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Zurich Ins. Co. v. Raymark Industries





Appeal from the Circuit Court of Cook County; the Hon. James C. Murray, Judge, presiding.


Rehearing denied July 1, 1986.

The present consolidated appeals arise out of a declaratory judgment action brought to determine the rights and obligations of various insurers to provide defense and indemnity in thousands of lawsuits involving asbestos-related claims filed against the insured, Raymark Industries, Inc. The trial court entered an order determining that insurance coverage for asbestos-related claims is triggered both by exposure to asbestos and by the manifestation of asbestos-related disease, but specifically reserved ruling on the allocation of indemnity and defense costs among Raymark's primary insurers. The insurers appeal, and Raymark cross-appeals.

Initially, we observe that this appeal involves certain issues which are novel to Illinois courts, but which have been grappled with by Federal courts around the country. The courts, in determining the obligations of insurance companies with regard to asbestos-related litigation, have offered completely different interpretations of the manner in which virtually identical insurance policies allocate liability among successive insurers and between insurers and insureds. Some of the issues now before this court have been described as "difficult" by one court, "impossible" by another court, and in one judge's words, issues which "`will perplex both district and circuit courts until they are resolved by the ultimate appellate authority.'" (See Lac d'Amiante du Quebec, Ltee. v. American Home Assurance Co. (D.C.N.J. 1985), 613 F. Supp. 1549, 1551.) With this in mind, we will review the background of the present litigation.

Raymark, formerly known as Rabestos-Manhatten, Inc., manufactures asbestos-containing products. During the past decade, Raymark has been sued by more than 25,000 claimants who allege that they have been injured by exposure to asbestos-containing products manufactured by Raymark. The claims have been brought primarily by individuals who developed one or more of three asbestos-related diseases: asbestosis, mesothelioma and bronchogenia carcinoma. Most of the claimants in the underlying suits allege they were exposed to asbestos during the 1940's, 1950's and 1960's.

Raymark has been insured since 1941 under various comprehensive general-liability insurance policies issued by the insurance companies involved as parties in this case. Specifically, the Employers' Liability Assurance Corporation, the predecessor in interest to Commercial Union Insurance Company (Commercial Union), insured Raymark from May 1, 1941, through May 1, 1945, and from February 4, 1947, through February 4, 1950. Between February 1950 and September 1951, Raymark was insured by Globe Indemnity Company (Globe). From September 26, 1951, through September 1967, Raymark was insured by Federal Insurance Company (Federal) and its predecessor in interest, United States Guarantee. Commercial Union insured Raymark from September 1967 through October 15, 1969. Since October 15, 1969, Raymark has been insured by Zurich Insurance Company (Zurich). Northbrook Excess & Surplus Insurance Company (Northbrook) has issued policies of excess insurance to Raymark since 1976.

In 1978, Zurich filed the present declaratory judgment action against Raymark, Federal, and Commercial Union to determine questions of coverage and defense for the asbestos claims filed against Raymark. In February 1979, Northbrook intervened as a plaintiff requesting relief similar to that sought by Zurich. In September 1981, Zurich filed an amended complaint adding Globe as a defendant.

On October 4, 1982, Raymark filed a counterclaim for declaratory judgment against Zurich, Commercial Union, Federal and Globe. Raymark sought a declaration that each of its insurers is obligated to provide indemnity and defense for asbestos-related claims in accordance with their contracts of insurance; a declaration that the insurers in the past had refused in bad faith to fully defend and indemnify Raymark; and such further relief as the court deemed just and proper.

The policies that each of the insurance companies issued to Raymark are nearly identical in terms of coverage language. They provide as follows:


The (insurance) company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury * * * caused by an occurrence * * *.


`Bodily injury' means bodily injury, sickness or disease sustained by any person.

`Occurrence' means an accident, including injurious exposure to conditions, which results in bodily injury during the policy period neither expected nor intended from the standpoint of the insured."

Three different theories of coverage have been advanced by the parties during the litigation. The "exposure theory," advocated by Zurich and Northbrook, provides that coverage of asbestos-related claims should be based solely on the claimant's period of exposure to asbestos. If the exposure occurs during the policy period of more than one carrier, the coverage and defense obligations would be apportioned pro rata among the carriers on the risk during any period of exposure. The exposure theory proponents urge that medical evidence shows that bodily injury takes place at or shortly after exposure to asbestos and therefore coverage and defense obligations must be tied to exposure. The exposure theory was adopted first by the Sixth Circuit (Insurance Co. of North America v. Forty-Eight Insulations, Inc. (6th Cir. 1980), 633 F.2d 1212, clarified (6th Cir. 1981), 657 F.2d 814, cert. denied (1981), 454 U.S. 1109, 70 L. Ed 2d 650, 102 S.Ct. 686, rehearing denied (1982), 455 U.S. 1009, 71 L.Ed.2d 878, 102 S.Ct. 1648), and later by the Fifth Circuit (Porter v. American Optical Corp. (5th Cir. 1981), 641 F.2d 1128, cert. denied (1981), 454 U.S. 1109, 70 L.Ed.2d 650, 102 S.Ct. 686) and Eleventh Circuit (Commercial Union Insurance Co. v. Sepco Corp. (11th Cir. 1985), 765 F.2d 1543).

