Segal McCambridge Legal Blog

In a case of first impression, on August 9, 2012, the California Supreme Court issued its long-awaited decision in State of California v. Continental Insurance Company, et al.  California policyholders with long-tail environmental liabilities are now able to recover more money from their historic commercial general liability insurers.

Rejecting the insurers’ arguments that a pro-rata allocation methodology should be applied, the court ruled that the State of California was allowed to recover up to the total limits of all triggered policies over multiple policy years. But the court did not stop there. It extended its holding to allow the stacking€? of limits across all triggered policy years. The California Supreme Court concluded that the fact that all policies were covering the risk at some point during the property loss is enough to trigger an insurer’s indemnity obligation. As a result, the insurers on the risk were ordered to pay all sums for property damage attributable to the Stringfellow Superfund site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was on the loss.

The Supreme Court of California determined that the all sums language in the excess policies’ insuring agreements meant that the insurers had to cover all damage up to their policy limits, even damage that occurred before or after their policy was in effect. The court further held that the during the policy period language that the insurers relied on to limit coverage does not appear in the insuring agreement section of the policies and, therefore, is neither logically [n]or grammatically related to theall sums’ language in the insuring agreement.

The court next found that the State of California could stack the coverage limits of all policies in the absence of any anti-stacking provisions. The court noted that all-sums-with-stacking coverage allocation ascertains each insurer’s liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct period of injury. The court found nothing unfair or unexpected in allowing stacking in a continuous long-tail loss.

In reaching its decision, the California Supreme Court reasoned that:

It is often ‘virtually impossible’ for an insured to prove what specific damage occurred during each of the multiple consecutive policy periods in a progressive property damage case. . .If such evidence were required, an insured who had procured insurance coverage for each year during which a long-tail injury occurred likely would be unable to recover.

The court asserted that extending coverage throughout the entirety of the ensuing property damage best reflects the policyholder’s expectations and the insurers’ indemnity obligations under their respective policies. Stacking generally refers to the stacking of policy limits across multiple policy periods that were on a particular risk. In other words, [s]tacking policy limits means that when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy. The California Supreme Court found that an all-sums-with-stacking rule has numerous advantages because:

It resolves the question of insurance coverage as equitably as possible, given the immeasurable aspects of a long-tail injury. It also comports with the parties’ reasonable expectations, in that the insurer reasonably expects to pay for property damage occurring during a long-tail loss it covered, but only up to its policy limits, while the insured reasonably expects indemnification for the time periods in which it purchased insurance coverage.?

Today, liability insurers typically include anti-stacking provisions in their policies to avoid an outcome like the California Supreme Court’s decision. Consequently, the State of California v. Continental Insurance Company, et al., ruling is not expected to have a major impact on more recently issued coverage. However, the decision presents significant exposure implications for historic insurers of California insureds. The court’s reasoning could also be extended to apply to other types of long-tail situations such as asbestos bodily injury exposure claims. Further, while many states have already adopted allocation rules, the State of California v. Continental Insurance Company, et al. case may be influential in states without settled insurance allocation coverage law.

Today, the article I wrote with my colleague John Lee, "Climate Change Claims: The Next Y2K Insurance Litigation Scare?" appears in the current issue of Business Insurance. Just before publication, I was able to modify the article to include mention of recent developments in one of the cases, AES Corp. v. Steadfast Ins. Co. On April 20, 2012, the Virginia Supreme Court affirmed its prior ruling that Steadfast Ins. Co. has no obligation to defend or indemnify AES Corp. in a climate change liability case arising out of an underlying suit brought by the Village of Kivalina, Alaska. The court found no coverage because the underlying complaint alleged damages that were the "natural and probably consequence" of AES's intentional actions.  Consequently, the court noted that the complaint did not allege a fortuitous accident or event. As we explain in the article, Kivalina is an Inupiat island community in the Arctic waters just off the Alaskan coast. Residents sued ExxonMobil and others energy firms, claiming the companies' activities were contributing to global warming which damaged the sea ice that protects the island's coast from storms. Shoreline erosion, the suit claimed, would ultimately force the population to relocate.

