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Quebec v. American Home Assurance Co.

argued: January 19, 1988.

LAC D'AMIANTE DU QUEBEC, LTEE, A CORPORATION OF THE STATE OF DELAWARE, APPELLEE
v.
AMERICAN HOME ASSURANCE COMPANY, A CORPORATION OF THE STATE OF NEW YORK, HIGHLANDS INSURANCE COMPANY, A CORPORATION OF THE STATE OF TEXAS, MIDLAND INSURANCE COMPANY, A CORPORATION OF THE STATE OF NEW YORK, MIDLAND INSURANCE COMPANY, APPELLANT



On Appeal From the United States District Court for the District of New Jersey, D.C. Civil No. 83-2108

Higginbotham, Becker, Circuit Judges and Shapiro, District Judge*fn*

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal arises from a civil action in the district court for the District of New Jersey by a seller of asbestos against its insurers seeking indemnity for sums it has paid out in connection with asbestos related claims against it. The district court resolved a number of complex contractual issues, including the highly controversial and unsettled question whether exposure, manifestation or some combination thereof is the triggering event for insurance coverage. It thereupon made a liability determination and fixed the amount of damages with respect to the defendant insurers, including Midland Insurance Company ("Midland"), notwithstanding that a New York Court, pursuant to New York's Uniform Insurers Liquidation Act, had ordered Midland into liquidation proceedings and had appointed the New York Superintendent of Insurance as its statutory receiver.

Shortly after the onset of the district court proceedings, Midland moved to dismiss or stay the action against it on the ground that the federal court should abstain in favor of the New York liquidation proceedings. The district court denied the motion. The threshold (and ultimately dispositive) question on this appeal (Midland is the sole remaining defendant, the other insurers having settled) is whether the district court erred in so doing. More precisely, the question is whether the court should have abstained under the doctrine of Burford v. Sun Oil Co., 319 U.S. 315, 87 L. Ed. 1424, 63 S. Ct. 1098 (1943), to avoid disruption to an important, complex state regulatory system (which we discuss at length below). For the reasons that follow we believe that the court should have done so; hence we vacate and remand with directions to dismiss the action.

I. FACTS AND PROCEDURAL HISTORY

Appellee Lac D'Amiante du Quebec ("LAQ"), a Delaware Corporation with its principal place of business in Quebec, Canada, has mined, milled, and sold asbestos since 1958. LAQ has faced and will continue to face lawsuits for injuries caused by asbestos that LAQ has produced and distributed to various manufacturers for the manufacturers' use or for sale to third parties.*fn1 LAQ sought declaratory and monetary relief in the district court based on third party indemnity policies underwritten by American Home Assurance Company ("AHAC"), Highlands Insurance Company ("Highlands"), and Midland. Jurisdiction was based on diversity of citizenship.

LAQ's insurance is best analyzed as three successive tiers of protection, each of which must be exhausted before the next is tapped. The first is LAQ's primary coverage, which was provided by the Canadian General Insurance Company ("Canadian General") from 1962 to 1976 and by LAQ as seIf-insurer from 1976 to 1984. This primary coverage rose from $50,000 in 1962 to $3,000,000 in 1984. Starting on March 15, 1975, LAQ obtained secondary coverage from AHAC to insure against liability in excess of that covered by LAQ's primary coverage but below a higher annual aggregate limit, which changed from year to year as LAQ and AHAC renegotiated the contract. On March 15, 1975, LAQ also acquired $20 million of tertiary coverage from Highlands to insure against liability in excess of that covered by its primary and secondary insurance. Midland replaced Highlands as tertiary insurer on April 29, 1975 and continued to provide tertiary coverage to LAQ until March 15, 1978. Midland's annual aggregate limit varied during this period, at one point exceeding $30 million.

The Highlands and Midland policies are "form following excess policies", that unless otherwise provided, incorporate and follow the operative provisions of the AHAC policies. The parties stipulated before the district court that the operative provisions of each of the policies are identical and do not differ in any significant respect from the provisions of the standard Comprehensive General Liability policies widely used in the insurance industry.