Commercial Union and Federal rely on the "manifestation theory." Under this theory, coverage and defense obligations are not triggered until the occurrence insured against has "manifested" itself in such a manner as to be medically detectable and diagnosable. The proponents of this theory assert that the court, in interpreting the policy terms, must focus on the word "disease" rather than bodily injury. They contend that medical evidence from the clinician's standpoint clearly shows that asbestos-related diseases are undiagnosable until an individual has developed recognizable signs or symptoms. The manifestation theory has been adopted by the First Circuit (Eagle-Picher Industries, Inc. v. Liberty Mutual Insurance Co. (1st Cir. 1982), 682 F.2d 12, cert. denied (1983), 460 U.S. 1028, 75 L.E.2d 500, 103 S.Ct. 1280).

The third theory of coverage is advanced solely by Raymark and is referred to as the Keene theory, or the hybrid approach. This theory is based on the opinion in Keene Corp. v. Insurance Co. of North America (D.C. Cir. 1981), 667 F.2d 1034, cert. denied (1982), 455 U.S. 1007, 71 L.Ed.2d 875, 102 S.Ct. 1644, and provides that coverage under the comprehensive general liability policies is triggered by injury, and that such injury occurs from first inhalation of asbestos through exposure and until clinical manifestation of an asbestos-related disease. Obviously, this theory provides Raymark with the maximum amount of insurance coverage. *fn1 More recently, the Keene theory was adopted by the Third Circuit. (Acands, Inc. v. Aetna Casualty & Surety Co. (3rd Cir. 1985), 764 F.2d 968.) Accord, Lac d'Amiante du Quebec, Ltee. v. American Home Assurance Co. (D.C.N.J. 1985), 613 F. Supp. 1549.

In 1981 and 1982, cross-motions for summary judgment on the trigger of coverage issue were filed by Zurich, Commercial Union and Raymark. The court denied the motions, stating that medical evidence was necessary to determine how the policy terms "bodily injury, sickness or disease" apply to asbestos-related disease. The court thereafter heard extensive medical testimony from nine experts who were board certified clinicians or pathologists. *fn2

Zurich called as witnesses two board-certified pathologists, Dr. John Craighead and Dr. Jerold Abraham, and one board-certified clinician, Dr. David Cugell. Testifying on Commercial Union's behalf were board-certified clinicians Dr. Ronald Crystal and Dr. James Merchant, who is also certified in epidemiology. *fn3 Federal called as a witness Dr. Theodore Rodman, a board-certified clinician. Raymark presented the testimony of clinician Dr. Margaret Turner-Warwick and two pathologists, Dr. Donald Greenberg *fn4 and Dr. Elliott Kagan, who is also board certified in immunology.

At the conclusion of the medical testimony, the trial court issued a lengthy memorandum opinion and order in which it did a commendable job of summarizing and evaluating the evidence. The following summarization of the medical testimony is taken in large part from the court's memorandum opinion.

As the trial court observed, the expert testimony falls into two distinct categories: The pathologists' view of asbestos-related diseases and the clinicians' view of asbestos-related diseases. There is no disagreement by the experts as to how the diseases develop. Rather, they disagree as to how to define "injury" and "disease" and at what stage they are willing to characterize a condition as being either "injury" or "disease."

The pathologists define injury as "an alteration of structure and function of a cell, tissue or organ." Injury includes physical or chemical damage to the body which may be detectable only on a microscopic or subclinical level. Disease is defined as an ongoing process of repair or reaction to injury.

The clinicians' definition of "injury" requires that there be some kind of noticeable harm. For example, Dr. Merchant testified that injury refers only to trauma caused by an internal force. Dr. Rodmar defined injury as significant damage which results to structure or functions as a result of an external force either physical or chemical. Both doctors refer to disease as a clinical concept requiring detectable abnormalities in appearance and function.

