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Case Briefs
Extrinsic Evidence of Custom and Usage Properly Admitted to Assist in Interpreting 'Asbestosis Exclusion'
Recently, the U.S. Court of Appeals for the Third Circuit ruled on two significant issues that are likely to have important implications in future coverage cases in AstenJohnson, Inc. v. Columbia Casualty Co. et al., No. 07-2305 (3d Cir. Apr. 2, 2009). The dispute in AstenJohnson, which was tried in Pennsylvania federal court, arose out of primary and excess liability policies issued by Columbia Casualty Company and American Insurance Company to AstenJohnson's predecessor, a manufacturer of asbestos-containing dryer felts. After a non-jury trial, the trial judge found, in addition to ruling on other issues, that: 1) the asbestosis exclusion in Columbia's policy applied to all asbestos-related diseases, and 2) American had no obligation under its upper-level excess policies to defend AstenJohnson or to reimburse AstenJohnson for defense costs it may incur. AstenJohnson appealed.
Defense Costs
The Third Circuit affirmed the district court's holding that American's upper-level excess policies did not impose a duty to defend or pay defense costs. American's 1982 excess policy expressly provided that:
The Company shall not ' be called upon to assume charge of the settlement or defense of any claims made or suits brought, or proceedings instituted against the Insured, but shall have the right and opportunity to be associated with the Insured in the defense and trial of any such claims, suits or proceedings relative to any occurrence which, in the opinion of the Company may create liability on the part of the Company under the terms of the policy. If the Company avails itself of such right and opportunity, the Insured and the Company shall cooperate in all respects so as to effect a final determination of the claim or claims.
The policy further provided that:
Loss expenses and legal expenses, including court costs and interest, if any, which may be incurred by the Insured with the consent of the company in the adjustment of defense claims, suits or proceedings shall be borne by the Company and the Insured in the proportion that each party's share of loss bears to the total amount of said loss. Loss expense hereunder shall not include salaries and expenses of the Insured's employees incurred in investigation, adjustment and litigation.
The district court concluded that this language unambiguously gave American the option at American's sole discretion to consent to pay defense expenses incurred by AstenJohnson.
AstenJohnson further argued that the “follow form clause” of the excess policy trumped these provisions by incorporating a duty to defend clause from the underlying umbrella policy. The “follow form clause” language reads as follows:
The insurance afforded by this policy is subject to the same warranties, terms (including the terms used to describe the application of limits of liability), conditions and exclusions as are contained in the underlying insurance ' except, unless otherwise specifically provided in this policy, any such warranties, terms, conditions or exclusions relating to premium, the obligation to investigate and defend, the amount of limits and liability, and any renewal agreement.
The Third Circuit, however, rejected this argument and affirmed the district court's determination that any “obligation to investigate or defend” in the umbrella policy is not incorporated into the excess policy, which clearly states no obligation to defend unless the excess carrier consents to do so. The excess policy requires indemnification for “ultimate net loss” in excess of underlying insurance and the policy definition of “ultimate net loss” is “all sums actually paid or which the Insured is legally obligated to pay as damages in settlement of satisfaction of claims or suits which insurance is afforded by this policy” Defense costs are not included in this language. The Third Circuit stated that the duty to defend is contractual, and if there is no contract to defend, it follows that there is no duty to defend.
The Asbestosis Exclusion
The Columbia Policy included the following language:
It is agreed that this policy does not apply to any claim alleging exposure to or the contracting of asbestosis or any resulting liability therefrom.
Before the district court, AstenJohnson argued that this clause refers only to the specific disease asbestosis. The insurers contended that, among the parties and within the insurance industry during the early 1980s, the term “asbestosis” was used and intended to mean all asbestos-related diseases. The district court agreed with the insurers. In so holding, the district court examined expert testimony and the testimony of AstenJohnson's procuring agent that supported the position that in the insurance industry at the time, the term “asbestosis” had two different meanings. The district court then looked at the course of performance of the parties for 20 years under the insurance policy, which indicated that AstenJohnson understood that the “asbestosis exclusion” was intended to exclude all asbestos-related diseases.
