Bondex International, Inc. v. Hartford Accident and Indemnity

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0025p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
-
BONDEX INTERNATIONAL, INC.; RPM, INC.;
-
REPUBLIC POWDERED METALS, INC.
(08-4735), -
Plaintiffs-Appellants/Cross-Appellees, -
Nos. 08-4735; 09-3091/
,
3092/3304/3307
>
-
-
v.
-
-
HARTFORD ACCIDENT AND INDEMNITY
COMPANY, et al., -
Defendants, -
-
-
-
ALLSTATE INSURANCE COMPANY (09-3091);
MT. MCKINLEY INSURANCE COMPANY -
-
-
(09-3092); CENTURY INDEMNITY COMPANY
-
(09-3304); CONTINENTAL CASUALTY
-
COMPANY; COLUMBIA CASUALTY COMPANY
(09-3307), -
Defendants-Appellees/Cross Appellants. -
N
Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
No. 03-01322—Ann Aldrich, District Judge.
Argued: October 12, 2011
Decided and Filed: November 28, 2011*
Before: DAUGHTREY, COOK, and KETHLEDGE, Circuit Judges.
_________________
COUNSEL
ARGUED: Dennis R. Lansdowne, SPANGENBERG SHIBLEY & LIBER LLP,
Cleveland, Ohio, for Plaintiffs. Daniel F. Gourash, SEELEY, SAVIDGE, EBERT &
GOURASH CO., L.P.A., Cleveland, Ohio, Patricia B. Santelle, WHITE AND
WILLIAMS LLP, Philadelphia, Pennsylvania, Andrew T. Frankel, SIMPSON
*
This decision was originally issued as an “unpublished decision” filed on November 28, 2011.
On January 24, 2012, the court designated the opinion as one recommended for full-text publication.
1
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THACHER & BARTLETT LLP, New York, New York, for Defendants. ON BRIEF:
Dennis R. Lansdowne, Shelly K. Hillyer, SPANGENBERG SHIBLEY & LIBER LLP,
Cleveland, Ohio, Michael E. Brittain, Jeffrey J. Lauderdale, CALFEE, HALTER &
GRISWOLD LLP, Cleveland, Ohio, John B. Nalbandian, TAFT, STETTINIUS &
HOLLISTER LLP, Cincinnati, Ohio, for Plaintiffs. Daniel F. Gourash, Robert D.
Anderle, SEELEY, SAVIDGE, EBERT & GOURASH CO., L.P.A., Cleveland, Ohio,
Patricia B. Santelle, Michael E. DiFebbo, Shane R. Heskin, WHITE AND WILLIAMS
LLP, Philadelphia, Pennsylvania, Andrew T. Frankel, SIMPSON THACHER &
BARTLETT LLP, New York, New York, Robert F. Cossolini, Jeremiah L. O’Leary,
FINAZZO, COSSOLINI, O’LEARY, MEOLA & HAGER LLC, Morristown, New
Jersey, David M. Rice, CARROLL, BURDICK & McDONOUGH LLP, San Francisco,
California, Clifford C. Masch, Holly M. Wilson, REMINGER & REMINGER CO.,
LPA, Cleveland, Ohio, Howard J. Fishman, ARONBERG GOLDGEHN DAVIS &
GARMISA, Chicago, Illinois, Brian T. Winchester, McNEAL, SCHICK, ARCHIBALD
& BIRO CO., LPA, Cleveland, Ohio, Michael J. Baughman, COHN, BAUGHMAN &
MARTIN, Chicago, Illinois, David J. Fagnilli, DAVIS & YOUNG, Cleveland, Ohio,
Andrew T. Hayes, Steven R. Hobson, LEIBY, HANNA & RASNICK, Akron, Ohio,
Michael E. Smith, FRANTZ WARD LLP, Cleveland, Ohio, Andrew M. Wargo,
BONEZZI SWITZER MURPHY POLITO & HUPP CO. L.P.A., Cleveland, Ohio, for
Defendants. Michael J. Hendershot, Richard D. Schuster, VORYS, SATER,
SEYMOUR AND PEASE LLP, Columbus, Ohio, for Amicus Curiae.
_________________
OPINION
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COOK, Circuit Judge. Plaintiffs-Appellants RPM, Inc. (“RPM”) and its two
subsidiaries, Bondex International, Inc. (“Bondex”) and Republic Powdered Metals, Inc.
(“New Republic”), seek coverage from multiple insurance companies, Appellees, for
Appellants’ settlement and defense costs related to thousands of asbestos-exposure
products-liability lawsuits that began in 1981. Many of the underlying asbestos claims
allegedly arise from consumers’ exposure to products manufactured by The Reardon
Company (“Old Reardon”), a corporation that sold its assets and liabilities to RPM (then
known as Republic Powdered Metals, Inc.), dissolved, and became a division of RPM’s
business in 1966. The relevant policies, issued in Ohio for policy periods spanning from
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1973–1985,1 did not expressly identify Old Reardon or its later incarnation as “Named
Insureds.” Nevertheless, the insurance companies do not dispute that the policies
provide coverage for asbestos claims related to the Reardon products (the “Reardon
claims”), and each has paid Appellants pursuant to the applicable policies’ aggregate
limits for “Products Hazard” claims. Collectively, the insurance companies have paid
more than $100 million in coverage under the relevant policies. Appellants now seek
more than $125 million in additional coverage under the relevant policies, as well as
several million dollars in continuing defense costs from Mt. McKinley Insurance
Company, arguing that the policies’ “Products Hazard” caps do not apply to the
Reardon claims.