As has happened in similar cases, the judge dismissed the case as centering on "non-justiciable" issues, or issues better addressed through political, rather than judicial, means. The underying case is on appeal.

To read the entire Business Insurance article, click here.  (Free registration required to read the complete article.)

The decision can be found at http://www.nycourts.gov/reporter/3dseries/2012/2012_00421.htm

From http://newsandinsight.thomsonreuters.com/Legal/

A New York appellate court affirmed a $420.4 million ruling in favor of insurer Travelers Cos, handing it a victory in one of the longest-running and most complex asbestos-related litigations in history.

The dispute has to do with the obligations of certain reinsurers to Travelers, which joined in payments of nearly $1 billion to cover asbestos claims against the company Western MacArthur. Travelers subsequently sought to recover some of its payments from its reinsurance companies.

Among those reinsurers is the U.S. unit of industry leader Munich Re and units of the insurer and reinsurer ACE Ltd. A spokeswoman for Munich Re Americas declined to comment. An ACE spokesman could not immediately be reached for a comment.

In October 2010 a lower New York court ruled that the reinsurers were obliged to help cover Travelers. That ruling was affirmed on appeal on Tuesday.

The Appellate Division, First Department, ruled 4-1 that the reinsurance companies were bound by a concept known as the “follow the fortunes doctrine,” which holds that reinsurers share the burdens taken on by the insurance companies with which they do business.

The appellate court found that the lower court “correctly determined that the follow-the-fortunes doctrine required defendants to accept the reinsurance presentation made by (Travelers unit) USF&G.”

A Travelers spokesman could not immediately comment on the ruling.

The facts behind the case date to 1948, when USF&G first wrote a liability insurance policy for Western Asbestos Co. By the late 1970s, people harmed by asbestos began to sue Western Asbestos’ successor company, Western MacArthur, which in 1993 sued USF&G and two other insurers seeking indemnification.

In 2002, the sides reached a settlement, which resulted in Western MacArthur going into bankruptcy. USF&G then sought indemnification from its reinsurers.

The one dissenter in Tuesday’s ruling was Justice Sheila Abdus-Salaam, who said there was a genuine dispute as to whether some of the settlement USF&G reached with Western MacArthur was subject to the reinsurance treaties.

Besides the length of the litigation, the case is notable because of the high-profile law firms involved. Travelers was represented on the appeal by Simpson Thacher & Bartlett, while Wachtell, Lipton, Rosen & Katz represented Munich Re and Boies, Schiller & Flexner represented ACE.

The case is United States Fidelity & Guaranty Company vs. American Re-Insurance Co, New York Supreme Court, Appellate Division, First Department, No. 604517/02.

For American Re-Insurance Company: Herbert Wachtell of Wachtell, Lipton, Rosen & Katz.

For Excess Casaulty Reinsurance Association and OneBeacon America Insurance Company: Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan.

For ACE Property & Casualty Company: George Carpinello of Boies, Schiller & Flexner.

For respondents: Mary Kay Vyskocil of Simpson Thacher & Bartlett

Since December 5, 1980, Medicare has been a secondary payer, meaning that if a Medicare recipient has another source of funds for medical care, that source must pay first. Thus, in personal injury actions where an injured plaintiff whose related treatment was paid for by Medicare, Medicare must be reimbursed out of funds from a settlement, judgment or other award.  Medicare has just implemented a $300 settlement threshold for certain Liability Insurance cases.  For cases meeting the below criteria, where the lump sum settlement payment was $300 or less, Medicare will not seek to recover from the settlement, judgment or award.  This limit to recovery does not apply to exposure cases, such as asbestos-related disease cases, nor does it apply to cases where an insurer is paying on-going medical bills. The criteria established by MSPRC is (quoting from  http://www.msprc.info/index.cfm?content=toolkitsalert):

• The beneficiary’s settlement, judgment, award or other payment claims/releases a physical trauma-based incident/injury/accident/illness. (This does not include alleged ingestion, implantation or exposure-based incident/injury/accident/illness).
• The beneficiary obtains a liability insurance (including self- insurance) settlement, judgment, award, or other payment for a Total Payment Obligation to Claimant (TPOC) of $300 or less.
• There are no multiple settlements, judgments, awards or other payments for the same underlying claim which total more than $300.
• A demand [letter from MSPRC] has not been issued.

