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John Crane, Inc. v. Admiral Insurance Co.

Court of Appeals of Illinois, First District, Second Division

June 4, 2013

JOHN CRANE, INC., Plaintiff-Appellant and Cross-Appellee,
v.
ADMIRAL INSURANCE COMPANY, AMERICAN MOTORISTS INSURANCE COMPANY, FIRST STATE INSURANCE COMPANY, HARTFORD ACCIDENT AND INDEMNITY, LUMBERMENS MUTUAL CASUALTY COMPANY, and TWIN CITY FIRE INSURANCE COMPANY, CERTAIN UNDERWRITER AT LLOYDS OF LONDON, and CERTAIN LONDON MARKET INSURANCE COMPANIES, Including Excess Insurance Company, Ltd., General Reinsurance Corporation, River Thames Insurance Company, World Auxiliary Insurance Corporation, and John Does 1 Through 400, Defendants Allianz Underwriters Insurance Company, Allstate Insurance Company, AIU Insurance Company, American Re-Insurance Company, Granite State Insurance Company, Lexington Insurance Company, National Surety Corporation, National Union Fire Insurance Company of Pittsburgh, PA, Insurance Company of North America, and TIG Insurance Company, Defendants-Appellees; Columbia Casualty Company, Continental Casualty Company, and The Continental Insurance Company, Defendants-Appellees and Cross-Appellants.

Appeal from the Circuit Court of Cook County No. 04 CH 08266 The Honorable Dorothy Kirie Kinnaird, Judge Presiding.

Justices Quinn and Connors concurred in the judgment and opinion.

OPINION

HARRIS PRESIDING JUSTICE

¶ 1 Plaintiff John Crane, Inc. (Crane), appeals the circuit court's judgment on its first amended complaint against defendants Columbia Casualty Company, Continental Casualty Company, Continental Insurance Company (collectively referred to as CNA), TIG Insurance Company (TIG), Allianz Underwriters Insurance Company, Munich Reinsurance America, Inc., f/k/a American ReInsurance Company, National Surety Corporation (collectively referred to as Allianz), Allstate Insurance Company, and AIU Insurance Company, Granite State Insurance Company, Lexington Insurance Company, and National Union Fire Insurance Company of Pittsburgh, PA (collectively referred to as AIG-related Companies), seeking a declaration of rights.[1] On appeal, Crane contends the trial court erred in (1) finding that the parties could not use the agreement concerning coverage (ACC) to determine that Kemper's primary policies had been exhausted by November 2004; (2) determining that a pro rata allocation of payments by excess and umbrella insurers applies, rather than an "all sums" allocation; and (3) finding that Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill.2d 23 (1987), requires Crane to prove all three trigger dates to prove exhaustion of its primary policies. CNA defendants also filed a cross-appeal in which it alleges that the trial court erred in (1) determining that mere exposure to asbestos constitutes bodily injury under Zurich; and (2) failing to adopt an equitable continuous trigger.

¶ 2 In an opinion filed on March 5, 2013, this court affirmed the trial court in part, reversed in part and remanded with directions. The CNA and Allianz defendants filed petitions for rehearing, which this court granted. Crane filed a response and the CNA and Allianz defendants filed their replies. Upon consideration of the petitions for rehearing, we issue the following opinion and affirm in part, reverse in part and remand with directions.

¶ 3 JURISDICTION

¶ 4 The circuit court entered an order on November 13, 2009, resolving all claims pled in Crane's first amended complaint, and all but one of defendants' counterclaims. The order stated that there was "no just reason for delaying either enforcement or appeal." Crane filed a notice of appeal on November 25, 2009. Accordingly, this court has jurisdiction pursuant to Illinois Supreme Court Rules 304(a) governing appeals that do not dispose of an entire proceeding. Ill. S.Ct. R. 304(a) (eff. Feb. 26, 2010).[2]

¶ 5 BACKGROUND

¶ 6 The trial court in this matter presided over intensive discovery, heard more than 25 summary judgment motions, and conducted two trials during a period of almost five years. It issued six detailed memorandum opinions and orders, and the record contains over 200 volumes. We have set forth only those facts necessary to resolve the issues on appeal and cross-appeal.