The district court rejected Appellants’ coverage theories and granted summary
judgment to the insurance companies, reasoning that the de facto merger doctrine
warranted extending the policies’ Products Hazard caps to Old Reardon, as RPM’s
absorbed predecessor. As a result of this ruling, the district court dismissed many of the
insurance companies’ contingent counterclaims and third-party claims as moot and
dismissed certain counterclaims for failure to meet the heightened pleading standard of
Federal Rule of Civil Procedure 9(b).
Although we do not adhere to the district court’s de facto merger analysis, we
affirm because the policy language and the parties’ course of dealing support the district
court’s judgment.
I.
Old Reardon, a company founded in 1883 and incorporated in Missouri in 1914,
manufactured and sold paint and drywall products later discovered to contain asbestos.
In March 1966, Republic Powdered Metals, Inc. (“Old Republic”) entered into a
purchase and assumption agreement (“1966 purchase agreement”) whereby it purchased
1
Appellants initially brought claims under policies issued by Hartford Accident and
Indemnification Co. that provided coverage from 1967–71. The parties settled those claims prior to the
ruling appealed here.
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Old Reardon’s assets for cash and assumed liability for claims arising from Old
Reardon’s products. At the same time as the purchase agreement, Old Reardon’s
shareholders approved a dissolution and liquidation plan. In short order, Old Reardon
changed its name to Nodraer (“Reardon” spelled backwards) Liquidating Company,
dissolved, and liquidated its assets by the end of the year. Despite the dissolution and
liquidation of Old Reardon, Old Republic continued Old Reardon’s business as an
internal division called the Reardon Division. The Reardon Division continued to
operate Old Reardon’s manufacturing plants with many of the same Old Reardon
employees, brand names, and product formulas. Naturally, the new products had the
same latent asbestos problems. Old Republic blurred the distinction between it and Old
Reardon by adopting Old Reardon’s founding and incorporation dates as its own and
advertising its products with Old Reardon’s trade names, “Bondex” and “The Reardon
Company.”
In November 1971, Old Republic changed its name to RPM, Inc., and created
two wholly owned subsidiaries called Bondex International, Inc. (“Bondex”) and
Republic Powdered Metals, Inc. (“New Republic”). The following May, RPM
transferred the assets and liabilities of the Reardon Division to Bondex and transferred
the assets and liabilities of Old Republic to New Republic, but the asset transfers did not
significantly affect RPM’s business or product lines.
Beginning in 1981 and continuing through the 2000s, numerous consumers filed
suit against Appellants claiming asbestos-related injuries caused by exposure to products
manufactured by The Reardon Company, RPM, Bondex, or Republic (collectively
“Republic/RPM”). By 2006, more than 32,000 plaintiffs had filed asbestos claims, many
of which targeted goods manufactured and sold by Old Reardon (pre-1967) or the
Reardon Division of RPM (post-1966). Republic/RPM had insured itself and its
subsidiaries against such risks under general coverage liability insurance policies issued
by Defendants-Appellees Allstate, Century, Continental, Columbia, and Mt. McKinley,
or their predecessors. Some of these insurers provided primary insurance, and others
provided excess insurance that kicked in if Appellants exhausted a primary or
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subordinate insurance policy. Although the relevant policies varied with regard to some
terms, they all provided defense or indemnity coverage to the policies’ “Named Insured”
or “Insured.” The policies also contained Products Hazard caps, which set aggregate
limits on the amount of coverage available to insureds for product-liability claims during
the applicable policy period. In the absence of the Products Hazard cap or another
limitation on coverage, the policies provided for general coverage liability (i.e.,
unlimited coverage).
The policies define the relevant terms as follows:
* NAMED INSURED: “Named Insured” means the organization
named in the declaration of this policy and includes: (1) any subsidiary
company (including subsidiaries thereof) and any other company under
their control and active management at the inception date of this policy;
(2) new organizations acquired by the Named Insured during the policy
period, through consolidation, merger, purchase of the assets of, or
assumption of control and active management; provided such acquisition
or assumption is reported to INA within sixty days after it is effected and
provided further such acquisition is endorsed on this policy.
* NAMED INSURED’S PRODUCTS: “Named Insured’s products”
means goods or products manufactured, sold, handled or distributed by
the Named Insured or by others trading under his name, including any
container thereof (other than a vehicle) . . . .
* PRODUCTS HAZARD: “products hazard” includes personal injury
and property damage arising out of the Named Insured’s products or
reliance upon a representation or warranty made at any time with respect
thereto, but only if the personal injury or property damage occurs away
from premises owned by or rented to the Named Insured after physical
possession of such products has been relinquished to others.
As the asbestos claims poured in throughout the 1980s and 1990s, Appellants
negotiated settlements between the asbestos plaintiffs and their insurance companies.
