On appeal from the Superior Court of New Jersey, Chancery Division, Middlesex County, Docket Number C-217-92.
Before Judges Baime, Fall and Axelrad.
The opinion of the court was delivered by: Fall, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
In this declaratory judgment action between a manufacturer of asbestos-containing products and its insurers, we examine the issue of whether an extension of an excess-coverage insurance policy for a shortened period less than the original policy period creates an additional set of aggregate policy limits. We also consider the question of whether that policy provides a single per occurrence limit regardless of the number of aggregate limits provided.
At the request of plaintiff, United States Mineral Products Company (USM), defendant, Twin City Fire Insurance Company (Twin City), issued an endorsement to its existing excess-coverage policy extending coverage for a two-week period, with all other terms of the existing policy to remain the same, in return for a prorated premium, to allow USM's excess-coverage insurance program to coincide with expiration of USM's underlying primary-coverage policies.
We hold that in the absence of unambiguous policy language to the contrary, an insured who pays a prorated premium for insurance coverage for an additional period with all other terms of the policy to remain the same would reasonably expect that such a prorated premium reflects only the insurer's reduced time on the risk, not a reduction in the policy's aggregate coverage limits. Accordingly, the two-week short-term policy extension issued here is construed as containing the same aggregate coverage limit as provided in the original excess-coverage insurance policy.
We also hold that in accordance with the reasoning set forth in Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994) and Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), the subject Twin City excess-coverage policy provides a separate per occurrence limit for each of the policy's aggregate periods.
These issues arose in the following factual and procedural context. From 1954 through 1971, USM or its predecessor companies manufactured products containing asbestos. More than 15,000 asbestos-related cases have been filed against USM nationally in which claimants have alleged personal injuries arising from alleged exposure to asbestos or asbestos-containing products manufactured and sold by USM. Additionally, more than 200 asbestos-related cases have been filed against USM alleging property damage due to installation of asbestos-containing products manufactured and sold by USM in buildings throughout the country. Approximately 500 asbestos-related cases have been instituted against USM in the courts of New Jersey.
USM was insured under various primary, umbrella, and excess standard-form comprehensive general liability (CGL) insurance policies covering personal injury and property damage caused by use of its products. Twin City, along with several of the insurer defendants, sold USM multi-period excess-coverage policies that included policy periods of less than one year.
On July 8, 1992, USM filed a declaratory judgment action against fourteen insurance companies from whom it had purchased primary, umbrella, and excess-coverage general liability insurance policies, including Twin City, seeking a defense and coverage concerning thousands of claims made against it for asbestos-related personal injury and property damage allegedly sustained as a result of the use of asbestos-containing products manufactured and sold by USM.
Relevant to the specific coverage issues between USM and Twin City, USM moved for entry of partial summary judgment against defendant, Puritan Insurance Company, on the issue of whether the issuance by Puritan of an extension of its excess-liability policy to USM created a new aggregate limit for the period of extension. The motion was argued and decided by the trial court on July 2, 1996. In ruling that the issuance to USM by Puritan of a ninety- day extension of its policy made available a new set of aggregate limits applicable to the period of the policy extension, the motion judge stated, in pertinent part:
The argument before the Court is whether or not the language of the period of coverage that is in question gives rise to a new aggregate limit or provision of coverage by defendant . . . Puritan[.]
The underlying facts, as I've indicated, are not in substantial dispute. [USM] carried both primary and excess coverage for a period of many years through the 1970s and into the 1980s. . . .
Puritan had issued . . . a series of annual policies coverage which carried with it a five million dollar per occurrence and with a five million dollar annual aggregate limit to coverage. Clearly aggregate limits to coverage are sole benefits to the issuing insurance company because it particularly identifies for them the maximum exposure under particular risks so they can in any way that seems appropriate to them underwrite the policy and determine the premium costs for that particular coverage.
