LM-2024-000252 - [2025] EWHC 2704 (Comm)

Fecha: 21-Oct-2025

Inclusion of the limits of the Global Excess Policies was neither reasonable nor principled

(v)

Inclusion of the limits of the Global Excess Policies was neither reasonable nor principled

62.

This complaint concerns the way in which the Newark Insurers ought reasonably to have understood and applied Owens-Illinois and Carter-Wallace in settlement negotiations. The issue may best be approached by first setting out some extended passages from the judgments in those two cases, as they are the territory over which battle is being fought. (I shall omit most of the references as being unnecessary for present purposes.)

63.

Owens-Illinois

“We will not attempt a universal resolution of all issues of coverage for gradual release of pollutants or toxins. At least in the context of asbestos-related personal injury and property damage, the rules that we adopt will attempt to relate the theory of a continuous trigger causing indivisible injury to the degree of risk transferred or retained in each of the years of repeated exposure to injurious conditions. In the absence of a satisfactory measure of allocation …, we believe that straight annual progression is not an appropriate measure of allocation. The degree of risk transferred or retained in the early years of an enterprise like O-I’s obviously was not at all comparable to that sought to be insured in later years. Hence, any allocation should be in proportion to the degree of the risks transferred or retained during the years of exposure. We believe that measure of allocation is more consistent with the economic realities of risk retention or risk transfer. That later insurers might need to respond to pre-policy occurrences is not unfair. ‘These are “occurrence” policies which, by their nature, provide coverage for pre-policy occurrences (acts) which cause injury or damage during the policy period.” … In this case, the year-by-year increase in policy limits must have reflected an increasing awareness of the escalating nature of the risks sought to be transferred. We believe that a better formula (putting aside for a moment the problem of periods of self-insurance) is that developed in California. In Armstrong World Industries, supra, 26 Cal. Rptr. 2d at 57, the court allocated the losses among the carriers on the basis of the extent of the risk assumed, i.e., proration on the basis of policy limits, multiplied by years of coverage.”

The court explained this approach by an example, which was set out before the passage just cited and analysed after that passage:

“Assume that a group of workers occupied an office building for nine years under the following circumstances. For the first three years, the building owners had no liability insurance, assuming any risk of loss. During each of the middle three years, the owners were insured under a CGL policy with the Trustworthy Insurance Company for $5,000,000 per occurrence. For the remaining three years of the period, the owners were again uninsured. Assume, too, that during the first three years the building occupants were exposed to asbestos fibers in the ceilings and insulation but that all asbestos products were removed at the end of the third year. During the first three years, no occupants of the building manifested any symptoms of disease. During the fourth, fifth, and sixth years, there was ‘exposure in residence,’ that is, some building occupants began to develop breathing problems, but no disease was diagnosable. In the final three years, some of the building’s occupants were diagnosed with asbestos-related diseases.
In the tenth year the owners received claims from thirty people who had worked in the building during the entire nine years asserting that they were suffering from asbestos-related disease as a result of their work environment. The owners, when presented with the claims, no longer had insurance. They sought coverage, however, for all the claims from the Trustworthy Insurance Company, which had insured the owners for three of the nine years – years when the building contained no asbestos. Must Trustworthy respond to the claims? If so, to what extent?
…
If we were to accept the constant levels of the policy limits as evidence of constant risks assumed over the nine-year span from exposure to manifestation (in the case of disease manifested in the ninth year), the carriers on the risk in years four, five, and six would each pay one-ninth of the loss, or collectively thirty-three percent. If the facts of coverage had been otherwise – let us say policies had been in effect for years one through three in the amount of two million per year and in years four through six at three million per year – we might assess the risk assumed in years seven through nine at four million per year. Carriers during the first three years would bear roughly twenty-two percent (6/27ths); carriers covering the middle three years would bear thirty-three percent (9/27ths); and the building owners would bear forty-four percent of the risk (12/27ths). Of course, policy limits and exclusions must be taken into account. We recognize that such even mathematical proportions will not occur, and so we must repose a substantial measure of discretion in a master who must develop the formula that fairly reflects the risks assumed or transferred.
We realize that many complexities encumber the solution that we suggest involving, as it does, proration by time and degree of risk assumed – for example, determining how primary and excess coverage is to be taken into account or the order in which policies are triggered. … The parties did not focus on those issues. Still, we do not believe that the issues are unmanageable. Constructing the model for analysis of the self-insurance portion of the risk assumed by O-I is difficult but not impossible. We recognize the difficulties of apportioning costs with any scientific certainty. However, the legal system ‘frequently resolves issues involving considerable uncertainty.’ …”

