Lead Opinion
The Trustee of a shipping line in bankruptcy, Prudential Lines, Inc., sued Prudential’s insurer, American Steamship Owners Mutual Protection and Indemnity Association (“American Club”), seeking declaratory relief clarifying American Club’s indemnity obligations for asbestos-related bodily injury claims asserted against Prudential; the asbestosis claimants (the “Claimants”) intervened. The issues contested on this appeal arise under the pay first provision; the deductible provision; and the clauses governing indemnity and other insurance.
The Pay First Provision. The American Club policies contain a pay first provision requiring that Prudential pay any claims pri- or to seeking indemnification from American
The Deductible Provision. The American Club policies require the policyholder to pay one deductible “per occurrence.” The bankruptcy court held that all asbestos-related bodily injury claims resulting from exposure to asbestos aboard one ship arose from a single occurrence — the presence of asbestos aboard the ship during the policy period — so that a single deductible satisfies the deductible provision with respect to all of those claims. See Prudential I,
The Indemnity and Other Insurance Clauses. American Club argues that when more than one of its policies is triggered by a single loss, the policyholder is entitled to no more than a fractional recovery under each policy. The bankruptcy court held that once triggered by injury-in-fact, each policy was liable for all damages resulting from asbestos exposure, and liability would not be allocated among all triggered policies (although allocation through a contribution action might be permissible). See Prudential I,
As to each issue, we affirm the judgment of the district court.
BACKGROUND
American Club is a nonprofit mutual insurance association of shipowners that writes protection and. indemnity (“P & I”) insurance for its shipowner members. Prudential was a member of American Club and a policyholder from 1940 to 1970 and from 1975 to 1986. In early 1986, Prudential filed a bankruptcy petition under Chapter 11.
Over the past 15 years, approximately 5,000 Claimants have alleged that they suffered asbestos-related bodily injuries by exposure to asbestos while working aboard Prudential’s ships, and have sought damages from Prudential for negligence under the Jones Act, 46 U.S.C. § 688 et seq., and for unseaworthiness under the general maritime law.
Each P & I contract is written for a one-year policy period, and provides in the indemnity clause (in pertinent part) that American Club will
indemnify the assured against any loss, damage or expense which the assured shall become liable to pay and shall pay by reason of the fact that the assured is the owner (or operator, ... as the case may be) of the insured vessel and which shall result from the following liabilities[,] risks[,] eventsf,] occurrences and expenditures:
(1) Liability for ... personal injury to, or illness of any person....
(emphasis added). The import of the emphasized wording is that Prudential must first pay any claims or judgments against it before obtaining indemnification from American Club. The lack of sufficient funds on hand at the time of Prudential’s bankruptcy made outright payment of the claims impossible, so
The Second Amended Joint Plan of Reorganization (the “Plan”), confirmed in 1990, creates a Prudential Disbursement Trust to resolve asbestos-related claims and to enforce the trust’s interests against Prudential’s insurers. Section 4.05.07 of the Plan sets aside $300,000 to be used by the Trustee to engage in certain loan arrangements for the replenishment of deductibles:
[T]he [Prudential] Disbursement Trustee is authorized to enter into arrangements under which in substance the [Prudential] Disbursement Trust pays the Allowed Insured Claim in full in cash; the holder of the Allowed Insured Claim repays in cash the full amount of the Deductible Claim and the Club or other insurer reimburses the [Prudential] Disbursement Trust in cash for the full amount of the Excess Claim ...; and the holder of the Allowed Insured Claim is given an Allowed Claim in Class 5C in the amount of the Deductible Claim.... The ... Trustee may alternatively enter into any lawful arrangement designed to achieve the same purpose, as may be agreed upon by the holder of an Allowed Insured Claim and the ... Trustee, but ... may not use funds of the ... Trust ... unless adequate assurances and documentation are provided ensuring that the ... Trust will promptly receive repayment and/or reimbursement of all amounts paid by the ... Trust.
(emphasis added).
In December 1990, the Prudential Trustee commenced this suit against American Club, seeldng a declaration of Prudential’s rights under the American Club policies; the Claimants intervened. The bankruptcy court determined that the action was a core proceeding. Prudential I,
In March 1993, the- Prudential Trustee and the Claimants agreed inter se to a Stipulation and Settlement Agreement determining Prudential’s liability to the Claimants and authorizing an arrangement for recycling Prudential’s $300,000 cash fund as required to satisfy the claims. Under this arrangement, the Trustee would pay Claimant A in cash from the $300,000 set aside under the Plan, and Claimant A immediately would loan the funds back to the bankrupt estate via a non-recourse loan. The replenished fund would then be used to compensate Claimant B, and so on.
The bankruptcy court “so ordered” the Stipulation and Settlement Agreement on March 9, 1993, and the Trustee recycled the $300,000 over and over until the Trustee owed $13 million to the Claimants on non-recourse loans. On August 4, 1993, the bankruptcy court ordered American Club to indemnify Prudential for the $13 million. The wheels continued turning, and on September 27, 1993, the bankruptcy court entered a partial judgment requiring that American Club indemnify Prudential for $66.16 million in such claims. American Club appealed those orders. (The bankruptcy
On July 29, 1994, the district court (i) reversed the bankruptcy court, holding that the recycling did not satisfy the pay first provision of American Club’s policy; (ii) reversed the bankruptcy court’s determination on the deductible issue, holding that the term “occurrence,” as used in relation to the policy deductible, was ambiguous, and remanding to the bankruptcy court to determine whether extrinsic evidence of practical construction supplied meaning to that term; and (iii) affirmed the bankruptcy court on the allocation issue. American Club then appealed the deductible and allocation issues to this Court, claiming that these issues were ripe for appeal. In addition, the Claimants moved for an interlocutory appeal of the pay first issue pursuant to 28 U.S.C. § 1292(b).
On December 6, 1994 — before the appeal was heard in this Court — the bankruptcy court issued an order vacating the Stipulation and Settlement Agreement in light of the district court’s rejection of the recycling arrangement.