From SeekingAlpha.com
Insurance: Is Buffett Right About Asbestos Liability?

Many P&C insurance companies are still dealing with legacy losses from asbestos, although policies issued since 1985 exclude coverage. On July 13, The Hartford Financial Services Group (HIG) announced substantial increases to its reserves for losses from that cause. The ads are back on TV: “If you or a loved one died from Mesothelioma, don’t wait, call now.”

Is the industry heading for another round of bleeding from long-tailed asbestos claims? Or is Warren Buffett’s Berkshire Hathaway (BRK.A) going to earn outsize profits by relieving other insurers of their exposure? The Oracle of Omaha once said: “I can go into an emergency room and write life insurance if you let me charge enough of a premium.” In April this year Berkshire assumed AIG’s (AIG) asbestos risk for $1.65 billion, after receiving $2 billion in 2010 to take on CNA’s asbestos and environmental risks.

Reserve Increases

In 4Q 2010 AIG took a reserve charge of $1.3 billion for asbestos, offering the following explanation:

During the 2010 year end loss reserve review, the third-party actuary’s standard account-specific asbestos model was updated for 2010 information and was calibrated to actual AIG experience, including that in the second and third quarters of 2010. AIG also modified certain of its loss-reserve-related assumptions to better reflect both industry-wide and AIG-specific expectations and experience for IBNR claims, taking into consideration recent, higher industry-wide trends regarding expanding coverage theories for liability.

HIG, pre-announcing 2Q 2011 results, noted an increase in asbestos reserves:

A reserve increase of $290 million, pre-tax, or $189 million, after tax, resulting from the company’s annual review of its legacy asbestos liabilities. The increase was primarily driven by higher frequency and severity of mesothelioma claims, particularly against certain smaller, more peripheral insureds.

AIG presumably had to update its reserves prior to the transaction with Berkshire. Berkshire would perform due diligence. David Merkel has lovingly chronicled AIG’s reserving practices, which at times have been egregiously slack. Given a very long history of under-reserving, the size of AIG’s increase should not be taken as indicative of the industry as a whole.

What is Buffett Thinking?

Reviewing the most recent 10-K, the following excerpts provide a fairly clear explanation of the nature of the the transactions and the reasoning behind them:

In 2010, BHRG (Berkshire Hathaway Reinsurance Group) entered into a reinsurance agreement with Continental Casualty Company, a subsidiary of CNA Financial Corporation ("CNA"), and several of CNA's other insurance subsidiaries (collectively the "CNA Companies") under which BHRG assumed the asbestos and environmental pollution liabilities of the CNA Companies subject to a limit of indemnification of $4 billion.

In BHRG's retroactive reinsurance business, the concept of time-value-of-money is an important element in establishing prices and contract terms, since the payment of losses under the insurance contracts are often expected to occur over lengthy periods of time. Losses payable under the contracts are normally expected to exceed premiums and therefore, produce underwriting losses. This business is accepted, in part, because of the large amounts of policyholder funds ("float") generated for investment, the economic benefit of which will be reflected through investment income in future periods.

Earlier in the 10-K, is the kicker:

For many years, the insurance industry has been subject to personal injury claims arising from exposure to asbestos. The magnitude of such losses has caused many manufacturers to file for protection under the U.S. Bankruptcy Code. Over the years, large numbers of asbestos related claims have been filed, including claims based upon exposure to asbestos, even though no related illness has been identified. Consequently, the U.S. Congress has periodically introduced legislation to assure that resources are available to indemnify claimants suffering from asbestos-related illnesses and to manage the overall cost of those claims. To date, no legislation has passed. It is highly uncertain as to whether or not any legislation will be enacted and, if enacted, how the provisions of such laws will affect Berkshire.