64.

Carter-Wallace

First, referring to its earlier decision in Owens-Illinois:

“[O]ur resolution of the issue [that is, the issue of allocation] was guided by our concern for the efficient use of resources to address the problem of environmental disease and by the demands of simple justice. We also observed that ‘[b]ecause insurance companies can spread costs throughout an industry and thus achieve cost efficiency, the law should, at a minimum, not provide disincentives to parties to acquire insurance when available to cover the risks.’ We determined that ‘any allocation should be in proportion to the degree of the risks transferred or retained during the years of exposure,’ and concluded that the better formula’ was to ‘allocate[] the losses among the carriers on the basis of the extent of the risk assumed, i.e., proration on the basis of policy limits, multiplied by years of coverage.’”

The Court continued:

“Nevertheless, we expressly declined to address how the solution we crafted would affect excess insurers:
‘We realize that many complexities encumber the solution that we suggest involving, as it does, proration by time and degree of risk assumed—for example, determining how primary and excess coverage is to be taken into account or the order in which policies are triggered. The parties did not focus on those issues.’
At issue in this appeal is how excess insurance is to be considered when allocating responsibility under a continuous trigger of liability.”

Having considered the allocation methods proposed by the parties, the Court explained its conclusion on the issue:

“We therefore reject each alternative advanced by the parties to this appeal. Instead, we are confident that another allocation method more faithful to the principles articulated in Owens-Illinois is available to resolve this issue. In Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co., 978 F.Supp. 589 (D.N.J.1997), Judge Brotman relied on Owens-Illinois in allocating coverage between various levels of excess insurance. Not unlike this appeal, Chemical Leaman involved a plaintiff that sought coverage for costs incurred as a result of environmental contamination. The insurers argued that each layer of insurance must be exhausted across all of the triggered policy years before the next layer would be allocated, a contention that Commercial Union echoes here. Using the example we provided in Owens-Illinois, the court observed that ‘[t]he Owens-Illinois method intentionally assigns a greater portion of indemnity costs to years in which greater amounts of insurance were purchased, based on the view that this measure of allocation is more consistent with the economic realities of risk retention and risk transfer.’ The court therefore rejected the theory of horizontal exhaustion by layer, and ‘direct[ed] apportionment of damages among policy years without reference to the layering of policies in the triggered years.’ However, the court did note that within any given year, each layer of excess coverage must be depleted before the next level is pierced.
…
We believe Judge Brotman’s well-reasoned opinion in Chemical Leaman represents a natural extension of Owens-Illinois, one that is entirely consistent with our belief that ‘any allocation should be in proportion to the degree of the risks transferred or retained during the years of exposure.’ Owens-Illinois, supra, 138 N.J. at 475, 650 A.2d 974. In Owens-Illinois we identified several public interest factors relevant to the appropriate method of allocating insurance coverage, including the efficient use of available resources, the interests of simple justice, and the need for an ‘efficient response’ to the logistical challenge posed by environmental insurance litigation. We are confident that the ChemicalLeaman solution best serves those interests. Firstly, this approach makes efficient use of available resources because it neither minimizes nor maximizes the liability of either primary or excess insurance, thereby promoting cost efficiency by spreading costs. That method also promotes ‘simple justice,’ by respecting the distinction between primary and excess insurance while not permitting excess insurers unfairly to avoid coverage in long-term, continuous-trigger cases. Additionally, adoption of that allocation method will introduce a degree of certainty and predictability into the complex world of environmental insurance litigation in continuous-trigger cases. Moreover, we perceive that that solution is consistent with the contract language, as Commercial Union’s second-level excess policy will not be pierced unless and until the primary and first-level excess policies in effect for a given year have been expended.
Our jurisprudence in this area has not been marked by rigid mathematical formulas, and we do not advocate any such inflexibility now. Rather, our focus remains on ‘[a] fair method of allocation . . . that is related to both the time on the risk and the degree of risk assumed.’ Nevertheless, we anticipate that the principles of Owens-Illinois, as clarified by our decision today, represent the presumptive rule for resolving the allocation issue among primary and excess insurers in continuous trigger liability cases unless exceptional circumstances dictate application of a different standard. See Comment, AllocatingProgressive Injury LiabilityAmong Successive Insurance Policies, 64 U. Chi. L.Rev. 257, 259 (1997) (noting that ‘[t]he magnitude of the losses in [progressive injury] cases further illustrates the need for courts to choose one method, and apply it consistently, when allocating liability for progressive injuries’).”