After this analysis, the district court found that it had sufficient reason to examine the circumstances surrounding the pre-contract negotiations because there was adequate doubt surrounding the literal reading of the exclusion to warrant consideration of parol evidence. The district court found that, based on the nature of the underlying asbestos complaints in the early 1980s, in which plaintiffs would allege asbestosis in addition to other asbestos-related injuries, the specific definition of asbestosis would offer the insurance company little protection. This finding, in addition to a communication between agents of AstenJohnson and Columbia and the fact that Columbia knew AstenJohnson's history and exposure, led the district court to find that the “asbestosis exclusion” was intended to cover all asbestos-related diseases.
On appeal, AstenJohnson asserted it was entitled to judgment as a matter of law because the district court erred in finding that the exclusion encompassed all asbestos-related diseases based on the fact that the text of the “asbestosis exclusion” is not ambiguous. Further, AstenJohnson argued the district court's consideration of evidence indicating the trade use of “asbestosis” as a catch-all for all asbestos-related diseases was erroneous.
The Third Circuit rejected AstenJohnson's arguments. It found that the district court acted properly in considering extrinsic evidence to determine the intentions of the parties regarding the meaning of “asbestosis.” While the Third Circuit observed that under Pennsylvania law extrinsic evidence cannot be used to contradict the unambiguous provisions of a contract, extrinsic evidence, including trade usage and course of performance evidence, is admissible to interpret the terms of a contract to determine whether an ambiguity exists. If, after this interpretation, the intent of the parties is still unclear, the court continued, a court may consider evidence concerning pre-contract negotiations to assist in determining intent.
AstenJohnson argued that it was improper for the district court to examine extrinsic evidence because the clause is unambiguous. AstenJohnson asserted that the dictionary definition of “exposure” includes the act of being open to something that poses a danger or risk. Based on this definition, “exposure to asbestosis” in the context of contractual language means “exposure to or contracting asbestosis,” unambiguously meaning “exposure to the risk of contracting asbestosis.” The Third Circuit disagreed with AstenJohnson's argument because AstenJohnson was equating exposure to asbestosis disease with risk of contracting the disease. The Third Circuit agreed with the district court that these are separate and distinct harms because someone exposed to asbestosis does not run a risk of contracting it, and this does not render “exposure to asbestosis” unambiguous. Moreover, the Third Circuit held that despite the fact that the term is unambiguous, the district court was still entitled under Pennsylvania law to consider trade usage and party performance.
AstenJohnson also argued on appeal that the district court improperly considered trade usage evidence that “asbestosis” was commonly used in the insurance industry in the early 1980s to refer to all asbestos-related diseases. In support, AstenJohnson offered evidence that the insurance industry regularly used “asbestosis” to mean the specific disease, evidence that 1981 policies issued by others broadly excluded all asbestos-related diseases without using the term “asbestosis” as shorthand for a broad exclusion, and asserted that the fact that Columbia's trade usage evidence did not include other policies in which “asbestosis” was used to mean other asbestos-related diseases. The Third Circuit did not find AstenJohnson's argument persuasive, stating that under Pennsylvania law, to be used as an aid in interpretation, trade usage does not need to show that a particular term always has a particular meaning or that the meaning claimed cannot be otherwise stated. The Third Circuit held that where a literal reading of the contract produces a non-sensical or unclear meaning and the court finds that the trade usage term is in frequent use by people in the trade at the relevant time, trade use evidence, like that presented in the instant case, can be properly considered.
While the Third Circuit ultimately remanded this issue to be tried before a jury rather than hold a bench trial, as the district court had done, these evidentiary rulings on the admissibility of extrinsic evidence of custom and usage will be important going forward. Just last month, the Third Circuit granted a stay of the decisions, pending the filing of a writ of certiorari before the U.S. Supreme Court on the Seventh Amendment issue.
