Argued March 31, 2014.
Approved for Publication September 30, 2014.
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On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-19-09.
Robin L. Cohen and Kenneth H. Frenchman of the New York bar, admitted pro hac vice, argued the cause for appellant/cross-respondent IMO Industries Inc. ( DeCotiis, FitzPatrick & Cole, L.L.P., Kasowitz, Benson, Torres & Friedman, L.L.P., Steven J. Roman ( Dickstein Shapiro, L.L.P. ) of the D.C. bar, admitted pro hac vice, and Mr. Frenchman, attorneys; Mr. Roman, Jeffrey D. Smith, Ms. Cohen and Elizabeth A. Sherwin, on the brief).
Sherilyn Pastor argued the cause for respondent/cross-appellant Transamerica Corporation ( McCarter & English, L.L.P., attorneys; Ms. Pastor and Gregory H. Horowitz, of counsel and on the brief; Nicholas M. Insua, Adam J. Budesheim, Stephanie Platzman-Diamant, and Mark D. Villanueva, on the brief).
Shawn L. Kelly argued the cause for respondent/cross-appellant TIG Insurance Company ( Riker Danzig Scherer Hyland & Perretti, L.L.P., attorneys; Mr. Kelly, Ronald Puhala, Sigrid S. Franzblau and Richard C. Kielbania, of counsel and on the brief).
Mark D. Hoerrner argued the cause for respondent Pyramid Insurance Company, Ltd. ( Budd Larner, P.C., attorneys; Mr. Hoerrner, Marc I. Bressman and David I. Satine, on the brief).
Patricia B. Santelle argued the cause for respondents/cross-appellants ACE Property & Casualty Insurance Company, Century Indemnity Company, Central National Insurance Company of Omaha, Industrial Underwriters Insurance Company, Pacific Employers Insurance Company, and Service.
Fire Insurance Company ( White and Williams L.L.P., attorneys; Ms. Santelle, Gregory S. Capps, and Paul A. Briganti, on the brief).
Mark J. Leimkuhler ( Lewis Baach, P.L.L.C. ) of the D.C. bar, admitted pro hac vice, argued the cause for respondents/cross-appellants London Market Insurers ( Tompkins, McGuire, Wachenfeld & Barry, L.L.P., and Mr. Leimkuhler, attorneys; Mr. Leimkuhler, of counsel and on the brief; Aisha E. Henry ( Lewis Baach, P.L.L.C. ) of the D.C. bar, admitted pro hac vice, and Matthew P. O'Malley, on the brief).
Michael A. Kotula argued the cause for respondents Fireman's Fund Insurance Company, Interstate Fire & Casualty Company and Westport Insurance Corporation ( Rivkin Radler, L.L.P., attorneys; Mr. Kotula and Lawrence A. Levy of the New York bar, admitted pro hac vice, on the brief).
Coughlin Duffy, L.L.P. and John K. Daly ( Meckler Bulger Tilson Marick & Pearson, L.L.P. ) of the Illinois bar, admitted pro hac vice, attorneys for respondents/cross-appellants Zurich American Insurance Company and Zurich International (Bermuda), Ltd. ( Robert J. Re and Mr. Daly, of counsel and on the brief; Maida Perez, on the brief).
L'Abbate, Balkan, Colavita & Contini, L.L.P., attorneys for respondent Transport Insurance Company ( Gretchen B. Connard and John D. McKenna, on the brief).
Ford Marrin Esposito Witmeyer & Gleser, L.L.P., attorneys for respondent Travelers Casualty & Surety Company ( James M. Adrian and Kenneth D. Walsh, on the brief).
Locke Lord L.L.P., attorneys for respondent CX Reinsurance Company Limited ( Richard I. Scharlat, on the brief).
Norris McLaughlin & Marcus, P.A., attorneys for amicus curiae Independent Energy Producers of New Jersey ( Robert Mahoney, on the brief).
Before Judges YANNOTTI, ASHRAFI, and ST. JOHN. The opinion of the court was delivered by ASHRAFI, J.A.D.
[437 N.J.Super. 588] ASHRAFI, J.A.D.
Several parties appeal from a final judgment determining insurance coverage for asbestos-related personal injury claims. Plaintiff IMO Industries, Inc. is the insured and the successor to a manufacturer of industrial products tat contained asbestos. Defendants are primary and excess liability insurers, as well as Transamerica Corporation, the former parent company of the predecessor manufacturer.
