at 18 (2000). Quite simply, absent federal legislative relief, asbestos cases will continue to clog U.S. courts. Moreover, asbestos litigation has and will continue to bog down a large segment of the U.S. economy. Studies are now projecting that asbestos lawsuits will continue until at least 2030.

The costs associated with asbestos pose staggering exposures for their insurers as well. Many insurers have increased reserves to respond to their potential asbestos liabilities. Several insurers ' including Home Insurance Company, Reliance Insurance Company and Frontier Insurance Company ' have been forced to declare insolvency because of such exposures. Nevertheless, policyholders are increasingly looking to their insurers to fund their asbestos-related liabilities.

Recently, policyholders have begun to pursue a novel argument in the attempt to shift the liability arising out of their use of asbestos-containing materials to their insurers. Specifically, many policies issued by insurers in the 1960s and 1970s included aggregate limits of liability for products hazards and completed operations, but did not include aggregate limits for other types of exposures. To avoid the application of aggregate policy limits, some policyholders seek to characterize asbestos-related claims against them as exposures that do not involve products/completed operations hazards. Most frequently, this argument is made when the policyholder is an asbestos installer or insulator.

Few courts have addressed this argument. The only decision that has squarely addressed this issue, however, recognized that asbestos insulators and installers cannot avoid straightforward policy terms in an effort to obtain limitless coverage. In re Wallace & Gale Co., 275 B.R. 223 (Bankr. D. Md. 2002), on appeal, No. 02-2389 (4th Cir.). Rather, courts must give effect to the products/completed operations hazard and its applicable limits in any policy period after the policyholder's operations are completed. This article addresses that case law and some of the arguments that have been presented by policyholders and insurers on this issue.

The Language of General Liability Policies

Typically, claims involving a “products hazard” or “completed operations” are subject to limits for “each occurrence” and an aggregate limit. In contrast, claims that do not involve these exposures usually are subject to a limit for “each occurrence” but not aggregate limits. Accordingly, the classification of a claim as falling under the “products hazard” or the “completed operations” provisions is an important one.

Many of the policies issued in the 1960s and 1970s define “products hazard” as:

“Products Hazard” includes bodily injury and property damage arising out of the named insured's products or reliance upon a representation or warranty made at any time with respect thereto, but only if the bodily injury or property damage occurs away from the premises owned by or rented to the named insured and after physical possession of such products has been relinquished to others.

The policies define “completed operations hazard” as:

“Completed Operations Hazard” includes bodily injury and property damage arising out of operations or reliance upon a representation or warranty made at any time with respect thereto, but only if the bodily injury or property damage occurs after such operations have been completed or abandoned and occurs away from premises owned by or rented to the named insured. “Operations” include materials, parts or equipment furnished in connection therewith. Operations shall be deemed completed at the earliest of the following times:

(1) when all operations to be performed by or on behalf of the named insured under the contract have been completed,

(2)when all operations to be performed by or on behalf of the named insured at the site of the operations have been completed, or

(3) when the portion of the work out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project.

Operations which may require further service or maintenance work, or correction, repair or replacement because of any defect or deficiency, but which are otherwise complete, shall be deemed completed.

These provisions are terms of coverage. See Fibreboard Corp. v. Hartford Accident & Indem. Co., 20 Cal. Rptr. 2d 376 (Ct. App. 1993) (completed operations/products hazard clause was not “in the nature of an exclusion,” by virtue of its aggregate limit, but rather was a term of coverage). It is black letter law that the policyholder has the burden of proving the existence of coverage. See, e.g., New Castle County v. Hartford Accident & Indem. Co., 933 F.2d 1162, 1181 (3d Cir. 1991); Rhone-Poulenc Basic Chems. Co. v. American Motorists Ins. Co. , 616 A.2d 1192, 1198 (Del. 1992); Miner v. Bray , 513 N.E.2d 580, 582 (Ill. App. Ct. 1987); John Hancock Mut. Life Ins. Co. v. Plummer , 28 A.2d 856, 858 (Md. 1942); Clark v. Hacker , 76 N.W.2d 806 (Mich. 1956); Munzer v. St. Paul Fire & Marine Ins. Co., 538 N.Y.S.2d 633, 636 (App. Div. 1989). Accordingly, the policyholder bears the burden of proving that its claims fall outside the scope of the completed operations/products hazard and are not subject to the aggregate limits applicable to them.

The policy language at issue clearly provides that injuries that occur after the policyholder's operations are complete are subject to an aggregate limit. Accordingly, a key question to be determined under each policy triggered in an asbestos claim is whether the policyholder was still undertaking operations at the time of the policy period. If the policyholder's operations were complete, then the claim would fall under the products/completed operations hazard.