In terms of the diseases themselves, the pathologists testified that the process which culminates in asbestosis starts with the exposure to and inhalation of asbestos fibers. Asbestos fibers are sphere-like structures which vary in terms of their size, length and diameter. Following inhalation, the body's own defense mechanisms eliminate most fibers. Depending, however, upon the volume and duration of exposure, the average active worker would have retained in his lungs as many as one million asbestos fibers during the course of one year. If they are not eliminated, the fibers settle in the lower portions of the lung known as the respiratory bronchioles and alveolar duct bifurcations. The sharp ended fibers, likened to slivers of glass, are thought to act as spears injuring the walls of the alveoli with each inhalation and expiration.

The fibers lie on the surface layer of cells and immediately begin to interact with the membranes of the cells. The fibers often become partially imbedded within the cell body. The presence of the fibers activates certain scavenger cells known as alveolar macrophages, which rapidly accumulate around the fibers in an attempt to engorge the foreign bodies. The macrophage, however, is unable to digest the inorganic fiber and eventually the fiber will cause the macrophage membrane to disintegrate, releasing harmful enzymes into the lung tissue. Once the macrophage is damaged, it secretes a substance which attracts other macrophages to the scene. This secretion results in an additional release of destructive enzymes which attract further macrophages. Macrophages also summon lymphocytes *fn5, which stimulate the macrophages to work harder. This results in more enzymes and macrophages which, in turn, result in more lymphocytes.

Both lymphocytes and macrophages, as well as the fibers themselves, are responsible for calling in fibroblasts, which are the cells responsible for producing collagen or connective tissue. Fibroblasts normally function within the interstitium of the lung, producing enough collagen to keep the lungs from collapsing. With the onset of macrophages and lymphocytes, however, the number of fibroblasts in the lower portion of the lung increases and, as a result, more collagen is produced which forms scar tissue or fibrosis. This fibrostic scar tissue in the alveoli prevents the lung from performing its normal oxygen-carbon dioxide gas exchange and eventually results in asbestosis.

The pathologists testified, within a reasonable degree of medical certainty, that the injury process which results in these changes to the lungs' structure and function begins at or very shortly after inhalation and retention of asbestos fibers. Based on experimental studies using animal and human tissue, the pathologists opined that the cells react to the presence of the fibers almost immediately.

The pathologists acknowledge that much less is medically understood about bronchogenic carcinoma (lung cancer) and mesothelioma. Dr. Craighead testified that bronchogenic carcinoma is a neoplasm of cancer that originates from cells lining the bronchial tubes. He stated that limited experimentation indicates asbestos alone would not induce this type of cancer, but when coupled with cigarette smoke, the two interact in some carcinogenic fashion to cause cancer.

Bronchogenic carcinoma goes through several stages before it is clinically detectable. The first stage, which begins shortly after the deposition of fibers in the lung, is called dysplasia and can be detected only pathologically. After some time, the dysplasia cells become cancer cells. It is not known what causes this transformation. The next stage, "cancer in situ," is a noninvasive type of cancer and is still undetectable by X ray. The tumor eventually spreads and expands in the lung and becomes large enough to detect.

Mesothelioma develops from cells that line the pleura, which is the outer lining of the lung. While little is known about this disease, it is hypothesized that asbestos fibers pierce through the alveoli and into the pleura. The fibers cause injury and irritation to the lining, thereby creating a premalignant disease stage called atypia. It is believed that these premalignant activities occur shortly after deposition of the fibers, followed by a long latency period and subsequent manifestation of a mesothelial tumor.

The clinicians concurred with much of the pathologists' testimony concerning the mechanics of asbestosis, bronchogenia carcinoma, and mesothelioma. For example, they agreed that once retained, an asbestos fiber may be acted upon by macrophages and enzymes, thereby resulting in the production of fibrous tissue in the lung. Where the clinicians disagree with the pathologists is with regard to when the disease process commences.

Throughout their testimony, the clinicians focused on the factor of individual susceptibility. It was their opinion that the lungs' defense mechanisms are able to successfully deal with the presence of asbestos fibers for a certain period of time. The clinicians state that even if microscopic injury occurs in the air sacs the lung has the ability to repair itself on a local level, including the ability to reverse fibrosis. At some point, however, for some unknown reason the body's defenses can no longer handle the fibers and the damage they cause. It is at that point that asbestosis begins to develop. Each individual's ability to deal with asbestosis differs, and thus no general rules are applicable. The clinicians concluded that due to the variability and uncertainty inherent in asbestos-related diseases, a disease does not occur until it can be diagnosed.

Based on the foregoing testimony and the policy language, the trial court ruled that coverage was to be provided if an insurer's policy was in effect either when the claimant was exposed to Raymark's products or when the claimant's condition resulting from that exposure manifested itself, but not if its policies were in effect only during the period after a claimant was exposed to the products but before his condition manifested itself.