When all necessary parties agreed to settlement terms, Appellants submitted approved
settlements to the insurers, the insurers disbursed settlement checks to Appellants’
attorneys up to the limits of the relevant insurance policies, and Appellants’ attorneys
disbursed settlement funds to the underlying plaintiffs. When a primary or subordinate
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insurance company reported to Appellants that they had exhausted their Products Hazard
coverage for a particular policy period, Appellants would seek coverage from the next
level of excess insurance. Occasionally, Appellants disputed coverage allocation with
their primary insurers, but these disputes did not concern whether the Products Hazard
caps applied to the Reardon-derived asbestos claims, and Appellants entered into two
separate settlement agreements with primary insurers in the 1990s that recognized the
“The Reardon Company” and “Reardon Division” as insured parties and stipulated that
all asbestos claims—including Old Reardon and Reardon Division claims—would
exhaust the primary insurer’s aggregate limits. (R. 614, App’x 5822–24 (1993 Bondex
Claims Handling Agreement); R. 383, App’x 5894–96 (1995 RPM Bodily Injury Claims
Handling Agreement).) After exhausting the last of their insurance policies in or about
2003, Appellants claimed for the first time that they had not exhausted their insurance
coverage, because the Products Hazard caps did not apply to the Reardon claims. (See
Appellants’ Br. at 14.)
Appellants filed suit against the insurance companies asserting claims for breach
of contract, declaratory judgment, and breach of the duty of good faith and fair dealing.
Appellants’ First Amended Complaint ostensibly contained an alternative theory for
unlimited coverage against Mt. McKinley under the “Contractual Liability” provisions
of the policies issued by its predecessor, Gibraltar. (See Am. Compl. ¶¶ 108–20.) The
insurance companies filed contingent counterclaims and third-party claims sounding in
estoppel, exhaustion, and fraud, and seeking contribution. The parties cross-moved for
summary judgment.
The district court resolved all cross-motions by final opinion and order of
February 10, 2009.2 Applying Ohio law, the court determined that the 1966 purchase
agreement constituted a de facto merger between Old Reardon and Republic/RPM (the
absorbing entity), such that the policy term “Named Insured” included Old Reardon and
2
The district court initially resolved the cross-motions for summary judgment by opinion and
order of December 1, 2008, and the parties thereafter filed motions for clarification and to amend
judgment. The final opinion does not differ materially from the initial opinion.
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the Products Hazard caps applied to the Reardon claims. Bondex Int’l, Inc. v. Hartford
Accident & Indem. Co., No. 1:03-cv-1322, slip op. at 15 (N.D. Ohio Feb. 10, 2009)
(applying “hallmarks” from Welco Industries, Inc. v. Applied Cos., 617 N.E.2d 1129,
1134 (Ohio 1993), to interpret insurance policies). In addition to finding that the caps
applied to the Reardon claims, the district court held that Mt. McKinley had exhausted
its coverage liabilities, ordered Appellants to return $231,073.33 of overpayments to
Mt. McKinley, and found for Mt. McKinley on Appellants’ bad faith claim. After
resolving Appellants’ insurance claims, the district court dismissed the insurance
companies’ contingent counterclaims and third-party claims. Id. at 18–24.
Appellants timely appealed, and the insurance companies filed contingent cross-
appeals on behalf of their dismissed claims. Trade organizations have filed amicus briefs
on both sides.
II.
The district court had diversity jurisdiction under 28 U.S.C. § 1332, and we have
appellate jurisdiction under 28 U.S.C. § 1291. We review the district court’s grant of
summary judgment de novo. Ciminillo v. Streicher, 434 F.3d 461, 464 (6th Cir. 2006).
Summary judgment is proper “if the movant shows that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.
Civ. P. 56(a). We draw all reasonable inferences from the record in the light most
favorable to the nonmoving party, and we only grant summary judgment “[w]here the
record taken as a whole could not lead a rational trier of fact to find for the non-moving
party.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587–88 (1986)
(citation omitted). Appellate courts reviewing summary judgment may affirm on any
grounds supported by the record. E.g., Babcock & Wilcox Co. v. Arkwright-Boston Mfg.
Mut. Ins. Co., 53 F.3d 762, 767 (6th Cir. 1995).
The district court concluded, and the parties do not dispute, that Ohio law
governs these policy disputes. See United States v. A.C. Strip, 868 F.2d 181, 184 (6th
Cir. 1989) (recognizing that Ohio law applies to policies issued in Ohio). Under Ohio
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law, the interpretation of an unambiguous insurance contract presents a question of law
that an appellate court reviews de novo. Nationwide Mut. Fire Ins. Co. v. Guman Bros.
Farm, 652 N.E.2d 684, 686 (Ohio 1995). The presence of undefined terms in a policy
does not convert the issue into a question of fact so as to preclude summary judgment.
Id.
III.
The primary coverage dispute presents a narrow interpretive question: Do Old
Reardon and the Reardon Division qualify as Named Insureds? If so, then the policies’
Products Hazard caps apply to claims arising from their products. Because we find that
both Old Reardon and the Reardon Division qualify as Named Insureds under the plain
language of the policies, we agree with the district court that the Products Hazard caps
apply to the Old Reardon and Reardon Division asbestos claims.
