NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6240-10T1

IMO INDUSTRIES INC.,

Plaintiff-Appellant/

Cross-Respondent,

v.

TRANSAMERICA CORPORATION, TIG 

INSURANCE COMPANY, f/k/a TRANSAMERICA 

INSURANCE COMPANY, A.C.E. INSURANCE 

COMPANY, LTD., THE CENTRAL NATIONAL 

INSURANCE COMPANY OF OMAHA, INSURANCE 

COMPANY OF NORTH AMERICA, ACE LTD., 

as successor-in-interest to INSURANCE 

COMPANY OF NORTH AMERICA, INDUSTRIAL 

UNDERWRITERS INSURANCE COMPANY, CERTAIN 

UNDERWRITERS AT LLOYD'S OF LONDON, 

CERTAIN LONDON MARKET INSURANCE 

COMPANIES, PACIFIC EMPLOYERS INSURANCE 

COMPANY, SERVICE FIRE INSURANCE COMPANY, 

ZURICH AMERICAN INSURANCE COMPANY, 

ZURICH AMERICAN INSURANCE COMPANY OF 

ILLINOIS, as successor-in-interest to 

ZURICH AMERICAN INSURANCE COMPANY, 

AMERICAN ZURICH INSURANCE COMPANY, as 

successor-in-interest to ZURICH 

AMERICAN INSURANCE COMPANY, ZURICH 

INSURANCE COMPANY, as successor-ininterest to ZURICH AMERICAN INSURANCE 

COMPANY, ZURICH INTERNATIONAL LTD., 

ZURICH INSURANCE GROUP, as successorin-interest to ZURICH INTERNATIONAL LTD., 

ACE PROPERTY & CASUALTY INSURANCE 

COMPANY, as successor-in-interest to 

AETNA INSURANCE COMPANY,

Defendants-Respondents/

Cross-Appellants,

and

APPROVED FOR PUBLICATION

September 30, 2014

APPELLATE DIVISION
2 A-6240-10T1

PYRAMID INSURANCE COMPANY OF BERMUDA, 

LTD., a/k/a PYRAMID INSURANCE COMPANY, 

LTD., AETNA CASUALTY AND SURETY 

COMPANY, a/k/a TRAVELERS CASUALTY AND 

SURETY COMPANY, TRAVELERS CASUALTY AND 

SURETY COMPANY f/k/a AETNA CASUALTY AND 

SURETY COMPANY, TRAVELERS PROPERTY 

CASUALTY CORP., as successor-in-interest 

to AETNA CASUALTY AND SURETY COMPANY 

and TRAVELERS CASUALTY AND SURETY 

COMPANY, FIREMAN'S FUND INSURANCE 

COMPANY, INTERSTATE FIRE AND CASUALTY 

COMPANY, PURITAN INSURANCE COMPANY, 

WESTPORT INSURANCE CORPORATION, as 

successor-in-interest to PURITAN 

INSURANCE COMPANY, TRANSPORT INDEMNITY 

COMPANY, MISSION AMERICAN INSURANCE 

COMPANY, as successor-in-interest to

TRANSPORT INDEMNITY COMPANY, ASSOCIATED 

INTERNATIONAL INSURANCE COMPANY,

INTEGRITY INSURANCE COMPANY, THE NEW 

JERSEY PROPERTY-LIABILITY GUARANTY 

ASSOCIATION on behalf of INTEGRITY 

INSURANCE COMPANY in insolvency, 

MIDLAND INSURANCE COMPANY, THE NEW 

JERSEY PROPERTY-LIABILITY GUARANTY 

ASSOCIATION on behalf of MIDLAND 

INSURANCE COMPANY in insolvency, 

MISSION INSURANCE COMPANY, THE NEW 

JERSEY PROPERTY-LIABILITY GUARANTY 

ASSOCIATION on behalf of MISSION 

INSURANCE COMPANY in insolvency, 

WESTERN EMPLOYERS INSURANCE COMPANY,

THE NEW JERSEY PROPERTY-LIABILITY 

GUARANTY ASSOCIATION on behalf of

WESTERN EMPLOYERS INSURANCE COMPANY 

in insolvency, YOSEMITE INSURANCE 

COMPANY,

Defendants-Respondents,

and

ALLIANZ UNDERWRITERS, INC., ALLIANZ 

UNDERWRITERS INSURANCE COMPANY, as 
3 A-6240-10T1

successor-in-interest to ALLIANZ 

UNDERWRITERS, INC., ALLIANZ GLOBAL RISKS 

US INSURANCE COMPANY, as successor-ininterest to ALLIANZ UNDERWRITERS INSURANCE 

COMPANY, AMERICAN BANKERS INSURANCE 

COMPANY OF FLORIDA, AMERICAN EMPIRE 

SURPLUS LINES INSURANCE COMPANY, as 

successor-in-interest to GREAT AMERICAN 

SURPLUS LINES INSURANCE COMPANY, 

AMERICAN EMPIRE SURPLUS LINES INSURANCE 

COMPANY, XL INSURANCE COMPANY, L.T.D., 

as successor-in-interest to AMERICAN 

EXCESS INSURANCE COMPANY, AMERICAN HOME 

ASSURANCE COMPANY, AMERICAN RE-INSURANCE 

COMPANY, AMERICAN INTERNATIONAL 

UNDERWRITERS, AIU INSURANCE COMPANY, as 

successor-in-interest to AMERICAN 

INTERNATIONAL UNDERWRITERS, AMERICAN 

INTERNATIONAL GROUP, as successor-ininterest to AIU INSURANCE COMPANY, 

EMPLOYERS MUTUAL CASUALTY COMPANY, 

FEDERAL INSURANCE COMPANY, FIRST STATE 

INSURANCE COMPANY, GRANITE STATE 

INSURANCE COMPANY, GREAT AMERICAN 

SURPLUS INSURANCE COMPANY, CITY 

INSURANCE COMPANY, THE HOME INSURANCE 

COMPANY, as successor-in-interest to 

CITY INSURANCE COMPANY, COLUMBIA 

CASUALTY COMPANY, COVENANT MUTUAL 

INSURANCE COMPANY, COVENANT INSURANCE 

COMPANY, as successor-in-interest to 

COVENANT MUTUAL INSURANCE COMPANY, 

GREAT AMERICAN SURPLUS INSURANCE 

COMPANY, CITY INSURANCE COMPANY, THE 

HOME INSURANCE COMPANY, as successorin-interest to CITY INSURANCE COMPANY, 

COLUMBIA CASUALTY COMPANY, COVENANT 

MUTUAL INSURANCE COMPANY, COVENANT 

INSURANCE COMPANY, as successor-ininterest to COVENANT MUTUAL INSURANCE

COMPANY, GREENWICH INSURANCE COMPANY, 

as successor-in-interest to HARBOR 

