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09/14/87 Zurich Insurance Company v. Raymark Industries

September 14, 1987





514 N.E.2d 150, 118 Ill. 2d 23, 112 Ill. Dec. 684 1987.IL.1334

Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County; the Hon. James C. Murray, Judge, presiding.


JUSTICE MORAN delivered the opinion of the court. JUSTICE WARD took no part in the consideration or decision of this case. JUSTICE SIMON, Concurring in part and Dissenting in part.


This declaratory judgment action involves the construction of various comprehensive general liability insurance policies issued to the defendant, Raymark Industries, Inc. (Raymark). In 1978, Zurich Insurance Company (Zurich), one of Raymark's primary insurers, filed this action in the circuit court of Cook County against Raymark and two of Raymark's other primary insurers, Federal Insurance Company (Federal) and Commercial Union Insurance Company (Commercial Union). Zurich sought a declaration of its obligations and the obligations of Federal and Commercial Union to defend and indemnify Raymark in thousands of underlying actions filed by individuals alleging personal injuries or wrongful death resulting from exposure to asbestos-containing products manufactured by Raymark. Federal (and another insurer which is not a party to this appeal) filed jury demands with their answers. In February 1979, Northbrook Excess and Surplus Insurance Company (Northbrook), one of Raymark's excess insurers, intervened as a plaintiff, seeking relief identical to that sought by Zurich. In October 1982, Raymark filed a counterclaim seeking a declaration that each of its primary insurers is obligated to provide a complete defense in all present and future asbestos-related actions and that the insurers' defense obligations continued even after the aggregate policy limits had been exhausted. Commercial Union filed a jury demand with its answer to Raymark's counterclaim. The circuit court struck the jury demands of Federal and Commercial Union, holding that the claims raised were essentially equitable in nature.

After denying cross-motions for summary judgment, the court heard extensive expert medical testimony. In a lengthy memorandum opinion and order, the circuit court found that the policy language was unambiguous and did not require extrinsic evidence to interpret its meaning. The court determined that a primary insurer is required to provide coverage of a claim if the claimant sustained either "bodily injury," "sickness," or "disease" during a policy period. The court concluded that "bodily injury" occurs simultaneously with, or shortly after, inhalation of asbestos fibers, and that a "disease" occurs when it is reasonably capable of being diagnosed. The court further concluded that a claimant who has not been diagnosed as having an asbestos-related disease, but "suffers from a disordered, weakened or unsound condition," may be classified as having a "sickness" which would also give rise to an insurer's obligations under the policies. Exactly when a claimant's sickness or disease occurs, the court found, must be determined on a case-by-case basis. Accordingly, the court declared that a primary insurer is required to provide coverage of a claim if its policy was in effect either during the time when the claimant was exposed to Raymark's products or when the claimant's asbestos-related disease was reasonably able to be detected and diagnosed.

The court went on to declare that, under the terms of policies issued to Raymark on or before September 26, 1967 (the pre-1967 policies), the primary insurers are obligated to defend new claims and to continue to defend claims pending against Raymark even after the liability limits of those policies are exhausted by the payment of judgments or settlements. In addition, the court held that under the terms of the policies issued on and after September 26, 1967 (the post-1967 policies), a primary insurer that had undertaken the defense of a claim prior to the exhaustion of the limits of its policy must continue to defend that claim even after the exhaustion of the policy limits unless and until another primary insurer, that is also obligated to defend the claim, assumes the defense of that claim.

The court further held that as between Raymark and its primary insurers, when coverage is required under more than one policy, each primary insurer that is required to provide coverage is fully and independently obligated to defend and indemnify Raymark. In those cases, the court held that Raymark is entitled to designate any triggered policy for defense of a claim and any triggered policy for indemnification of the claim and that the policy designated for defense need not be the same as the one designated for indemnification. The court reserved ruling on the allocation of defense and indemnity costs among the various insurers. The insurers appealed and Raymark cross-appealed.

The appellate court affirmed in part, modified in part, and reversed in part. (145 Ill. App. 3d 175.) First, the court affirmed in its entirety the circuit court's determination as to which events require an insurer to provide coverage for a claim. (145 Ill. App. 3d 175, 192.) The court reversed the circuit court's order with respect to the pre-1967 policies and held that those policies do not require the insurers to defend new claims commenced against Raymark after the policy limits are exhausted by payment of judgments or settlements. (145 Ill. App. 3d 175, 193.) The appellate court further held that those policies do not obligate a primary insurer to continue to fund the defense of actions pending against Raymark once its duty to indemnify has been terminated by the payment of judgments or settlements and the insurer has made an orderly withdrawal from Raymark's defense. (145 Ill. App. 3d 175, 193-94.) Next, the court modified the circuit court's order to provide that upon exhaustion of the limits of its post-1967 policies, Zurich has no obligation to continue to pay the costs of defending cases that it had already undertaken to defend prior to the exhaustion of the policy limits. (145 Ill. App. 3d 175, 196.) The court then concluded that the trial court did not err in denying Zurich's motion to order the pro rata allocation of the costs of defense and indemnity among the triggered policies. (145 Ill. App. 3d 175, 200.) Finally, the court affirmed the circuit court's order striking the jury demands of Federal and Commercial Union. (145 Ill. App. 3d 175, 198.) We granted Zurich, Raymark and Northbrook leave to appeal. The causes have been consolidated for the purposes of review.