65.

Mr Miller’s understanding of those decisions and how a court dealing with the BOC claims would be likely to apply them appears from his report cited in paragraph 52 above and his letters mentioned in paragraphs 54 and 58 above, as well as from Mr Davy’s report to the Reinsurers in December 1999, quoted in paragraph 56 above.

66.

The expert witnesses took differing positions on the principles and allocation methodology to be derived from the cases. The bottom line was that Mr Coughlin was of the opinion that the full limits of the Global Excess Policies should have been included in the BOC allocation calculations, and Mr Schiavone was of the opinion that they should not have been included at all.

67.

Mr Coughlin’s conclusion was that “there was a very high likelihood that the limits of the Global Excess Policies would be included in determining the appropriate allocation to the Newark Insurers” and that “based on the information provided and the principles of New Jersey law as they stood in March 2001, the appropriate allocation to the Newark Insurers of the defense and indemnity costs for the Toxic Tort Claims would have exceeded the 47% level agreed to in the TTSA” (report, paragraphs 4.1.1 and 4.1.2). Indeed, he expressed the view that “the issue was far less uncertain than Mr Miller described … [and] that the Global Excess Policies’ limits almost certainly would have been included in the allocation calculations had the issue been decided by the Court in accordance with New Jersey law” (report, paragraph 6.2). Mr Coughlin’s reasoning may be summarised as follows. The Supreme Court decisions were “policy driven” (report, paragraph 6.5.5.1 and passim).They established a presumptive allocation method, involving allocation by time on risk and the degree of risk transferred or assumed (“i.e. pro rata by time weighted by policy limits”). This intentionally assigns a greater portion of loss to years in which higher levels of insurance were purchased. “Whether specific policy limits are to be included in the calculation of the degree of risk transferred is not dependent on whether the policies are likely to be reached by a loss” (joint statement; also, for example, report, paragraph 6.5.7.1, citing the judgment in Chemical Leaman Tank Lines). Accordingly, the decision on allocation does not require prior ascertainment of the size of the claim (report, paragraphs 6.5.9 and 6.5.10). Once the allocation has been made, policies in each period respond layer by layer, as though they are responding to an occurrence solely in their period. But the likelihood of a layer being reached is irrelevant to the inclusion of the limits in the allocation; all policy limits are to be included. At the allocation stage itself, only broad exclusions would be taken into account (that is, such exclusions as would preclude coverage for the relevant class of claims). Otherwise, the terms, conditions, exclusions, attachment points and limits of the excess policies were only, and then fully, to be taken into account at the stage of response of the policies within each year. The court did have a discretion to depart from the presumptive allocation method, but only if exceptional circumstances dictate such a departure. Both the Supreme Court in Carter-Wallace and subsequent first-instance decisions had recognised the need for consistent application of a single allocation method (report, paragraph 6.5.16.1). In the present case, the “spike” of coverage in the years 1981-1985 is not an exceptional circumstance that justifies departure from the presumptive allocation method. Indeed, the Supreme Court in Owens-Illinois, having noted that the “degree of risk transferred in the early years of an enterprise like O-I’s obviously was not at all comparable to that sought by the insured in later years” (because increases in policy limits reflected an increasing awareness of the escalating nature of the risks sought to be transferred), concluded: “Hence, any allocation should be in proportion to the degree of the risks transferred or retained during the years of exposure.” In conclusion, “it would be improper to exclude excess policy limits in some years in order to achieve a more equal allocation across the triggered years” (joint statement).

