On certification to the Superior Court, Appellate Division, whose opinion is reported at 264 N.J. Super. 460 (1993).
The opinion of the Court was delivered by O'hern, J. Justices Clifford, Handler, Pollock, Garibaldi, and Stein join in this opinion. Chief Justice Wilentz did not participate.
The opinion of the Court was delivered by O'HERN, J.
This appeal involves two aspects of a dispute between a manufacturer of an asbestos product and its insurers concerning the coverage afforded to the manufacturer under its liability insurance policies. First is the "trigger of coverage" issue, a shorthand expression for identifying the events that must occur during a policy period to require coverage for losses sustained by the policyholder. Second is the "allocation issue," which involves the scope of coverage afforded under a triggered policy. One question,
for example, in the case of gradually-inflicted injury or property damage triggering a number of successive policies is whether the policyholder may recover the sum of all the policies or some allocated portion of each policy. The case is complicated by the fact that the plaintiff-manufacturer used a "captive insurance company" to manage its risks and to acquire the subject policies. That captive company, a wholly-owned subsidiary of the manufacturer, was in form a shell that reinsured the risks with the various defendant insurance companies.
The Appellate Division has ordered a hearing, 264 N.J. Super. 460, 522 (1993), on issues of fraud related to the issuance of the policies in that officers of the manufacturing company or the captive company, interlocked as they were, may have failed to disclose fully the underwriting risks for which the manufacturer sought coverage. The court below also believed that "further airing" was necessary to resolve whether the manufacturer expected or intended that its product would cause injury. Id. at 515. Those and other issues decided by the Appellate Division are not part of this appeal.
The facts of the case are set forth fully in the Appellate Division opinion. We recite only those facts necessary to our Disposition. Because the issues of coverage arose on cross-motions for summary judgment, we may accept as true in this appeal of defendants all the evidence supporting plaintiff's position, as well as all legitimate inferences that may be deduced therefrom. Boyer v. Anchor Disposal, 135 N.J. 86, 88, 638 A.2d 135 (1994). For purposes of this appeal, then, we adopt generally the factual version of the case set forth in the briefs of the plaintiff-manufacturer, Owens-Illinois (O-I).
The most salient feature of this case is that it concerns a decades-old manufacturing activity. From 1948 to 1958, O-I
manufactured and distributed Kaylo, a thermal insulation product containing approximately fifteen percent asbestos. Between 1948 and 1963, O-I was self-insured; it maintained no insurance to cover its products liability losses but bore that risk itself. Products liability law was at that time in its early stages. From September 1, 1963, to September 1, 1977, O-I was insured under excess indemnity (umbrella) insurance policies issued by the Aetna Casualty and Surety Company (Aetna). Owens-Illinois, Inc. v. Aetna Casualty & Sur. Co., 597 F. Supp. 1515, 1517 (D.D.C. 1984). Those Aetna policies contained a deductible, or "self-insured retention" (SIR), for each occurrence resulting in personal injury or property damage. The SIR was $100,000 from 1963 to 1970, and $250,000 from 1971 to 1977. Above the deductible amount, the policies provided that Aetna would cover O-I's "ultimate net loss" (defense costs and indemnity) up to the "aggregate annual" and "per occurrence" limits of the policies. The aggregate annual and per-occurrence limits, which were the same within each policy, ranged from $20 million to $50 million over the period of the insurance. Id. at 1517 n.6.
In the mid-1970s, defendant American Risk Management, Inc., offered to develop a new program of insurance for O-I involving a captive insurance company. The captive company would be a subsidiary of O-I. For a fee, American Risk Management would manage the subsidiary and arrange to reinsure the policies with companies in the United States and abroad. In 1975, Owens Insurance Limited (OIL) was established as the captive insurance company and began providing O-I with a fire and extended peril reinsurance program and loss prevention services. In 1976, American Risk Management proposed that OIL also provide O-I's casualty insurance, including products-liability coverage.
In June 1977, O-I invited quotes from various sources, including American Risk Management, to replace its Aetna insurance coverage, which would expire September 1, 1977. The bid package solicited a comprehensive general liability (CGL) policy covering general and products liability. After receiving various proposals,
O-I accepted American Risk Management's proposal to provide a comprehensive liability insurance package. The scheme of coverage was for an SIR of $250,000 per occurrence; primary coverage above the SIR up to $1 million per occurrence; and excess umbrella coverage of $50 million. The excess umbrella policy limits increased from $50 million to $150 million during the period between 1977 and 1985. Defendant United Insurance Company (United) provided the primary coverage. OIL issued the excess umbrella policy and reinsured with various companies, including United and other defendants. We shall refer to the management company and the insurers and re-insurers collectively as the Insurance Companies. We do not decide any issues regarding the status of the individual companies.