On June 26, 1995, we dismissed American Club’s appeal, and denied the Claimants’ motion for interlocutory appeal, finding that: (i) the appeals on the deductible and allocation issues were not ripe because they did not amount to final orders or judgments in light of the district court’s remand of the deductible issue; and (ii) the appeal of the pay first issue, although certified by the district court, was better heard at the completion of the bankruptcy proceedings. See In re Prudential Lines, Inc.,
Pursuant to the terms of the remand, the bankruptcy court conducted an evidentiary hearing on the parties’ practical construction (if any) of the deductible provision. On November 5, 1996, the bankruptcy court found that American Club had failed to prove that Prudential acquiesced to American Club’s practice of applying a single deductible per asbestosis claim per policy. In June 1997, the district court concluded that this finding was clearly erroneous, and reversed.
DISCUSSION
The Claimants appeal the district court’s ruling on the pay first and deductible issues; American Club cross-appeals the district court’s ruling on the allocation issue.
There are two threshold issues.
1. American Club argues that: (i) the Claimants failed to appeal the bankruptcy court’s December 6, 1994 order vacating the 1993 Stipulation and Settlement Agreement (which created the recycling arrangement); (ii) this order vacated the Stipulation and Settlement Agreement for reasons other than the district court’s ruling on the recycling; and (iii) therefore there is no viable recycling arrangement that could be implemented even if we were to reverse.
A declaratory judgment action presents an actual controversy if “the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Maryland Cas. Co. v. Pacific Coal & Oil Co.,
We think that the pay first issue continues to present a controversy that is immediate and real. The second premise of American Club’s argument is wrong; the bankruptcy court vacated the Stipulation and Settlement Agreement solely because of the district court’s decision on the pay first issue, not for other reasons, and therefore a decision favorable to the Claimants on the pay first issue could realistically lead to reinstatement of
2. The conclusion we reach infra on the pay first issue means that the recycling arrangement created by the Stipulation and Settlement Agreement cannot be used to trigger American Club’s indemnification obligations. We must therefore consider whether this opinion need decide the remaining issues concerning the deductible and the allocation of damages among triggered policies. The answer turns on whether a payment mechanism other than the recycling arrangement is available which renders these issues of sufficient immediacy and reality so as to justify declaratory relief.
At oral argument, the parties agreed that there are other available mechanisms (albeit less efficient) for triggering American Club’s indemnification obligations. The Claimants suggested specifically that the $300,000 set aside to fund the recycling could be used to settle individual claims. American Club did not contest the availability of those funds for this purpose, and we do not read the reorganization plan to preclude such use. See Plan, § 4.05.07(a)(i) (“[T]he bankruptcy court upon proper motion may authorize the use of such funds for other purposes in connection with efforts to liquidate Personal Injury Claims ....”); see also id. § 4.05.07(v). Given the availability of other payment mechanisms, the deductible issue and the allocation issue are of sufficient immediacy and reality to warrant declaratory judgment.
I. THE PAY FIRST PROVISION
We agree with Judge Haight’s conclusion that the recycling arrangement did not amount to payment under American Club’s policy and thus failed to satisfy the policy’s pay first provision. The American Club policies require it to “indemnify [Prudential] against any loss, damage or expense which [Prudential] shall become liable to pay and shall pay.” Because the American Club policy mandates payment prior to triggering the insurer’s indemnification obligations, it is an indemnity policy.
Federal maritime law, which applies to this essentially maritime contract, does not speak to the issue of what constitutes payment under an indemnity policy. See Liman v. American Steamship Owners Mut. Protection and Indem. Ass’n,
A. Liman v. American Steamship Oumers
The recycling arrangement is patterned after a similar device approved by this court in Liman, which involved an identical American Club policy. In Liman, approximately 120 claims were presented by seamen and longshoremen against a bankrupt shipping company. Although the shipping company had sufficient funds to pay the claims, and although there was no reason to doubt that the company would be indemnified eventually by the insurer (net of the deductible), the Government (the bankrupt’s chief creditor) opposed payment of the claims as illegal preferences because “the estate would be diminished to the extent of the $1000 deductible which would be attributed to each of the claims to be defended.” Liman,
The Trustee therefore propos[ed] to finance the $1,000 deductible in each case by defending each lawsuit pursuant to an agreement with the claimant to the effect that in the event of recovery or settlement in an amount in excess of $1,000, the estate will pay the full amount of the recovery to the claimant and the claimant will thereupon repay $1,000 to the estate, in exchange for which the claimant will become a general creditor of the estate in the sum of $1,000.
Id. at 108. The insurer objected that “in order to be indemnified under the policies the estate must show that it actually ‘absorbed’ the $1,000 deductible.” Id.
Liman summarized New York law on what constitutes payment under an indemnity policy (an interpretation which we adopted in our per curiam opinion affirming on the district court’s opinion): “[T]he test in New York is whether the assured has actually in good faith sustained the loss for which reimbursement is sought, and the insurer’s obligation to indemnify may not be avoided because of the assured’s insolvency.” Id. at 109. Thus, an indemnifiable payment entails (i) satisfaction of the claim and (ii) the absorption of some loss thereby by the insured, (iii) both in good faith. See also Ahmed v. American Steamship Mut. Protection & Indem. Ass’n,
In holding that the deductible financing arrangement amounted to payment under this standard, the Liman court focused on the use of the challenged arrangement only to finance the deductible, the rest of each claim representing a cash loss out of pocket. Liman,
Here, Prudential seeks to use the recycling arrangement to finance the whole of the claims, not the deductibles alone. This ease thus differs from Liman in the essential respect that indemnity is sought for a loss that the policyholder has not incurred. See Ahmed v. American Steamship Owners Mut. Protection & Indem. Ass’n,
B. Applying New York Law
As Liman notes, “the test in New York is whether the assured has actually in good faith sustained the loss for which reimbursement is sought.”
The Fifth Circuit has concluded that “Li-man does not stand for the proposition that ‘payment’ can be made by the use of a promissory note worthless from the day it is executed.” Conoco, Inc. v. Republic Ins. Co.,
*74 Since the bankrupt assured in Liman was not completely bereft of assets, the Liman court was not faced with the situation we face in this case, where Bonanza is literally incapable of sustaining a loss.... Bonanza not only had no intention of paying the promissory note, but offered no hope of eventually providing any value at all in exchange for the note. The company was dormant. Bonanza was gone, and it was not coming back.
Id. at 122-23.
Prudential is blocked by the same obstacle in this suit. The underlying claims were satisfied with non-recourse notes that entail for Prudential no actual loss incurred in good faith. The only difference between the present case and Conoco is that here Prudential issues boomerang payments from the $300,-000 account. But as these funds immediately came home, the Asbestosis Claimants received nothing of value from Prudential, and Prudential sustained no true loss. We do not think that this sham transaction triggered an indemnification obligation under New York law.