INSURANCE COMPANY, HARBOR INSURANCE 

COMPANY, INTERNATIONAL SURPLUS LINES 

INSURANCE COMPANY, INTERNATIONAL 

INSURANCE COMPANY, as successor-in-
4 A-6240-10T1

interest to INTERNATIONAL SURPLUS 

LINES INSURANCE COMPANY, CRUM AND 

FORSTER INSURANCE COMPANY, as 

successor-in-interest to INTERNATIONAL 

SURPLUS LINES INSURANCE COMPANY, 

HIGHLANDS INSURANCE COMPANY, HUDSON 

INSURANCE COMPANY, THE INSURANCE 

COMPANY OF THE STATE OF PENNSYLVANIA, 

LANDMARK INSURANCE COMPANY, LEXINGTON 

INSURANCE COMPANY, NATIONAL CASUALTY 

COMPANY, NATIONAL UNION FIRE INSURANCE 

COMPANY OF PITTSBURGH, PA, NORTHBROOK 

INDEMNITY COMPANY, ALLSTATE INSURANCE 

COMPANY, as successor-in-interest to 

NORTHBROOK INDEMNITY COMPANY, ROYAL 

INSURANCE COMPANY, ROYAL INSURANCE 

COMPANY OF AMERICA, as successorin-interest to ROYAL INSURANCE COMPANY, 

ROYAL INDEMNITY COMPANY, as successorin-interest to ROYAL INSURANCE COMPANY, 

ROYAL INDEMNITY COMPANY, X.L.,

REINSURANCE AMERICA, INC., as successorin-interest to SERVICE FIRE INSURANCE 

COMPANY, NATIONAL AMERICAN INSURANCE 

COMPANY OF CALIFORNIA, as successorin-interest to MISSION AMERICAN 

INSURANCE COMPANY, PREMIER INSURANCE 

COMPANY, S&H INSURANCE COMPANY, 

NATIONAL FARMERS UNION PROPERTY AND 

CASUALTY COMPANY, as successor-ininterest to S&H INSURANCE COMPANY, 

TRANSAMERICA PREMIER INSURANCE COMPANY, 

as successor-in-interest to PREMIER 

INSURANCE COMPANY, TIG PREMIER INSURANCE

COMPANY, as successor-in-interest to 

TRANSAMERICA PREMIER INSURANCE COMPANY,

TRANSCONTINENTAL INSURANCE COMPANY,

Defendants.

____________________________________________

Argued March 31, 2014 – Decided

Before Judges Yannotti, Ashrafi, and 

St. John.

September 30, 2014
5 A-6240-10T1

On appeal from Superior Court of New Jersey, 

Law Division, Morris County, Docket No. 

L-19-09.

Robin L. Cohen and Kenneth H. Frenchman of 

the New York bar, admitted pro hac vice, 

argued the cause for appellant/crossrespondent IMO Industries Inc. (DeCotiis, 

FitzPatrick & Cole, L.L.P., Kasowitz, 

Benson, Torres & Friedman, L.L.P., Steven J. 

Roman (Dickstein Shapiro, L.L.P.) of the 

D.C. bar, admitted pro hac vice, and Mr. 

Frenchman, attorneys; Mr. Roman, Jeffrey D. 

Smith, Ms. Cohen and Elizabeth A. Sherwin, 

on the brief).

Sherilyn Pastor argued the cause for 

respondent/cross-appellant Transamerica 

Corporation (McCarter & English, L.L.P., 

attorneys; Ms. Pastor and Gregory H. 

Horowitz, of counsel and on the brief; 

Nicholas M. Insua, Adam J. Budesheim, 

Stephanie Platzman-Diamant, and Mark D. 

Villanueva, on the brief).

Shawn L. Kelly argued the cause for 

respondent/cross-appellant TIG Insurance 

Company (Riker Danzig Scherer Hyland & 

Perretti, L.L.P., attorneys; Mr. Kelly, 

Ronald Puhala, Sigrid S. Franzblau and 

Richard C. Kielbania, of counsel and on the 

brief).

Mark D. Hoerrner argued the cause for 

respondent Pyramid Insurance Company, Ltd. 

(Budd Larner, P.C., attorneys; Mr. Hoerrner, 

Marc I. Bressman and David I. Satine, on the 

brief).

Patricia B. Santelle argued the cause for 

respondents/cross-appellants ACE Property & 

Casualty Insurance Company, Century 

Indemnity Company, Central National 

Insurance Company of Omaha, Industrial 

Underwriters Insurance Company, Pacific 

Employers Insurance Company, and Service 
6 A-6240-10T1

Fire Insurance Company (White and Williams 

L.L.P., attorneys; Ms. Santelle, Gregory S. 

Capps, and Paul A. Briganti, on the brief).

Mark J. Leimkuhler (Lewis Baach, P.L.L.C.) 

of the D.C. bar, admitted pro hac vice, 

argued the cause for respondents/crossappellants London Market Insurers (Tompkins, 

McGuire, Wachenfeld & Barry, L.L.P., and Mr. 

Leimkuhler, attorneys; Mr. Leimkuhler, of 

counsel and on the brief; Aisha E. Henry 

(Lewis Baach, P.L.L.C.) of the D.C. bar, 

admitted pro hac vice, and Matthew P. 

O'Malley, on the brief).

Michael A. Kotula argued the cause for 

respondents Fireman's Fund Insurance 

Company, Interstate Fire & Casualty Company 

and Westport Insurance Corporation (Rivkin 

Radler, L.L.P., attorneys; Mr. Kotula and 

Lawrence A. Levy of the New York bar, 

admitted pro hac vice, on the brief).

Coughlin Duffy, L.L.P. and John K. Daly 

(Meckler Bulger Tilson Marick & Pearson, 

L.L.P.) of the Illinois bar, admitted pro 

hac vice, attorneys for respondents/crossappellants Zurich American Insurance Company 

and Zurich International (Bermuda), Ltd. 