Over the years, IMO purchased a total of $1.85 billion in insurance coverage from all the defendant insurers. That amount is sufficient to pay for its anticipated liabilities and defense costs for asbestos-related personal injury claims. Nonetheless, IMO initiated this litigation to establish its rights under those insurance policies and to recover money damages.
Among many issues and topics, the appeals present some questions that have not been previously addressed in the New Jersey Supreme Court's insurance allocation decisions for so-called long-tail environmental losses, beginning with Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437, 650 A.2d 974 (1994), and Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312, 712 A.2d 1116 (1998). We must decide whether the trial court correctly [437 N.J.Super. 589] treated primary insurance policies that pay for all litigation defense costs " outside the limits," or in addition to, the indemnification limits of the policies. We must also decide how the coverage limits of excess multi-year policies must be treated in the allocation model. Additional issues include whether IMO was entitled to a jury trial on its claims for money damages, and numerous challenges to the trial
court's interpretation of insurance policies within the Owens-Illinois and Carter-Wallace allocation methodology.
Having considered the record and the parties' written and oral arguments, we find no ground to reverse the many rulings of the several judges who presided over this litigation. We affirm the final judgment of the Law Division.
Facts and Procedural History
Plaintiff IMO originated in 1901 as the Delaval Steam Turbine Company. It manufactured turbines, pumps, gears, and other machinery with industrial and military uses, including for United States Navy ships. In some of Delaval's products manufactured from the 1940s to the 1980s, component parts contained asbestos.
Defendant Transamerica is a holding company that acquired Delaval in 1963. Delaval operated as a subsidiary of Transamerica under different names until its divestiture in 1986 by means of a spin-off to shareholders. After the divestiture, plaintiff became IMO Industries, Inc.
From the 1960s until 1993, Transamerica owned Transamerica Insurance Company, which became defendant TIG Insurance Company (" TIG" ) when it was divested in 1993. Transamerica acquired Pyramid Insurance Company of Bermuda in the 1970s and still owned it at the time of this litigation. Transamerica, [437 N.J.Super. 590] TIG, and Pyramid are at times collectively referred to in this litigation as the Transamerica defendants.
The other defendants are insurance companies, together with their predecessors and affiliates, that provided different levels of primary or excess liability insurance to plaintiff or Transamerica. Among the excess insurers that have raised issues on appeal are two groups of insurers that we will refer to in this opinion as " ACE" and " LMI."  We will also refer to IMO and TIG to mean the present company or its predecessors.
Risk Management Program
In 1972, Transamerica established a corporate risk management program (" TARM" ) that oversaw insurance matters for its subsidiaries. The objectives of the TARM program were to protect Transamerica and its subsidiaries from catastrophic losses and to minimize costs for insurance coverage and accidental losses. According to Transamerica's director of risk management in the 1980s, the TARM program was never intended to be an insurer for subsidiaries, although Transamerica would often pay losses that fell within a subsidiary's self-insured retention (" SIR" ). A SIR operates in some ways like a deductible for an insurance policy but also is significantly different, as we will discuss later in this opinion. The TARM program procured insurance on behalf of Transamerica's subsidiaries in exchange for an annual fee. The fee covered the costs of purchasing insurance, TARM's operating costs, and the subsidiary's share of losses.
Transamerica would charge back its payments covering a subsidiary's SIRs through the risk management fees. Subsidiaries [437 N.J.Super. 591] like IMO that experienced unique or significant losses were also charged a catastrophe fee beyond the normal risk management fee. Before its divestiture in 1986, IMO had paid approximately $33 million in such fees to Transamerica.
IMO's Insurance Policies
Before 1964, IMO had general liability policies issued by New Jersey Manufacturers Insurance Company (" NJM" ) and Aetna Casualty and Surety Company (" Aetna" ). From 1964 to 1972, IMO purchased primary insurance directly from TIG. We will refer to these pre-1972 policies as TIG's " direct policies."
From 1972 through 1976, Transamerica purchased insurance on behalf of IMO from the Highlands Insurance Company. The Highlands policies were written above a $100,000 SIR, meaning that IMO's losses must exceed that level of loss from any single occurrence before it could access coverage under the Highlands policies. There was no insurance in place to cover IMO's SIR. TIG also issued excess policies to IMO during this time period.