C. Direct Actions by Claimants Against Marine Indemnity Insurers
It is obvious for reasons previously stated that the Claimants are the only parties with an interest in the indemnification from American Club. Our holding is therefore independently supported by the doctrine of New York law that bars direct actions by claimants against marine indemnity insurers. See Ahmed,
We have previously barred a suit by an insured’s judgment creditor against a marine policy on the ground that the suit closely resembled a direct action. See Wabco Trade Co. v. S.S. Inger Skou,
New York’s approach to insolvent insureds under the common law rule barring direct actions is quite categorical and firm in terms of the type of actual loss required to trigger an indemnification obligation:
[I]f the insured was insolvent, so that the person injured or the estate of one killed was unable to satisfy the judgment against him, the insurer in effect would be released. The policy being one of indemnity against loss suffered by the principal, it followed that the insured having suffered no damage, there was no loss for the insurer to indemnify.
Jackson v. Citizens Cas. Co.,
D. The Authorities Cited by the Claimants
The several New York cases upon which claimants rely either support our conclusion or are distinguishable. In Campbell v. London & Lancashire Indemnity Co.,
Finally, Feldman v. New York City Health & Hospitals Corp.,
As the Claimants in the present appeal point out, the Feldman court deemed the
Claimants invoke New York’s general policy of preventing an insurer from taking advantage of an insured’s bankruptcy; but we cannot find that the recycling arrangement adopted by Prudential and the Claimants amounts to payment of the claims under New York law. Accordingly, we hold that the pay first provision of American Club’s policy is not satisfied, and affirm the district court.
* * *
The parties’ remaining disputes concern principally the number and amount of the deductibles properly payable for each claim. Claimants argue that the presence of asbestos on a particular ship is a single occurrence triggering a single, deductible under each policy for all Claimants whose asbestosis injuries arose from their work on that ship. American Club argues not only that each Claimant’s injury triggers payment of a separate deductible but also that each claim must be allocated between the various policies in effect during the period of a particular seamen’s exposure, thus triggering multiple deductibles. For the reasons discussed infra, we find that the answer lies between these two views.
II. THE DEDUCTIBLE PROVISION
The deductible provision in each American Club policy provides (with an inapplicable exception) that personal injury claims “are subject to a deduction” in a stated amount “with respect to each accident or occurrence.” In the 1940s and 1950s, the deductibles varied from $250 to $1,000 per accident or occurrence; in the 1960s, 1970s, and 1980s, they varied from $2,500 to $50,000 (reaching $100,000 in one year). The terms “accident” and “occurrence” are not defined in the policies.
The parties dispute the proper application of the deductible provision in the circumstances of this case. The Claimants argue that the presence of asbestos on each Prudential vessel constituted a single occurrence, and that a single deductible applies to all bodily injury claims resulting from asbestos exposure aboard a particular ship within each policy year. American Club argues that each Claimant’s initial exposure to asbestos within a policy year constituted a separate occurrence. Under this interpretation, each claim would be subject to a full deductible.
The bankruptcy court concluded that “the occurrence was the presence of asbestos on each [Prudential] vessel during each triggered policy period,” and that “each P & I policy obligated to indemnify will be able to claim one deductible, irrespective of the number of claims filed against an individual policy.” Prudential I,
The bankruptcy court conducted an evi-dentiary hearing on American Club’s practice in interpreting the term “occurrences.” The court concluded that “[t]he preponderance of the proffered evidence does demonstrate that American Club’s policy for asbestosis claims resulting from exposure prior to 1989 has been to apply a deductible for each policy year in which a particular seaman worked.” Prudential III,
A. Insurance Policy Interpretation Under New York Law
As noted above, although the P & I policy is essentially a maritime contract, its interpretation is governed in this ease by New York law. Under New York law, an insurance policy is a contract that is construed to effectuate the intent of the parties as expressed by their words and purposes. See American Home Prods. Corp. v. Liberty Mut. Ins. Co.,
If the policy is ambiguous, extrinsic evidence may be introduced to support a particular interpretation. Kinek v. Paramount Communications, Inc.,
Ordinarily, if an “ambiguity arises that cannot be resolved by examining the parties’ intentions, ... the ambiguous language should be construed in accordance with the reasonable expectations of the insured when he entered into the contract.” Haber,
After concluding that in the absence of a definition of the term “occurrence,” the deductible provision was ambiguous as applied to this ease, the district court based its interpretation of the deductible provision on extrinsic evidence of the parties’ practical construction. Because the bankruptcy court’s finding that Prudential had failed to acquiesce in American Club’s practice was a finding of fact, it could be rejected only if clearly erroneous. See In re Prudential Lines, Inc.,
In rejecting the finding, the district court focused on two facts: (i) Prudential’s failure to object to American Club’s practice while Prudential was a member of American Club’s board of directors; and (ii) Prudential's acceptance of the Club’s reimbursement of the Graham claim, which applied multiple deductibles.
Under New York law, “[i]f ambiguity exists, to show a practicable construction ... there must have been conduct by the one party expressly or inferentially claiming as of right under the doubtful provision, coupled with knowledge thereof and acquiescence therein, express or implied, by the other.” Continental Cas. Co. v. Rapid-American Corp.,
As to Prudential’s failure to object to the policy during American Club’s board meetings, the question of the proper deductible was not discussed by the board until after Prudential left the club in 1986. Up to that time, Prudential submitted very few asbestos claims, and when it did claim indemnification for asbestos loss, it applied a single deductible for each claim, not American Club’s practice of applying one deductible for each triggered policy. As Thomas McGowan, American Club’s secretary, noted in a September 16, 1987 memorandum to the Board of Directors relating to the deductible practice: “Clearly the past [asbestos-related] settlements are insignificant either from the members’ or the Association’s point of view.” Under the district court’s analysis, Prudential would be considered to have acquiesced in all American Club practices, even those never discussed by the board; this is implausible. It was not clear error for the bankruptcy court as the trier of fact to infer that Prudential’s silence at board meetings did not amount to acquiescence in American Club’s deductible policy.
