New Jersey Appellate Court Rejects Rescission and Known Loss Defense for Asbestos-Related Claims

January 28, 2009

A New Jersey appellate court recently upheld a lower court’s rulings that an excess insurer could not rescind a policy or pursue a known loss defense where the insured disclosed asbestos claims but certain liability was not known at the time the insured applied for insurance. Scottsdale Insurance Co. v. Woolsulate Corp., No. A-4815-06T1, N.J. Super., App. Div. (2008).

The insured, Woolsulate Corp., was a commercial insulation contractor that previously used asbestos in its work. Beginning in 1984, several asbestos-injury lawsuits were being filed against Woolsulate. Chubb Group of Insurance Companies (Chubb) provided Woolsulate with primary insurance from 1984 to 1986, and Woolsulate applied for and received excess coverage from Scottsdale for a four-month period in 1986. Brokers placing the excess coverage with Scottsdale included a “loss run summary” that contained information provided by Chubb and other primary insurers reporting on the handful of pending lawsuits against Woolsulate.

Shortly after Scottsdale’s policy expired in 1986, Woolsulate’s agent notified Scottsdale about asbestos personal injury claims filed against Woolsulate. Scottsdale acknowledged receipt of the claims and opened up a claim file. The agent continued to send notice of claims the following year. In October 1990, Chubb informed Scottsdale that Chubb’s primary coverage was nearing exhaustion. In 1998, Woolsulate notified Scottsdale that all of its primary insurers were exhausting their policy limits, and it demanded a defense and indemnification for the asbestos-related claims. Scottsdale reserved its rights to deny coverage and filed a declaratory judgment action, seeking to rescind Woolsulate’s excess policy on the ground that in its application for insurance, Woolsulate misrepresented its involvement with asbestos and its awareness of asbestos-related lawsuits filed against it. Scottsdale also challenged Chubb’s claimed exhaustion of policy limits.

The trial court rejected Scottsdale’s rescission claim, and ruled that Scottsdale could not avail itself of any known loss/loss-in-progress defenses. Scottsdale appealed. Further, the trial court held that Chubb’s primary policy had been properly exhausted.

In an unpublished per curiam opinion, the appellate panel upheld the judge’s conclusion on rescission. It noted that even though Woolsulate tendered an asbestos-related lawsuit to Scottsdale in 1986, the insurer waited thirteen years before it claimed to have been defrauded or that it was unaware of Woolsulate’s involvement with asbestos. “Scottsdale’s silence, for more than a decade after receiving the 1986 asbestos-related complaint, spoke volumes about what Scottsdale knew at the time the policy was issued.” Further, Scottsdale’s delay in asserting its position rendered it unable to procure critical witnesses and documents, thus resulting it its “self-inflicted” proof problems.

The appellate panel also rejected Scottsdale’s argument that Woolsulate’s knowledge of its potential liability precluded loss under the known loss/loss-in-progress doctrine. In so doing, it relied upon CPC International Inc. v. Hartford Accident & Indemnity Co., 316 N.J. Super. 351, 377 (App. Div. 1998) cert. denied, 158 N.J. 73 (1999), which held that as long as there is uncertainty about damage or injury that may occur during the policy period and no legal liability has been imposed on the insured, a potentially insurable risk remained that may be covered in continuous or progressive damage or injury claim cases. In the court’s view, at the time it applied for insurance, Woolsulate had received a limited number of claims and did not know that in the future it would receive hundreds of claims or be held liable for those claims. The court found no public policy reason to excuse Scottsdale from covering the risk it undertook, even if it did so mistakenly believing that its exclusions might otherwise bar coverage for such claims. To rule otherwise would give the insurer an unfair “heads I win, tails you lose” advantage over the insured.

Finally, the appellate panel rejected Scottsdale’s argument that Chubb did not exhaust the limits of its primary coverage by 1991, finding that the trial court’s decision that New Jersey’s seminal allocation decision in Owens-Illinois Inc. v. United Ins. Co., 138 N.J. 437 (1994), decided three years after Chubb paid out its policy limits, could not be applied retroactively to force Chubb to recalculate its liability for each policy year. Notwithstanding, the court held that under Owens-Illinois, Scottsdale could not invoke an “other insurance” clause in its policy to escape its duty to defend its insured.

This decision highlights the need for policyholders to provide information concerning their liabilities in the insurance application process so that they can have peace of mind that coverage is in place in the years to come.