A. Plain Language
Under Ohio law, insurance companies bear the burden of demonstrating that an
insurance claim falls within an exclusion to coverage. E.g., Cont’l Ins. Co. v. Louis
Marx Co., 415 N.E.2d 315, 317 (Ohio 1980); St. Marys Foundry, Inc. v. Emp’rs Ins. of
Wausau, 332 F.3d 989, 992–93 (6th Cir. 2003). “Our goal when construing [an
insurance] policy is to ascertain the intent of the parties.” Chicago Title Ins. Co. v.
Huntington Nat’l Bank, 719 N.E.2d 955, 959 (Ohio 1999). We review policy terms in
the context of the whole policy so as to read the policy terms in harmony. Foster
Wheeler Enviresponse, Inc. v. Franklin Cnty. Convention Facilities Auth., 678 N.E.2d
519, 526 (Ohio 1997); see also Stith v. Milwaukee Guardian Ins., Inc., 541 N.E.2d 1071,
1072 (Ohio Ct. App. 1988) (explaining that “such construction must be given as will
harmonize and give effect to all its provisions, and that no provision is to be wholly
disregarded as inconsistent with other provisions unless no other reasonable construction
is possible.”). Where the policy language sets forth the relevant coverages and
exclusions in unambiguous terms, we must apply the terms as written, according to their
“plain and ordinary meaning.” E.g., Cincinnati Indem. Co. v. Martin, 710 N.E.2d 677,
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679 (Ohio 1999); Monticello Ins. Co. v. Hale, 114 F. App’x 198, 201 (6th Cir. 2004).
Specialized definitions provided in the policy govern notwithstanding their ordinary
meaning, see, e.g., United Nat’l Ins. Co. v. SST Fitness Corp., 182 F.3d 447, 450 (6th
Cir. 1999), but ambiguous coverage or exclusion terms “will be construed strictly against
the insurer and liberally in favor of the insured,” King v. Nationwide Ins. Co., 519
N.E.2d 1380, 1383 (Ohio 1988); accord Monticello Ins., 114 F. App’x at 201. To
establish ambiguity, the insured must provide a reasonable alternative understanding of
the relevant policy language, see Lager v. Miller-Gonzalez, 896 N.E.2d 666, 669 (Ohio
2008), but challenges to the fairness of the policy will not suffice, Foster Wheeler, 678
N.E.2d at 526 (“A contract does not become ambiguous by reason of the fact that in its
operation it will work a hardship upon one of the parties thereto.”) (internal quotation
marks and citation omitted).
The relevant policies do not expressly identify Old Reardon or the Reardon
Division as Named Insureds. Appellants suggest that the analysis should end there, but
this argument overlooks the policies’ specialized definition of “Named Insured,” which
includes both organizations identified in the policy declarations and “any subsidiary
company (including subsidiaries thereof) and any other company under their control and
active management at the inception date of [the] policy.” Appellants’ argument also
gives short shrift to the term Named Insured’s Products, which extends broadly to any
“goods or products manufactured, sold, handled or distributed by Named Insured or by
others trading under his name.” In order to give effect to these expansive policy terms,
this court must look to their plain and ordinary meaning to ascertain which unidentified
parties qualify as Named Insureds, and which goods constitute Named Insured’s
Products. See Guman Bros. Farm, 652 N.E.2d at 686 (“A court must give undefined
words used in an insurance contract their plain and ordinary meaning.”).
Significantly, the definition of “Named Insured” uses the inclusive phrase “any
other company”—which itself expands the field of covered entities beyond the narrower
designation “any subsidiary company”—rather than a restrictive term like
“corporation.” At the time of the relevant policies’ inception, contemporary dictionaries
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broadly defined the term “company” to refer to “an association of persons for
carrying on a commercial or industrial enterprise.” Webster’s New Collegiate
Dictionary 229 (1975 ed.); Webster’s Third New International Dictionary of the
English Language Unabridged 461 (1976 & 1981 eds.); see also Merriam-Webster
Online, http://www.merriam-webster.com/dictionary/company (definition 3(b) (same))
(last visited Nov. 22, 2011). Nothing in this definition provision, or elsewhere in the
relevant policies, suggests that the term “company” only extends to formal business
entities, such as corporations, partnerships, or sole proprietorships, and Appellants’
counsel conceded as much at oral argument.
With these definitions in mind, we consider the Reardon Division and Old
Reardon claims.
1. The Reardon Division (Post-1966)
Although Appellants deny that Republic/RPM ever controlled or actively
managed Old Reardon, Appellants do not dispute that Republic/RPM controlled and
actively managed the Reardon Division that continued Old Reardon’s business after its
purchase and later dissolution in 1966. The Reardon Division did not have a separate
legal existence from Republic/RPM, and the undisputed record reveals that the Reardon
Division used the same manufacturing plants, employed the same employees, and made
and sold many of the same products under the same brand names as Old Reardon. To
the extent the relevant policies even view the Reardon Division as a distinct entity, we
have no doubt that the Reardon Division constituted a company under the control and
active management of Named Insured Republic/RPM at inception, and thus qualifies as
a Named Insured. Nor do we doubt that the products, which Republic/RPM continued to
manufacture and sell through the Reardon Division, qualify as Named Insured’s
Products. The same conclusion necessarily holds for products manufactured by Old
Reardon (pre-1967), but sold, handled, or distributed by the Reardon Division (post-
1966). Consequently, the policies’ Products Hazard caps apply to the Reardon Division
claims.