(Robert J. Re and Mr. Daly, of counsel and 

on the brief; Maida Perez, on the brief).

L'Abbate, Balkan, Colavita & Contini, 

L.L.P., attorneys for respondent Transport 

Insurance Company (Gretchen B. Connard and 

John D. McKenna, on the brief).

Ford Marrin Esposito Witmeyer & Gleser, 

L.L.P., attorneys for respondent Travelers 

Casualty & Surety Company (James M. Adrian 

and Kenneth D. Walsh, on the brief).

Locke Lord L.L.P., attorneys for respondent 

CX Reinsurance Company Limited (Richard I. 

Scharlat, on the brief).
7 A-6240-10T1

Norris McLaughlin & Marcus, P.A., attorneys 

for amicus curiae Independent Energy 

Producers of New Jersey (Robert Mahoney, on 

the brief).

The opinion of the court was delivered by 

ASHRAFI, J.A.D. 

Several parties appeal from a final judgment determining

insurance coverage for asbestos-related personal injury claims. 

Plaintiff IMO Industries, Inc. is the insured and the successor 

to a manufacturer of industrial products that contained 

asbestos. Defendants are primary and excess liability insurers, 

as well as Transamerica Corporation, the former parent company 

of the predecessor manufacturer. 

Over the years, IMO purchased a total of $1.85 billion in 

insurance coverage from all the defendant insurers. That amount 

is sufficient to pay for its anticipated liabilities and defense 

costs for asbestos-related personal injury claims. Nonetheless, 

IMO initiated this litigation to establish its rights under 

those insurance policies and to recover money damages. 

Among many issues and topics, the appeals present some 

questions that have not been previously addressed in the New 

Jersey Supreme Court's insurance allocation decisions for socalled long-tail environmental losses, beginning with Owens-
8 A-6240-10T1

Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994), and 

Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312 

(1998). We must decide whether the trial court correctly 

treated primary insurance policies that pay for all litigation 

defense costs "outside the limits," or in addition to, the 

indemnification limits of the policies. We must also decide how 

the coverage limits of excess multi-year policies must be 

treated in the allocation model. Additional issues include 

whether IMO was entitled to a jury trial on its claims for money 

damages, and numerous challenges to the trial court's

interpretation of insurance policies within the Owens-Illinois

and Carter-Wallace allocation methodology. 

Having considered the record and the parties' written and 

oral arguments, we find no ground to reverse the many rulings of 

the several judges who presided over this litigation. We affirm 

the final judgment of the Law Division.

I.

Facts and Procedural History

The Parties

Plaintiff IMO originated in 1901 as the Delaval Steam 

Turbine Company. It manufactured turbines, pumps, gears, and 

other machinery with industrial and military uses, including for

United States Navy ships. In some of Delaval's products
9 A-6240-10T1

manufactured from the 1940s to the 1980s, component parts 

contained asbestos.

Defendant Transamerica is a holding company that acquired 

Delaval in 1963. Delaval operated as a subsidiary of 

Transamerica under different names until its divestiture in 1986

by means of a spin-off to shareholders. After the divestiture, 

plaintiff became IMO Industries, Inc. 

From the 1960s until 1993, Transamerica owned Transamerica 

Insurance Company, which became defendant TIG Insurance Company 

("TIG") when it was divested in 1993. Transamerica acquired 

Pyramid Insurance Company of Bermuda in the 1970s and still 

owned it at the time of this litigation. Transamerica, TIG, and 

Pyramid are at times collectively referred to in this litigation 

as the Transamerica defendants.

The other defendants are insurance companies, together with 

their predecessors and affiliates, that provided different 

levels of primary or excess liability insurance to plaintiff or 

Transamerica. Among the excess insurers that have raised issues 

on appeal are two groups of insurers that we will refer to in 

this opinion as "ACE" and "LMI."1 We will also refer to IMO and 

TIG to mean the present company or its predecessors.

 

1 "ACE" in this opinion shall mean one or more of the following 

insurers: ACE Property and Casualty Insurance Company, Century 

(continued)
10 A-6240-10T1

Risk Management Program

In 1972, Transamerica established a corporate risk 

management program ("TARM") that oversaw insurance matters for

its subsidiaries. The objectives of the TARM program were to 

protect Transamerica and its subsidiaries from catastrophic 

losses and to minimize costs for insurance coverage and

accidental losses. According to Transamerica's director of risk 

management in the 1980s, the TARM program was never intended to 

be an insurer for subsidiaries, although Transamerica would 

often pay losses that fell within a subsidiary's self-insured 

retention ("SIR"). A SIR operates in some ways like a 

deductible for an insurance policy but also is significantly 

different, as we will discuss later in this opinion. The TARM 

program procured insurance on behalf of Transamerica's 

subsidiaries in exchange for an annual fee. The fee covered the 

costs of purchasing insurance, TARM's operating costs, and the 

subsidiary's share of losses. 

 

(continued)

Indemnity Company, CCI Insurance Company, Insurance Company of 

North America, Indemnity Insurance Company of North America, 

Central National Insurance Company of Omaha, Service Fire 

Insurance Company, Industrial Underwriters Insurance Company, 

and Pacific Employers Insurance Company.

 "LMI" stands for "London Market Insurers" and shall mean one 

or more of individual Lloyd's syndicates or London Market 

companies.
11 A-6240-10T1

Transamerica would charge back its payments covering a 

subsidiary's SIRs through the risk management fees. 

Subsidiaries like IMO that experienced unique or significant 

losses were also charged a catastrophe fee beyond the normal 

risk management fee. Before its divestiture in 1986, IMO had 

paid approximately $33 million in such fees to Transamerica.

IMO's Insurance Policies

Before 1964, IMO had general liability policies issued by 

New Jersey Manufacturers Insurance Company ("NJM") and Aetna 

Casualty and Surety Company ("Aetna"). From 1964 to 1972, IMO 

purchased primary insurance directly from TIG. We will refer to 

these pre-1972 policies as TIG's "direct policies." 

From 1972 through 1976, Transamerica purchased insurance on 

behalf of IMO from the Highlands Insurance Company. The 

Highlands policies were written above a $100,000 SIR, meaning 

that IMO's losses must exceed that level of loss from any single 

occurrence before it could access coverage under the Highlands 

policies. There was no insurance in place to cover IMO's SIR. 