¶ 7 Crane manufactures sealing systems and prior to 1986, it manufactured gaskets containing asbestos. From January 1, 1944, through August 1, 2001, Crane purchased primary insurance coverage from Kemper, which is not a party to this appeal. These policies contained a duty to defend, and provided that defense costs would be paid in addition to the policy limits. The parties to this appeal stipulated that the limits of Kemper's primary policies totaled $41, 075, 000.

¶ 8 Crane also purchased umbrella insurance coverage above the primary coverage. CNA issued umbrella policies to Crane from 1961 to 1967, and from 1978 to 1981. Allianz issued an umbrella policy for the period between November 30, 1981, to November 30, 1982, and TIG issued an excess policy above Allianz's umbrella policy for that same period. Kemper also issued three umbrella policies to Crane above its primary insurance from 1967 to 1977.

¶ 9 Since 1979, Crane has been named as a defendant in over 250, 000 asbestos-related bodily injury claims throughout the United States. Kemper began defending Crane in these suits and agreed to adopt a no-settlement policy based on Crane's position that their products were not the likely source of the victims' asbestos-related disease. In 2001, facing financial difficulty, Kemper attempted to renegotiate the no-settlement policy with Crane. On January 7, 2002, the parties entered into the ACC. The purpose of the ACC was to resolve "the questions and issues addressed herein relating to the existence and handling of coverage for John Crane for Asbestos-Related Claims." The ACC addressed retroactive amendments to Kemper's primary policies issued from January 1, 1987 to August 1, 2001 (post-1986 policies). Crane did not have umbrella or excess insurance coverage by defendant insurers for this period. The ACC provided that although the original policies issued by Kemper allowed only for indemnity payments to erode the policy limits, the retroactive amendments provided that the post-1986 policy limits would be eroded by payments of both damages and defense expenses. As the trial court stated in its October 16, 2007, order, "the Post-1986 Policies' limits changed from $2 million per year plus unlimited defense to $2 million per year including defense." The ACC further provided that Kemper issue a new $70 million supplemental excess policy (SEP) to Crane and that Kemper agreed to continue with the no-settlement strategy.

¶ 10 On January 7, 2002, the parties also entered into the Caruolo agreement, which involved a case originating in New York. The dispute centered on the payment of $5.83 million in prejudgment interest in the case. The agreement provided that the payment could be allocated against Kemper's pre-1987 policy limits in exchange for $5 million being added to the limits of the post-1986 Kemper policies.

¶ 11 Crane filed a claim for declaratory judgment in May 2004. On October 22, 2004, it filed its first amended complaint containing three counts. Count I sought a declaration that Crane's primary insurance coverage was exhausted. Counts II and III sought a declaration of the obligations of the umbrella and excess insurance carriers as to the underlying asbestos claims. CNA filed a counterclaim for declaratory judgment, seeking a determination of the appropriate triggers for coverage, that CNA is entitled to a pro rata allocation of payments, and that Crane's primary coverage limit had not been exhausted.

¶ 12 In February 2005, citing Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill. 2D 23 (1987), Crane filed a motion for partial summary judgment arguing that an "all sums" allocation of payments is appropriate whereby each umbrella policy triggered by a claim must pay up to its policy limits. CNA filed a response claiming an affirmative defense. Allianz filed a cross-motion arguing, in part, that the "all sums" allocation was contrary to the terms of its umbrella policy and was not equitable as applied to umbrella insurers. On April 12, 2006, the trial court issued an order determining that a pro rata allocation applied to the excess and umbrella carriers, pointing out that Zurich involved only primary insurers. The court denied Crane's motion for partial summary judgment on count I of its first amended complaint seeking an "all sums" allocation. The court granted Allianz's cross-motion for partial summary judgment on the issue of pro rata allocation and CNA's affirmative defense in seeking a pro rata allocation.

¶ 13 The trial court also found that, regarding the ACC, Crane and Kemper could retroactively amend their post-1986 policies without consulting nonprimary insurers because none of those insurers issued policies to Crane after 1986. In the trial court, Kemper and Crane argued that under the terms of the ACC, Kemper's primary insurance was exhausted in November 2004. The trial court, however, decided that it could not rule on this issue until it determined the validity of the ACC and resolved issues of good faith and intent of the parties in entering the agreement. The court also directed the parties to brief the issue of severability of the agreement in case one or more provisions proved invalid.