Toward the end of 1977, O-I's in-house legal department became aware of a number of asbestos-related lawsuits involving the Kaylo product. Early in 1978, O-I gave notice of those claims to Aetna, its carrier from September 1, 1963, to September 1, 1977. Aetna took the position, with which O-I originally agreed, that the cases should be reported on a manifestation basis, that is, the policy in effect when the disease manifested itself should respond to the claim. Because most statutes of limitations were of at least several years in duration, O-I assumed that Aetna would be the responsible carrier. As a precaution, O-I also informed the Insurance Companies of the asbestos claims.
Aetna rejected the claims submitted to it because it insisted that the $250,000 SIR was a per-claim figure. It thus estimated that none of the claims could reasonably be thought to call for coverage under its policies. As claims continued to mount, O-I recognized that the claims were no longer the exclusive responsibility of Aetna because the manifestation dates were now presumed to be after September 1, 1977. Accordingly, in 1980 O-I gave formal notice to the Insurance Companies of the pendency of those asbestos claims. The Insurance Companies adopted the same position as had Aetna with respect to the $250,000 SIR. They
further maintained, however, that the trigger of coverage was the exposure to the product and not the manifestation of the disease. Because the exposures had presumably predated the issuance of the OIL policies, the Insurance Companies declined coverage.
By January 1980, O-I had established a $3 million reserve for general legal expenses, substantially generated by its growing number of asbestos cases.
In late November 1984, O-I sought a declaratory judgment from the Chancery Division that the two lead carriers, United and OIL, must provide coverage for O-I's asbestos-related personal-injury and property-damage claims. The other defendants joined or were joined in the proceedings.
In an early phase of the proceedings, Judge Keefe, then sitting as a Chancery Division Judge, concluded that an "injury in fact" triggering coverage under the insurance policies occurs on the inhalation of asbestos fibers and continues up to and including manifestation of an asbestos-related disease. Following discovery, Judge Conley reaffirmed Judge Keefe's ruling and held all insurers whose policies were triggered to be jointly and severally liable to O-I to the extent of the policy limits. In addition, the court held that the continuous trigger should apply to claims for property damage.
The Chancery Division also resolved other issues that we do not review. Among those issues was whether the $250,000 SIR was on a per-occurrence or a per-loss basis. Because the vast majority of individual claims do not exceed $250,000, the Insurance Companies' position would have effectively eliminated coverage for most of the claims made against O-I. However, the courts below, consistent with other jurisdictions, see Owens-Illinois v. Aetna, supra, 597 F. Supp. at 1525, held that the $250,000 SIR applied not to individual claims but to the aggregate of exposures due to a single condition during the policy period. The Appellate Division held that "the manufacture and sale of Kaylo must be regarded as the single occurrence triggering liability for asbestos-related injury
or damage. O-I's coverage is thus subject to a single deductible for each policy period." 264 N.J. Super. at 503.
In addition, the Chancery Division held, and the Appellate Division agreed, that certain exclusions in the policies were either internally contradictory or ineffective. Those questions of policy construction pertaining specifically to the policies in this case were not of such public importance as to warrant review under Rule 2:12-4. However, the Appellate Division did agree with the Insurance Companies that disputed issues of fact existed that required further hearings on certain other coverage issues. 264 N.J. Super. at 521-22. The issues of expected or intended environmental injury should be more readily resolved in light of this Court's decision in Morton International, Inc. v. General Accident Insurance Co. of America, 134 N.J. 1, 629 A.2d 831 (1993), cert. denied, U.S. , 114 S. Ct. 2764, 129 L. Ed. 2d 878 (1994).
The economic realities of this litigation are stark. By 1991, when O-I filed its Appellate Division briefs, it had settled 43,000 bodily-injury lawsuits. More than 90,000 bodily-injury and sixty-three property-damage cases were pending in all states and some territories. With bodily-injury lawsuits accumulating at the rate of 1700 per month, O-I's unreimbursed costs of defending and settling those cases had by then exceeded $95 million. O-I had already spent close to $10 million in defense and settlement costs associated with the property-damage cases. The questions raised here concern which of the insurance policies issued from 1977 to 1985 provide indemnity to O-I and to what extent.
Our grant of certification, 135 N.J. 301 (1994), was limited to two issues: (1) the application of the "continuous trigger" theory, and (2) any consequent apportionment of liability.
