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Old Is Gold: Secondary Evidence Of Insurance Coverage For Asbestos Liabilities

By Stephanie A. Scharf, Allan V. Abinoja, and Lorelie S. Masters

After a period of doubt, the answer now is clear: The next mass tort after asbestos is—asbestos. While the United States Congress attempts to address the asbestos-liability crisis through legislation, policyholders facing this most recent “third” wave of asbestos litigation should turn to their insurance assets for help. Because asbestos is a long-tail liability, insurance policies reaching back years—and even decades—may apply to pay for defense costs, judgments, and settlements. With insurance policies, old is gold.

For many companies finding old insurance policies may be difficult. However, as shown by a recent decision by the California Supreme Court, secondary evidence of coverage is important and may help confirm the protection provided by “occurrence” insurance policies dating back decades. As shown by Dart Industries, Inc. v. Commercial Union Insurance Co., 28 Cal. 4th 1059 (2002), policyholders facing this third wave of asbestos liabilities may be able to pursue insurance overage even if they cannot find the old insurance policies themselves.

The Dart Decision

On August 19, 2002, the California Supreme Court issued its decision in Dart, which addresses the method of proving the terms of missing insurance policies. In Dart, the Court held that, in the case of a lost policy, secondary evidence is admissible to show coverage, and the secondary evidence need not re-create the actual language of the missing insurance policy. The policyholder need only show the relevant substance of the missing policy. Id. at 1074. In so holding, the Court rejected the actual language test applied by the California Court of Appeal and suggested that its decision extends to lost written instruments generally.

How to prove coverage absent an actual policy has become a critical issue for many policyholders around the country. Faced with an increasing number of “long tail” and other claims in which liability is based on events that allegedly took place more than forty years ago, policyholders often face the daunting task of trying to locate insurance policies effective at that time. Few companies keep records going back that far. Accordingly, policyholders have sought to establish the terms of insurance coverage through the use of secondary evidence. Missing policy cases present several issues of law including (a) what the burden of proof is on the policyholder and (b) how much evidence is sufficient to meet that burden. The Dart case did not address the burden of proof issue, but considered the issue of how much and what type of evidence was required.

The policyholder in Dart, the successor in interest of a drug company, sued its insurance companies seeking damages and a declaration that the insurers were obligated to defend and indemnify the policyholder in connection with various personal injury cases filed against it. Dart was unable to locate a copy of the relevant insurance policy and sought to establish coverage through the use of secondary evidence. After a protracted series of procedural rulings and interlocutory appeals, the trial court issued a detailed statement of decision and judgment in favor of Dart. Among other things, the court found that Dart conducted a diligent and exhaustive search for the insurance policy and was unable to find it; that Dart proved the existence of the insurance policy by secondary evidence; that the policy covered Dart’s predecessor for the single five-year term from 1946 to 1951; that the policy provided coverage for product liability claims, including injuries caused by diethylstilbestrol (DES) exposure during the policy period but not manifesting itself until after the period ended; the limits of the insurance policy; and that defense costs were covered in addition to the policy limits. Commercial Union appealed.

The California Court of Appeal reversed. The appellate court found that the evidence was insufficient to support the findings of the trial court on the material terms of the insurance policy, principally because Dart failed to produce the actual language of the policy. The Supreme Court granted Dart’s petition for review to determine (1) what a policyholder must prove to establish its rights under a lost insurance policy; and (2) whether the Court of Appeal correctly held that the evidence was insufficient to support the trial court’s findings regarding the contents of the lost policy. Id. at 1068.

As to the first issue, the Supreme Court rejected the “actual language” test enunciated by the Court of Appeal. Rather, the Court concluded that the policyholder in a missing policy case has the burden of proving: (a) that he or she was insured under the lost policy during the relevant time period, and (b) the substance of each policy provision essential to that particular coverage. Id. at 1071. Once the policyholder has met its burden, the insurance company must prove the substance of any policy provision that functions to defeat the claim, including any relevant exclusions. Id.

The Court went on to consider whether Dart’s evidence was sufficient to support the trial court’s findings regarding the contents of the lost policy. In particular, the Court examined the trial court’s conclusion that the lost policy provided occurrence-based coverage for exposure to DES during the policy period, even if the injuries were not discovered until after the policy period ended. Dart’s evidence consisted, in part, of the testimony of the insurance broker—that he was familiar with the product liability coverage of the missing policy and that he had seen a provision that made clear it provided occurrence-based coverage. Id. Dart also introduced documentary evidence regarding two other product liability claims against Dart that had been paid by Commercial Union under the missing insurance policy. Id. The Court held that Dart’s evidence was sufficient to support the trial court’s finding that the policy covered DES injuries taking place during the policy period but manifesting themselves outside the policy period. Id. at 1077.

Burden of Proof

A critical issue in missing policy cases often concerns the appropriate burden of proof to be imposed on the policyholder. In Dart, the Court was not asked to address this issue. Id. at 1072 n.4. Accordingly, while the Dart case represents a victory for the policyholders, the Court expressly reserved itself the chance to revisit the issue of the burden of proof. If that issue is presented, it will be vigorously argued by both sides. See id. at 1082 (Brown, J., concurring) (opining that the evidence was “barely sufficient” to satisfy the trial court’s finding and that if a clear and convincing evidence had applied, she would have affirmed the Court of Appeal’s judgment “without hesitation”); see also Star Oil Co. v. Aetna Casualty & Surety Co., No. 93-CV-72686, 1995 WL 875597, at *3 n.2 (E.D. Mich. June 14, 1995) (recognizing split in federal courts as to whether clear and convincing or preponderance of evidence standard governs).

Conclusion

Dart teaches important lessons. First, insurance policies and documents evidencing their purchase should be kept on permanent retention and imaged, particularly if they relate to occurrence-based coverage. Second, policyholders can succeed in enforcing their insurance coverage for long-tail claims even in they cannot find copies of all of their own insurance policies. Policyholders facing long-term liabilities should look for all documents that show the existence and terms of insurance. Examples include claim documents, policy registers, old policy applications and related correspondence, old contracts requiring proof of insurance, and insurance broker files. There may be “gold” in those old files. 

ABOUT THE AUTHORS

Stephanie A. Scharf is a partner in Jenner & Block’s Chicago office. She represented the policyholder in Dart at trial. Allan V. Abinoja is an associate in the Chicago office of Jenner & Block. Lorelie S. Masters is a partner at Jenner & Block, LLC, in Washington, D.C. She is co-author of a treatise entitled Insurance Coverage Litigation and the Policyholder Chair of the Insurance Coverage Litigation Committee of the ABA’s Section of Litigation.

riskVue | The webzine for risk management professionals
July 2003