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2. Old Reardon
The question remains whether the Products Hazard caps apply to claims arising
from products manufactured, sold, handled, and distributed by Old Reardon prior to the
1966 purchase agreement and dissolution. We find that the undisputed business
continuity between Old Reardon and the Reardon Division justifies application of the
caps.
Notably, of the three relevant policy terms—Named Insured, Named Insured’s
Products, and Products Hazard—only Named Insured includes a specific temporal
limitation. By focusing on “the inception date of th[e] policy,” the term takes a snapshot
of companies under the Named Insured’s control and active management at the time the
policies took effect. As noted above, the undisputed record reflects that the Reardon
Division continued Old Reardon’s business—making many of the same paint and
drywall products, at the same plants, with the same employees, and then selling these
products under the same brand names. Republic/RPM went so far as to adopt Old
Reardon’s founding and date-of-incorporation as its own in business filings and public
releases. Appellants maintain that factual disputes remain, but they show no genuine
dispute with regard to the above facts, which demonstrate a continuity of Old Reardon’s
business. Although Old Reardon lost its cloak of corporate independence after the 1966
purchase agreement and dissolution, the same “association of persons for carrying on a
commercial enterprise”—and thus, the same company under the plain meaning of that
term—continued as a division of Republic/RPM. Because the temporal element of
“Named Insured” looks to the date of inception, it does not matter that Republic/RPM
did not control Old Reardon prior to the 1966 purchase agreement; it only matters that
they controlled and actively managed the company at the onset of the relevant policies,
the first of which took effect in 1973.
Appellants focus on Old Reardon’s corporate independence prior to 1967 has no
application to this insurance dispute, which requires us to apply the plain language of the
relevant policies. Nothing in the policy language supports applying the policies’
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definition of Named Insured so as to limit coverage for Reardon Division products but
provide unlimited coverage for Old Reardon’s products. Indeed, as previously noted,
Appellants’ counsel conceded at oral argument that the definition’s use of the broad term
“any other company” extended beyond formal corporate entities. Cf. SmithKline
Beecham Corp. v. Rohm & Haas Co., 89 F.3d 154, 161 (3d Cir. 1996) (majority
narrowly construed indemnification agreement where contract provided a limited
definition to the term “business,” but noted that a broader definition, or no definition at
all, would have changed the outcome).
Despite this concession, Appellants’ counsel suggests that a broad interpretation
of the term “company” leads to inconsistent usage of that word in sub-definition (2) of
the term “Named Insured.” But, according to the policy examples provided in the
record, that provision does not even use the word “company”; rather, it refers to “new
organizations acquired by the Named Insured during the policy period, through
consolidation, merger, purchase of . . . assets . . . , or assumption of control and active
management.” We see no inconsistency. From later statements we understand
Appellants’ counsel to argue that, because sub-definition (2) identified “purchase of
assets” as a covered method of acquisition, sub-definition (1) should have included this
method too. But this logic oversteps the limited contours of Ohio’s ambiguity analysis.
We may not ponder whether the insurance companies (or we) could have drafted more
precise language; we only consider whether Appellants have offered a reasonable
alternative interpretation. Lager, 896 N.E.2d at 669; Hacker v. Dickman, 661 N.E.2d
1005, 1006 (Ohio 1996) (“It is axiomatic that this rule [of strict construction against the
insurer] cannot be employed to create ambiguity where there is none. It is only when a
provision in a policy is susceptible of more than one reasonable interpretation that an
ambiguity exists in which the provision must be resolved in favor of the insured.”).
Furthermore, Appellants’ argument overlooks the different functions of
the two sub-definitions. The first focuses on the policies’ inception dates and
broadly encompasses “any other company under [the Named Insured’s] control and
active management.” The second provision focuses on acquisitions made during the
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policy period (i.e., after the insurance company has already assumed the risk) and sets
reporting requirements for the insured to receive coverage for certain types of
acquisitions. Viewed in the context of the entire definition of Named Insured—the
designation which triggers Products Hazard caps for Named Insured’s Products—sub-
definition (1)’s all-encompassing language serves to extend the policies’ aggregate limits
to covered entities not identified in the other sub-definitions: the Named Insured’s
formal subsidiaries and any other company controlled or actively managed by the
Named Insured at inception. Appellants would have us read the definition of Named
Insured to create a loophole that does not exist—a once-independent corporation that the
Named Insured had long since absorbed at the time of inception, whose liabilities qualify
for the Named Insured’s coverage, but which receives unlimited coverage, unlike every
other covered entity on Named Insured’s policy. Given the sub-definitions’ different
purposes, we see no reason to constrain the broad language of the first provision by
reference to the narrow language of the second provision.