As to Prudential’s failure to sue American Club over the Graham claim, the district court relied on Continental Casualty, but the case law relied on in Continental Casualty seems to suggest that finding a practical construction ordinarily requires the implementation of the supposed practice on more than one occasion. See, e.g., City of New York v. New York City Ry. Co.,
C. The Intent of the Parties
Notwithstanding our disagreement with the district court’s analysis on the factual issue of practical construction, we think that the parties to the American Club policies at issue intended to apply the interpretation advanced by American Club in this litigation, ie., to treat each initial exposure by a Claimant to asbestos during a policy period as a separate occurrence. That conclusion is based on: (i) the wording of the policies, (ii) the contracting parties’ actions prior to the commencement of litigation, and (iii) New York law on the interpretation of the word “occurrence.”
First, we are not convinced that the deductible provision is ambiguous. Claimants’ proposed interpretation is inconsistent with the plain and ordinary meaning of the term “occurrence.” In Newmont Mines Ltd. v. Hanover Ins. Co.,
Second, even if we were to conclude that the deductible provision is ambiguous, we would still find that the parties to the policy intended American Club’s interpretation. Although the evidence cited by the district court does not compel a finding that Prudential acquiesced in American Club’s interpretation, it does show something about Prudential’s reasonable expectations and intentions under the policy. “The New York courts have frequently resorted to the conduct of the parties in determining a contract’s meaning, and insurance contracts are no exception to this practice.” See American Home Prods. Coup.,
In dissent, Judge Lay advances spirited arguments on the doctrinal question of the definition of “occurrence” under New York law (with which we disagree, as explained below). The short answer is that although the contract language is less than clear, it has been illumined by conduct on the part of the signatories that reflects an understanding incompatible with the position urged in this case by the Claimants, who are strangers to the contract.
Third, New York law gives some guidance for ascertaining the reasonable expectations of an insured as to number of “occurrences.” In Arthur A. Johnson Corp. v. Indemnity Ins. Co.,
The insurer claimed that the damage to the two buildings resulted from a single accident within the meaning of the policy, and that a single “per accident” limit of $50,000 applied. The Court of Appeals expressly considered and rejected two tests used by other jurisdictions in determining the number of “accidents,” including the “negligent act or omission” test (a single occurrence for all injuries caused by the same negligent act or omission) and the “effects” test (one occurrence per each person or thing injured). Id. at 227-28,
In finding that the collapse of the two walls in Johnson constituted two accidents, the court stated:
[W]e need only point out that it is agreed that, during a heavy rainfall, a protecting wall collapsed under the water pressure and destruction poured into a building. Almost an hour later, another wall gave way and water flooded another building. There is no suggestion that the collapse of the first wall caused the failure of the second.... In addition, the catastrophe was not the rain — that, in itself, did no harm. It was the breach of the wall letting the rain water in. Furthermore, if the walls were located blocks away from each other on different job sites but subject to the same rainfall, no one could contest that there were two accidents.
Id. at 230,
In Hartford Accident & Indem. Co. v. Wesolowski,
We have expressed the rule of these cases as follows:
In determining the number of occurrences for deductible purposes, New York inquires whether multiple claims result from “an event of an unfortunate character that takes place without one’s foresight or expectation.” ... [Although a single “occurrence” may give rise to multiple claims, courts should look to the event for which the insured is held liable, not some point further back in the causal chain.
Stonewall Ins. Co. v. Asbestos Claims Management Corp.,
Stonewall distinguished Champion Int’l Corp. v. Continental Cas. Co.,
In Champion, the insured was exposed to liability merely because it had delivered the defective product; in this case, by contrast, [the insured’s] liability, as reflected in the underlying complaints, results not from its delivery of asbestos-containing products, but rather from its manufacture of those products, resulting in the presence of [asbestos-containing materials] each time the products were installed on the property of third parties. Consequently, each location at which [the insured’s] products are present, reflecting a separate installation of those products, is the site of a separate occurrence requiring imposition of another deductible.
Stonewall,
Under New York law, multiple injuries are grouped as a single “occurrence” when they arise out of the same event of unfortunate character and occur close in time with no intervening agent. Applying this test, we conclude that all asbestos-related bodily claims against Prudential resulting from exposure to asbestos on a particular ship cannot be attributed to a single occurrence. In Stonewall, we found that installation of the asbestos was the final link in the causal chain leading to a manufacturer’s liability for property damage. Id. at 1213; see also Maryland Cas. Co. v. W.R. Grace and Co.,
This conclusion is consistent with the few cases that both (i) use an approach similar to New York’s in defining “occurrence” and (ii)
whether 1) each claimant who was injured by exposure to asbestos constituted a separate “occurrence” (or “accident”), or 2) [the plaintiffs] “decision” to install asbestos-containing insulation during a policy period was itself a single “occurrence” (or “accident”), regardless of how many persons may have been injured as a result of that single “occurrence.”
Id. at 1210. The court followed the reasoning of Judge Brown in a California asbestos proceeding:
The common thread running through the California cases is that an “occurrence” or “accident” is associated with the time of injury. This leads to the conclusion that the “cause” of injury which determines the number of occurrences undoubtedly refers to the immediate rather than the remote cause of injury. As the court stated in Maples [v. Aetna Casualty and Surety Co.], supra, 83 Cal.App.3d [641], 647-48,148 Cal.Rptr. 80 [ (1978) ], in reference to both California and out-of-state cases on the timing of “occurrences” or “accidents”:
[T]his seemingly unbroken line of authority find[s] that the term “accident” unambiguously refers to the event causing damage, not the earlier event creating the potential for future injury....
The event causing damage in the asbestos-related bodily injury cases is exposure to asbestos fibers.... Since each individual claimant has a unique work history, each claimant’s exposure must be viewed as a separate occurrence.
Id. at 1211 (quoting Asbestos Insurance Coverage Cases, Judicial Council Coordination Proceeding No. 1072, Statement of Decision Concerning Phase IV Issues, at 9-16 (Super.Ct. San Fran. Jan. 24, 1990), aff'd in part and reversed in part on other grounds sub nom. Armstrong World Indus. v. Aetna Cas. & Sur. Co.,
It might be argued that if exposure is the occurrence, each period of exposure of each Claimant (or even each breath) is a separate occurrence. American Club does not make this argument and therefore does not seek to apply multiple deductibles to each Claimant in each policy period. In any event, liability attaches following the first exposure; each
We hold that each claim arose from a separate occurrence, and a single deductible is applicable to each claim.