¶ 14 The trial court subsequently found that sections five and six of the ACC, which deal specifically with issues of trigger, allocation, and cost recovery from other insurers, were severable. It determined that the "core purpose" of the ACC was to resolve the no-settlement strategy issue between Kemper and Crane, and the parties would have entered into the agreement even without those provisions.

¶ 15 The trial court also decided that it would hold an exhaustion trial in the future to determine whether Kemper's primary policies had been exhausted. If, during the exhaustion trial, sections five and six were found to be void, those sections could be severed without affecting the rest of the ACC. The trial court concluded that "Crane may use the ACC in demonstrating exhaustion at the Exhaustion Trial. Whether the primary layer of coverage is exhausted will be determined after the Exhaustion Trial based upon the principles of the doctrine of horizontal exhaustion."

¶ 16 After the trial court issued its April 12, 2006, order, certain excess carriers including TIG filed a joint motion to extend the court's ruling adopting a pro rata allocation to their excess policies. The trial court granted their motion on June 21, 2006.

¶ 17 On October 30, 2006, Crane and Kemper entered into another agreement (2006 settlement). Crane agreed to release Kemper from all potential remaining obligations under its primary policies and its umbrella policies for a lump sum totaling more than $20 million. The 2006 settlement also contained a provision in which Crane agreed to undertake any obligations Kemper would have had under the primary policies. As the trial court noted, "Crane concedes that as a result of the 2006 Settlement, Crane stands in the shoes of Kemper."

¶ 18 On October 16, 2007, the trial court issued an order that determined whether Crane, in standing in the shoes of Kemper, may rely on policy limits as established by the ACC to prove exhaustion, or whether it was obligated to prove exhaustion of Kemper's original policy limits. Relying on United States Gypsum Co. v. Admiral Insurance Co., 268 Ill.App.3d 598 (1994) (hereinafter U.S. Gypsum), AAA Disposal Systems, Inc. v. Aetna Casualty & Surety Co., 355 Ill.App.3d 275 (2005), Kajima Construction Services, Inc. v. St. Paul Fire & Marine Insurance Co., 368 Ill.App.3d 665 (2006) (Kajima I), and North River Insurance Co. v. Grinnell Mutual Reinsurance Co., 369 Ill.App.3d 563 (2006), the trial court held that the horizontal exhaustion doctrine applied. The doctrine is based on the "other insurance" provision of excess insurer policies, which "require[ ] the insured to exhaust all triggered primary insurance before pursuing coverage under the excess policies." The trial court cited the above cases to support its finding that insureds cannot "choose to make policies unavailable" for application of the horizontal exhaustion doctrine.

¶ 19 The trial court reasoned that Crane's argument "assert[s] that Kemper's original policy limits are unavailable for purposes of exhaustion because of the ACC [sic] and the 2006 Settlement retroactively amended the Post-1986 Policies and it is those amendments that control." Therefore, "the original policies' limits of liability are no longer available." The court held that "Crane cannot make the original limits of liability to primary insurance unavailable simply by retroactively amending policy terms. [I]n order for the umbrella or excess coverage to be triggered, the insured must show that the full limits of the policies as originally written are exhausted." The original limits on these policies were $2 million per year excluding defense costs.

¶ 20 On December 20, 2007, after holding a medical trial, the trial court confirmed the continued applicability of "Zurich's holding that exposure to asbestos constitutes bodily injury and thus, the policies in effect during the exposure years are triggered." It rejected Crane's argument for a continuous trigger because after presentation of the evidence the court could not "conclude that in every case there is a progression of continuing body injury between the time a claimant's exposure to asbestos ceases and the time the claimant is diagnosed with the disease." Therefore, the trial court applied Zurich's triple trigger. "Insurance policies in effect during the years of exposure, during the years of sickness, and during the years of manifestation (through duration) of the disease will be triggered." However, it determined that "any mutations that may occur between the last day of exposure and the first day of symptoms[] do not constitute a new injury or sickness to which the policies must respond."