B. Extrinsic Evidence
Appellants attempt to bolster their ambiguity argument by pointing to insurance
industry developments in the 1980s, namely (i) an internal legal memorandum circulated
by counsel for a prominent industry association, and (ii) industry changes to the standard
policy definition of “Named Insured’s Products” to ensure coverage caps for
predecessors’ products. Under Ohio law, we may consider extrinsic evidence “to
interpret, but not to contradict, the express language,” Ohio Historical Soc’y v. Gen.
Maint. & Eng’g Co., 583 N.E.2d 340, 344 (Ohio Ct. App. 1989), and we note that courts
have looked to industry practice for guidance on the interpretation of insurance policies,
see, e.g., U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 884–85 (Fla. 2007). Yet
Appellants’ industry developments carry little weight because they occurred at the end
of the relevant policies, and they addressed a global policy issue rather than the specific
coverage circumstances at issue in this case. The earliest industry developments cited
by Appellants occurred in 1981 (legal memo)—coincidentally, the same year of the first
underlying asbestos case filed against Appellants—eight years into the relevant policies.
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Appellants further acknowledge that the revised definition of named insured’s products
did not appear in industry standard policy forms until 1986, after the initiation of
coverage under the last of the relevant policies.
In any event, the industry practice interests us less in light of the parties’ actual
course of business. Most significantly, Appellants claim that they did not discover that
the insurance companies had “misclassified” the Reardon claims as Products Hazard
claims until 2003, more than 20 years after the filing of the first asbestos claim. We find
this stance regarding “misclassification” difficult to accept, considering that Appellants
have long known that the insurers treated the Old Reardon claims as subject to the
policies’ aggregate limits.
Throughout the 1990s and early 2000s, Appellants submitted their underlying
asbestos claims to the insurance companies by priority of insurance, proceeding up the
chain of excess insurance each time they exhausted policy coverage under a Products
Hazard cap. At the same time, Appellants did not submit Reardon claims to one
insurance company, USF&G, whose policy completely excluded Products Hazard claims
from coverage. The fact that the insurance companies repeatedly claimed exhaustion of
their policies with Reardon claims over this lengthy claims-submission period in the
1990s and early 2000s—which itself occurred long after the end of the relevant policy
periods (1973–1985)—should have alerted Appellants that they were not receiving the
unlimited coverage they now seek under the policies.
Also telling, Appellants entered into two settlement agreements with their
primary insurers in the 1990s that conspicuously treated Old Reardon and the Reardon
Division as insureds. These agreements reflected this understanding in both the
preamble and the definition of “Insured,” and each further stipulated that all “Indemnity
Payments”—defined to include “Asbestos-Related Bodily Injury Action[s]” arising from
Old Reardon and Reardon Division products—would “impair and may Exhaust the
Aggregate Limits of the Policies.” Though we do not use these agreements to interpret
the meaning of the policies, they do show that, at least as of the early 1990s, Appellants
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were aware that the insurers treated the Reardon claims as Products Hazard claims
subject to the policies’ limits. The aforementioned circumstances suggest that
Appellants discovered a new theory for unlimited coverage in 2003, rather than a
misclassification of their claims.
C. Alternative Theory of Coverage: Contractual Liability
Our resolution of the primary coverage issue requires us to consider Appellants’
alternative theory of uncapped coverage against Century and Mt. McKinley under the
“contractual liability” provisions of certain insurance policies. Appellants did not
identify this theory as a separate cause of action in the Amended Complaint, and the
district court did not squarely address these arguments. Finding the record sufficiently
developed for our review, we reject this theory of coverage.
Preliminarily, we do not consider this theory of coverage against Century because
Appellants forfeited the claim by failing to raise it in any pleadings or at any stage of the
proceedings below. See, e.g., Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 552 (6th Cir.
2008); Thomas v. City of Detroit, 299 F. App’x 473, 476–77 (6th Cir. 2008). Whereas
the Amended Complaint presented facts relevant to a contractual liability claim against
Mt. McKinley, it did not link Century to these factual allegations, and Appellants further
failed to respond to Century’s treatment of the issue in its motion for summary judgment.
Appellants suggested at oral argument that the pleadings’ generic references to the
misconduct of “all Defendants” encompassed this theory of coverage against Century,
but we cannot accept such threadbare allegations as meeting the Federal Rules’ notice-
pleading standard. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (noting that,
while the Federal Rules do not require detailed factual allegations, they “demand[] more
than an unadorned, the-defendant-unlawfully-harmed-me accusation”); Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 555 (2007) (explaining that the pleadings should “‘give the
defendant fair notice of what the . . . claim is and the grounds upon which it rests’”)
(quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).
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With regard to Mt. McKinley, we reject the theory on the merits because
Appellants fail to substantiate their claim for uncapped coverage under the predecessor’s
policy (“Gibraltar policy”). Appellants assert contractual liability coverage only under
the Gibraltar policy effective from May to December 1983. (See Appellants’ Br. at
67–68; Appellants’ Reply Br. at 88 n.16.) According to Appellants, the Gibraltar policy
incorporated unlimited contractual liability coverage from the underlying Cardinal policy
via the Gibraltar policy’s “broad as primary insurance” provision. The record evidence,
however, belies Appellants’ assertion that the underlying Cardinal policy provided
unlimited contractual liability coverage for Products Hazard claims. While the 1983
Cardinal policy sets no aggregate limits on contractual liability coverage, Appellants fail
to explain how this coverage applies to Products Hazard claims under the terms of the
policy. We note that the 1981 Cardinal policy—which uses the same standard form as
the 1983 Cardinal policy—expressly excludes all Products Hazard claims from
contractual liability coverage (R. 614, App’x 5759, Exclusion (q)), but the version of the
1983 Cardinal policy included in the record conspicuously lacks the exclusions page (see
R. 672, App’x 2097). Mt. McKinley noted this oversight in their brief, stating that the
1983 Cardinal policy had the same standard exclusion as the 1981 Cardinal policy, and
Appellants did not respond. Under the circumstances, we view Appellants’ silence as
a concession.