From 1977 to 1986, Transamerica purchased first-layer excess insurance coverage for IMO from ACE and Pyramid. These policies also required SIRs. To cover the SIRs, Transamerica purchased insurance policies from TIG, which are referred to in this litigation as " fronting policies." These policies allowed IMO to obtain insurance certificates showing full coverage for all losses. The " fronting" reference meant there was no risk assumed by the insurance carrier, here TIG.
[437 N.J.Super. 592] The TIG fronting policies had stated coverage limits of $1 million from 1977 through 1984 and higher limits for 1985 and 1986, totaling in the aggregate $10.75 million for the ten-year period. For the fronting policies in effect from 1977 through 1981, defense costs were paid " outside the limits" of the policies. This means that the policies would pay their stated $1 million indemnity limits plus defense costs; the defense costs were supplemental to the indemnification coverage and did not erode the indemnity limits. We will refer to these policies as " outside the limits" policies. Defense costs for the policies in effect from 1982 through 1986 were within the policy limits, meaning payments for defense costs did erode the indemnity limits.
Thus, IMO had " direct policies" from TIG from 1964 through 1972, excess policies at various times including 1972 through 1976, and " fronting policies" from 1977 to 1986, the first five years of which were " outside the limits" policies. Over the years since the 1986 divestiture, TIG made payments totaling more than $30 million for IMO's asbestos liabilities and defense costs from both its direct and fronting policies. Adding TIG's payments from excess policies, TIG paid IMO more
than $72 million for its asbestos liabilities and costs.
IMO also received payments from Pyramid's excess policies, including from the time that TIG claimed it had no more responsibility for IMO's losses.
Digressing briefly from the facts to restate the lead issue in this appeal, TIG claims its policies are exhausted because it has paid far more than the amount of loss allocated to it under the Owens-Illinois and Carter-Wallace loss allocation model. IMO contends TIG's obligations have not ended because the indemnification limits of the " outside the limits" policies cannot be exhausted by allocating responsibility to those policies. It contends only actual payments that reach the $1 million dollar indemnification limits [437 N.J.Super. 593] will exhaust TIG's obligation to cover defense costs under the five years of " outside the limits" policies. According to IMO, as of the end of 2010, TIG owed an additional $48 million in defense costs under those policies.
Transamerica's Agreements with TIG
Between 1976 and 1992, Transamerica entered into four agreements with TIG to indemnify TIG for its payments under the fronting policies. In 1992, Transamerica and TIG also entered into an agreement with regard to the pre-1972 direct policies pursuant to which Transamerica would contribute to TIG half the total amounts of defense and indemnity sought by IMO for asbestos litigation. The result of these agreements was that Transamerica actually paid approximately half the amounts paid by TIG to IMO under its direct and fronting policies.
Divestiture of IMO
In 1986, Transamerica divested IMO's predecessor by spinning off its shares to Transamerica shareholders, and the new company became IMO. The terms of the divestiture were contained in a Distribution Agreement dated December 18, 1986. On the subject of insurance coverage, the agreement stated:
Section 6.02 Insurance With respect to all insurance plans of [IMO], [IMO] shall be liable for payment of claims (to the extent not covered by Transamerica's Risk Management Program) arising out of incidents, known or unknown, reported or unreported, which were incurred prior or subsequent to the Distribution Date.
A dispute on appeal pertains to the underscored language and the obligations, if any, it imposes upon Transamerica after the divestiture.
Asbestos Lawsuits, IFAs, and Exhaustion of Policies
At the time of the 1986 divestiture, IMO had been named as a third-party defendant in three asbestos liability lawsuits. IMO tendered these claims to TIG for indemnification and defense. TIG provided one hundred percent of the funds to pay these claims, and Transamerica then reimbursed TIG at least half that [437 N.J.Super. 594] amount pursuant to their agreements. Many more asbestos claims were filed after the divestiture, and TIG continued to provide a defense to IMO under both its direct policies and its fronting policies.
In 1989, IMO sent " first notice" letters to excess insurers. These letters made no demand for payment and provided minimal information about the claims against IMO or any underlying policies that might be in place. In fact, according to the excess insurers, IMO told them it had ample primary insurance coverage and their policies were unlikely to be reached in the foreseeable future.