TIG also issued excess policies to IMO during this time period.

From 1977 to 1986, Transamerica purchased first-layer 

excess insurance coverage for IMO from ACE and Pyramid. These 

policies also required SIRs. To cover the SIRs, Transamerica 

purchased insurance policies from TIG, which are referred to in 
12 A-6240-10T1

this litigation as "fronting policies." These policies allowed

IMO to obtain insurance certificates showing full coverage for 

all losses. The "fronting" reference meant there was no risk 

assumed by the insurance carrier, here TIG.2 

The TIG fronting policies had stated coverage limits of $1 

million from 1977 through 1984 and higher limits for 1985 and 

1986, totaling in the aggregate $10.75 million for the ten-year 

period. For the fronting policies in effect from 1977 through 

1981, defense costs were paid "outside the limits" of the 

policies. This means that the policies would pay their stated 

$1 million indemnity limits plus defense costs; the defense 

costs were supplemental to the indemnification coverage and did 

not erode the indemnity limits. We will refer to these policies 

as "outside the limits" policies. Defense costs for the 

policies in effect from 1982 through 1986 were within the policy 

 

2 "Fronting" means "[t]he use of a licensed, admitted insurer to 

issue an insurance policy on behalf of a self-insured 

organization or captive insurer without the intention of 

transferring any of the risk. The risk of loss is retained by 

the self-insured or captive insurer with an indemnity or 

reinsurance agreement. . . . Fronting arrangements allow 

captives and self-insurers to comply with financial 

responsibility laws imposed by many states that require evidence 

of coverage written by an admitted insurer, such as for 

automobile liability and workers compensation insurance." 

Fronting, IRMI Risk & Ins., http://www.irmi.com/online/ 

insurance-glossary/terms/f/fronting.aspx (last visited Sept. 4, 

2014); see also Richard V. Rupp, Insurance & Risk Management 

Glossary 150 (1991) (fronting insurer issues policy on behalf of 

captive insurer but assumes little or no financial exposure). 
13 A-6240-10T1

limits, meaning payments for defense costs did erode the 

indemnity limits. 

Thus, IMO had "direct policies" from TIG from 1964 through 

1972, excess policies at various times including 1972 through 

1976, and "fronting policies" from 1977 to 1986, the first five 

years of which were "outside the limits" policies. Over the 

years since the 1986 divestiture, TIG made payments totaling 

more than $30 million for IMO's asbestos liabilities and defense 

costs from both its direct and fronting policies. Adding TIG's 

payments from excess policies, TIG paid IMO more than $72 

million for its asbestos liabilities and costs. 

IMO also received payments from Pyramid's excess policies, 

including from the time that TIG claimed it had no more 

responsibility for IMO's losses. 

Digressing briefly from the facts to restate the lead issue 

in this appeal, TIG claims its policies are exhausted because it 

has paid far more than the amount of loss allocated to it under 

the Owens-Illinois and Carter-Wallace loss allocation model. 

IMO contends TIG's obligations have not ended because the 

indemnification limits of the "outside the limits" policies 

cannot be exhausted by allocating responsibility to those 

policies. It contends only actual payments that reach the $1 

million dollar indemnification limits will exhaust TIG's 
14 A-6240-10T1

obligation to cover defense costs under the five years of 

"outside the limits" policies. According to IMO, as of the end 

of 2010, TIG owed an additional $48 million in defense costs 

under those policies.

Transamerica's Agreements with TIG

Between 1976 and 1992, Transamerica entered into four 

agreements with TIG to indemnify TIG for its payments under the 

fronting policies. In 1992, Transamerica and TIG also entered 

into an agreement with regard to the pre-1972 direct policies 

pursuant to which Transamerica would contribute to TIG half the 

total amounts of defense and indemnity sought by IMO for 

asbestos litigation. The result of these agreements was that 

Transamerica actually paid approximately half the amounts paid 

by TIG to IMO under its direct and fronting policies. 

Divestiture of IMO

In 1986, Transamerica divested IMO's predecessor by 

spinning off its shares to Transamerica shareholders, and the 

new company became IMO. The terms of the divestiture were 

contained in a Distribution Agreement dated December 18, 1986. 

On the subject of insurance coverage, the agreement stated:

Section 6.02 Insurance With respect to all 

insurance plans of [IMO], [IMO] shall be 

liable for payment of claims (to the extent 

not covered by Transamerica's Risk 

Management Program) arising out of 

incidents, known or unknown, reported or 
15 A-6240-10T1

unreported, which were incurred prior or 

subsequent to the Distribution Date. 

[(Emphasis added).]

A dispute on appeal pertains to the underscored language and the 

obligations, if any, it imposes upon Transamerica after the 

divestiture.

Asbestos Lawsuits, IFAs, and Exhaustion of Policies

At the time of the 1986 divestiture, IMO had been named as 

a third-party defendant in three asbestos liability lawsuits. 

IMO tendered these claims to TIG for indemnification and 

defense. TIG provided one hundred percent of the funds to pay 

these claims, and Transamerica then reimbursed TIG at least half

that amount pursuant to their agreements. Many more asbestos 

claims were filed after the divestiture, and TIG continued to 

provide a defense to IMO under both its direct policies and its

fronting policies. 

In 1989, IMO sent "first notice" letters to excess 

insurers. These letters made no demand for payment and provided 

minimal information about the claims against IMO or any 

underlying policies that might be in place. In fact, according 

to the excess insurers, IMO told them it had ample primary 

insurance coverage and their policies were unlikely to be 

reached in the foreseeable future. 
16 A-6240-10T1

In 1991, IMO discovered NJM's and Aetna's older primary 

insurance policies and tendered its asbestos claims to NJM and 

to Travelers Insurance Company ("Travelers") as successor to 

Aetna. Aetna's policies covered IMO from 1955 to 1964. On 

September 30, 1992, IMO entered into an Interim Defense and 

Indemnification Funding Agreement ("IFA") with TIG and 

Aetna/Travelers under which all defense costs were to be paid by 

TIG and Aetna, and indemnity payments were split in three equal 

shares among TIG, Aetna, and IMO. 

NJM, on the other hand, did not acknowledge coverage on its

primary liability policies issued to IMO from 1935 through 1954. 