Paul Kalish, a member of this newsletter's Board of Editors and a partner at Crowell & Moring, contributed this month's case brief.
Extrinsic Evidence of Custom and Usage Properly Admitted to Assist in Interpreting 'Asbestosis Exclusion'
Recently, the U.S. Court of Appeals for the Third Circuit ruled on two significant issues that are likely to have important implications in future coverage cases in AstenJohnson, Inc. v. Columbia Casualty Co. et al., No. 07-2305 (3d Cir. Apr. 2, 2009). The dispute in AstenJohnson, which was tried in Pennsylvania federal court, arose out of primary and excess liability policies issued by Columbia Casualty Company and
Defense Costs
The Third Circuit affirmed the district court's holding that American's upper-level excess policies did not impose a duty to defend or pay defense costs. American's 1982 excess policy expressly provided that:
The Company shall not ' be called upon to assume charge of the settlement or defense of any claims made or suits brought, or proceedings instituted against the Insured, but shall have the right and opportunity to be associated with the Insured in the defense and trial of any such claims, suits or proceedings relative to any occurrence which, in the opinion of the Company may create liability on the part of the Company under the terms of the policy. If the Company avails itself of such right and opportunity, the Insured and the Company shall cooperate in all respects so as to effect a final determination of the claim or claims.
The policy further provided that:
Loss expenses and legal expenses, including court costs and interest, if any, which may be incurred by the Insured with the consent of the company in the adjustment of defense claims, suits or proceedings shall be borne by the Company and the Insured in the proportion that each party's share of loss bears to the total amount of said loss. Loss expense hereunder shall not include salaries and expenses of the Insured's employees incurred in investigation, adjustment and litigation.
The district court concluded that this language unambiguously gave American the option at American's sole discretion to consent to pay defense expenses incurred by AstenJohnson.
AstenJohnson further argued that the “follow form clause” of the excess policy trumped these provisions by incorporating a duty to defend clause from the underlying umbrella policy. The “follow form clause” language reads as follows:
The insurance afforded by this policy is subject to the same warranties, terms (including the terms used to describe the application of limits of liability), conditions and exclusions as are contained in the underlying insurance ' except, unless otherwise specifically provided in this policy, any such warranties, terms, conditions or exclusions relating to premium, the obligation to investigate and defend, the amount of limits and liability, and any renewal agreement.
The Third Circuit, however, rejected this argument and affirmed the district court's determination that any “obligation to investigate or defend” in the umbrella policy is not incorporated into the excess policy, which clearly states no obligation to defend unless the excess carrier consents to do so. The excess policy requires indemnification for “ultimate net loss” in excess of underlying insurance and the policy definition of “ultimate net loss” is “all sums actually paid or which the Insured is legally obligated to pay as damages in settlement of satisfaction of claims or suits which insurance is afforded by this policy” Defense costs are not included in this language. The Third Circuit stated that the duty to defend is contractual, and if there is no contract to defend, it follows that there is no duty to defend.
The Asbestosis Exclusion
The Columbia Policy included the following language:
It is agreed that this policy does not apply to any claim alleging exposure to or the contracting of asbestosis or any resulting liability therefrom.
Before the district court, AstenJohnson argued that this clause refers only to the specific disease asbestosis. The insurers contended that, among the parties and within the insurance industry during the early 1980s, the term “asbestosis” was used and intended to mean all asbestos-related diseases. The district court agreed with the insurers. In so holding, the district court examined expert testimony and the testimony of AstenJohnson's procuring agent that supported the position that in the insurance industry at the time, the term “asbestosis” had two different meanings. The district court then looked at the course of performance of the parties for 20 years under the insurance policy, which indicated that AstenJohnson understood that the “asbestosis exclusion” was intended to exclude all asbestos-related diseases.