Five issues have been raised in this court: (1) What event or events give rise to the primary insurers' obligation to provide coverage for asbestos-related claims under the standard comprehensive general liability policy, and when do those events occur? (2) Do the terms of the policies issued to Raymark before September 26, 1967 (the pre-1967 policies), require the primary insurers to defend new actions and to continue to defend actions pending against Raymark after the limits of liability under those policies have been exhausted by the payment of judgments or settlements? (3) Do the terms of the policies Zurich issued after September 26, 1967 (the post-1967 policies), require Zurich to continue to defend actions pending against Raymark after the limits of those policies have been exhausted by the payment of judgments or settlements? *fn1 (4) Should the defense and indemnity costs of each claim be allocated among the various primary insurers and Raymark on a pro rata basis? and (5) Was Federal Insurance Company entitled to a jury trial?

Raymark (formerly Raybestos-Manhatten, Inc.) has manufactured products containing asbestos since the 1920's. Raymark is currently a defendant in more than 30,000 lawsuits pending in both State and Federal courts throughout the United States in which plaintiffs have alleged injuries caused by exposure to asbestos products. The plaintiffs in these underlying actions typically allege that they or their decedents contracted asbestosis, mesothelioma or bronchogenic carcinoma (lung cancer) resulting from exposure to asbestos products, including products manufactured and sold by Raymark, during the 1940's, 1950's and 1960's.

Since 1941, Raymark has been insured under various comprehensive general liability insurance policies issued by the primary insurers in this case. The Employers' Liability Assurance Corporation, the predecessor in interest to Commercial Union, insured Raymark from May 1, 1941, through May 1, 1945, and from February 4, 1947, through February 4, 1950. Federal and its predecessor in interest, United States Guaranty Company, insured Raymark from September 26, 1951, through September 26, 1967. Commercial Union insured Raymark from September 26, 1967, through October 15, 1969. Zurich insured Raymark after October 15, 1969. Northbrook has issued excess policies since 1976.

The circuit court found, as we do, that the policies at issue are identical in all relevant respects and warrant the same interpretation. The language of the policies that Zurich issued to Raymark is typical. Those policies provide:


The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

Coverage A. bodily injury . . .

. . . caused by an occurrence . . .."

The policies also set forth the following definitions:

"'bodily injury' means bodily injury, sickness or disease . . ..

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

When Raymark tendered the asbestos-related actions to its insurance companies for defense, disputes arose among Raymark and its insurance carriers concerning the interpretation of the policies' coverage of asbestos-related claims. Zurich filed this action for declaratory judgment in 1978. Zurich contended that coverage was triggered only when a claimant inhaled asbestos fibers and that the defense and indemnity obligations for each claim are to be allocated among the various insurers who were on the risk during the years when the claimant was exposed to asbestos in proportion to the number of years that each carrier was on the risk throughout the claimant's exposure. Federal and Commercial Union argued that their respective policies provided coverage only for those claims in which the asbestos-related injury first manifested itself during a policy period. Raymark initially advocated the exposure theory advanced by Zurich. In June 1981, Zurich moved for summary judgment, asking the court to declare that coverage was triggered only by exposure to asbestos. Raymark submitted a memorandum in support of Zurich's motion. On October 1, 1981, in an unrelated action construing the comprehensive general liability policy's coverage for asbestos-related diseases, the United States Court of Appeals for the District of Columbia held that each insurer on the risk from a claimant's initial exposure to asbestos through the manifestation of a disease is liable to its insured for the costs of defense and indemnification. (Keene Corp. v. Insurance Co. of North America (D.C. Cir. 1981), 667 F.2d 1034, 1040-41, cert. denied (1982), 455 U.S. 1007, 71 L. Ed. 2d 875, 102 S. Ct. 1644.) Less than three weeks later, Raymark withdrew its support for Zurich's motion for summary judgment and argued that the court should apply the Keene approach. The circuit court denied the motion for summary judgment, ruling that medical evidence concerning the cause and course of development of asbestos-related diseases was necessary to determine how the policy language applied to asbestos-related diseases.