III. THE ALLOCATION ISSUE
Prudential claims the contract right to designate any single policy to indemnify Prudential in full for any insurance claim arising out of injury that spans two or more policy periods. American Club argues that payment of each insurance claim should be allocated in the first instance among all triggered American Club policies (as opposed to such allocation as the Club and its members may accomplish through contribution or internal accounting).
American Club argues that two provisions of the policy compel allocation: (i) the indemnification clause, and (ii) the other insurance clause.
A. The Indemnification Clause
Each American Club policy covers a one-year period and provides that the Club will indemnify Prudential as
the Assured against any loss, damage or expense which the Assured shall become liable to pay and shall pay by reason of the fact that the Assured is the owner ... of the insured vessel and which shall result from the following liabilities, risks, events, occurrences and expenditures: ... Liability for ... loss of life, or personal injury to, or illness of any person....
Applying New York law, the bankruptcy court held that “injury-in-fact during the policy period triggers coverage.” Prudential I,
In the context of asbestos-related injuries, the bankruptcy court found that “injury-in-faet in the form of tissue damage occurs simultaneously or soon after asbestos inhalation.” Id. (citing Insurance Co. of N.A. v. Forty-Eight Insulations, Inc.,
The answer is, it depends. When exposure, and therefore the cumulative injury, spans several policies, the harms resulting from exposure to asbestos cannot easily be assigned to a particular policy. See J.H. France Refractories Co. v. Allstate Ins. Co.,
Some courts dealing with similar coverage language have concluded that any single policy designated by the policyholder owes full coverage. In Keene Corp. v. Insurance Co. of N. Am.,
[E]ach policy has a built-in trigger of coverage. Once triggered, each policy covers Keene’s liability. There is nothing in the policies that provides for a reduction of the insurer’s liability if an injury occurs only in part during a policy period. As we interpret the policies, they cover Keene’s entire liability once they are triggered.
Id. at 1048. Under this approach, (i) the insured selects a single policy from which to seek indemnification, (ii) that insurer pays the claim, and (iii) then the insurer seeks contribution from other liable insurers under the “other insurance” provisions of the policies or under the common law doctrine of contribution. Id. at 1049-50 & n. 35; see also ACandS, Inc. v. Aetna Cas. & Sur. Co.,
This approach has its shortcomings. One commentator has noted that “[sjhoehorning all damages into one policy period is ‘intuitively suspect’ and inconsistent with the development of toxic tort jurisprudence. An insured purchases an insurance policy to indemnify it against injuries occurring within the policy period, not injuries occurring outside that period.” Allocating Liability, supra, at 270; see Owens-Illinois, Inc. v. United Ins. Co.,
Some courts have adopted an approach which allocates liability among triggered policies based upon some seemingly objective factor, such as proportion of exposure occurring during the policy period, or time on the risk.
Both approaches allow allocation among policies at some transactional point, i.e., either when the loss is paid, or when it becomes the subject of contribution among policies and insurers. The courts that have endorsed allocation when the loss is paid have generally been motivated by considerations of equity and policy, rather than contract wording. First, these courts have sought to ensure that a single insurer underwriting a small proportion of the risk does not get saddled with the full loss, see Uniroyal,
Fortunately, a number of factors that often complicate the inquiry are absent here. Prudential had insurance coverage in each policy period implicated by the claims, and had no periods of self-insurance. In any event, no issue has been raised that a self-insured period existed, or arose by exhaustion of limits. And for virtually the entire span of years, American Club was Prudential’s only insurer. In 1971-74, Prudential was insured by another club that is not a party to this litigation, though apparently there exists an understanding among the insured shipowners and P & I insurers providing for allocation of loss among themselves.
•The financial significance of the allocation issue in this proceeding lies in its impact on the number of deductibles that will be applied to each claim. Under American Club’s pro rata allocation approach, one deductible would apply per claim as well as per triggered policy, whereas under the Claimants’ approach, all losses from any single claim would be recovered under a single policy and therefore a single deductible would apply to each claim. Given: (i) the policy’s broad language covering “any loss [or] damage” which Prudential becomes liable to pay resulting — presumably even in part — from injuries occurring during the policy period; (ii) the absence of a contractual intent to require allocation of liability among policies in the first instance; and (iii) the lack of any compelling policy or equitable considerations favoring allocation, we decline to read the policies in a way that would have the (probably unintended) effect of multiplying the deductibles applicable to each claim.
We hold that, in the circumstances presented, Prudential has the right to demand that a policy pay full coverage for each insurance claim in which the underlying Claimant suffered asbestos exposure and therefore asbestos injury during the policy period.
B. The Other Insurance Clause
The other insurance clause does not compel allocation of liability among triggered American Club policies in the first instance: “The Association shall not be liable for any loss, damage or expense against which, but for the insurance herein provided, the Assured is or would be insured under existing insurance.”
In construing this clause, we must determine the intent of the parties as expressed by the policy’s words and purposes. See American Home Prods. Corp. v. Liberty Mut. Ins. Co.,
Whether the other insurance clause reduces Prudential’s liability for claims which are covered by Prudential’s 1971-74 coverage is a different question. But it is inappropriate to resolve that issue at this stage because we do not know whether such claims exist and do not have before us the other club’s policy. Moreover, cases following the approach which we adopt here have employed other insurance clauses to distribute liability in the contribution phase, not in the liability phase. See, e.g., Keene Corp.,
Accordingly, we hold that the other insurance clause does not mandate allocation of liability among triggered American Club policies in the first instance. That is, Prudential may seek recovery under a single triggered policy of its choosing, and American Club presumably will allocate liability among the triggered policies as an internal accounting matter, or through claims for contribution, or not at all, as its board and internal gover
CONCLUSION
To summarize: (i) the recycling arrangement created by the Stipulation and Settlement Agreement does not satisfy the pay first provision of American Club’s policy; (ii) each Claimant’s asbestos-related injuries arose from a separate occurrence and therefore a single deductible will be applied to each claim; and (iii) liability will not be allocated in the first instance among triggered American Club policies.
The judgment of the district court is affirmed.