In the instant case, [USM] had decided to revamp its insurance program and wished to carry forward a period of coverage which would exceed the termination of the original annual contract . . . , to run it over to the beginning of its new insurance program. It was an occurrence policy as was the coverage that was issued sequential to it. And by definition, because it was an occurrence policy, neither party at that time had in its possession specific firsthand affirmative knowledge as to the amount of claims that were made or could be made or the degree to which the aggregate would be exhausted.
So, both parties when they entered into the contract of coverage, whether you call it stub policy, whether you call it something analogous to renewal, I'm not sure the labels are particularly helpful to the Court in concluding what was provided by the agreement. Of course, the first guide post that any court should use is the language of the contract[.] . . .
There was a request for coverage for a period that was not covered in the annual coverage concluding in May and which Puritan was not required to sell. Puritan could sell it, not sell it, do as it saw fit. They saw fit to sell a period of coverage that they were not otherwise required to do so.
Counsel for defendant argues that we must call this an extension and that that semantic definition carries with it a series of legal sequelae which have great substance.
In analyzing all the cases that the parties have cited, . . . the Court concludes that it is of no logical significance to try to evaluate the name this thing we are here about. The truth of the matter is that Puritan could have at that time decided not to sell anything, had no coverage, and concluded whatever coverage they did. Having sold a period of coverage that they were not required to do, it is in essence a new contract. It is a contract wherein the parties agree to use terms of previous coverage so that the simple extension says that this policy is issued and it says that with the extension over time it relies on all the previous terms and definitions in the earlier policy.
The question for this Court is what did that language convey as an understanding to the parties as to what they were purchasing? Objective reasonable intent is merely an [aid] in or an expectation is merely an [aid] in discerning or divining, if you will, what the parties had expected to get and what reasonably they sold.
In the instant case, I am satisfied that the Court must apply some logical conclusion as to what occurred. What occurred? Defendant would have me . . . find that an important component of coverage . . . was indeed no coverage at all, it was merely a . . . new reporting period by which to exhaust previous claims which are concededly far now in excess of the coverage here.
If that was such an important and significant limitation, . . . that clearly is something I am satisfied should have been made clear in the contracting language. If you were going to sell coverage for a ninety day period which was guided by the earlier policy limits, it seems to me that absent some disclosure that there was an important part of the earlier coverage which was not now available, that the insurance company does so at its own risk in construction of the policy at a later date.
In essence, because insurance policies can only be determined by later developments, what in essence was happening was that [USM] was buying coverage which excluded a significant material component and that was for the five million dollar aggregate for product liability and for occupational injury or disease.
Quite clearly a contract of insurance purchases coverage for a period of time certain. By accepting a quarter premium for a quarter year reduced the exposure of the . . . insurance company to certain claims. It, therefore, should have reflected the full terms and full coverage of the earlier policy.
Counsel for defendant argues that annual limit means annual limit and anything less than a year is less than that, but the analogy to an extension or as to a cancellation of policy is a logically applicable way of analyzing the problem. You pay for a limited period of coverage. That reduces the carrier's exposure to a particular risk, which is why they agree to accept the risk at a reduced premium.
I am satisfied that the [Diamond Shamrock Chemicals v. Aetna, 258 N.J. Super. 167 (App. Div. 1992), certif. denied, 134 N.J. 481 (1993)] case may be distinguished on the basis asserted by plaintiff. Diamond Shamrock dealt with both primary and surplus coverage.
I am further satisfied that Diamond Shamrock's distinction in regard to the issuing language of the policy of coverage leads this Court to the conclusion that I am not bound to follow what in essence as it reflects to this case is not binding. The fact that the Diamond Shamrock [case] concluded that the thirty day coverage was . . . an extension of the per occurrence limit for an additional month, given the distinctions between that case and this, I am satisfied that I am not bound to it.
Likewise, while I am not required to follow out of state decisions which apply different law, I may accept reasoning that the Court finds persuasive and logical. In this case, I am satisfied that the analysis and distinction dealt with in [The Flintkote Co. v. American Mutual Liability Ins. Co. (Mealey's, Vol. 6, #48, No. 808-594 (Cal. Sup. Ct., Dept. No. 12, Proposed Statement of Decision, Aug. 17, 1993)] decision in California is a persuasive evaluation and analysis of the argument in question.