IMO filed suit against NJM and was successful in compelling it

to provide coverage. On March 24, 1993, IMO entered into an IFA 

with NJM, which applied in conjunction with the earlier IFA with 

TIG and Aetna/Travelers. Neither of the two IFAs was intended 

to be a final allocation of IMO's losses, and both reserved the 

parties' rights to seek reallocation of the amounts paid.

Under the two IFAs, defense costs were split equally among 

Aetna, NJM, and TIG, and indemnity costs were split equally 

among the three insurers and IMO. In 1998, NJM declared its 

policies exhausted, having paid $4,234,703 in defense and 

indemnity costs. It made no further payments after that time. 

When Aetna balked at continuing payments, IMO filed suit against 
17 A-6240-10T1

Aetna and IMO's excess insurers seeking to compel payments under 

Aetna's IFA. IMO did not actively pursue the matter against the 

excess insurers, and in 2000 it voluntarily dismissed them from 

the litigation. A new sharing arrangement was reached among

Aetna/Travelers, TIG, and IMO under which Aetna paid one fourth 

of defense costs and one fourth of indemnity costs, IMO paid one 

third of indemnity costs and none of the defense costs, and the 

balance of both types of costs was paid by TIG. 

Aetna declared its policies exhausted in August 2003, 

having paid a total of $15,240,064. IMO did not challenge 

Aetna's declaration of exhaustion. TIG then continued making 

payments under the IFAs for several more months, paying one 

hundred percent of defense costs and two thirds of the indemnity 

costs. All of IMO's defense costs through the end of 2003 were 

paid by means of the IFAs, and IMO incurred no unreimbursed 

defense costs through that time. 

In early 2004, when TIG declared its 1977 through 1986 

fronting policy limits exhausted, TIG had paid a total of 

$30,856,193 to IMO as reimbursement of indemnity and defense 

costs, these payments being allocated by TIG to both its pre1972 direct policies and to the 1977 through 1986 fronting 

policies.
18 A-6240-10T1

Owens-Illinois and Carter-Wallace

The New Jersey Supreme Court's 1994 decision in OwensIllinois, supra, 138 N.J. at 478-79, first established the 

"continuous trigger" theory of insurance coverage for long-tail 

environmental losses, such as exposure to asbestos. The Court

defined the term "occurrence" in liability policies to mean a 

separate triggering event for insurance coverage in each year 

from the time a claimant alleging injury was first exposed to 

asbestos until manifestation of an asbestos-related disease or 

until insurance coverage became unavailable. Ibid. The Court

also established a pro-rated model for the allocation of 

coverage responsibilities among multiple insurers based on an 

insurer's time on the loss and limits of risk coverage in the 

policies. Id. at 474-75. 

In July 1998, the Court issued its decision in CarterWallace, supra, 154 N.J. 312, as further development of the 

allocation methodology. The Court held that excess insurers 

were included in the model, and that policies would be exhausted 

"vertically" in each year of coverage applicable to a claim 

rather than all primary insurance policies being exhausted 

"horizontally" first across the range of "triggered" coverage

years before excess insurers' policies would attach. Id. at

325-28.
19 A-6240-10T1

In November 1998, representatives from IMO, TIG, and 

Transamerica met and discussed applying the Carter-Wallace

allocation methodology to IMO's claims. IMO's General Counsel

strongly disagreed with Carter-Wallace and refused to apply its 

methodology to allocate responsibility among IMO's insurers. He 

was satisfied with the IFA arrangements in place where IMO paid 

a third of indemnity and no defense costs. 

The Present Litigation 

In 2002, IMO sought assurance from the Transamerica 

defendants that they would continue to pay full defense costs 

and most of the indemnity costs for asbestos claims. When 

assurance was not given, IMO filed its initial complaint in 

August 2003 against the Transamerica defendants. 

In early 2004, the Transamerica defendants informed IMO 

that TIG's fronting policies were exhausted as of December 31, 

2003. A February 4, 2004 letter written by counsel for Pyramid

stated that, up to December 31, 2003, Transamerica had paid "at 

least $9,703,101 in indemnity for asbestos bodily injury claims, 

and at least $5,138,148 for expenses for those claims" and that 

those sums exceeded the amount of the SIRs and the limits of 

TIG's fronting policies. The letter informed IMO that any 

future payments for indemnity and expenses would be paid "by 

Pyramid's excess policies, up to the limits of the Pyramid 
20 A-6240-10T1

policies." Pyramid's future payments would be based on its

Carter-Wallace allocation share after a short transitional 

period. 

Although IMO eventually added the excess insurers to the 

present litigation, it initially told them in private meetings 

that it had done so to avoid inconsistent judgments if active 

litigation against the excess insurers were to become necessary 

in the future. IMO reassured the excess insurers that their 

policies were not going to be reached because the TIG "outside 

the limits" policies for 1977 through 1981 would never reach 

their limits of coverage.3

In July 2005, IMO appeared to waver in its belief that the 

TIG policies had not been exhausted. As a result, Pyramid 

agreed that its excess policies were triggered and advanced IMO 

$2 million toward defense invoices. In August 2005, however, 

 

3 According to TIG and some of the excess insurers, IMO 

originally took the position that the $1 million limits of the

fronting policies would never be reached because each asbestos

personal injury claim was a separate occurrence, and IMO's 

indemnification liability for those claims was a relatively 

small amount. No individual asbestos claim would exhaust the $1 

million in indemnification coverage and TIG would perpetually 

have to provide defense costs on the "outside the limits" 

policies. As we will explain further, IMO and its expert 

presented a different version of their theory of "limitless 

defense costs" during this litigation that did not rely on a 

separate occurrence and $1 million dollars of indemnity coverage 

for each individual claim. 
21 A-6240-10T1

IMO again asserted that the TIG policies had not been exhausted. 

Pyramid then stopped making payments.

On August 21, 2007, IMO wrote to excess insurers demanding 

that they pay IMO's asbestos losses in accordance with an 

allocation calculated by IMO's expert, Dr. Charles Mullin. In 

his trial testimony, Mullin reviewed his calculations and agreed 

that they indicated TIG's fronting policies should be allocated 

$13,349,296 in defense and indemnity costs. He subsequently 

adjusted that figure to $13,433,600. 

Since making its August 2007 demand on excess insurers, IMO 

has settled with more than a dozen of them, with total policy 

limits of at least $708 million. Some of the excess insurers 

that did not settle and raise issues in this appeal have also 

paid millions of dollars to IMO under their policies.

