United States Court of Appeals
For the First Circuit
No. 06-1993
ONEBEACON INSURANCE COMPANY,
Plaintiff, Appellant,
v.
GEORGIA-PACIFIC CORPORATION,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Boudin, Chief Judge,
Cyr, Senior Circuit Judge,
and Lipez, Circuit Judge.
Joseph S. Sano with whom John E. Matosky and Prince, Lobel,
Glovsky & Tye LLP were on brief for appellant.
Martin C. Pentz with whom Jeremy A.M. Evans and Foley Hoag LLP
were on brief for appellee.
January 18, 2007
BOUDIN, Chief Judge. In 1967, the Employers Surplus
Lines Insurance Company ("Employers") issued a comprehensive
general liability ("CGL") policy to Georgia-Pacific Corporation.
The standard CGL policy is designed primarily to protect the
insured from claims by third parties. 2 Stempel, Stempel on
Insurance Contracts § 14.01 (3d ed. 2006). The policy, whose
coverage period was set at three years beginning on January 1,
1967, provided for a $10 million annual aggregate limit of
liability as well as a $10 million per occurrence limit.1
Shortly after the policy was issued, Georgia-Pacific
found its interests better served by a new policy from the
Insurance Company of the State of Pennsylvania ("ICSOP"). Georgia-
Pacific therefore cancelled its Employers policy effective April 1,
1967, and replaced it with an ICSOP policy. Employers issued a
cancellation endorsement that shortened the policy period, refunded
$8,700 of Georgia-Pacific's $10,000 premium, and stated that "all
other terms and conditions remain unchanged."
Decades later, Georgia-Pacific presented OneBeacon
Insurance Company, the successor to Employers, with $10 million of
asbestos product-liability losses allegedly covered by the
1
The Employers policy was an excess umbrella policy, applying
in excess of a $1 million primary policy and $9 million umbrella
policy, both issued by Travelers Insurance Company. Because this
feature of the policy does not change the analysis, but does
complicate the description, we ignore it in the discussion that
follows.
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Employers policy. OneBeacon maintained that its liability was
capped at $2.5 million since the policy was only in effect for one-
quarter of the year. It sued for a declaratory judgment to that
effect. The district court granted summary judgment in Georgia-
Pacific's favor, holding that the insurance contract nowhere
contemplated proration of the annual aggregate limit.
OneBeacon now appeals. Our review, on the grant of
summary judgment, is de novo. Iverson v. City of Boston, 452 F.3d
94, 98 (1st Cir. 2006). The issue being one of contract
interpretation, we look to language and other common indicia (e.g.,
context, inferred purpose); extrinsic evidence of commercial
practice and negotiations between the parties might also be
relevant if there were any, but nothing meaningful in these
categories was tendered by the parties.
On language alone, looking at both the policy and the
cancellation endorsement, Georgia-Pacific has the better case. The
policy, although in effect for only three months, explicitly
provides $10 million in both per occurrence and aggregate annual
coverage. Further, the cancellation endorsement stated that the
only consequences of the cancellation were the shortened period of
coverage and the refund of part of the premium: it said nothing
about modifying the aggregate limit of $10 million and substituting
a $2.5 million figure.
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OneBeacon's argument from language focuses on the
sentence in the original policy describing the limit as $10 million
"in the aggregate for each annual period during the currency of
this policy." The most straightforward reading of this language is
that the insured cannot collect from OneBeacon more than $10
million for any year. Consonantly, what Georgia-Pacific seeks is
exactly $10 million for the period within 1967 in which the policy
was in effect.
Nor is it possible to read the phrase "for each annual
period" as implying that the aggregate limit should be mechanically
prorated by the day, week, month or quarter. Counsel for OneBeacon
has conceded that the insurer would be liable for $10 million--not
$2.5 million--if a single catastrophic loss (say, a single
explosion) had occurred on January 2, 1967. This is so even if the
policy were cancelled a week after the event. The concession was
inevitable since no one would want $10 million per occurrence
coverage with an aggregate limit one quarter that size.