Companies like CNA or AIG have difficulty maintaining their financial strength ratings due to the expected volatility of asbestos liabilities. They evidently prefer to take their losses and move on, leaving AAA rated Berkshire to bear the risk, and enjoy the profits. If at some point Congress does something to rein in the excesses of plaintiff lawyers on asbestos claims, so much the better.

Even though no related illness has been identified? There may be some need for corrective action.

Berkshire Hathaway

Buffet’s approach to investing has been marked by an extremely long term view, a willingness to be greedy when others are fearful, and an appreciation for the value of float. The asbestos transactions sit at the intersection of these three lines of thinking, and are likely to be a source of long term earnings strength for Berkshire.

Social Inflation and Legislative Relief

The phenomenon of increased litigiousness may be described as social inflation. Attorneys become very adept at securing increasing settlements, devising new theories of liability, and identifying new classes of claimants. Always idealistic, Americans strive to do the right thing for themselves and their loved ones. Often that means calling a lawyer.

Ideology becomes involved, with the right wing eager to restrain litigation, and the left more willing to let the plaintiff’s bar have its way.

From time to time, Congress considers Tort Reform, but has not enacted any legislation to date. As the US becomes more polarized, the possibilities of well thought out reform diminish. There is no reason to look for legislative relief on asbestos liability.

Summary

Legacy losses from asbestos related loss exposures are in the process of putting on another growth ring. A complex set of considerations involving access to equity capital, rating agency opinions, and regulatory capital requirements makes these legacy exposures difficult for insurers that do not enjoy extremely strong credit and insurance financial strength ratings. AIG and CNA sought relief from Berkshire for that reason, paying prices that should be profitable to their rescuer.

The recent developments on asbestos do not make the insurance industry as a whole unattractive. Many companies have little or no exposure, and others have arranged to offload the risk onto Berkshire Hathaway. It’s best to make the analysis for each company separately. In the cases reviewed, a hypothetical 20% increase to asbestos reserves reduced book value by 0.6% to 1.8%, very manageable for companies that are trading below historical P/B multiples.

From an analytical point of view, simply doing a word search for “asbestos” on the most recent 10-K will lead the investor to numerical data that can be quantified against book value or earnings in order to get a handle on the risk involved.

From Reuters
Asbestos-related diseases have been falling for a decade, but warnings from a pair of U.S. insurance giants about new claims raise questions about the industry’s ability to put the scourge behind it.

While medical evidence suggests fewer new cases of asbestosis and the lung cancer mesothelioma, insurers say they are getting sued more frequently and aggressively by people with claims against “peripheral insureds,” such as contractors that worked on projects where asbestos was used.

As some of these lawsuits succeed in courts across the country, it fuels new suits by aggressive plaintiffs’ lawyers and compounds the problem for insurers trying to understand their exposure.

The disconnect between a waning disease and flourishing claims also exposes a flaw endemic to insurers. When they set aside reserves for indistinct risks, they are making guesses — even if educated ones — on how long a particular risk will endure and what it will cost them to be done with it.

No law says any particular company’s guess has to match anyone else’s, but investors raise alarms about companies where reserves are not in line with peers.

That’s why Hartford Financial’s announcement this month of a $290 million pretax earnings hit from increasing reserves for asbestos cases fostered concerns beyond the insurer’s citation of rising claims for mesothelioma.

“Although these items are one-time events, the result raises questions about … reserve adequacy,” Barclays Capital analyst Jay Gelb said in a note to investors. He was referring to both the asbestos charge and Hartford’s sharp rise in second-quarter catastrophe losses.

American International Group Inc similarly riled investors in early February with a $4.1 billion addition to its reserves, including more than $1 billion related to its asbestos exposure.

Fitch Ratings responded by cutting the credit rating on AIG’s domestic property unit insurance units, calling the charges “a significant outlier” compared to competitors and the whole property insurance market.