 On September 10, 2008, IMO produced a new allocation of 

losses and claimed that TIG and Transamerica owed millions more 

than the approximately $13.5 million calculated in Mullin's 

earlier allocations. IMO based this claim on TIG's continuing 

obligation to pay defense costs under the first five fronting 

policies until its actual payments of indemnification 

obligations, rather than allocation, reached the $1 million 

level of each policy. IMO claimed that allocation of losses to 

the fronting policies under the Carter-Wallace model was not 
22 A-6240-10T1

sufficient to reach their limits but actual payment had to be 

made by TIG in accordance with the language of those policies. 

In this litigation, IMO has referred to this coverage 

position by several different names, including "bookend" and 

"limitless defense costs." The Transamerica defendants refer to 

it as the "running spigot" theory of coverage under TIG's 

fronting policies of 1977 through 1981. The crux of this theory 

is that, with defense costs being paid outside the policy 

limits, TIG's obligation to cover defense costs for claims that 

could be attributed to those policy years would continue until 

TIG actually paid $1 million in indemnity costs from the policy 

in each of those years. With the small amount of indemnity 

payments on the liability that IMO has for injured plaintiffs in 

asbestos cases (many of those cases settling for only several 

thousand dollars from IMO), the limits of the TIG "outside the 

limits" policies would not be reached for many years. TIG's 

obligation to continue paying for defense costs would continue 

indefinitely.

Pleadings and Pre-Trial Proceedings

IMO began this litigation with its first complaint and jury 

demand filed in August 2003 against only the Transamerica

defendants. It sought a declaration of rights and obligations 

under the TARM program and under the primary and excess 
23 A-6240-10T1

insurance policies issued by TIG and Pyramid. It also sought 

compensatory and punitive damages for breach of contract and 

related causes of action. Defendants filed answers, crossclaims, counterclaims, and a third-party complaint against three 

excess insurance carriers. 

In 2004, IMO filed a second amended complaint, adding new 

claims against the Transamerica defendants and also naming

numerous excess insurers as defendants. Over time in this 

litigation, most of the excess insurers either settled with IMO 

or were dismissed from the case. Twelve defendants remained in 

the case at the time of the trials beginning in 2009. 

In the intervening time, the court entered orders holding 

that New Jersey law is applicable to certain pertinent issues, 

granting or denying summary judgment on various grounds,

determining that the Carter-Wallace allocation methodology would 

be applied, and appointing a special allocation master ("SAM") 

to consider all allocation-related issues and to make 

recommendations to the trial judge. 

In January 2009, Retired Judge Robert Muir, Jr., was 

recalled to the bench and assigned to the case. At about that 

time, Pyramid and TIG renewed motions they had filed earlier to 

strike plaintiff's jury demand and to proceed with a bench 

trial. On June 30, 2009, Judge Muir granted the motions and 
24 A-6240-10T1

ordered that all issues would be tried without a jury. This 

court and the Supreme Court denied IMO's motions for leave to 

appeal that ruling.

Bench Trials on Discrete Issues

In June 2009, Judge Muir tried the issues related to 

certain excess insurers in a four-day bench trial. He issued a 

final decision and order on the excess insurers' coverage 

disputes on December 16, 2009. Several excess insurers —

including ACE, LMI, and Zurich American Insurance Company and 

its predecessors and affiliates ("Zurich") — have crossappealed, challenging Judge Muir's December 2009 decision as 

well as other aspects of the final judgment entered two years 

later.

After the June 2009 bench trial, Judge Muir scheduled 

separate bench trials on two major issues. At the Phase I trial

conducted in the early months of 2010, the issue was whether the 

TIG fronting policies were in fact exhausted. Judge Muir found 

by an oral decision on October 14, 2010, that the policies were 

not only exhausted by the end of 2003, but that TIG had overpaid 

its obligations. 

In reaching that conclusion, Judge Muir found that IMO's 

allocation expert, Mullin, was not a credible witness and that 

IMO's "limitless defense costs" or "running spigot" theory was 
25 A-6240-10T1

not supported by the evidence or legal precedent. He determined 

that TIG had paid $9,655,200 in indemnity losses and $6,254,400 

in defense costs, for a total of $15,909,600 paid under its 

fronting policies of 1977 through 1986 and also excess policies 

from 1972 through 1976. Since the judge's findings allocated 

$13,636,700 to IMO's defense costs and indemnification losses 

during that time period based on an allocation model prepared by 

the SAM, TIG had overpaid its obligations by $2,271,900. Judge 

Muir stated it would be inequitable and unconscionable to allow 

IMO to keep the overpayments, but he did not rule further with 

respect to disposition of TIG's overpayments, and did not reach 

any decision as to payments TIG had made under its pre-1972 

direct policies. 

At the Phase II trial held in the spring of 2010, Judge 

Muir considered the dispute between IMO and Transamerica. In 

his written decision issued on December 29, 2010, the judge 

found that IMO had failed to establish the existence of an 

implied-in-fact contract requiring Transamerica to continue 

reimbursing IMO for its SIRs and other unreimbursed costs of 

asbestos claims, and that the written Distribution Agreement 

controlling the 1986 divestiture of IMO is an unambiguous 

contract that governs the issues between IMO and Transamerica. 

The judge rejected IMO's assertion that Transamerica was IMO's 
26 A-6240-10T1

de facto insurer for its SIRs, deductibles, and other expenses,

and he dismissed IMO's claims for breach of contract, estoppel, 

and bad faith.

Judge Muir completed his service on recall in January 2011 

after issuing his decisions on the Phase I and Phase II trials. 

Retired Judge Donald Coburn was then assigned on recall to 

preside over the case.

Final Judgment

Following the Phase I trial, the SAM prepared a retroactive 

allocation of IMO's losses, which "ignored" payments by TIG and 

others in calculating the allocation figures and made no 

recommendations as to the treatment of overpayments by TIG that 

Judge Muir had found. Because the SAM's report attributed 

defense costs to TIG after 2003, it concluded that TIG still 

owed IMO almost $2 million under the fronting policies. 