But even if the 1983 Cardinal policy did not expressly exclude Products Hazard
claims, we fail to see how the Cardinal policy’s contractual liability coverage abrogates
the Gibraltar policy’s express Products Hazard caps. Mt. McKinley correctly notes that
contractual liability coverage generally applies to a third-party’s claims against an
insured on the basis of a contractual agreement, not an insured’s claims against the
insurer on the basis of products liability claims. See, e.g., Dreis & Krump Mfg. Co. v.
Phoenix Ins. Co., 548 F.2d 681, 683 (7th Cir. 1977) (explaining that contractual liability
coverage only applies where “the party seeking to recover against the insured . . . [is] in
a contractual relationship with [the insured]”); W. Waterway Lumber Co. v. Aetna Ins.
Co., 545 P.2d 564, 566–67 (Wash. Ct. App. 1976) (declining broad interpretation of
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contractual liability provision and noting that “its purpose is to provide coverage in the
event the insured is held liable under a ‘hold harmless’ or ‘save harmless’ clause”).
Similarly, courts have narrowly construed “broad as primary” provisions appearing in
excess insurance policies, finding that such provisions only refer to the scope of
coverage and, thus, only incorporate the underlying policy’s covered risks. E.g., Dexter
Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No. 3:95cv00702, 1997 WL
289677, at *4 (D. Conn. Mar. 12, 1997) (concluding that “broad as primary” provision
did not overcome excess insurance policy’s express limits of liability); Highlands Ins.
Co. v. New England Ins. Co., 811 S.W.2d 272, 275 & n.4 (Tex. Ct. App. 1991)
(rejecting contention that “broad as primary” provision modified the excess insurance
policy’s subrogation provisions). Appellants do not respond to these authorities.
Because Appellants offer no cogent rationale for disregarding the Gibraltar policy’s
express Products Hazard caps, we reject their contractual liability theory against Mt.
McKinley.
D. De Facto Merger
Because we conclude that the policies’ plain language resolves these disputes,
we need not consider the district court’s de facto merger analysis. We note, however,
that federalism principles caution against a federal court expanding the de facto merger
doctrine—a state-law equitable remedy concerning successor liability—into a general
rule of contract interpretation. See, e.g., Grantham & Mann, Inc. v. Am. Safety Prods.,
Inc., 831 F.2d 596, 608 (6th Cir. 1987) (explaining that federal courts applying state law
must do so “in accordance with the then controlling decisions of the highest state court”)
(citations and internal quotation marks omitted).
IV.
Appellants also challenge the district court’s denial of their bad faith and
exhaustion claims against Mt. McKinley. Like Appellants’ primary coverage claims,
these claims fall flat.
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A. Exhaustion
Beyond reiterating their primary coverage position, Appellants challenge Mt.
McKinley’s method of payment and the district court’s laches judgment; the laches
judgment awarded $231,073.33 in overpayments to Mt. McKinley. Appellants do not
deny that Mt. McKinley paid its aggregate limits under the relevant policies—$39
million—into trust accounts managed by Appellants’ national coordinating counsel.
They nevertheless contend that this indirect form of payment did not satisfy
Mt. McKinley’s coverage obligations, and therefore that Mt. McKinley remains liable
for millions of dollars in continuing defense costs incurred after payment of the
aggregate limits. Appellants support their argument with cases where the courts found
that an insurer’s payment to its own trust accounts or third-party accounts did not satisfy
coverage obligations. See, e.g., Nat’l Cas. Co. v. Ins. Co. of N. Am., 230 F. Supp. 617
(N.D. Ohio 1964) (payment to court). Yet these cases do not speak to this case’s
situation, where the insurance company, with the insured’s consent, paid the insurance
proceeds to a trust fund managed by the insured’s attorney. Appellants’ national
coordinating counsel’s deposition testimony confirms that Mt. McKinley’s form of
payment complied with the parties’ routine claims-submission practice. (See R. 608,
Bowers Dep. 116–18, App’x 1561–62 (explaining that, once the parties approved a
settlement, the insurance companies would send a check to Bowers’s firm, his firm
would record the check in its trust notebooks, and then his firm would issue a settlement
check from the trust account to either local counsel or the underlying plaintiff’s
attorney).) The record further reflects the absence of objection by Appellants at the time
of payment. Appellants provide no justification for their newfound objection to Mt.
McKinley’s form of payment, and we will not speculate as to one.
With regard to the district court’s laches judgment, which concerned Mt.