According to insurance ratings agency AM Best, the Hartford had the fourth-highest level of asbestos and environmental reserves of all large property insurers at the end of 2009 while AIG ranked seventh. They also ranked in the top seven in terms of average annual asbestos losses in 2005-2009.

AIG and The Hartford are in particularly sensitive positions since they were two of the three insurers who took government bailouts during the financial crisis. Their reserve accounting has not been questioned by any of their regulators.

SAVVIER PLAINTIFFS

For decades asbestos was a favorite material in building products, naval applications and other industrial settings because of its fire-retardant properties. Over time, though, exposure to its microscopic fibers causes health problems.

More recently, many of the rescue workers at the Ground Zero site in New York after the 9/11 attacks were exposed to high concentrations of asbestos – in some cases, reports have said, nearly a million times the normal background level.

To be sure, some of the new claims stem from plaintiffs’ lawyers becoming more effective at suing people who are only peripherally connected to asbestos victims. Late-night cable television is flooded with ads from asbestos lawyers, and “mesothelioma” is among the most valuable of advertising keywords on Google. Since there is still plenty of asbestos in buildings across the country, it is also possible that new cases are adding to insurers’ burdens.

Best warned in February that the insurance industry is generally underfunded in its asbestos reserves. It cited a growing number of legal claims reflecting a weakening of tort reform in some states and the “ongoing filing of mesothelioma claims for years to come.”

Asbestos claims have been a bane of insurers for at least a decade. They nearly brought down the Lloyd’s of London market in the 1990s and have cost some of the industry’s largest players billions of dollars. Insurers like MetLife were accused for decades of helping to conceal the deadly side effects of the fire retardant.

In recent years, insurance investors have been celebrating the steady decline of asbestos-related claims and reserves. According to the Insurance Information Institute, reserves grew every year from 2001 to 2005, then shrank every year since through 2009.

TREND EASING

The trend appeared to be tracking the medical evidence. New cases of malignant mesothelioma, a lung cancer caused only by asbestos exposure that one oncologist called a “tremendously lousy disease,” declined at an annual rate of 1.8 percent from 1999 to 2008, according to the American Cancer Society.

“I am surprised myself to hear insurers are (seeing) more claims, because we think with the reduction of asbestos years back we’re starting to see a reduction in incidence of the disease,” said Kevin Becker, an oncologist at Maimonides Medical Center in New York.

Annual reports from MetLife, the country’s largest life insurer, show new claims and total outstanding claims dropping at a steady pace from 2003 through 2010, declining around 40 percent over the period.

The sums paid annually by the industry as settlements also have generally been shrinking. A.M. Best’s forecast that the insurance industry may ultimately end up paying $75 billion in asbestos claims over time seems inflated to some regulators.

“I can’t speak for everyone out there but (claims) may be a little less than that,” said Joseph Torti, Rhode Island’s superintendent of insurance and the designated spokesman on asbestos issues for the National Association of Insurance Commissioners.

LONG-TERM CHALLENGE

But deciding to build or draw down reserves remains a crapshoot for insurers.

Mesothelioma has an incredibly long latency period, meaning 30 years or more can pass between exposure to asbestos and the onset of the cancer. That is why companies such as Travelers and Berkshire Hathaway continue to build reserves.

“Trends were kind of favorable, but you still see the companies with exposure kind of trickling up their reserves from time to time,” said Jim Auden, head of the property and casualty insurance unit at Fitch Ratings.

Another concern for insurers are new and expensive therapies being developed to treat mesothelioma.

The upshot? Asbestos claims and payments are not going away, and no one knows when the bend will turn.

“You wish that this would be completed,” Auden said. “These claims are tied to activities in the ’70s mostly (and) you still can’t get your arms around it.”