Judge Coburn directed the SAM to prepare a new loss 

allocation report that did not accept IMO's "running spigot"

theory and took into account all payments made by TIG. The 

SAM's revised allocation schedule issued in April 2011 was based 

on total estimated costs to IMO of $325 million through the end 

of 2010. It allocated $15,232,832 to the TIG fronting policies 

under what TIG calls a "modified spigot" theory. 
27 A-6240-10T1

In his ruling on the final loss allocation, Judge Coburn 

rejected parts of the SAM's revised allocation schedule as 

contrary to Judge Muir's Phase I decision. Applying Judge 

Muir's decision that TIG payments from policy years that were 

overpaid would be transferred to those years that were 

underpaid, Judge Coburn determined that all payments from TIG, 

including those previously attributed to the pre-1972 direct 

policies, could be transferred to determine if policies were 

exhausted under the proper Carter-Wallace allocation. He 

further found that the "running spigot" theory was not supported 

by IMO's own reasonable expectations when it procured the 

insurance policies, and that the allocation of additional

defense costs to the fronting policies would be disproportionate 

to the degree of risk transferred to TIG under those policies. 

Judge Coburn adjusted the SAM's calculation by reducing 

defense costs attributed to TIG by the amounts incurred after 

the TIG policies were exhausted. He allocated $8,165,364 in 

indemnity and $5,159,341 in defense costs to TIG's pre-1972 

direct policies, a total of $13,324,705. He allocated 

$8,403,478 in indemnity and $5,342,606 in defense costs to TIG's 

fronting policies, a total of $13,746,084. By taking into 

account TIG's payments under the IFAs, which totaled

$30,856,193, and also payments made by another insurer 
28 A-6240-10T1

affiliated with TIG, Judge Coburn determined that TIG had 

overpaid IMO $15,201,438, which he rounded off to $15,200,000. 

Judge Coburn suggested that the parties discuss resolution 

of how that amount might be reimbursed to TIG by the excess 

insurers that had coverage obligations. The parties, however,

were not able to resolve the issue. By final judgment dated 

August 16, 2011, the judge awarded $15,200,000 to TIG as money 

damages against IMO for TIG's overpayments on its policies, plus 

prejudgment interest of $1,400,000. Of the amount awarded to 

TIG, the judgment accounted for a total of $8,521,771 as sums 

paid or to be paid by ACE, LMI, and one other excess insurer to 

IMO, the balance being IMO's separate responsibility. 

The final judgment also declared that Transamerica had no 

further obligation to IMO for its asbestos claims, and the 

excess insurers were ordered to pay their shares according to 

the allocation schedule adopted by the final judgment. The 

judgment also denied IMO's application for attorneys' fees and 

prejudgment interest and Transamerica's application for 

attorneys' fees under an indemnification provision of the 1986 

Distribution Agreement. All remaining claims, counterclaims, 

and cross-claims that were not specifically addressed in the 

final judgment were dismissed with prejudice. 
29 A-6240-10T1

II.

Exhaustion of TIG's Fronting Policies

The lead issue in the case — the exhaustion issue — is 

whether TIG must cover defense costs for an endless or 

indefinite time until it has actually paid the indemnification 

limits of its policies, or whether those policies were exhausted 

and TIG has no further obligations to IMO. 

IMO, some excess insurers, and amicus curiae Independent 

Energy Producers of New Jersey claim error in Judge Muir's 

exhaustion decision and its implementation by Judge Coburn in 

the final allocation judgment. They contend the judges failed 

to hold TIG liable for a continuing obligation to pay defense 

costs although the fronting policies from 1977 through 1981

require payment of defense costs "outside the limits" of the 

indemnification coverage. 

The policies provide that the insurer will "not be 

obligated to pay any claim or judgment or to defend any suit 

after the applicable limit of the company's liability has been 

exhausted by payment of judgments or settlements" (emphasis 

added). IMO argues that the policies unambiguously require 

exhaustion by formal payment, not just by allocation of 

sufficient losses to the policies. 
30 A-6240-10T1

Before we address this argument, we will review OwensIllinois, supra, 138 N.J. 437, and some cases that followed it. 

Owens-Illinois is the seminal case in New Jersey setting forth 

the methodology for proportional allocation of indemnity and 

defense costs among multiple insurers in "long-tail"

environmental exposure litigation. Spaulding Composites Co. v. 

Aetna Cas. & Sur. Co., 176 N.J. 25, 39 (2003), cert. denied sub 

nom. Liberty Mut. Ins. Co. v. Caldwell Trucking PRP Grp., 540 

U.S. 1142, 124 S. Ct. 1061, 157 L. Ed. 2d 953 (2004). 

The insurance policies in Owens-Illinois contained standard 

clauses providing liability coverage for bodily injury that 

"occur[ed]" within the policy period. Owens-Illinois, supra, 

138 N.J. at 447. The Court explained that, where injuries were

sustained over long periods of time, questions arise as to when 

and how liability insurance coverage of the allegedly 

responsible parties is triggered and as to how losses should be 

fairly allocated among the range of triggered policies. 

Spaulding Composites, supra, 176 N.J. at 32. The Court observed 

that rigid enforcement of the policy terms as governed by 

traditional principles of insurance law could not capture the 

time of an occurrence in the context of such toxic-tort 

litigation. Owens-Illinois, supra, 138 N.J. at 457-59. It

concluded that "[m]ass-exposure toxic-tort cases have simply 
31 A-6240-10T1

exceeded the capacity of conventional models of judicial 

response." Id. at 459.

The Court reviewed a number of options to resolve the 

question of determining the "occurrence" of an injury that does 

not manifest for many years. It ultimately adopted a 

"continuous-trigger" theory by which an injury would trigger 

coverage continuously from the date of the claimant's first 

exposure to asbestos onward as a single "occurrence" for each 

year. Id. at 478-79. The Court then adopted a pro-rata 

allocation methodology, distributing the insured's losses for 

the triggered time period in percentage shares commensurate with 

the "degree of risk transferred or retained in each of the years 

of repeated exposure to injurious conditions." Id. at 475. The 

resulting allocation among insurance policies would thus be 

"related to both the time on the risk and the degree of risk 

assumed." Id. at 479. The insured would share in the 

allocation for periods where it voluntarily retained the risk 

rather than contracting for available insurance. Ibid. Policy 

limits and exclusions would remain applicable, and the resulting 

allocation would conform to the particulars of the policies at 

issue. Id. at 476.