The present case differs from the hypothetical case of an
explosion because the asbestos claims do not comprise a single loss
caused by a single event. The asbestos injuries likely are
continuing occurrences that straddle the effective periods of the
Employers policy and the replacement ICSOP policy, probably
extending to periods before and after both policies. But the
problem of allocating a continuing loss among the many insurers who
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were on the risk for the loss is not peculiar to short term
policies, nor is it an excuse for a court to alter express policy
limits.
How to assign to coverage periods a claim for a slow
acting disease, whose causes and effects play out over time, has
bedeviled courts and produced a variety of solutions. OneBeacon
has not sought a ruling as to which claims against Georgia-Pacific
are covered by which policies; it has assumed at least arguendo
that the losses attributable to the insured period exceed $2.5
million, and it has presented us only with the issue whether the
policy's aggregate limit is $2.5 million or $10 million.
Where a claim is the responsibility of more than one
company, sometimes policy language assigns primary responsibility;
here, both the Employers' and ICSOP policies have an identical
"prior insurance" and "non-cumulation" clause. Courts have also
developed allocation rules of varying kinds.2 Here, the parties
rely on neither this clause nor this case law: the only issue
before us is whether the Employers policy's annual aggregate limit
2
Some courts hold insurers jointly and severally liable up to
their respective policy limits, see Keene Corp. v. Ins. Co. of N.
Am., 667 F.2d 1034, 1041 (D.C. Cir. 1981), cert. denied, 455 U.S.
1007 (1982); others prorate the liability by policy limits; and
still others prorate the liability by time on the risk, see Ins.
Co. of N. Am. v. Forty-Eight Insulations Inc., 633 F.2d 1212, 1226
(6th Cir. 1980), clarified in part, 657 F.2d 814 (6th Cir.), cert.
denied, 454 U.S. 1109 (1981). See generally 2 Stempel on Insurance
Contracts § 14.10.
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should be prorated. The language of the policy says nothing about
requiring proration.
OneBeacon's better argument for its position is that
reading the policy literally will produce a windfall to Georgia-
Pacific. Georgia-Pacific would in effect enjoy $20 million of
total aggregate coverage against continuing occurrences that
straddle 1967 periods: $10 million of coverage from the Employers
policy and another $10 million from ICSOP. Yet, OneBeacon assumes,
Georgia-Pacific would only have paid premiums for $10 million of
aggregate coverage.
This argument looks to the reasonable expectations of the
parties, which--absent extrinsic evidence of intent--means the help
that context, inferred purpose and common sense may give in
determining what the parties probably intended or would have been
likely to intend if they had focused on the issue. See 16
Williston on Contracts § 49:20 (4th ed. 2006). Courts, whatever
tributes they may pay to plain language, tend to be interested in
such arguments, although the weight accorded turns on the
circumstances. Here, the circumstances are unhelpful to OneBeacon.
OneBeacon is arguing in effect that Georgia-Pacific seeks
to reap a $10 million unjustified gain, $7.5 million of which would
come at OneBeacon's expense. But Georgia-Pacific sought $10
million in per-occurrence and aggregate coverage from Employers and
a smaller aggregate would have made no sense given the per-
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occurrence limit. The windfall argument therefore reduces to the
question whether Employers would have charged Georgia-Pacific a
higher monthly premium for such coverage had the policy been sought
only for three months.
The decision as to how much of the premium to refund was
within Employers' control, presumably governed by policy language
which Employers drafted or adopted. In fact, the refund was not
strictly pro rata; instead, the cancellation penalty amounted to 5
percent of the total premium paid. If Employers conferred any
windfall on Georgia-Pacific by granting a refund on these terms,
this was a self-inflicted wound.
Both sides cite case law, which we address as a matter of
general law. Ordinarily, if there were marked differences in the
laws of various states, we might have to consider choice of law
issues.3 But since there is no clear-cut answer to the question of
whose law a Massachusetts court would apply in this case, and since
there do not appear to be significant differences in the laws of
the relevant states, we bypass this issue. Lexington Ins. Co. v.
Gen. Accident Ins. Co. of Am., 338 F.3d 42, 46 (1st Cir. 2003).