68.

Mr Schiavone, by contrast, concluded that it was “very unlikely that a Court would have allocated 47% or more of the bodily injury losses to the 1981-1985 policy years. Correctly excluding the Global Excess Policies from the final allocation calculation would mean that it was much more likely that approximately 23% of the losses would have been allocated to the 1981-1985 policy years” (report, paragraph 18). He stated: “There is no ‘presumptive rule’ for allocating claims under the continuous trigger theory” (joint statement; see also report, paragraph 78). His position was, however, more nuanced than that statement, taken by itself, might suggest. He acknowledged that the court in Carter-Wallace had said that the principles in Owens-Illinois, as clarified by its own judgment, “represent the presumptive rule for resolving the allocation issue among primary and excess insurers in continuous trigger liability cases”. But he said that this only gave presumptive force to the guiding “polestars” in Owens-Illinois (namely, maximising resources to cope with environmental injury or damage, providing an incentive to insureds to acquire insurance, and notions of simple justice: report, paragraphs 26 and 41; also at paragraphs 48 to 51, with specific reference to the subsequent decision of the Supreme Court of New Jersey in Spaulding Composites Co. v Aetna Casualty and Surety Company 178 N.J. 25 (2003); and again at paragraph 81), and he observed that the Court had anyway qualified its statement by saying “unless exceptional circumstances dictate application of a different standard”. The approach in Owens-Illinois was designed to promote reasonable and fair allocations. The very point of leaving allocation issues to be decided in the first instance (subject to final decision of the trial judge) by a Special Master with expertise in insurance matters was that he would have “a substantial measure of discretion [to] develop a formula that fairly reflects the risks assumed or transferred” (Owens-Illinois). “The allocation approach adopted in Owens-Illinois was designed to promote reasonable and fair allocations. After Owens-Illinois, it was expected that continuous trigger allocations would need to pass the test of fairness” (joint statement; also report, paragraph 20). In marked contrast to the present case, the cases considered by the Supreme Court had involved only a very modest difference between the coverage included in the allocation and the coverage that the insurers sought to exclude (report, paragraph 61). The Supreme Court in Carter-Wallace had not dealt with the issue of disproportionate or “spiked” cover in a small number of years, as that was not an issue in the case (report, paragraph 37). But the Supreme Court there was “attempting to balance respect for the integrity of excess of loss policies and the concern that the excess coverage should be made available, if the excess cover was actually needed, to cover the losses at issue” (report, paragraph 38; my emphasis). Mr Schiavone’s primary opinion was that there was no requirement to include excess policies’ limits (with different attachment points and limits) in an allocation exercise. But he thought that, even if such excess policies’ limits were presumptively to be included, there were exceptional circumstances in the present case that would lead to the exclusion of the excess policies’ limits: the very high attachment points of the Global Excess Policies, the excess availability of coverage to pay the claims without recourse to them, and the absence of any evidence that a spike of losses actually occurred in the years 1981-1985. Further, there was no rule of law that excluded consideration of the terms, conditions, exclusions, attachment points and limits of the excess policies from the allocation exercise, and the Special Master had discretion to consider those matters when determining an equitable allocation. “[I]t is appropriate and necessary for the Court to take into account the size of the losses. This is a fundamental part of the allocation process” (joint statement). In the present case, to achieve a reasonable and fair outcome it was necessary to exclude the Global Excess Policies from the allocation process. Mr Miller “recommended settlement at a level of payment that I do not consider to be reasonable or based upon an appropriate allocation as a matter of New Jersey law” (report, paragraph 19).