LAQ sued AHAC, Highlands, and Midland for indemnification for asbestos property and personal injury claims.*fn2 Because of the nature of the diseases caused by asbestos, the injuries now manifesting themselves in the 1980s derived from exposure to asbestos much earlier. The asbestos fibers entered the lungs of people exposed to it and immediately started to cause damage, but that damage was subclinical and therefore difficult to diagnose until years later.*fn3 Similarly, asbestos installed in buildings years ago emitted fibers into the atmosphere, damaging the environment of the building. Substantial injury to property occurred because of the loss of value of the asbestos-contaminated property and the cost of asbestos removal.

LAQ sued each of the three insurance companies on a breach of contract theory. LAQ contended that the insurance companies were obligated to indemnify LAQ for claims against it if they provided insurance to LAQ at any time between the injured parties' initial exposure to asbestos and the final manifestation of asbestos injury. Under this approach, LAQ was entitled to select any one year period in between the two benchmarks of exposure and manifestation and thereby trigger the various policies for that year. Once LAQ's self insurance limit was depleted, LAQ would be entitled to indemnification from its secondary insurer and then from its tertiary insurer. Under LAQ's theory, the fact that an insurer had not insured LAQ either at the time of exposure or at the time of manifestation was irrelevant; to be held liable to the limits of its policy ceiling the insurer merely had to have provided insurance to LAQ during some portion of the one year period that LAQ chose. The insurance companies rejoined that they were required to indemnify LAQ for asbestos injuries only if their policies provided third party coverage to indemnify LAQ at the time of asbestos exposure, and that even if their liability were greater, LAQ's interpretation of the contracts was over broad.

In its July 31, 1985 opinion addressing summary judgment motions on various issues, the district court resolved much of the dispute over the proper construction of the insurance contracts. See Lac D'Amiante du Quebec v. American Home Assurance Co., 613 F. Supp. 1549 (D.N.J. 1985). Applying New Jersey law, the district court agreed with LAQ that under the liability insurance provided by the defendants, coverage for asbestos-related settlement or judgment is triggered continuously from the time of exposure to the time of manifestation.*fn4 The district court held that this continuous trigger applied to property damage as well as personal injury under the insurance policies.*fn5 Furthermore, it held that each insurer was jointly and severally liable, and that the continuous trigger applied to indemnification for defense costs as well as third party claims. Pursuant to the court's July 31, 1985 opinion, LAQ elected to select the period March 15, 1975 to March 15, 1976, thereby triggering the various insurance policies that it had during that year.*fn6

In a later ruling (on March 5, 1986) the district court resolved additional motions for summary judgment concerning the meaning of various clauses in the insurance contracts and how defense costs should be apportioned among the insurance companies.

At this juncture LAQ and the insurance companies had already stipulated to LAQ's defense, settlement and damage costs as of December 31, 1983 arising out of the many suits against it, and no dispute had arisen over costs arising out of suits that LAQ had settled after that date. The only issue that remained to be adjudicated under the district court's legal framework was the injury manifestation date of many of those who had sued LAQ; under the court's prior rulings, an insurance company was not responsible for claims arising out of injuries which manifested themselves before the date it issued its insurance policy to LAQ. While LAQ had proffered a list of manifestation dates for each claimant, the insurance companies had not yet engaged in sufficient discovery to assess the accuracy of LAQ's list. The district court's March 5 order permitted the insurance companies additional time to engage in discovery.