In 1991, IMO discovered NJM's and Aetna's older primary insurance policies and tendered its asbestos claims to NJM
and to Travelers Insurance Company (" Travelers" ) as successor to Aetna. Aetna's policies covered IMO from 1955 to 1964. On September 30, 1992, IMO entered into an Interim Defense and Indemnification Funding Agreement (" IFA" ) with TIG and Aetna/Travelers under which all defense costs were to be paid by TIG and Aetna, and indemnity payments were split in three equal shares among TIG, Aetna, and IMO.
NJM, on the other hand, did not acknowledge coverage on its primary liability policies issued to IMO from 1935 through 1954. IMO filed suit against NJM and was successful in compelling it to provide coverage. On March 24, 1993, IMO entered into an IFA with NJM, which applied in conjunction with the earlier IFA with TIG and Aetna/Travelers. Neither of the two IFAs was intended to be a final allocation of IMO's losses, and both reserved the parties' rights to seek reallocation of the amounts paid.
Under the two IFAs, defense costs were split equally among Aetna, NJM, and TIG, and indemnity costs were split equally among the three insurers and IMO. In 1998, NJM declared its policies exhausted, having paid $4,234,703 in defense and indemnity costs. It made no further payments after that time. When Aetna balked at continuing payments, IMO filed suit against Aetna and IMO's excess insurers seeking to compel payments [437 N.J.Super. 595] under Aetna's IFA. IMO did not actively pursue the matter against the excess insurers, and in 2000 it voluntarily dismissed them from the litigation. A new sharing arrangement was reached among Aetna/Travelers, TIG, and IMO under which Aetna paid one fourth of defense costs and one fourth of indemnity costs, IMO paid one third of indemnity costs and none of the defense costs, and the balance of both types of costs was paid by TIG.
Aetna declared its policies exhausted in August 2003, having paid a total of $15,240,064. IMO did not challenge Aetna's declaration of exhaustion. TIG then continued making payments under the IFAs for several more months, paying one hundred percent of defense costs and two thirds of the indemnity costs. All of IMO's defense costs through the end of 2003 were paid by means of the IFAs, and IMO incurred no unreimbursed defense costs through that time.
In early 2004, when TIG declared its 1977 through 1986 fronting policy limits exhausted, TIG had paid a total of $30,856,193 to IMO as reimbursement of indemnity and defense costs, these payments being allocated by TIG to both its pre-1972 direct policies and to the 1977 through 1986 fronting policies.
Owens-Illinois and Carter-Wallace
The New Jersey Supreme Court's 1994 decision in Owens-Illinois, supra, 138 N.J. at 478-79,650 A.2d 974, first established the " continuous trigger" theory of insurance coverage for long-tail environmental losses, such as exposure to asbestos. The Court defined the term " occurrence" in liability policies to mean a separate triggering event for insurance coverage in each year from the time a claimant alleging injury was first exposed to asbestos until manifestation of an asbestos-related disease or until insurance coverage became unavailable. Ibid. The Court also established a pro-rated model for the allocation of coverage responsibilities among multiple insurers based on an insurer's time on the loss and limits of risk coverage in the policies. Id. at 474-75, 650 A.2d 974.
[437 N.J.Super. 596] In July 1998, the Court issued its decision in Carter-Wallace, supra, 154 N.J. 312, 712 A.2d 1116, as further development of the allocation methodology. The Court held that excess insurers were included in the model, and that policies
would be exhausted " vertically" in each year of coverage applicable to a claim rather than all primary insurance policies being exhausted " horizontally" first across the range of " triggered" coverage years before excess insurers' policies would attach. Id. at 325-28, 712 A.2d 1116.
In November 1998, representatives from IMO, TIG, and Transamerica met and discussed applying the Carter-Wallace allocation methodology to IMO's claims. IMO's General Counsel strongly disagreed with Carter-Wallace and refused to apply its methodology to allocate responsibility among IMO's insurers. He was satisfied with the IFA arrangements in place where IMO paid a third of indemnity and no defense costs.
The Present Litigation
In 2002, IMO sought assurance from the Transamerica defendants that they would continue to pay full defense costs and most of the indemnity costs for asbestos claims. When assurance was not given, IMO filed its initial complaint in August 2003 against the Transamerica defendants.