McKinley’s indemnification payments for another RPM subsidiary, Appellants do not
deny that Mt. McKinley paid $231,073.33 on those claims. Rather, Appellants take issue
with the district court’s determination that Mt. McKinley overpaid its aggregate limits.
Positing that they believed these payments were just settlement contributions and not
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coverage, Appellants generally deny that Mt. McKinley presented sufficient evidence
to establish a laches defense. But Appellants do not identify any deficiency in
Mt. McKinley’s showing or the district court’s laches analysis. See State ex rel. Polo
v. Cuyahoga Cnty. Bd. of Elections, 656 N.E.2d 1277, 1279 (Ohio 1995) (“The elements
of laches are (1) unreasonable delay or lapse of time in asserting a right, (2) absence of
an excuse for the delay, (3) knowledge, actual or constructive, of the injury or wrong,
and (4) prejudice to the other party.”). Nor do Appellants dispute the relevant facts the
district court relied on: that Mt. McKinley sent five separate notices to Appellants more
than six years before this lawsuit informing Appellants that these payments counted
toward the aggregate limits, and that Appellants never objected to these notices. We find
no error in the district court’s laches ruling on the basis of these undisputed facts.
B. Bad Faith
Finally, Appellants attempt to resurrect their bad faith claim against Mt.
McKinley as a free-standing claim. Appellants argue that “McKinley committed bad
faith by failing, without reasonable justification, to pay a portion of defense costs
incurred by Plaintiffs before McKinley allegedly exhausted its Policies that McKinley
admitted was due and owing.” But the pleadings do not support this
breach-before-exhaustion assertion.
The Amended Complaint points to the following conduct for bad faith:
156. On or about February 28, 2003, Mt. McKinley wrongfully claimed
that it had exhausted all of its remaining aggregate limits of liability
under the Gibraltar Umbrella Policies.
157. Prior to its wrongful claim of exhaustion, Mt. McKinley
acknowledged its duty to defend and indemnify RPM, Bondex and New
Republic in asbestos bodily injury cases. Mt. McKinley also specifically
agreed to pay a portion of all defense counsel fees and other defense
costs (“defense costs”) incurred by RPM, Bondex and New Republic in
asbestos bodily injury cases prior to the date of the alleged exhaustion of
the Gibraltar Umbrella Policies.
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158. In material breach of its duty to defend and its specific agreement
to pay a portion of defense costs incurred by RPM, Bondex and New
Republic in asbestos bodily injury cases, Mt. McKinley has wrongfully
failed and refused to pay defense costs in excess of $350,000. . . .
Fairly read, the Amended Complaint fails to allege sufficient factual matter to assert a
plausible claim that Mt. McKinley breached some agreement other than the relevant
insurance policies. See Iqbal, 129 S. Ct. at 1949–50; Twombly, 550 U.S. at 555–63.
Presented with these pleadings, the district court properly treated the bad faith claim as
a contingent claim that fell with Appellants’ primary coverage claims. If Mt. McKinley
exhausted its coverage obligations in February 2003, it did not owe anything more to
Appellants under the relevant insurance policies, and its denial of coverage cannot
constitute bad faith. See O’Malley v. U.S. Fid. & Guar. Co., 776 F.2d 494, 501 (5th Cir.
1985) (noting that the insured’s bad faith claim depended on the outcome of the
coverage claim).
Appellants attempt to flesh out the bad faith claim in their reply brief by pointing
to a May 13, 2003 fax sent by Mt. McKinley’s claims manager, arguing that it shows
that Mt. McKinley threatened to discontinue paying defense costs before Mt. McKinley
exhausted its coverage. We do not consider this argument raised for the first time in a
reply brief. See, e.g., Sanborn v. Parker, 629 F.3d 554, 579 (6th Cir. 2010). Even if
properly raised, the fax adds nothing to Appellants’ argument; it does nothing more than
state Mt. McKinley’s position that it had already exhausted its coverage by notice of
February 2003. Appellants also object to the district court’s sua sponte denial of this
claim, after previously having stayed discovery. But, because Appellants articulate no
distinct factual basis for bad faith, we agree with the district court that the primary
coverage claims subsume the bad faith claim. Federal Rule of Civil Procedure 56(f)
permits a court to grant judgment to a nonmovant, or on grounds not raised by the
parties, if it first “giv[es] notice and a reasonable time to respond.” Although it appears
that the district court did not provide notice before issuing the initial ruling in December
2008, Appellants had notice and an opportunity to respond to that ruling in its later
motion for clarification and to amend judgment, which prompted the final opinion and
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order of February 2009. Furthermore, even if the district court failed to provide
sufficient notice before the sua sponte ruling, Appellants’ argument fails in the absence
of a showing of prejudice. See, e.g., Delphi Auto. Sys., LLC v. United Plastics, Inc., 418
F. App’x 374, 380 (6th Cir. 2011); Yashon v. Gregory, 737 F.2d 547, 552 (6th Cir.
1984). Under such circumstances, we need not engage in “an empty formality.” Excel
Energy, Inc. v. Cannelton Sales Co., 246 F. App’x 953, 960 (6th Cir. 2007).
V.
For these reasons, we AFFIRM the district court’s judgment on all counts. We
DISMISS as MOOT the insurance companies’ contingent cross-appeals.