Insured’s Decision to Manufacture A Dangerous Product Knowing No Insurance Is Available Doesn’t Sway Court To Create An Equitable Exception To The Unavailability Rule
The Supreme Court of New Jersey recently resolved an 18-year-old asbestos coverage row, encompassing 330 policies and thousands of claims. In reaching its decision in Cont’l Ins. Co. v. Honeywell Int’l, Inc., No. 078152, 2018 WL 3130638 (N.J. June 27, 2018), the court confirmed that lex loci contractus is dead in New Jersey for purposes of resolving choice of law issues in contract cases and declined to recognize an equitable exception to the “unavailability of insurance” allocation principle it had announced in its seminal Owen-Illinois decision even where an insured elects to manufacture a dangerous product fully aware that there is no insurance available in the marketplace to shield it from liability.
By way of background, the Bendix Corporation, a corporate predecessor to Honeywell, manufactured and sold friction products that contained asbestos. Beginning around 1975, Bendix began to receive liability claims asserting that asbestos in its friction products caused bodily injury to users. It was undisputed that the friction products contained asbestos until 2001, and that Honeywell, as the successor in interest, was responsible for asbestos liabilities attributed to Bendix. It was also undisputed that excess insurance coverage for asbestos-related personal injury claims became unavailable for purchase after April 1, 1987.
This appeal before the Supreme Court of New Jersey arose out of a coverage dispute between Honeywell and its excess insurers. Honeywell sought insurance coverage for those claims where initial exposure occurred prior to 1987. Meanwhile, the excess insurers sought to have Honeywell contribute to coverage for claims where the initial exposure occurred between 1987 and 2001.
Before the court could address allocation of liability, it had to consider whether the law of New Jersey or Michigan applied where no provision of the insurance contracts or of state law compelled the application of a specific state’s law. The court rejected the excess insurers’ argument that the law of the place of contracting applied; noting that New Jersey no longer follows lex loci contractus for insurance contracts. Rather, in matters involving nationwide products-liability claims relating to items manufactured in virtually all fifty states and internationally and sold in the national marketplace, the proper starting place is Restatement (Second) of Conflict of Laws Section 188. The court noted as most significant the factors relating to domicile, residence and places of incorporation and of business of the parties, and the place of performance. With that framework in mind, the court concluded that New Jersey law applied.
Settled on New Jersey law, the court next reviewed whether the lower courts properly applied the unavailability exception to the continuous-trigger method of allocation of insurance liability that has been recognized in New Jersey since the court’s 1994 decision in Owen-Illinois.
The continuous-trigger method assumes the availability of insurance. When no insurance is available, the unavailability exception can be applied to relieve a policyholder of its responsibility for the pro rata portion of liability that reflects a period of insurance unavailability. As a practical matter, New Jersey courts have applied the unavailability exception to require an insured to share in an allocation of liability under the continuous trigger doctrine only when it foregoes purchasing available insurance.
In this appeal, the excess insurers asked the court to create an equitable exception to the unavailability rule for corporations that continue to manufacture products after insurance becomes unavailable for those products. The excess insurers urged the court to conclude that Honeywell’s decision to continue to manufacture and sell products containing asbestos, after insurance was no longer available, should result in requiring Honeywell to contribute to the losses from its past and future sale of those products.
The court was unpersuaded, refusing to find an “exceptional circumstance” warranting departure from the well-established unavailability exception rule set forth in Owen-Illinois. Particularly persuasive to the court was the fact that the record indisputably demonstrated when insurance became unavailable in the marketplace, and that none of the initial asbestos exposures for which Honeywell sought coverage occurred after insurance became unavailable.
The court’s ruling provides clarity on two important points. First, when considering whether to bring a declaratory judgment action, insurers should give careful consideration to their contacts with New Jersey if they wish to avail themselves of the state’s law, as the place of contracting will no longer suffice. Second, with respect to allocation, when the continuous trigger of coverage is applied, every insurer between the date of initial exposure and the date when insurance is not “reasonably available” will be triggered. An insured’s decision to manufacture a dangerous product knowing that there is no insurance will not prevent such allocations.