In early 2004, the Transamerica defendants informed IMO that TIG's fronting policies were exhausted as of December 31, 2003. A February 4, 2004 letter written by counsel for Pyramid stated that, up to December 31, 2003, Transamerica had paid " at least $9,703,101 in indemnity for asbestos bodily injury claims, and at least $5,138,148 for expenses for those claims" and that those sums exceeded the amount of the SIRs and the limits of TIG's fronting policies. The letter informed IMO that any future payments for indemnity and expenses would be paid " by Pyramid's excess policies, up to the limits of the Pyramid policies." Pyramid's future payments would be based on its Carter-Wallace allocation share after a short transitional period.
[437 N.J.Super. 597] Although IMO eventually added the excess insurers to the present litigation, it initially told them in private meetings that it had done so to avoid inconsistent judgments if active litigation against the excess insurers were to become necessary in the future. IMO reassured the excess insurers that their policies were not going to be reached because the TIG " outside the limits" policies for 1977 through 1981 would never reach their limits of coverage.
In July 2005, IMO appeared to waver in its belief that the TIG policies had not been exhausted. As a result, Pyramid agreed that its excess policies were triggered and advanced IMO $2 million toward defense invoices. In August 2005, however, IMO again asserted that the TIG policies had not been exhausted. Pyramid then stopped making payments.
On August 21, 2007, IMO wrote to excess insurers demanding that they pay IMO's asbestos losses in accordance with an allocation calculated by IMO's expert, Dr. Charles Mullin. In his trial testimony, Mullin reviewed his calculations and agreed that they indicated TIG's fronting policies should be allocated $13,349,296 in defense and indemnity costs. He subsequently adjusted that figure to $13,433,600.
Since making its August 2007 demand on excess insurers, IMO has settled with more than a dozen of them, with total policy limits of at least $708 million. Some of the excess insurers that did not settle and raise issues in this appeal have also paid millions of dollars to IMO under their policies.
[437 N.J.Super. 598] On September 10, 2008, IMO produced a new allocation of losses and claimed that TIG and Transamerica owed millions more than the approximately $13.5 million calculated in Mullin's earlier allocations. IMO based this claim on TIG's continuing obligation to pay defense costs under the first five fronting policies until its actual payments of indemnification obligations, rather than allocation, reached the $1 million level of each policy. IMO claimed that allocation of losses to the fronting policies under the Carter-Wallace model was not sufficient to reach their limits but actual payment had to be made by TIG in accordance with the language of those policies.
In this litigation, IMO has referred to this coverage position by several different names, including " bookend" and " limitless defense costs." The Transamerica defendants refer to it as the " running spigot" theory of coverage under TIG's fronting policies of 1977 through 1981. The crux of this theory is that, with defense costs being paid outside the policy limits, TIG's obligation to cover defense costs for claims that could be attributed to those policy years would continue until TIG actually paid $1 million in indemnity costs from the policy in each of those years. With the small amount of indemnity payments on the liability that IMO has for injured plaintiffs in asbestos cases (many of those cases settling for only several thousand dollars from IMO), the limits of the TIG " outside the limits" policies would not be reached for many years. TIG's obligation to continue paying for defense costs would continue indefinitely.
Pleadings and Pre-Trial Proceedings
IMO began this litigation with its first complaint and jury demand filed in August 2003 against only the Transamerica defendants. It sought a declaration of rights and obligations under the TARM program and under the primary and excess insurance policies issued by TIG and Pyramid. It also sought compensatory and punitive damages for breach of contract and related causes of action. Defendants filed answers, cross-claims, counterclaims, and a third-party complaint against three excess insurance carriers.
[437 N.J.Super. 599] In 2004, IMO filed a second amended complaint, adding new claims against the Transamerica defendants and also naming numerous excess insurers as defendants. Over time in this litigation, most of the excess insurers either settled with IMO or were dismissed from the case. Twelve defendants remained in the case at the time of the trials beginning in 2009.
In the intervening time, the court entered orders holding that New Jersey law is applicable to certain pertinent issues, granting or denying summary judgment on various grounds, determining that the Carter-Wallace allocation methodology would be applied, and appointing a special allocation master (" SAM" ) to consider all allocation-related issues and to make recommendations to the trial judge.
In January 2009, Retired Judge Robert Muir, Jr., was recalled to the bench and assigned to the case. At about that time, Pyramid and TIG renewed motions they had filed earlier to strike plaintiff's jury demand and to proceed with a bench trial. On June 30, 2009, Judge Muir granted the motions and ordered that all issues would be tried without a ...