69.

It is not the function of this judgment to decide which of these two opinions is preferable. Rather, I am concerned with whether the advice on which the Newark Insurers acted, and for which they and the claimants must take responsibility in these proceedings, was such as no careful lawyer, reasonably competent in the law of New Jersey, could have given, so as to make the decision to settle on the basis of it a failure to take proper and businesslike steps. In short: was the settlement based on the negligent adoption of a wrong method of allocation? In my judgment, it was not.

70.

I shall briefly identify the factors that seem to me to be important and explain such firm conclusions as I have reached.

•

“The level of appropriate settlement, and the point at which insurers should dig their heels in, in relation to a disputed insurance claim are often difficult matters of judgment or feel, on which different people may well hold different views”: Gan Insurance Company Ltd v Tai Ping Insurance Company Ltd (Nos. 2 and 3) [2001] EWCA Civ 1047, [2001] Lloyd’s Rep IR 667, 699, per Mance LJ at [77].

•

The decisions in Owens-Illinois and Carter-Wallace did not give an express and definitive answer to the question whether the Global Excess Policies should be counted in the allocation process. (Mr Schiavone himself states, in paragraphs 22 and 44 of his report, that there was not at the time of the TTSA and is not now any New Jersey case law that determines the point. In cross-examination he accepted that it was a “novel issue”, though he went on to say that he did not regard the settlement actually achieved as being within the “range of [reasonable] possible outcomes”.) That was why the insurers and BOC were negotiating with specific reference to the question, and why the question turns on judgements formed on the basis of contested interpretations of such case law as there was. In the absence of a definitive answer, it was necessary to form a view as to what the trial court (initially the Special Master, and ultimately the Judge) would be likely to do. (Footnote: ²)

•

On my interpretation of the authorities (which, unsurprisingly, I think to be an interpretation that could reasonably have been held), the Supreme Court clearly did lay down a presumptive method, and that method involved allocation by time on risk and the degree of risk transferred or assumed and also involved the inclusion of excess policies at the allocation stage. Insofar as Mr Schiavone opines that no method but merely underlying principles had presumptive force, I consider that his reading of Carter-Wallace is clearly wrong and that Mr Coughlin’s reading is clearly correct. At the very least, Mr Coughlin’s reading, which was that of Mr Miller, was a reasonable one.

•

It is also clear that the Supreme Court was not mandating a rigid and inflexible approach. There are, in my view, two aspects to this point. First, the Special Master was expected to bring expertise and judgement to bear on the matter. But this was, at least primarily, within the basic approach established by the Supreme Court: as stated in Owens-Illinois, his task was to “develop the formula that fairly reflects the risks assumed or transferred” (my emphasis). Second, if there were “exceptional circumstances” the court could depart from the presumptive method. This leaves two potential routes of analysis of the basic question of inclusion or exclusion of the Global Excess Policies: whether they should be excluded by a proper application of the presumptive method; and whether the circumstances were exceptional so as to justify a departure from the presumptive method.

•

Whichever route of analysis one chooses, the basic question seems to me to be one on which opinions could reasonably differ.

•

There are factors that might militate in favour of exclusion of the Global Excess Policies from the allocation exercise. In particular, they caused a great spike in coverage for the years 1981 to 1985, and the limits in those policies were far in excess of any losses in those years, so that the lower layers of cover were not in fact exhausted and were highly unlikely to be exhausted (so that it would not have been necessary to quantify the bodily injury claims in detail to know that the cover under the policies would not in fact be triggered).

•

However, there were factors pointing in favour of the inclusion of the Global Excess Policies in the allocation calculation. I note in particular the following points.

The Supreme Court, though not intending to mandate an inflexible approach, was clearly concerned “to choose one method, and apply it consistently” on account of “several public interest factors relevant to the appropriate method of allocating insurance coverage, including the efficient use of available resources, the interests of simple justice, and the need for an ‘efficient response’ to the logistical challenge posed by environmental insurance litigation.” A nuanced approach to every case in the interests of fairness would tend to undercut the aim of “certainty and predictability”; the requirement of “exceptional circumstances” to justify departure from the presumptive rule is important.