Case Law and the Multiple Policies Trigger Theory

This issue has special importance when a court adopts a multiple trigger theory. Where there is a continuous injury that triggers multiple policies, courts are required to analyze the applicability of coverage anew under each policy. This is consistent with the plain language of the policy, the case law concerning continuous injury, the case law concerning the products/completed operations hazard, and fundamental principles of contract interpretation.

Most recently, a federal district court in Maryland addressed how to apply the terms of each policy to an asbestos claim against an installer where multiple policies were triggered over a period of years. Specifically, the court in Wallace & Gale held that any injury occurring after the policyholder completed its operations was subject to the completed operations hazard aggregate:

“[W]hatever injury ' theoretical or real ' is assumed to have occurred after [the policyholder's] operations were completed will always ' by definition ' be covered by the completed operations clause. The injury occurs after operations were completed. Nor does it matter whether an injury is viewed as occurring both upon initial exposure before operations are completed as well as thereafter. The portion of the injury extending beyond completion would still, by definition, occur post-operations and thus remain subject to the completed operations hazard aggregate limit.” Id.

The court adopted a single, bright-line test for determining whether a claim fell under the products hazard provision of a particular policy:

“If a claimant's initial exposure occurred while [the policyholder] was still conducting operations, policies in effect at that time will not be subject to any aggregate limit. If, however, initial exposure is shown to have occurred after operations were concluded or if exposure that began during operations continued after operations were complete, then the aggregate limits of any policy that came into effect after operations were complete will apply.” Id. at 241.

Other courts agree. In Johnson v. Studyvin , 828 F. Supp. 877 (D. Kan. 1993), which involved property damage arising from the policyholder's application of asbestos-containing ceiling texturing material, the court determined that the seven policies that were issued after the installation of the asbestos were triggered. Four of those seven policies contained exclusions for claims falling under the completed operations hazard. Id. at 884. The court concluded that those policies provided no coverage. Thus, rather than finding that all seven triggered policies provided coverage because injury first occurred during a policy that did not have an exclusion, the court concluded that it was appropriate to apply the products/completed operation hazard provision applicable to each individual policy at issue.

In sum, if “bodily injury” occurs after the policyholder has completed its operations, the products/completed operations hazard provision should apply regardless of the fact that “bodily injury” first occurred while the policyholder's operations were underway. This is consistent with any multiple trigger theory of liability, the policy language at issue, and the case law addressing bodily injury that is held to trigger multiple policies.

Policyholder Arguments Concerning the Continuous Nature of Asbestos Injuries

Policyholders also frequently argue that, when courts have held that asbestos injuries are continuous, they are likewise indivisible. Accordingly, policyholders contend that such injuries are incapable of simply being general liability claims under one policy and falling under theproducts/completed operations hazard under another. Through this argument, policyholders seek to categorize the claims as outside the products/completed operations hazard under all of the applicable policies, even though only a fraction of the bodily injury occurred while the policyholder was conducting its operations. The policyholders then argue that insurers are somehow “morphing” a claim to change it into one involving products/completed operations.

This argument fails to appreciate the relationship between the actual work done by the insulators and the trigger theories developed by courts. Typically, an insulator will complete its work within a short period of time ' eg, one policy period. At the insistence of policyholders, courts have sometimes adopted a multiple trigger, whereby they conclude that a claimant suffers asbestos-related injuries not only during the first policy period, but for many years thereafter. Successive policies issued after the insulator has completed its work are then triggered.

The “morphing” arguments made by policyholders actually contradict their justification for a multiple trigger. Policyholders seek to recover under multiples policies on the basis that the injury occurs over multiple periods. At the same time, they seek to avoid the clear limits of coverage available under later policies by arguing that analysis of the injury should be frozen in time as one that takes place when operations are ongoing. If accepted, this argument would unjustly reward policyholders with unlimited coverage under each triggered policy, in spite of the fact that the policyholder had completed its operations by the time the subsequent policies were triggered and under those policies the aggregate limit for completed operations exposures should apply.

A policyholder cannot benefit from a multiple policy trigger without being subjected to the limitations on coverage that may appear in each applicable policy. To obtain a multiple trigger, the policyholder must argue that injury took place during successive policy periods. The logical corollary is that coverage for that injury must be analyzed independently under each triggered policy.

Conclusion

The products/completed operations hazard and the aggregate limits applicable to claims falling under them are important components of insurance policies and reflect limitations on which coverage is based. By seeking to evade the aggregate limits applicable to products/completed operations hazards, policyholders seek to make insurers' obligations for asbestos claims limitless. So far, courts have rejected the policyholders' arguments, but these theories will be tested in important cases in the upcoming months.