The source of any duty on the part of the Insurance Companies to defend actions or to pay any judgments is obviously in the
contract of insurance. The United policy language pertinent to the trigger-of-coverage issue is as follows:
The [insurance] company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay, either by adjudication or settlement, as damages because of personal injury or property damage * * * to which this insurance applies, caused by an occurrence and the [insurance] company shall indemnify the insured for costs associated with the defense of any suit or claim against the insured seeking damages on account of such personal injury or property damage * * *
The [insurer] will indemnify the insured for ultimate net loss in excess of the applicable underlying limit which the insured shall become legally obligated to pay as damages because of:
B. Property Damage * * * to which this policy applies, caused by an occurrence * * *
Both the United and OIL policies are subject to policy limits and certain exclusions. Although they are not boilerplate policies, they closely resemble a standard CGL policy.
The United policy contains the following definitions: An occurrence means an accident, including continuous or repeated exposure to conditions, which results in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the Insured." "Bodily injury" means "bodily injury, sickness or disease sustained by any person which occurs during the policy period * * * ." "Property damage" means "physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom * * * ." The corresponding definitions in the OIL policy are similar.
The policies do not refer to a "trigger"; "the term 'trigger' is merely a label for the event or events that under the terms of the insurance policy determines whether a policy must respond to a claim in a given set of circumstances." Robert D. Fram, End Game: Trigger of Coverage in the Third Decade of CGL Latent Injury Litigation, in 10th Annual Insurance, Excess, and Reinsurance Coverage Disputes 9 (PLI Litig. & Admin. Practice
Course Handbook Series No. 454, 1993), available in WESTLAW, PLI-LIT Database, *2-3.
The "trigger" is plain when these three policy provisions are combined: the carrier must pay for "all sums which the insured shall become legally obligated to pay as damages because of . . . [injury . . . sustained by any person which occurs during the policy period] or [injury to . . . property which occurs during the policy period], caused by [an accident, including continuous or repeated exposure to conditions]. . . ." In short, CGL policies provide coverage for property damage or bodily injury that "occurs" during the policy period.
Despite the relative familiarity of these concepts, the one hundred or so pertinent words in the coverage clause have spawned "a bewildering plethora of authority" interpreting their meaning. Gottlieb v. Newark Ins. Co., 238 N.J. Super. 531, 534, 570 A.2d 443 (App. Div. 1990).
To place the issues in context, we shall use an example to which most of us can relate. (The example is intended not to suggest that workers might in fact contract disease in the manner as stated but only to simplify our analysis.) Assume that a group of workers occupied an office building for nine years under the following circumstances. For the first three years, the building owners had no liability insurance, assuming any risk of loss. During each of the middle three years, the owners were insured under a CGL policy with the Trustworthy Insurance Company for $5,000,000 per occurrence. For the remaining three years of the period, the owners were again uninsured. Assume, too, that during the first three years the building occupants were exposed to asbestos fibers in the ceilings and insulation but that all asbestos products were removed at the end of the third year. During the first three years, no occupants of the building manifested any symptoms of disease. During the fourth, fifth, and sixth years, there was "exposure in residence," that is, some building occupants began to develop breathing problems, but no disease was diagnosable. In the final three years, some of the building's occupants were diagnosed with asbestos-related diseases.
In the tenth year the owners received claims from thirty people who had worked in the building during the entire nine years asserting that they were suffering from asbestos-related disease as a result of their work environment. The owners, when presented with the claims, no longer had insurance. They sought coverage, however, for all the claims from the Trustworthy Insurance Company, which had insured the owners for three of the nine years--years when the building contained no asbestos. Must Trustworthy respond to the claims? If so, to what extent?
Trustworthy's CGL policy is as broad as those in this case. The policy promised that the company would pay all sums that the insured should become legally obligated to pay as damages for bodily injury caused by an occurrence during the policy period. Each of the thirty claimants in our hypothetical might recover from the owners a large sum, let us say $500,000, for a total of $15,000,000 in damages. Was there an occurrence during the fourth, fifth, and sixth years that calls for full indemnity? The owners contend that the fibers once inhaled by the building occupants continued to cause injury to the occupants during those middle years, and that they paid premiums to cover their risk of liability for injury during those three years even if caused by earlier exposure. The owners seek indemnity to the extent of the full $5,000,000 for each year of coverage, for a total of $15,000,000. The first question is: Were the policies issued in the middle years "triggered"?