For similar reasons, although in principle it would be possible to argue that lower levels of cover in earlier years should be seen as a deliberate decision to minimise insurance and, in that sense, to self-insure, the encouragement of detailed investigation of such matters at the allocation stage would tend to undermine the Supreme Court’s desire to establish an efficient and streamlined allocation process as a matter of policy. Absent clear indications to the contrary, such lower levels of cover in previous years are explicable in terms of lack of awareness until later of the scale of the risk, and it seems unlikely, or at least doubtful, that a Special Master or Judge would entertain a detailed investigation of the point. (In this regard, I note Mr Coughlin’s evidence in re-examination: transcript, day 2, pages 111 – 113.)

Cases such as Owens-Illinois and Chemical Leaman Tank Lines involved situations where, as was noted in Owens-Illinois, the coverage level in early years “was not at all comparable” to that in later years. I bear in mind that, as Mr Coughlin accepted, the risk-allocations in Owens-Illinois and in Carter-Wallace did not involve a “disproportionate” spike in any one year. However, the worked example in Chemical Leaman Tank Lines at 605-606 involved allocation of 0.29% to the year 1960-1961 and 14.21% to the year 1980-1981 on the basis of the difference in coverage between the polices in those respective years.

There is force, accordingly, in Mr Coughlin’s contentions, drawn from the judgment in Owens-Illinois, that the appropriate measure of “proportionality” “is with respect to the degree of risks transferred by the insured in each year and is not concerned with whether the allocation of losses to one year is comparable to that in another”. There is force, further, in Mr Coughlin’s view that the public policy interest in “fairness” had been taken into account by the Supreme Court in fixing an allocation method, so that it was inappropriate for successive courts to weigh the public policy factors afresh in each case (supplemental report, paragraphs 3.3.1 and 3.4 – 3.5; see also Chemical Leaman Tank Lines, per Judge Brotman at 603-604).

Thus, there is force in Mr Coughlin’s opinion that the expertise of the Special Master is properly brought to bear, in the exercise of his discretion, not, or not primarily, with regard to questions of fairness or policy but rather in respect of complexities of detail relating, for example, to large numbers of bodily injury claims stretching over a long period, where issues of incomplete claims data, differing claim values, differing policy inception and end dates, projections for future claims and so forth arise (supplemental report, paragraph 4.5).

•

The evidence shows that Mr Miller had considered the arguments on allocation methodology, including those advanced by Mr Schiavone in these proceedings and that he and Mr Reston had them in mind and formed a view on their prospects of success. In particular, Mr Miller pressed the argument that inclusion of the Global Excess Policies would lead to an inequitable result; he thought this Newark’s strongest argument but considered that it was unlikely to succeed. Further, as I have mentioned, Newark’s views were made known not only to RSA but to Eagle Star and the Reinsurers, all of whom were content with the way the matter was being handled.

•

Also relevant are considerations mentioned by Mr Miller in his evidence: he said that New Jersey was a favourable jurisdiction for insureds in relation to environmental and toxic tort claims against insurers, as the trend in the courts was towards maximizing coverage for insureds; and he was mindful, in conducting the defence of the bodily injury claims, that BOC had previously conducted environmental claims with great vigour and at great expense, and he anticipated that it would adopt a similar approach to the bodily injury claims. These are matters relevant to a decision how far to press arguments in which one does not have confidence, particularly in view of the relatively modest amounts of money involved in the TTSA.

•

Mr Schiavone accepted in cross-examination that, so far as he knew, in the years since the decision in Owens-Illinois there had been no New Jersey cases in which a court or allocation Master had found there to be exceptional circumstances leading to the disapplication of the proration method of allocation. This evidence of what has happened subsequently tends to support the conclusion that Mr Miller was reasonable in thinking that the odds were heavily against a finding of exceptional circumstances in this particular case.