Products Liability Law Daily Wrap Up, DAMAGES—ASBESTOS—N.D. Cal.: Insurers must cover ‘payment percentage’ of asbestos claims against roofing materials maker, (Apr 8, 2016)

By Susan Engstrom.

The insurers for a manufacturer of building materials were liable for the “payment percentage” of underlying asbestos-exposure claims in accordance with a trust established after the insured filed for bankruptcy, a federal court in California ruled. Contrary to the insured’s assertion, the insurers’ coverage obligation was not based on the liquidated value of the claims (Flintkote Co. v. Aviva PLC, April 4, 2016, Illston, S.).

Prior to bankruptcy, Flintkote Co. manufactured and distributed building materials containing asbestos fibers. After bankruptcy, a trust was formed to channel and pay all pending and future asbestos bodily injury claims filed against the company. The “Trust Distribution Procedures” (TDPs) set forth the method for processing and paying Flintkote’s share of the value of the claims, with the intention of paying all claimants over time as equivalent a share as possible of the value of their claims.

Claimants who qualified for payments under the TDPs were to be paid a percentage of the nominal “value” the trust assigned to their claims. Claims evaluated under the individual review process were subject to “maximum values” ranging from $650 to $450,000. Regardless of the nominal values assigned to a claim, the trust’s obligation to pay a qualifying claim was both limited and determined by the “payment percentage.”

Insurance policies. Flintkote held asbestos liability insurance policies from Aviva PLC, Aviva International Insurance, Ltd., and The Ocean Marine Insurance Company Ltd. (collectively, the insurers). The policies stated that the insurers would “indemnify the Assured for all sums which the Assured shall be obligated to pay by reason of the liability … imposed upon the Assured by law … for damages on account of … [p]ersonal injuries” (emphasis added).

The dispute in the instant case involved what the insurers were “obligated to pay” Flintkote. The insurers asserted that their indemnity obligation was to cover the payment percentage, i.e., what the trust “actually pays” to the asbestos claimants. Flintkote argued that the insurers had to honor their pre-bankruptcy coverage obligations and pay the full liquidated value of the claims. In Flintkote’s view, the TDPs allowed for this increased recovery.

TDPs. The TDPs contemplated that the payment percentage could change, as the initial percentage assumed several factors such as the number of claimants, the types and number of diseases ranging in severity, and the available assets. If the payment percentage did not change, earlier claimants who were paid less could be entitled to a higher payment. However, the TDPs pointed out that no guarantee could be made of higher payment amounts.

In addition, the language of the TDPs mandated that insurance proceeds first go to maintain or stabilize the payment percentage. Contrary to Flintkote’s assertion, the language did not mean that there was a direct “link between insurance recoveries and claimant payments.” The trustees still exercised discretion, based on a series of external factors, when deciding whether to adjust the payment percentage.

Insurers’ indemnity obligation. In an analogous coverage dispute involving asbestos-injury claims against a bankrupt insulation company, a California appellate court found that the relevant insurance policies indemnified the insured for amounts it was “obligated to pay” by law, and that under the bankruptcy trust’s “claims resolution procedures” (CRPs), the only amount the insured was obligated to pay was each claim’s payment percentage—not the allowed liquidated value. The appellate court reasoned that the allowed liquidated value served only as a model of what would be paid under the best case scenario, assuming that the payment percentage reached 100 percent.

The court in the instant case determined that the appellate decision dictated what the insurers were “obligated to pay” Flintkote. The CRPs in the state case appeared to employ the same mechanism as the Flintkote TDPs in that they increased the payment percentage if the trustees determined it was appropriate based on a similar set of factors, including the recovery of additional assets.

Contrary to Flintkote’s argument, the TDPs did not severely circumscribe the discretion of the trustees, mandating that insurance recoveries go to the benefit of claimants. Rather, the language clearly provided that, once every three years, “the Trustees shall reconsider the then applicable Payment Percentage to assure that it is based on accurate, current information and may, after such reconsideration, change the Payment Percentage if necessary, with the consent of the [Trust Advisory Committee] and the Future Claimants Representative.”

In addition, the CRPs and TDPs both: (1) required the trustees to periodically examine the payment percentage; (2) allowed for supplemental payments to past claimants if the payment percentage subsequently increased; and (3) stated that the “overarching goal” was to maximize value for claimants.

Accordingly, in line with the state appellate decision, the insurers were obligated to pay Flintkote the trust payment percentage, and not the liquidated value.

Bond. Finally, the court determined that the insurers must post a bond to secure the payment of any final judgment that may be rendered. To that end, the court ordered each party to file a statement on an appropriate bond amount.

The case is No. 15-cv-01638-SI.

Attorneys: Marc S. Maister (Irell & Manella LLP) and Michael Collins Smith (McCarter & English, LLP) for Flintkote Co. and Flintkote Trust. Andrew G. Wanger (Clyde & Co. US, LLP) for Aviva PLC f/k/a Commercial Union Assurance Co. Ltd., The Ocean Marine Insurance Co., and Aviva International Insurance Ltd.

Companies: Flintkote Co.; Flintkote Trust; Aviva PLC f/k/a Commercial Union Assurance Co. Ltd.; The Ocean Marine Insurance Co.; Aviva International Insurance Ltd.

Cases: CourtDecisions DamagesNews AsbestosNews CaliforniaNews