Currently, reporting requirements under the Medicare Secondary Payer (MSP) Act require claims resolved on or after October 1, 2011 for over $5,000 to be reported to the Centers for Medicare and Medicaid Services (CMS) starting January 1, 2012. In an effort to analyze the impact of the threshold on both funds recovered and costs of compliance, RAND looked at data from auto injuries and medical malpractice claims in a recently published Occasional Paper, “Recovery Under the Medicare Secondary Payer Act: Impact of Reporting Thresholds.” RAND authors Eric Helland and Fred Kipperman concluded that maintaining a reporting threshold for cases resolved, such as $5,000, will have a minimal impact on revenue and significantly relieve reporting burdens. Using auto accidents as an example, and  assuming there is no reimbursement to Medicare from recoveries on claims under the threshold, “retaining the $5,000 reporting threshold would reduce recoveries by 2.4 percent, or $24 million, while reducing the number of claims that must be reported by 43 percent.” As many insurers have implemented procedures to address conditional payments on every claim involving a Medicare recipient, regardless of the reporting threshold, it is possible this reduction in recovery will be even less, with great savings to the insurance industry. As costs are often passed on to consumers, many may benefit should CMS maintain a $5,000 reporting threshold.
The RAND paper may be accessed at http://www.rand.org/pubs/occasional_papers/OP332.html

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In Wilson v. State Farm, a ruling made June 14, 2011 in the USDC, WD KY, the court found an insurer did not act in bad faith in its refusal to pay a settlement while Medicare as Secondary Payer issues remain unresolved.    In summary, a settlement agreement was reached, the defendant wanted to resolve Medicare liens before paying the plaintiff and plaintiff's counsel refused to cooperate and would not let State Farm talk to Medicare. Instead he "asked State Farm to deposit the full policy limits in an escrow account from which the Medicare lien would be paid. Plaintiff agreed “to hold State Farm . . . harmless from any claim by Medicare.” Medicare was not involved in nor bound by this agreement. As an alternative, State Farm suggested including Medicare as a payee on the settlement check. Plaintiff rejected this request. Finally, State Farm decided to await Medicare’s determination of the value of its lien and then issue separate checks to Medicare and Plaintiff."

Plaintiff filed an action claiming "to delay payment of the $50,000 more than thirty days merely to protect Defendant from later liability to Medicare" was bad faith. Plaintiff ad a separate count under a KY statute that would allow for 12 percent interest and reasonable attorneys fees where an insurer failed to settle a claim without reasonable foundation. While the bad faith action was pending, State Farm learned the lien amount and paid the plaintiff and Medicare.  

The court found that " to comply with federal law and to protect its own legitimate interest against overpayment is reasonable and certainly is not in bad faith. Defendant did not delay payment in order to pay less or harass Plaintiff. Motorists Mut. Ins. Co., 996 S.W.2d at 452-453 (stating that “there must be proof or evidence supporting a reasonable inference that the purpose of the delay was to extort a more favorable settlement or to deceive the insured with respect to the applicable coverage”). While it may serve Defendant’s self interest to comply with federal law, such action was not bad faith, especially when Plaintiff apparently refused to cooperate with Defendant’s attempts to pay the claim more quickly."

The court also found that the delay was based on a " ' reasonable  foundation' " when the delay in payment of the settlement was to seek "assurances concerning the amount and payment of the lien."

This is a great ruling for companies who are struggling with resolving Medicare issues on settled cases, working under threat of suit for sanctions.

For more information on the author of this post, click here.

From Business Insurance.com

OneBeacon does not owe CNA reimbursement for asbestos defense: N.Y. court

As of June 6, 2011, the opinion can be found here

NEW YORK—Timely notice must be given to obligate an insurer to pay defense costs, a New York Supreme Court’s appellate division has ruled.

The case, Continental Casualty Co. et al. vs. Employers Insurance Co. of Wausau and Robert A. Keasbey Co., stems from a long-running asbestos liability dispute. At issue is how to allocate defense costs among insurers involved in the litigation against now-defunct contractor Keasbey.

In a previous ruling, a judge agreed with Continental’s parent company—CNA Financial Corp.—that the four insurers involved, including CNA, had an equal duty to defend Keasbey, and that CNA was entitled to be reimbursed by OneBeacon America Insurance Co. for one-quarter of the cost of defending Keasbey.