3
In this instance, the choice would be among Oregon (where
Georgia-Pacific was based), Washington (where Employers' managing
general agent was based), and Massachusetts (where Employers was
located). But the parties agree that no conflict of laws is
presented in this case, so we bypass the choice of law question and
construe the contract using general principles of contract law.
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The decision cited by OneBeacon that is most closely on
point, Stonewall Insurance Co. v. National Gypsum Co., says that
"where a policy is . . . cancelled before the end of its stated
period . . . there is no proration of the policy limits and
therefore, [the insured] is entitled to recover up to the full
policy limits for the shortened period." 1992 WL 188433 (S.D.N.Y.
1992), at *1, aff'd sub nom, 73 F.3d 1178 (2d Cir. 1995). Accord
Sybron Transition Corp. v. Security Ins. Co., 158 F. Supp. 2d 906,
909-10 (E.D. Wis. 2000).
The general language, helpful to Georgia-Pacific, was
qualified by an exception on which OneBeacon relies. This
exception was applied in Stonewall to a particular set of facts
where a $2 million policy was replaced part way through the policy
term with a $5 million policy from the same insurer, covering the
remainder of the original policy's term. The court held that the
aim of the transaction was to upgrade overall coverage to $5
million and that a payout from the insurer of $7 million would be
unreasonable. 1992 WL 188433 at *2.
But Stonewall suggested that this exception would not be
likely to apply to situations where "there was either a total
change in the insurance carrier or a change in the level at which
the carrier became liable." Id. Rather, where an insurance policy
is replaced or extended rather than upgraded, the general rule
disallowing proration applies. In such circumstances, the court
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concluded, "[w]hile it can be argued that [the insured] is getting
a windfall, it cannot be disputed that each of the insurers is
simply being held to its contract." Id. at *1.
OneBeacon also cites In re Midland Insurance Co., 269
A.D.2d 50, 64-65 (N.Y. App. Div. 2000), a case with facts similar
to our own in which the court adopted on res judicata grounds a
federal district court's decision--in an unreported case--to
prorate the cancelled policy's annual aggregate limit.4 But the In
re Midland court noted that the district court's holding was at
odds with the general rule that "proration of policy limits is not
permitted when the coverage period has been shortened." Id. at 65.
Georgia-Pacific claims further support from another set
of cases in which the policy term is extended for a stub period but
the aggregate limits are not prorated. E.g., Bd. of Trs. of Univ.
of Ill. v. Ins. Corp. of Ireland, Ltd., 750 F. Supp. 1375, 1383-84
(N.D. Ill. 1990), aff'd, 969 F.2d 329 (7th Cir. 1992). These cases
could be distinguished, but even without them, the case law still
favors Georgia-Pacific.
Finally, in Continental Insurance Co. v. PACCAR, Inc.,
634 P.2d 291 (Wash. 1981), the court prorated an annual aggregate
deductible upon cancellation of the policy by the insurer. But
4
The district court's reasoning for making an exception is
difficult to discern from either In re Midland or a related Third
Circuit case, Lac d'Amiante du Quebec, Ltee. v. Am. Home Assur.
Co., 864 F.2d 1033, 1037 n.7 (3d Cir. 1988).
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there the cancellation was initiated by the insurer which, absent
proration, could have applied the whole deductible to the early
losses, pocketed the early premiums, and left the insured without
the protection from later losses that it had relied upon in paying
its early premiums. Thus, the equitable argument for proration was
far stronger in that case than in ours.
It is true that one can view an aggregate limit as
comparable to the insurer's deductible. Nevertheless, in addition
to the equitable argument already noted, a central distinction
remains between the two cases: in the deductible case, the insurer
who wrote the policy is manipulating it to his advantage; by
contrast, in a case like ours, the insurer is complaining about
harm to it caused by its own poor draftsmanship.
Policy language, surrounding circumstances and equitable
concerns are likely to vary a good deal from case to case. It is
enough for us to say here that the policy language favors Georgia-
Pacific, that the most pertinent case law helps its position and
that OneBeacon has not shown that its outcome--reducing aggregate
coverage from $10 million to $2.5 million--produces a result that
is either fairer or closer to reasonable expectations.
Affirmed.
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