During a hearing that began on May 2, 1983, and concluded on June 7, 1983, the court heard extensive medical testimony from nine experts who were board certified clinicians or pathologists. The trial court summarized the evidence in a lengthy memorandum opinion and order. The appellate court's summarization was taken in large part from the circuit court's memorandum opinion. After reviewing the record, we find that the circuit court's and the appellate court's summarizations of the evidence are correct. (See 145 Ill. App. 3d 175, 183-86.) The evidence showed that asbestosis begins when a person first inhales asbestos fibers. The body's defense mechanisms eliminate most of the inhaled fibers. Nevertheless, the average worker would have retained as many as one million asbestos fibers in his lungs in a single year. These fibers then settle in the small air passages in the lower respiratory tract known as the respiratory bronchioles and alveolar duct bifurcations. These are the first portions of the respiratory system in which the oxygen-carbon dioxide gas exchange takes place. The sharp-ended asbestos fibers, likened to slivers of glass, puncture the epithelium, or surface layer of the cells of the alveolar walls, and are believed to continuously injure the lung's tissue with every inhalation and expiration.

Ordinarily, the lung reacts to the presence of foreign particulate matter by activating scavenger cells known as alveolar macrophages. The macrophages attack and envelop organic foreign particles in a process known as phagocytosis. Once the macrophage engulfs the particle, it releases enzymes stored within the cell which destroy the foreign particle. This system is ineffective, however, against asbestos fibers. If the fiber is short, the macrophage can completely envelop it. But if, as is more often the case, the fiber is long, the macrophage cannot completely ingest it. In that case, the macrophage membrane disintegrates and releases harmful enzymes into the surrounding lung tissue. This process takes place almost immediately after the fibers become lodged in the lung.

Once the macrophage is damaged and secretes its enzymes, other macrophages are activated which, in turn, are also punctured and release additional destructive enzymes which activate still more macrophages. This cycle becomes self-perpetuating. In addition, the macrophages secrete a substance which activates the white blood cells, or lymphocytes. Lymphocytes attract more macrophages and also secrete a different substance that stimulates the macrophages to work harder and eventually become hyperactive. This process, in turn, increases the amount of enzymes produced by the macrophages and activates even more macrophages.

The macrophages, lymphocytes and the asbestos fibers also activate fibroblasts. Fibroblasts are the cells which normally function within the interstitium of the lung producing collagen, the connective tissue which keeps the lungs from collapsing. The increase in the number of fibroblasts results in an increase in the production of collagen in the lower respiratory tract. The collagen, in turn, forms fibrosis, or scar tissue, in the alveoli which prevents the lung from performing its normal oxygen-carbon dioxide gas exchange. The pathologists testified, with a reasonable degree of medical certainty, that this process begins at or shortly after the inhalation and retention of asbestos fibers. Based on studies using both human and animal tissue, the pathologists were of the opinion that the cells of the human lung react to the presence of asbestos fibers almost immediately; and, that with continuing exposure to asbestos, clinical evidence of fibrosis can appear in as little as five years.

Mesothelioma is a malignant tumor that invades the membranous covering of the lung, which is known as the pleura, or the lining of the diaphragm, which is called the peritoneum. Although little is known about the disease, it is generally believed that it is attributable to asbestos fibers that pierce through the alveoli into either the pleura or the peritoneum. Shortly after, these fibers injure and irritate the lining, causing a pre-malignant disease known as atypia. Then, there follows a long latency period before the actual manifestation of a mesothelial tumor.

Bronchogenic carcinoma originates in the cells that line the bronchial tubes. There was testimony based upon limited experimentation, that asbestos alone would not cause this type of cancer. When coupled with cigarette smoke, however, the two interact synergistically to cause cancer. Before it is clinically detectable, bronchogenic carcinoma progresses through several stages. By the time the tumor has grown to a size large enough to detect by an X ray, however, the disease is usually terminal.

While the clinicians agreed with the pathologists' testimony regarding the pathogenesis of asbestos-related diseases, they disagreed with them as to the point in time when the diseases occur. Unlike the pathologists, the clinicians' testimony emphasized an individual's susceptibility to disease. The clinicians were of the opinion, based on a reasonable degree of medical certainty, that even if the inhalation of asbestos fibers causes microscopic injury to the cells of the lung, the lung has the capacity to repair localized damage, and can even reverse fibrosis. Eventually, though, for some unknown reason, the lungs' defense mechanisms are overcome. It is at this point, in the opinion of the clinicians, that asbestosis begins to develop. But because the effectiveness of every individual's defense mechanisms varies depending upon various factors, including the duration and intensity of exposure, no general rules can be developed. Nevertheless, the clinicians concluded that while it is not possible to determine exactly when a disease begins, it cannot be said to begin when asbestos fibers are first inhaled. Rather, it is more likely that asbestosis does not begin to develop until many years after exposure, in the years closest to the clinical manifestation of the disease. Because of the variability of an individual's susceptibility to asbestosis, the ...

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