After this analysis, the district court found that it had sufficient reason to examine the circumstances surrounding the pre-contract negotiations because there was adequate doubt surrounding the literal reading of the exclusion to warrant consideration of parol evidence. The district court found that, based on the nature of the underlying asbestos complaints in the early 1980s, in which plaintiffs would allege asbestosis in addition to other asbestos-related injuries, the specific definition of asbestosis would offer the insurance company little protection. This finding, in addition to a communication between agents of AstenJohnson and Columbia and the fact that Columbia knew AstenJohnson's history and exposure, led the district court to find that the “asbestosis exclusion” was intended to cover all asbestos-related diseases.
On appeal, AstenJohnson asserted it was entitled to judgment as a matter of law because the district court erred in finding that the exclusion encompassed all asbestos-related diseases based on the fact that the text of the “asbestosis exclusion” is not ambiguous. Further, AstenJohnson argued the district court's consideration of evidence indicating the trade use of “asbestosis” as a catch-all for all asbestos-related diseases was erroneous.
The Third Circuit rejected AstenJohnson's arguments. It found that the district court acted properly in considering extrinsic evidence to determine the intentions of the parties regarding the meaning of “asbestosis.” While the Third Circuit observed that under Pennsylvania law extrinsic evidence cannot be used to contradict the unambiguous provisions of a contract, extrinsic evidence, including trade usage and course of performance evidence, is admissible to interpret the terms of a contract to determine whether an ambiguity exists. If, after this interpretation, the intent of the parties is still unclear, the court continued, a court may consider evidence concerning pre-contract negotiations to assist in determining intent.
AstenJohnson argued that it was improper for the district court to examine extrinsic evidence because the clause is unambiguous. AstenJohnson asserted that the dictionary definition of “exposure” includes the act of being open to something that poses a danger or risk. Based on this definition, “exposure to asbestosis” in the context of contractual language means “exposure to or contracting asbestosis,” unambiguously meaning “exposure to the risk of contracting asbestosis.” The Third Circuit disagreed with AstenJohnson's argument because AstenJohnson was equating exposure to asbestosis disease with risk of contracting the disease. The Third Circuit agreed with the district court that these are separate and distinct harms because someone exposed to asbestosis does not run a risk of contracting it, and this does not render “exposure to asbestosis” unambiguous. Moreover, the Third Circuit held that despite the fact that the term is unambiguous, the district court was still entitled under Pennsylvania law to consider trade usage and party performance.
AstenJohnson also argued on appeal that the district court improperly considered trade usage evidence that “asbestosis” was commonly used in the insurance industry in the early 1980s to refer to all asbestos-related diseases. In support, AstenJohnson offered evidence that the insurance industry regularly used “asbestosis” to mean the specific disease, evidence that 1981 policies issued by others broadly excluded all asbestos-related diseases without using the term “asbestosis” as shorthand for a broad exclusion, and asserted that the fact that Columbia's trade usage evidence did not include other policies in which “asbestosis” was used to mean other asbestos-related diseases. The Third Circuit did not find AstenJohnson's argument persuasive, stating that under Pennsylvania law, to be used as an aid in interpretation, trade usage does not need to show that a particular term always has a particular meaning or that the meaning claimed cannot be otherwise stated. The Third Circuit held that where a literal reading of the contract produces a non-sensical or unclear meaning and the court finds that the trade usage term is in frequent use by people in the trade at the relevant time, trade use evidence, like that presented in the instant case, can be properly considered.
While the Third Circuit ultimately remanded this issue to be tried before a jury rather than hold a bench trial, as the district court had done, these evidentiary rulings on the admissibility of extrinsic evidence of custom and usage will be important going forward. Just last month, the Third Circuit granted a stay of the decisions, pending the filing of a writ of certiorari before the U.S. Supreme Court on the Seventh Amendment issue.
Paul Kalish, a member of this newsletter's Board of Editors and a partner at
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