On April 3, 1986 the Supreme Court of New York ordered Midland into insolvency proceedings pursuant to New York's Uniform Insurers Liquidation Act. In re Corcoran (Midland Insurance Co.), No. 86-41294 (N.Y. Sup. Ct. April 3, 1986). The Supreme Court's order declared Midland insolvent and appointed New York's Superintendent of Insurance as statutory receiver. The court did not, however, extinguish Midland's corporate existence. The corporate charter, like Midland's other assets, was vested in the Superintendent as liquidator. The court also enjoined all suits against Midland:

all . . . persons, including . . . claimants [and] plaintiffs . . . who have claims against MIDLAND, are permanently enjoined and restrained from bringing or further prosecuting any action . . . against [Midland] or its estate, or the Superintendent . . . as Liquidator thereof, or from . . . in any way interfering with the Superintendent . . . in the discharge of his duties as Liquidator thereof, or in the liquidation of the business of [Midland].

Id. at 7-8. The court order established April 3, 1987 as the last date for submitting claims against Midland to the liquidator. The court retained continuing jurisdiction over the liquidation proceeding. The Supreme Court's order also restrained all "agents" of Midland from taking further steps on its behalf.

On May 30, 1986, the Superintendent gave Midland's prior counsel limited authority to move to dismiss LAQ's claim against Midland in the district court action. On June 30, 1986, Midland filed a motion in the district court to dismiss or alternatively to stay the action against it, arguing that the district court should abstain and that it owed full faith and credit to the New York injunction.

The district court addressed Midland's motion in an opinion filed on November 10, 1986. Noting that it had the power to hear the case in personam despite the state court injunction, the district court addressed the question of abstention. The court reasoned that a declaratory judgment against Midland would not sufficiently disturb the state court proceedings to warrant abstention:

[No] determination by this court will be disruptive of state efforts to establish a coherent policy with respect to Midland's liquidation. The Liquidator of Midland is in essence charged with sorting out all claims against it and processing them for full or, more likely, partial payment. In this case, I will merely be clarifying Midland's legal obligation for policies it issued to LAQ when interpreted in conjunction with other policies issued to the other named defendants. LAQ will be forced to take whatever declaratory judgment it receives in the instant case and seek the actual money from the Liquidator. . . . [T]he determination in this case will not affect the authority of the Liquidator but will only clarify the amount of any claims LAQ may have against Midland. . . . This court is concerned with the abstract notion of how much liability Midland has under certain policies. The state proceeding is concerned with how much LAQ, in light of Midland's financial plight, can collect.

Dist. Ct. Op. at 8-11 (Nov. 10, 1986). Finding the abstention doctrines of neither Burford v. Sun Oil Co., 319 U.S. 315, 87 L. Ed. 1424, 63 S. Ct. 1098 (1943), nor Colorado River Water Conservation District v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976), applicable, the district court denied Midland's motion.

On March 4, 1987, the Court filed an opinion with accompanying order reaffirming its previous decisions and entered a final judgment pursuant to Fed. R. Civ. P. 54(b).*fn7 The court ordered Midland to pay damages totalling $6,219,636, "representing $3,321,800 in settlements incurred between February 1985 and June 1986, plus $2,897,836 in defense costs attributable to those settlements." Dist. Ct. Op. at 11 (March 4, 1987). Although the district court also ordered judgment against AHAC and Highlands, it granted Midland 28 days to review the reasonableness of the claims assessed against it because Midland had not yet approved LAQ's proffered list of asbestos injury manifestation dates. The court stated that Midland would be granted time beyond the 28 day period "on a showing by Midland, which will bear the burden of proof on such an application, that the charges assigned to it are probably unreasonable." Id. at 12. On March 9, 1987, the Superintendent of Insurance gave Midland's counsel authority to proceed with discovery to allow it to assess the accuracy of the manifestation dates.

On April 2, 1987, after the 28-day period expired, the district court entered a money "judgment for damages" against "Midland . . . or its successors or representatives" for $6,219,636, but granted Midland 10 days to make a motion for reconsideration. Midland did so and repeated its argument that many of the claims assigned to its policy involved asbestos injuries that had manifested before its policy took effect. Midland argued that even under the continuous trigger theory, manifestation of asbestos injury constituted the ...


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