Zurich, Northbrook, Commercial Union, Federal and Globe appeal the court's determination as to coverage. Raymark has filed a cross-appeal challenging only the court's finding that coverage is not triggered under those policies in effect between the time of exposure and manifestation. Additionally, each of the insurers appeal the court's later rulings as to other issues, including their duty to defend Raymark following exhaustion of their policies' indemnity limits. The court reserved ruling on the rights and obligations as between the various insurers, pending the outcome of this appeal.

The following issues are presented for our review: (1) whether the trial court correctly determined what triggers coverage under the policies in question; (2) whether the trial court erred in holding that Federal, Commercial Union and Globe had a duty to defend claims against Raymark even after the limits of their pre-1966 policies had been exhausted; (3) whether the trial court erred in holding that Zurich is required under its post-1966 policies to continue to pay defense costs incurred by Raymark in certain pending cases even after proper exhaustion of the policy limits; (4) whether the trial court erred in striking the jury demands of Federal, Commercial Union, and Globe; (5) whether the trial court erred in denying Zurich's motion for a pro rata allocation of obligations among triggered policies; (6) whether the trial court erred in denying Northbrook's post-trial motion for clarification of its September 29, 1983, order concerning Northbrook's duty to defend Raymark; and (7) whether the trial court erred in determining the existence and coverage of certain policies sold to Raymark by Commercial Union's predecessor in interest.

An amicus curiae brief as been filed by United States Gypsum Company in support of Raymark's position concerning the trigger of coverage and duty to defend following exhaustion of the policy limits. An amicus curiae brief filed by The Home Insurance Company and a joint amicus curiae brief filed by American Motorists Insurance Company and American Manufacturers Mutual Insurance Company urge this court to adopt the "exposure-only" theory and to reverse the court's denial of a pro rata allocation. Finally, amicus curiae briefs filed by Liberty Mutual Insurance Company and Fireman's Fund Insurance Company urge both adoption of the "manifestation-only" theory and reversal as to the court's ruling on the duty to defend following exhaustion of the policy limits.

Before addressing the merits of the issues now before us, we note briefly that on November 18, 1983, Federal filed a motion to join as necessary parties in Zurich's declaratory judgment action three of Raymark's first-layer excess carriers — American Home Assurance Company, First State Insurance Company, and American Centennial Insurance Company. On November 22, 1983, the trial court granted the joinder motion and ordered that Zurich's complaint be amended to add as defendants the three excess insurers. The propriety of the trial court's decision to join the excess carriers as defendants is the subject of another appeal to this court (Zurich Insurance Company v. Raymark Industries, Inc. (1986), 144 Ill. App.3d 943).


• 1 We will first review the propriety of the trial court's determination as to what triggers coverage under the policies at issue. In so doing, we observe initially that general rules of construction which apply to other contracts apply with equal force to insurance contracts. (DeFoor v. Northbrook Excess & Surplus Insurance Co. (1984), 128 Ill. App.3d 929, 471 N.E.2d 938.) As such, all of the provisions of an insurance contract, rather than isolated parts, should be read together to interpret it. (United States Fire Insurance Co. v. Schnackenberg (1981), 88 Ill.2d 1, 429 N.E.2d 1203.) The words of the policy should be interpreted in accordance with their plain and ordinary meaning where they are clear and unambiguous. (88 Ill.2d 1, 429 N.E.2d 1203.) When interpreting words according to their common and ordinary meaning, Illinois courts often rely on dictionary definitions. See, e.g., Kozak v. Retirement Board (1983), 95 Ill.2d 211, 447 N.E.2d 394.

Under the policies in question, coverage is triggered by "bodily injury, sickness or disease" which occurs during the policy period. As the trial court found, the terms themselves are not inherently ambiguous. Rather, the problem lies in how these terms apply to asbestos-related diseases.

The application of these terms in the context of asbestos-related diseases was the subject of considerable testimony during the proceedings below, with the pathologists focusing on the word "injury," while the clinicians focused on the word "disease." The trial court correctly determined, however, that each of the three terms is separate and distinct, as evidenced by the use of the disjunctive "or," and must be considered separately as a trigger of coverage. (People v. Vraniak (1955), 5 Ill.2d 384, 125 N.E.2d 513, cert. denied (1955), 349 U.S. 963, 99 L.Ed. 1285, 75 S.Ct. 895.) Accordingly, coverage under the policies is triggered either by "bodily injury" or "disease" or "sickness."


In determining that coverage is triggered by exposure, the trial court focused on the term "bodily injury." The word "injury" is defined as harm or damage. (Webster's Third New International Dictionary 1164 (1981).) The adjective "bodily," which modifies injury, is defined as "of, or relating to the body." (Webster's Third New International Dictionary 245 (1981).) Taken ...

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