Notes
. The wording of the Stipulation is as follows:
11. Pursuant to the Plan and solely from the Liman Funds, ... the Trust shall pay (the "Claim Payment”) each Allowed Claim.... The Claim Payment shall be made to Claimants' Counsel and shall at all times be held by Claimants' Counsel in its trust or escrow account .... Immediately upon clearing the account where deposited, the claims from each Claim Payment shall be used by each Asbestosis Claimant to or on behalf of whom a Claim Payment was made, and by Claimants' Counsel to make the Claimant Loan described in paragraph 12 hereof.
12. In order to facilitate the implementation of the Plan, and further to assist the Asbestosis Claimants in the realization of the proceeds of the Coverage under which the Debtor may have been insured with respect to an Asbestosis Claimant's Insured Claim, each Asbestosis Claimant, through Claimants' Counsel, shall loan (the "Claimant Loan”) to the Trust, a sum up to and including the amount of the Claim Payment.... The Claimant Loan shall be made in cash or certified or wired funds immediately upon receipt of the Claim Payment by Claimants’ Counsel.... The Claimant Loan shall be “non-recourse” to the Liman Funds, the Trust, the Debtor and the Trustee, and ... neither the Debtor, or the Trust shall have any obligation to repay the Claimant Loan.
. In July 1994, the district court held that the recycling arrangement did not satisfy the pay first clause of American Club's policy. Prudential II,
Then, on December 6, 1994, while the motion for interlocutory appeal was pending, the bankruptcy court vacated the Stipulation and Settlement Agreement as unfair because the district court’s ruling (that the loan arrangement did not satisfy the pay first provision) prevented the funding of the settlement. See In re Prudential Lines, Inc.,
Judge Haight directed that I determine whether the original stipulation was fair.
Based upon the facts which have been presented in reference to the funding of the plan, the funding of the settlement, it is clear that [the] settlement cannot meet a fairness determination nor can it meet a settlement of a claim or a case because there is really not a clear ability to fund that settlement without the cooperation of the clubs ....
However, it is clear that [there is] an inability to fund it and there has been no evidence to the contrary.
I know [Claimants’ attorney] has alluded he can get the money, but the only thing that talks in bankruptcy is money, it appears to me that settlement cannot be implemented. So, therefore, I do not find that it is fair, nor do I find that it is an appropriate settlement under the [TMT Trailer ] case because it just is not appropriate under these circumstances.
(emphasis added). The bankruptcy court's citation was to Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson,
. As the bankruptcy court noted, New York has the most significant connections to the policies: American Club drafted and issued its policies in New York, and the parlies negotiated coverage here as well.
. The dissent inadequately characterizes Liman. Without support, the dissent recites that "in Li-man, the estate was able to pay all but $1,000 to each claimant.... [T]he promissory notes in Liman were directly related to the estate's ability to pay the various claimants.” Dissent at [page 90]. In fact, the Government objected to the payment of the debtor's claims in Liman because the payment of the deductible would have amounted to a preference, ■ and unlike the rest of the claim, the deductible portion of the payment would not have been reimbursed. In any event, as noted infra, we see Liman as turning on the limited extent of the recycling arrangement.
. In Employers’ Liability Assurance Corp. v. International Milk Products Co.,
. The unifying principle employed in the dissent as to both the deductible and pay first issues is that the P & I contract issued by American Club must be construed to maximize the rights of Prudential as the policyholder. First, that principle (whatever its effect might otherwise arguably be) is not implicated here, because (among other reasons) Prudential (i) is one of a handful of American Club’s membership companies, (ii) holds an appreciable interest in it, (iii) is represented on its board of directors, and (iv) has actively guided many of its fortunes and policies. Second, the contra proferentem principle, which by nature is applicable as a last resort, does not come into play in this case because the conduct of the parties, and other interpretive guides, al
. The district court described the Graham claim as follows:
On the Graham claim, [Prudential] paid out $50,000 and, in late 1983 and early 1984, presented a claim for reimbursement to American Club. This lime, more than one policy year was involved; there were twelve (12) (1952-1963). The Club applied a deductible for each policy year. The deductibles totalled $49,000. Accordingly, the Club paid [Prudential] $1,000 plus legal expenses of $2,463.65. So far as American Club's records reveal, [Prudential] accepted that payment without protest.
Prudential IV,
. The bankruptcy court rejected this conclusion because it determined that bodily injury occurs immediately or soon after exposure to asbestos, and prior cases had found that the term "occurrence" should be construed to mean something different than "injury.” For this proposition the bankruptcy court relied heavily on Uniroyal, Inc., in which the policy explicitly distinguished between occurrence and injury. See Uniroyal, Inc. v. Home Ins. Co.,
. A decision to the contrary is Owens-Illinois, Inc. v. Aetna Cas. & Sur. Co.,
It is worth noting that most Comprehensive General Liability ("CGL”) policies contain the same clause as in Owens-Illinois, under which "all personal injury ... arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.” Our reading of the American Club policies (which contain no such clause) may have limited application to asbestos personal injury cases involving CGL policies.
. The dissent would construe the contract to maximize coverage on the theory that in cases involving "ongoing exposure by several claimants to a hazardous condition, some event other than the exposure should be the occurrence in order to avoid the injustice where a single condition causes hundreds of thousands of injuries constituting hundreds of thousands of occurrences." Dissent at [page 89]. Earlier, the dissent warns that, if Prudential owes 5,000 deductibles, one for each Claimant, "[t]he practical result is that American Club will owe little or no coverage.” Dissent at [page 87 n. 1]. Elsewhere, the dissent predicts a "total forfeiture and a windfall to the American Club." Dissent at [page 91]. -
With all respect, this is grossly overdrawn. And while the dissent's interpretation would increase the insurance yield under the particular policies at issue here, the insurance yield would decrease under that interpretation when claims arising out of a single continuous occurrence are presented under policies with low per occurrence limits but high (or no) aggregate limits. In any event, the dissent’s analysis' amounts to reasoning from result.
. American Club asserts that the district court misunderstood it to argue that the losses should be allocated among all policies covering ships on which a Claimant was exposed to asbestos (even ships owned by other shipping lines), rather than only triggered policies covering Prudential ships. Whether or not such a misunderstanding occurred below, on appeal American Club only seeks to allocate liability among triggered policies covering Prudential ships.
