“Arising Out Of” Not Ambiguous In Pennsylvania
Decades of litigation over the effects of pervasive asbestos use have yielded a financial burden borne across an array of industries. A historical manufacturer of asbestos-containing products and its insurer disputed the rightful allocation of asbestos-related losses under thirty-year-old excess insurance policies.
In General Refractories Company v. First State Insurance Co; Westport Insurance Corporation, et al, United States Court of Appeals, Third Circuit, 2017 WL 1416364 (April 21, 2017) the Third Circuit Court of Appeal was asked to decide whether a policy exclusion that disclaims losses “arising out of asbestos” will prevent a manufacturer from obtaining indemnification for thousands of negotiated settlements with plaintiffs who have suffered adverse health effects from exposure to its asbestos-containing products.
After a bench trial, the District Court found that the phrase “arising out of asbestos” contained latent ambiguity because the exclusion could reasonably be read to exclude only losses related to raw asbestos, as opposed to losses related to asbestos-containing products and awarded General Refractories $21,000,000 plus additional $15,273,705 for interest.
General Refractories Company (“GRC”) is a manufacturer and supplier of refractory products that are designed to retain their strength when exposed to extreme heat. To serve this purpose, GRC previously included asbestos in some of its products. GRC’s use of asbestos brought about approximately 31,440 lawsuits alleging injuries from “exposure to asbestos-containing products manufactured, sold, and distributed by GRC” dating back to 1978.
In 2002, after years of continued settlements of multiple asbestos related suits GRC tendered the underlying claims to its excess insurance carriers, including Travelers, all of whom denied coverage on the basis of exclusions for asbestos claims.
In maintaining that it need not compensate GRC for losses related to the underlying asbestos claims, Travelers relies on an “Asbestos Exclusion” contained within the excess insurance contracts, which reads: “It is agreed that this policy does not apply to EXCESS NET LOSS arising out of asbestos, including but not limited to bodily injury arising out of asbestosis or related diseases or to property damage. The policies do not define the terms “arising out of” or “asbestos.”
At its core, the parties dispute the meaning of four words within the Asbestos Exclusion: “arising out of asbestos.” The District Court held a one-day bench trial specifically to interpret this language. GRC took the position that at the time the policies were drafted “arising out of asbestos” had a separate meaning than “arising out of asbestos-containing products.” In GRC’s view, the term “asbestos” plainly referred to the raw asbestos mineral that is “mined, milled, processed, produced, or manufactured for sale in its raw form.” There is no dispute that GRC made and sold refractory products that sometimes contained asbestos components.
Having found ambiguity, the District Court observed that GRC’s industry custom and trade usage evidence supported the assertion that “[d]uring the relevant era, industry participants used the phrase to denote losses arising from mining, milling, producing, processing, or manufacturing the raw mineral,” not from “finished products.” The District Court deemed the Asbestos Exclusion unenforceable to preclude indemnification to GRC for its losses in the underlying asbestos-related lawsuits, and issued a memorandum and order to this effect. The District Court concluded that Travelers must cover $21,000,000 of GRC’s losses—the combined limit of the two excess insurance policies. The District Court accepted this stipulation, awarded GRC an additional $15,273,705 in prejudgment interest, and entered final judgment for GRC. Travelers appealed.
As always, the interpretation of an insurance contract is a question of law.
Ambiguity exists where the language of the contract is reasonably susceptible of different constructions and capable of being understood in more than one sense. The phrase “arising out of,” has an established, unambiguous meaning under Pennsylvania insurance law.
The language at issue was not asbestos but “arising out of” that has an unambiguous legal meaning in Pennsylvania. As a result any uncertainty concerning the meaning of the word “asbestos” is immaterial. Pennsylvania courts have long construed the phrase “arising out of” — when used in the context of an insurance exclusion — to mean causally connected with, not proximately caused by. A policy provision containing the phrase “arising out of” is satisfied by “but for” interpretation of causation.
Not only have courts applying Pennsylvania law interpreted “arising out of” to require “but for” causation, they have also held that the phrase is unambiguous. With this consistent interpretation in mind, the Third Circuit, compelled to follow state law, found that the plain language of the Asbestos Exclusion, disclaiming “EXCESS NET LOSS arising out of asbestos,” is unambiguous on its face and is not reasonably susceptible of different constructions. The provision plainly encompasses losses that would not have occurred but for asbestos or which are causally connected to asbestos.
Evidence of industry custom or trade usage is always relevant and admissible in construing commercial contracts, and does not depend on the existence of ambiguity in the contractual language. Where it can be shown that words have a special meaning or usage in a particular industry, members of that industry are presumed to use the words in that special way, whatever the words mean in common usage and regardless of whether there appears to be any ambiguity in the words.
Even the narrowest interpretation of “asbestos” — as referring only to raw mineral asbestos — as GRC argued, leads to the conclusion that coverage for losses associated with the claims against GRC is disclaimed by the Asbestos Exclusion. Even if GRC’s theory that “asbestos” only referred to mineral asbestos in its raw, unprocessed form the asbestos claims against GRC would still fall within the Asbestos Exclusion. The application of “but for” causation compels the conclusion that GRC’s losses are excluded under the policy as a matter of law. “But for” causation is a de minimis standard of causation, under which even the most remote and insignificant force may be considered the cause of an occurrence.
The claims that underlie this litigation stem from exposure to the asbestos incorporated into the finished products that GRC manufactured or sold. GRC only paid settlements and incurred damages when the underlying claimants alleged exposure to GRC’s asbestos-containing products. For each such settlement, a claimant was required to produce sworn evidence of exposure to a GRC asbestos-containing product and medical verification of an asbestos-related disease.
But for the inclusion of asbestos in GRC’s products—which was originally mined or milled as a raw mineral—the plaintiffs exposed to those products would not have contracted asbestos-related diseases.
Parties to an insurance contract must be able to place faith in consistent interpretations of common language when drafting their policies if they are to properly allocate the risks involved. The phrase “arising out of,” when used in a Pennsylvania insurance exclusion, unambiguously requires “but for” causation.
Because the losses relating to the underlying asbestos suits would not have occurred but for asbestos, raw or within finished products, the judgment of the District Court was reversed by the Third Circuit.
One of the most dangerous aspect of judging is allowing compassion for a litigant over the clear language of a contract and a clear statement of the law. The Third Circuit, reversing the District Court, applied a long line of insurance law cases establishing the meaning of the term “arising out of” and refused to find an ambiguity when none existed. Courts, as did the Third Circuit, must apply the meaning of an insurance contract as written and cannot allow compassion for the plaintiff overrule the wording of the policy.
This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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