According to Thursday’s decision, Keasbey never bought a policy directly from OneBeacon, but was covered by two wrap-up policies issued by OneBeacon that provided liability coverage to contractors working on a specified project at a nuclear power plant. Neither policy had an asbestos exclusion.

The court said defense coverage provided to Keasbey under CNA’s primary policies was exhausted by 1992, but that CNA did not find evidence of the OneBeacon wrap-up policies until 2003 and sought to make OneBeacon reimburse CNA for its costs in defending Keasbey in asbestos actions since March 1, 2003.

Review overturns previous ruling

Upon review, a New York Supreme Court appellate division reversed much of the previous ruling. The court said CNA is not entitled to be reimbursed by OneBeacon for the costs of defending Keasbey in asbestos actions from March 1, 2003, to Sept. 30, 2007, or for any portion of the costs defending the same actions after Sept. 30, 2007, because it had "failed to establish that it gave OneBeacon timely notice of any of the actions."

The court also held that to the extent CNA paid for Keasbey’s defense in any asbestos actions commenced after Sept. 30, 2007, CNA was barred from seeking reimbursement from OneBeacon unless it established that it had provided OneBeacon with "timely notice of that particular action under the terms of the OneBeacon policies."

The court, however, also held that CNA "has no further obligation to defend or indemnify" Keasbey in asbestos actions involving primary comprehensive general liability policies it had issued to Keasbey from Feb. 15, 1970, to Feb. 15, 1987.

From the Dow Jones Daily Bankruptcy Review
Insurers Win Right To Attack Global Industrial Chapter 11 Plan
Peg Brickley
04 May 2011

A split appeals court in Philadelphia Wednesday voted six to four to give insurance companies a shot at upsetting the confirmation of the Chapter 11 exit plan of Global Industrial Technologies Inc., one of many companies that resorted to bankruptcy to deal with massive claims for asbestos damages.

The majority said the insurance companies didn’t get a full hearing on their contention that improper collusion swelled the number of claims for silica-related injuries that were dealt with in Global Industrial’s Chapter 11 emergence plan.

A maker of refractories and other industrial products, Global Industrial filed for Chapter 11 protection in 2002. The Chapter 11 plan that was confirmed about five years later proposed to deal with both asbestos-related and silica-related injuries.

Silica, like asbestos, is a toxic material blamed for lung injuries. Global Industrial’s Chapter 11 plan proposed to let the company escape the overhang of hundreds of millions of dollars worth of potential liabilities by setting up trusts that would pay damage claims for both silica and asbestos.

The number of silica-related claims boomed once Global Industrial made it known its Chapter 11 case would set up a way to address silicosis damages. As a result, Global Industrial’s Chapter 11 plan affected the pocketbooks of Hartford Accident & Indemnity Co. and other insurers, the Third Circuit Court of Appeals found.

“When a federal court gives its approval to a plan that allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections addressed,” the majority wrote.

A bankruptcy judge in Pittsburgh, backed up by a federal district court judge, said the insurance companies’ rights weren’t affected by Global Industrial’s Chapter 11 plan because whether the insurers would have to pay for silicosis damages depended on the terms of their policies, not on whether the claims were made against the company or against a bankruptcy trust. Invalid claims presented for payment to the asbestos trust are subject to challenge, just like claims presented against a company.

The appeals court majority, however, said the insurance companies should have been given a chance to prove their potential liability was increased as a result of Global Industrial and plaintiffs’ lawyers working together to create an “explosion of new claims.”

A four-judge minority said the bankruptcy court was “fully aware of past abuse in the realm of silicosis claims” and required evidence under penalty of perjury that the claims filed in Global Industrial’s case were legitimate before signing off on the company’s Chapter 11 plan.

Wednesday’s ruling will only prolong the period of uncertainty dogging Global Industrial, “a move that may very well imperil the financing on which the reorganized entity is relying to succeed,” according to the dissenting judges.

Global Industries Technologies Inc. (GIT) (In re: Global Industrial Technologies, Inc., et al., No. 08-3650, 3rd Cir.).

As of May 6, 2011, the Third Circuit Opinion can be found here