Not surprisingly, the answer to the trigger-of-coverage question varies by jurisdiction. The most frequently offered theories for the trigger of coverage are (1) the exposure theory, (2) the manifestation theory, and (3) the continuous-trigger theory. A concise summary of these approaches is contained in a law
review article cited by the respected Judge Jack B. Weinstein of the Eastern District of New York in Uniroyal, Inc. v. Home Insurance Co., 707 F. Supp. 1368, 1387 (1988), a case concerning coverage for toxic-induced disease related to Agent Orange:
Fixing the date of an injurious occurrence is crucial to determining which of the several insurers in a company's history must bear the liability for an environmental incident. Injuries from toxic wastes usually evolve slowly, and thus it is difficult to define the date on which an occurrence triggers liability for insurance purposes. Many years may pass from the time a toxin enters the body until the time the toxin's presence manifests itself in the form of a disease. The word "occurrence" itself is ambiguous because the injury process is not a definite, discrete event. Courts have set the time of occurrence in three ways: at the date of exposure, at the date of manifestation, and over the continuous period from exposure to manifestation (the "continuous trigger" rule).
The exposure theory holds that the date of occurrence is the date on which the injury-producing agent first contacts the body. The leading case espousing this view is the Sixth Circuit's decision in Insurance Co. of North America v. Forty-Eight Insulations, Inc. [633 F.2d 1212 (6th Cir. 1980), clarified in part, 657 F.2d 814 (6th Cir.), cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L. Ed. 2d 650 (1981)]. The court in Forty-Eight found that the occurrence was the immediate contact of an asbestos fibre with the lungs, even though the disease took some time to develop. The court's central purpose was to maximize coverage: it chose the exposure theory because the plaintiff was effectively uninsured after 1976, and any other theory would have put the date of occurrence after 1976. In most toxic waste cases, however, when exposure is not discoverable until many years after the fact, the exposure rule will not provide a feasible method for insurers to monitor risks and charge appropriate premiums.
Courts have similarly adopted the manifestation theory for its expedience in maximizing coverage. In Eagle-Picher Industries v. Liberty Mutual Insurance Co. [682 F.2d 12 (1st Cir. 1982), cert. denied, 460 U.S. 1028, 103 S. Ct. 1280, 75 L. Ed. 2d 500, 103 S. Ct. 1279 (1983)], the First Circuit argued that the injury resulting from inhalation of asbestos fibres did not "occur" until the disease manifested itself. The court took note of the Forty-Eight opinion but distinguished it on the ground that, given the particular facts before the court, the manifestation rule would maximize coverage. In most cases, however, a manifestation rule would reduce coverage: insurers would refuse to write new insurance for the insured when it became apparent that the period of manifestations, and hence a flood of claims, was approaching. The insured would be left without coverage for victims whose diseases were not yet manifested.
The continuous trigger theory has also been justified by its ability to maximize coverage in particular cases. In Keene Corp. v. Insurance Co. of North America [215 U.S. App. D.C. 156, 667 F.2d 1034 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007, 102 S. Ct. 1644, 71 L. Ed. 2d 875, 102 S. Ct. 1645 (1982)], the District of Columbia Circuit held that because asbestos-related disease develops slowly, the date of the occurrence should be the continuous period from exposure to manifestation. It held all the insurers over that
period liable for the continuous development of the disease. Again, the court relied on the presumption of maximizing coverage. Because it avoids the dangers of the manifestation rule, and because it encourages all insurers to monitor risks and charge appropriate premiums, the continuous trigger rule appears to be the most efficient doctrine for toxic waste cases.
[Developments in the Law--Toxic Waste Litigation, 99 Harv. L. Rev. 1458, 1579-81 (1986) (footnotes omitted).]
The conceptual underpinning of the continuous-trigger theory, then, is that injury occurs during each phase of environmental contamination -- exposure, exposure in residence (defined as further progression of injury even after exposure has ceased), and manifestation of disease.
At least two other less-frequently followed theories exist. One is the "injury-in-fact" (or "damages-in-fact") approach, which holds that coverage is triggered by a showing of actual injury or damage-producing event. See, e.g., American Home Prods. Corp. v. Liberty Mut. Ins. Co., 565 F. Supp. 1485 (S.D.N.Y. 1983), aff'd as modified, 748 F.2d 760 (2d Cir. 1984). Under that theory, coverage is triggered by "a real but undiscovered injury, proved in retrospect to have existed at the relevant time * * * irrespective of the time the injury became manifest." Id. at 1497. "That is, after an injury has been diagnosed, it may be inferred, from the nature of the gestation period and from the stage of the illness, that the harm actually began sometime earlier." Armstrong World Indus., Inc. ...