Clearly in this case, if in fact there is a reasonable expectation argument to be made, the clear implication is a reasonable expectation of paying one quarter premium for the same coverage means precisely that. All that's reduced is the period of exposure to the coverage which is reflected by the lesser premium. To presuppose that they should pay or anyone should pay a one quarter premium for a one quarter coverage but for significantly less coverage that's included because the aggregate clearly has been exhausted or will be exhausted or the claims that are made clearly will exhaust the aggregate would certainly fly in the face of any analysis, especially dealing with the cancellation program.
I am satisfied under all these circum- stances that the issuance of the ninety day extension policy, whether you call it extension, whether you call it stub, whether you call it renewal, whether you call it a new policy, reflects an agreement of the language which imposes upon the defendant Puritan in this case the issuance of not only a five million dollar per occurrence, but a five million dollar annual aggregate which should be available under the terms of the policy here. The Court so rules.
Turning our attention to the specific issues between Twin City and USM, Twin City sold USM a third-layer excess liability insurance coverage under policy number TXS 103131 for the approximately fifteen-month policy period August 8, 1983 through November 11, 1984, for the sum of $5,040. Under paragraph 4 of the declarations, "Limits of Liability," the limits of Twin City's liability under the policy, "subject to all the terms of the policy relating thereto," were as follows:
$10,000,000 EACH OCCURRENCE/AGGREGATE WHERE APPLICABLE PART OF $14,000,000 EACH OCCURRENCE/AGGREGATE WHERE APPLICABLE
Accordingly, the policy provided a maximum of $10 million in coverage for any one occurrence and, regardless of the number of occurrences, the policy also provided a maximum of $10 million in coverage in the aggregate. Another insurer provided the remaining $4 million in coverage per occurrence and in the aggregate in the same layer of excess coverage. Therefore, Twin City had a "quota share" of that layer, requiring it to pay ten-fourteenths of any covered claim that reached the layer, subject to its per occurrence and aggregate limits.
Pursuant to Section I, "INSURING AGREEMENT," the policy provides, in part:
The company will indemnify the insured for ultimate net loss in excess of the underlying insurance stated in item 5 of the declarations, but not in excess of the company's limit of liability stated in item 4 of the declarations.
In accordance with paragraph 5 of the policy declarations, "Total Limits of Liability - All Underlying Insurance Policies," the coverage is:
$20,000,000 EACH OCCURRENCE/AGGREGATE WHERE APPLICABLE
This identifies the limits of the underlying coverage as $20 million, whereas paragraph 4 lists the limits of the Twin City policy as $10 million per occurrence and in the aggregate, part of a $14 million per occurrence and aggregate limit.
Paragraph 6 of the declarations section of the Twin City policy states that the policy "shall follow the terms, conditions, definitions and exclusions of the controlling underlying insurance policy" issued by Integrity Insurance Company. However, Section I also states that "[e]xcept as otherwise provided by this policy, the insurance afforded herein shall follow the terms, conditions, definitions and exclusions of the controlling underlying insurance policy designated in item 6 of the declarations."
Endorsement No. 8 to the Twin City policy identifies two separate annual $10 million aggregate periods, as follows:
APPLICATION OF AGGREGATE ENDORSEMENT
IT IS AGREED THAT FOR THE PURPOSE OF THIS INSURANCE THE ANNUAL AGGREGATE PERIODS SHALL APPLY AS FOLLOWS:
1ST FROM 8-1-83 TO 11-11-83
2ND FROM 11-11-83 TO 11-11-84
On February 2, 1984, USM purchased additional coverage from Twin City for the two-week period from November 11, 1984 through November 25, 1984. This is reflected in Endorsement No. 12, which states, in pertinent part:
IN CONSIDERATION OF THE ADDITIONAL PREMIUM CHARGE OF $152.00, IT IS AGREED THAT THE POLICY PERIOD IS AMENDED TO EXPIRE AS FOLLOWS:
ALL OTHER TERMS AND CONDITIONS REMAIN THE SAME.