¶ 21 The trial court's orders up to this point determined that (1) there was a single occurrence; (2) it would use Zurich's triple trigger to determine exhaustion of Kemper's primary policies; (3) the doctrine of horizontal exhaustion applied; and (4) Crane must "stand in the shoes" of Kemper in demonstrating exhaustion of the primary policies as they were originally issued. The trial court set a date for a bench trial (exhaustion trial) to determine whether Crane sufficiently proved that payments of the first 67 claims exhausted Kemper's primary policies in effect from 1944 to 2001.

¶ 22 The parties stipulated to Kemper's original primary policy limits of $41, 075, 000 and that payments of $37, 065, 259 have been made on 54 of the 67 claims at issue. The 13 payments in dispute total $14, 804, 583. Prior to trial, Crane presented two witnesses who testified as to the disputed payments. The disputes centered on the "amount paid and the amount allocated for indemnity or prejudgment interest or delay damages." After presentation of the evidence, the trial court determined that Crane failed to prove six of the disputed payments, totaling $8, 832, 467.

¶ 23 At the exhaustion trial, Crane had the burden of proving trigger dates and allocation. In its memorandum opinion and order of March 10, 2009, the trial court outlined the following facts. Crane presented Mr. Jones as its sole expert witness. Mr. Jones testified as to the trigger dates, allocation of the 67 adverse asbestos claims at issue, and to what extent Kemper's primary policies were exhausted by payments of these claims. Although the discovery process yielded 500 boxes of documents, CNA's counsel, along with consultant Dr. Anne Gron, reduced the documents used to four boxes. CNA did not retain Dr. Gron as an expert witness and no one with first-hand knowledge testified at trial as to the reduction process. The trial court noted that although this is the third time Mr. Jones has testified about insurance allocations, it "is the first time he testified where he did not participate in, collect, or supervise the collection of the data that supports his allocation. This is also the first time that Mr. Jones has testified to an insurance allocation based upon data collected by opposing counsel and opposing counsel's experts."

¶ 24 The trial court found that Mr. Jones' allocations suffered from "methodological and procedural defects" such that he "did not complete, participate in, or supervise a true, independent, expert review of the underlying claim materials." The trial court specifically noted four areas of concern. "First, Mr. Jones did not seek to determine or independently confirm whether the four boxes were a representative or relevant sample of the universe of 500 boxes. Second, Mr. Jones relied on everything in the four boxes without question [as to their reliability or trustworthiness]. " Third, Mr. Jones used Dr. Gron's dates even though he had never spoken to or met her. Although he knew that she had not previously performed an insurance allocation, he accepted her dates "the majority of the time even in those instances when the document or his protocol dictated that he should select another date." Fourth, Mr. Jones only reviewed materials contained in the four boxes selected by CNA's counsel and Dr. Gron because he was instructed to do so by Crane's counsel. Mr. Jones testified that he would have reviewed the entire 500 boxes of material if asked to do so. The trial court also found that some of the documents relied upon by Mr. Jones were untrustworthy and unreliable.

¶ 25 The trial court also found that Crane did not satisfy its burden of proving that Kemper's primary policies had been exhausted by the 67 claims. It reasoned that Crane's expert, Mr. Jones, was not credible given the limitations Crane imposed on him and his allocation "was based on incomplete information which the Court found to be largely untrustworthy." Therefore, reliable trigger dates could not be ascertained from Mr. Jones' testimony and Crane could not prove whether certain primary policies were triggered for coverage. Since Crane did not prove exhaustion of the primary policies, defendants at this time "have no coverage obligations to Crane under their respective umbrella and excess policies. Under these circumstances, the Court need not reach the legal issues raised by the parties nor address the relief request in" defendants' counterclaims.

ΒΆ 26 However, the trial court did find that the claim of Bernard Mayer was sufficiently proved. The parties stipulated to the exposure, sickness, and diagnosis dates. Therefore, the trial court determined that "[t]he Kemper primary policies in effect from January 1, 1944, to December 31, 1944, and from January 1945 to December 31, 1945, are eroded by the ...


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