. We have never addressed the allocation issue directly. In Stonewall Insurance Co., the district court ruled that "each triggered policy was responsible for only a pro rata share of [the manufacturer’s] liability as to a particular claimant," and this ruling was not challenged on appeal. Stonewall Ins. Co. v. Asbestos Claims Management Corp.,
. American Club argues that allocation of loss among policies is a corollary of the injury-in-fact trigger. We are unconvinced. Courts that employ an exposure trigger (which works much like injury-in-fact in this case) may also allocate among policies as a reasonable and fair approach, but they do not treat allocation as a corollary of the exposure trigger, mandated by the same medical or scientific assumptions. See, e.g., Clemtex, Inc. v. Southeastern Fidelity Ins. Co.,
. American Club asserts that the loss should be allocated in part to the unidentified, non-party club that insured Prudential in policy years 1971-74. But Prudential's rights (if any) vis-á-vis thal non-party are not before us, and the record reflects that the various clubs and their members have reached an understanding for the allocation of loss on seamen’s asbestos claims:
[T]here is already in place among shipowners and their P & I underwriters a practice to allocate liability for asbestos claims among shipowners pro rata according to sea service days of the seaman’s employment by each owner; if an owner had more than one underwriter for implicated policy years, a further allocation is made among underwriters, and*86 the Club applies one deductible for each implicated policy year.
American Club's Reply Brief at 15-16 n. 3. We have no reason to believe that American Club and the club which insured Prudential from 1971 to 1974 have not reached a similar agreement, thus rendering inapplicable the policy considerations favoring allocation discussed above.
. Under such reasoning, as in the Agent Orange cases, there exists in the present case more than 5,000 occurrences and the result will be that there exists 5,000 deductibles. The practical result is that American Club will owe little or no coverage.
Dissenting Opinion
dissenting:
I.
The majority holds that “each claim arose from a separate occurrence, and a single deductible is applicable to each claim.” I must respectfully disagree. Such a construction is not supported by the law of New York. The consequence of the majority’s conclusion, based upon the idea that the exposure of the claimants is an “occurrence,” is that each subsequent exposure would also count as a separate occurrence. The majority recognizes this possible consequence of its logic, but avoids it by simply stating that American Steamship Owners Mutual Protection and Indemnity Association (“American Club”) does not make such an argument. The majority opinion stops short of this unavoidable and unreasonable conclusion and instead concludes that the intent of the parties was that “each claimant’s first exposure in the policy period is the final unfortunate event which causes injury. ...”
The majority acknowledges that in Arthur A. Johnson Corp. v. Indemnity Ins. Co.,
In Uniroyal, Judge Weinstein observed that the policy at issue in the Agent Orange case read that occurrence was not identical to accident, but includes accident as well as “event,” “happening,” and “continuous or repeated exposure to conditions.” Uniroyal, Inc. v. Home Ins. Co.,
The policy language of the American Club provides coverage for “accident or occurrence.” Although the policy language in the instant case is not identical to that construed by Judge Weinstein in Uniroyal, it is similarly fundamental that the two terms in the policy at issue were not intended to mean the same thing because they are set forth in the disjunctive. In any event, relying on the definition in Webster’s Third New Int’l Dictionary 1561 (unabridged ed.1981), the majority adheres to New York law and applies the “unfortunate event” test to define an occurrence. The majority opinion, however, thereafter equates both the event and injury as the definition of occurrence. It is at this juncture I must respectfully part company.
As Judge Weinstein observed:
Neither the Johnson nor the Wesolowski court provided any guidance, apart from the “average man” aphorism, on how to identify the “unfortunate event” or on how to distinguish among several plausible such*88 events. All that can surely be drawn from those two cases is that the “unfortunate event” is not the “negligent act or omission” and it is not the injury to each victim. The “unfortunate event” is evidently one of the several happenings, with the exception of the negligent act or omission, which precedes and contributes to the resulting injury.
Uniroyal,
In the present case, the majority summarily dismisses the Uniroyal analysis on the ground that the policy in Uniroyal specifically provided that the occurrence was defined not to be the injury; that the injury was stated to be the result of the occurrence.
Under these circumstances one could urge that the most favorable construction of the ambiguity should be resolved in favor of the insured, Prudential Lines, Inc. (“PLI”).
The vast majority of courts ... have concluded that although injury must be suffered before an insured can be held liable, the number of occurrences for purposes of applying coverage limitations is determined by reference to the cause or causes of the damage and not to the number of injuries or claims. The number and timing of injuries is relevant in addressing the distinct question of the policy period to which each injury will be assigned.
The definitions of “occurrence” in the present insurance policies reflect this approach .... The language makes the [event] constituting the occurrence logically distinct from the injuries which later take place_ We hold that ... the policy terms admit of only one reasonable interpretation.
Michigan Chemical,
Under the majority’s approach, the policy is triggered at the time of the injury (the exposure of a claimant) which is likewise construed to mean the occurrence. In common parlance, however, it is only logical that an event is separate from the damage it causes. The policy language in Uniroyal is nothing more than a re-statement of the common understanding of the relationship between “occurrence” and “injury.” If one
The occurrence and the injury it produces need not have any relationship to each other in time or place. The time of the occurrence producing the ultimate injury is irrelevant to triggering the policy. The majority’s argument that it is the immediate event (the exposure) rather than the remote cause of injury (the presence) merely states a principal of causation (proximate cause) which is intended to avoid but-for reasoning. But the immediate event created by PLI in this case is not a multiple accident but a continuous condition which ultimately could and did result in bodily injury to over 8,000 seamen. The individual exposures were not caused by the steamship line. They occurred through the acts of the seamen. The installation and presence of the asbestos on the ships, as the place of employment, was the last immediate and unfortunate event brought about by the PLI. The present case begs for the adoption of Judge Weinstein’s reasoning in Uniroyal Where there is an ongoing exposure by several claimants to a hazardous condition, some event other than the exposure should be the occurrence in order to avoid the injustice where a single condition causes hundreds of thousands of injuries constituting hundreds of thousands of occurrences.
In the present case, just as in Uniroyal, there are multiple events to choose from to define the occurrence. It could be the purchase of the asbestos by PLI, the overall presence of the asbestos on each ship, the overall presence of the asbestos on all ships, the initial exposure by each claimant, or the overall multiple exposure by each claimant. The latter two events equate the injury with the occurrence and should be rejected. Because the allocation of each policy per policy year requires a new deductible, it is only logical that the overall installation and presence on all ships should constitute a single occurrence.