THE EFFECTIVE DATE OF THIS ENDORSEMENT IS NOVEMBER 25, 1984.
THIS ENDORSEMENT IS ATTACHED TO AND MADE PART OF TXS 103131 ISSUED TO [USM] BY [TWIN CITY].
On or about September 16, 1996, USM filed a motion for partial summary judgment against several of the insurers, including Twin City, seeking a ruling, consistent with the court's July 2, 1996 decision on the Puritan Insurance Company issue, that the insurers' stub, extension, or short-term policies provided additional full aggregate liability limits applicable to USM's asbestos claims.
Twin City opposed the motion and cross-moved for partial summary judgment, seeking an order determining, (1) that the Twin City policy period extension did not create new aggregate policy limits and, (2) a declaration that the Twin City policy provided only a single-occurrence limit for USM's asbestos-related claims.
The motions were argued before Judge Hamlin on October 24, 1996. In a written opinion dated December 2, 1996, the court granted USM's motion for partial summary judgment and denied Twin City's motion. An order memorializing those rulings was executed on December 23, 1996. In analyzing the issues, Judge Hamlin stated, in pertinent part:
National Union Fire Insurance Company of Pittsburgh, Pa., Hartford Fire Insurance Company and Twin City Fire Insurance Company . . . sold general liability insurance coverage to USM between May 8, 1979 and May 14, 1984. These policies are standard form policies, similar to each other and to Puritan's policy. Each of these policies requires the insurer to pay "all sums" USM becomes obligated to pay as the result of bodily injury or property damage claims brought against it. Each of these policies contains aggregate liability limits and provides that the aggregate limit applies to each "annual period." Each of these policies was extended for a period of less than one year in exchange for additional prorated premiums. In addition, the policies sold by National Union and Twin City contain a cancellation procedure whereby the insurer can cancel the policy and retain a pro rated premium, but still must pay full aggregate limits.
Twin City sold USM excess umbrella liability insurance for the period August 8, 1983 through November 11, 1984. The policy provides $10 million in aggregate policy limits. This policy expressly identifies two distinct "annual aggregate periods," both of which afford $10 million aggregate limits. On February 2, 1984, Twin City sold USM additional coverage for the period November 11, 1984 through November 25, 1984. The premium USM paid for two additional weeks of coverage represents slightly more than a pro rata portion of the $5,040 premium paid for the initial policy.
[USM] argue[s] that this Court correctly found that an insured who pays an additional prorated premium for additional coverage identical to that provided by the original policy reasonably would expect that its prorated premium reflects only the insurer's reduced time on the risk, not a reduction of aggregate limits. [Twin City] argue[s] that the doctrines of reasonable expectations and contra proferentum do not apply here. [Twin City] maintain[s] that on the basis of the plain reading of the policies and appropriate case law, such extensions do not create additional aggregate limits.
Insurance policies are consistently distinguished from other contracts by our Supreme Court. New Jersey recognizes special rules for their construction and application. . . . The unique nature of insurance policies and the courts' distinct interpretation rules arise from the standardization of insurance policy language, the need, in the case of casualty insurance, to compensate innocent third parties for injury or damage caused by the insured and duty, imposed by law, requiring the insurer to place its policyholder's interests above their own. . . . Three fundamental principles of law govern insurance coverage:
(1) the objective in construing the policies' coverage of liability must be to give effect to the policies' dominant purpose of indemnity; (2) ambiguity in an insurance contract must be construed in favor of the insured; and (3) the court should ordinarily strive to give effect to the objectively reasonable expectations of the insured. Keane Corp. v. Insurance Co. of North Am., 667 F. 2d 1034, 1041 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007 (1982).
To achieve objective equity among policyholders, courts have adopted the principle of the insured's ...