In- Uniroyal, Judge Weinstein recognized that finding a single continuous occurrence is especially appropriate in cases involving mass deliveries of hazardous products that impose damage on large numbers of people. Uniroyal,
In this case, however, applying the doctrine of most favorable construction for the insured makes the overall installation and presence the likely choice in the face of ambiguous policy language. Beyond this, it would seem that the common understanding, in the terms of the “average business man,” supports this rule. Furthermore, this approach is more equitable and manageable.
Such a result would certainly fall within the reasonable expectations of both the insured and insurer. Furthermore, this analysis does not depend on fictional hypothesis but rather on the actual experience involved here. The occurrence in this case was the continuing presence of the asbestos and is clearly separate from the injury encountered by the claimants’ exposure. In sum, common understanding of the term “occurrence” points to the underlying event rather than to the initial exposure (injury) by the worker.
II.
Plaintiffs’ utilization of the $300,000 reserve fund to recycle all payments (set up and approved by the bankruptcy judge as a part of the reorganization plan) provided only a momentary loss, but it was a loss. In 1969, Judge Mansfield observed:
[T]he courts of New York have repeatedly held that an insured fulfills his obligations under an indemnity policy and is entitled to reimbursement when a judgment against him has been satisfied, and the insurer may not escape its obligation to indemnify by showing that the payment made by the assured was advanced to it by a third party or financed in some other fashion.
Liman v. American S.S. Owners Mut. Protection & Indem. Ass’n,
The majority rejects plaintiffs’ plan of recycling payments to the claimants on the ground that plaintiffs’ arrangement was to finance “the whole of the claims, not the deductible alone.” The majority then reasons that “indemnity is sought for a loss that the policy holder has not incurred.” (emphasis added). Thus, the majority finds that plaintiffs’ non-recourse notes to the claimants is not a loss.
In all due respect, I fail to understand the proffered distinction. The payment of $300,-000, the satisfaction of judgments, along with the proffer of the non-recourse notes to each claimant constitutes a loss to the estate. It has created a new obligation to pay from existing estate funds certain sums of money. For example in Liman, the estate was able to pay all but $1,000 to each claimant. If it had been required to pay all 147 deductibles, it would not have had sufficient funds to pay any claims. Thus, the promissory notes in Liman were directly related to the estate’s ability to pay the various claimants. In addition in Liman, if all deductibles had been paid, the United States government would not have sufficient funds to protect its priority claims.
The majority reasons that “the insured’s lack of assets to satisfy claims against the bankrupt estate typically leaves the insured unable to sustain the loss and pay the claim.” The result of the majority’s decision is wholly inequitable; it allows a windfall to the insurer and denies any hope of payment to the injured worker. The financial plan created by Liman followed by the bankrupt estate mitigates this inequity and provides some partial relief.
By reducing each claim to a money judgment, the estate must obtain satisfaction of the judgment by proffering up to $300,000 to each claimant. When it has done that, the fact that the judgment creditor loans the monies back to the estate in exchange for a non-recourse note is not a sham. True, it is a contrived plan, but it was contrived in good faith with approval of the court.
Under this plan, each claimant (note holder) as a general creditor will still not be paid in full — but in this case, partial payment is better than nothing. Furthermore, what happens to the monies Prudential paid out should be of little concern to the indemnitor. There is no case that holds the plan is wrong;
. Judge Weinstein stated "[i]f the policy had defined the occurrence to be both the ‘event and the injury resulting therefrom,’ ” the result might have been different. Id. at 1380.
. In regard to the question of applying contra proferentum in the context of this case, I fail to see that PLI is not the insured in its relationship to the American Club simply because it also shares in a system of mutual insurance. PLI is not an insurance company and it does not act as a self-insurer as the insured did in Loblaw, Inc. v. Employers' Liab. Assurance Corp.,
.I fully recognize American Home can be distinguished on the basis that its policy terms state that the occurrence is distinct from the injury. However, once again the American Club policy does not contradict these terms or expressly provide to the contrary. Because of such ambiguity, at the very least, the doctrine of reasonable expectation of the insured should apply.
. Judicial approval of the use of a promissory note as a means of payment to satisfy the "pay first” requirement of an indemnity policy can be found in early decisions throughout the country. For example, in Riner v. Southwestern Sur. Ins. Co.,
. Cf. Taxicab Motor Co. v. Pacific Coast Cas. Co. of San Francisco,
[I]t will be remembered that the terms of the proposed payment and satisfaction were made known by the administratrix to the judge sit*91 ting in probate and received his sanction and approval before the settlement was made. It seems to us that this latter fact is alone sufficient to dispel any idea of bad faith that might arise from the transaction itself, and sufficient to require some direct and cogent proof of bad faith before it can be held that the transaction is not what it purports to be.
Id. at 395 (emphasis added).
. A note "has been held in numerous cases sufficient to constitute loss or damage under an indemnity against loss if that note is accepted as payment and in satisfaction of the judgment against the obligee.” Walker Mfg. Co. v. Dickerson, Inc.,
. The majority cites two cases in support of its attempt to distinguish Liman from the present case: Ahmed v. American S.S. Owners Mut. Protection & Indem. Ass’n, Inc.,
The majority cites Ahmed for the proposition that it distinguishes Liman because the insured in Ahmed "never paid any of the claims against it or arranged to finance such payments.” Ahmed,
The majority also cites Conoco in support of its proposition that the present case and Liman are distinguishable. In Conoco, an insolvent insured executed a demand promissory note, two years after its insolvency, in favor of the injured party claiming that the note was payment under the marine indemnity policy. Conoco,
First, in Conoco, the injured party informed the insured that it would not attempt to collect on the promissory note. Id. at 121. There was no such assurance made by the claimants in this case. Second, the Conoco decision was supported by and decided under Texas law, not New York law. Id. at 123. Third, in Conoco, the insured was "completely bereft of assets” and "literally incapable of sustaining a loss.” Id. at 122. The insured corporation was also dissolved. This is not true here. In addition, the insured in Conoco “offered no hope of eventually providing any value at all in exchange for the note.” Id. at 123 (emphasis added). While Prudential may not have the assets to completely pay the full amount of claimants’ judgments, Prudential does have some assets (as evidenced by the $300,000 used in the recycling agreement) and is capable of sustaining a loss. Prudential does offer hope of providing some value for the non-recourse notes.