The Court "recognize[d] the difficulties of apportioning 

costs with any scientific certainty," but accepted that a "rough 
32 A-6240-10T1

measure" of each insurer's proportionate allocation of losses 

might be the best that could be achieved. Id. at 476-77. The 

Court never independently addressed allocation of defense costs

as opposed to indemnification for claims that the insured would 

have to pay to the injured person, though the undeniable 

implication of Owens-Illinois is that defense costs are also 

allocable, subject to policy terms, in the same manner as 

indemnity expenditures.

In Carter-Wallace, supra, 154 N.J. at 325-27, the Court 

confirmed the application of the continuous-trigger theory and 

pro-rata methodology in allocating liability among both primary 

and excess policies. It rejected an argument made by the 

second-level excess insurer in that case that the insured party 

must exhaust all primary and first-level excess policies in the 

entire coverage block before accessing any second-level excess 

coverage. Id. at 324. 

The Court also rejected the insured's contention that the 

entire universe of losses should be collapsed to a single year 

so as to access immediately the coverage from all insurers for 

that one year. Id. at 325. Neither of these arguments was 

faithful to the holding of Owens-Illinois that ongoing injuries

should be treated as a single occurrence within each year. 

Consequently, the Court adopted an approach requiring that 
33 A-6240-10T1

losses first be allocated "horizontally" among the range of 

years in the coverage block, but that policies be exhausted 

"vertically" within each year, such that each successive layer 

of insurance within a given year would be accessed as the one 

below was exhausted. Id. at 327-28. The Court added:

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." [Owens-Illinois, supra, 

138 N.J.] at 479. Nevertheless, we 

anticipate that the principles of OwensIllinois, 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.

[Carter-Wallace, supra, 154 N.J. at 327-28.]

In Spaulding Composites, supra, 176 N.J. at 28, the Court 

considered whether application of a "non-cumulation" clause in a 

comprehensive general liability policy could be enforced 

consistently with the Owens-Illinois methodology. Such clauses 

"operate[] to limit an insurer's liability under multiple 

sequential . . . policies where losses related to a 'single 

occurrence' trigger the successive policies." Id. at 43-44 

(emphasis added). The purpose of such clauses is to avoid the 

"'cumulation' of policy limits for damage arising out of [a]
34 A-6240-10T1

single occurrence . . . ." Id. at 44. Because Owens-Illinois

had explicitly rejected the theory that an injury in a long-term 

environmental exposure case constitutes one single occurrence, 

the Court held that non-cumulation clauses simply did not apply 

in that context. Ibid. It added:

[E]ven if the non-cumulation clause was not 

facially inapplicable, we would not enforce 

it because it would thwart the OwensIllinois pro-rata allocation modality. Once 

the court turns to pro rata allocation, it 

makes sense that the non-cumulation clause, 

which would allow the insurer to avoid its 

fair share of responsibility, drops out of 

the policy.

[Ibid.]

Thus Spaulding Composites supports the proposition that the 

Owens-Illinois and Carter-Wallace allocation model supersedes

contrary terms of an insurance policy. 

The Court again affirmed the allocation model in Benjamin 

Moore & Co. v. Aetna Casualty & Surety Co., 179 N.J. 87, 91 

(2004), but this time the Court adhered to the language of the 

policies where they did not conflict with the allocation model. 

In Benjamin Moore, the Court determined that an insured would 

have to satisfy its full per-occurrence deductibles for each 

policy before accessing indemnity coverage. In so doing, the 

Court clarified that:

when a policy is triggered, so are its 

fundamental terms and conditions. Although 
35 A-6240-10T1

Owens-Illinois did not turn on policy 

language or traditional interpretation rules 

because it was crafting an overarching 

scheme for solving the scientifically 

unsolvable problem of determining how to 

allocate progressive environmental damage to 

sequential policies, that scheme was 

nevertheless meant to be superimposed on the 

specific terms of insurance contracts. That 

is why the Owens-Illinois allocation 

methodology is subject to "limits and 

exclusions." In other words, Owens-Illinois

was never intended to displace the basic 

provisions of the insurance contract so long 

as those provisions are not inconsistent 

with the underlying methodology specifically 

adopted in that case.

[Id. at 101 (emphasis added and citations 

omitted).]

IMO argues this last-quoted explanation by the Court means 

that the Owens-Illinois and Carter-Wallace allocation 

methodology must be superimposed over the terms of TIG's 

fronting policies rather than superseding those terms. If, as 

IMO contends, the policies require that only actual payments for 

IMO's losses can relieve TIG of its contractual obligation to 

pay for defense costs, total coverage of IMO's losses and the 

attachment point for excess insurers will be affected. 

IMO and amicus curiae contend that Judge Coburn mistakenly 

deemed the policy language requiring actual payment to be 

ambiguous and inappropriately resolved that ambiguity in favor 

of his own belief that a reasonable insured would never expect 

coverage of defense costs far exceeding the indemnity limits of 
36 A-6240-10T1

a policy. Judge Coburn commented that an insurer would pay its 

indemnification limit in full before incurring a much larger 

obligation to pay defense costs, but IMO and amicus curiae 

contend that case law prohibits an insurer that provided 

"outside the limits" defense coverage from avoiding its 

obligations by paying its indemnity limit and then abandoning 

the insured. See, e.g., Chubb/Pacific Indem. Group v. Ins. Co. 

of N. Am., 233 Cal. Rptr. 539, 543 (Ct. App. 1987); Douglas v. 

Allied Am. Ins., 727 N.E.2d 376, 382 (Ill. App. Ct. 2000); 

Simmons v. Jeffords, 260 F. Supp. 641, 642 (E.D. Pa. 1966). 

According to IMO and amicus curiae, many insureds actively 

seek and bargain for limitless coverage of litigation defense 

and related costs. Amicus curiae cites examples in the federal 

courts to support its argument that such coverage may far exceed 

the limits of the indemnification obligation of the insurer. 

See, e.g., Emhart Indus. v. Home Ins. Co., 515 F. Supp. 2d 228, 

231, 257 (D.R.I. 2007), aff’d sub nom. Emhart Indus. v. Century 

Indem. Co., 559 F.3d 57 (1st Cir. 2009).

In his final allocation decision, Judge Coburn first noted 

that coverage for defense costs outside policy limits was 

provided in policies representing only $40.6 million of more 

than $1.85 billion of total coverage. Consequently, the SAM's 

allocation schedule had "only used the indemnity amount of each 
37 A-6240-10T1

policy without attempting to include any value for those 

portions of policies that paid defense costs in addition to the 

face amount." The parties agreed with this approach for the 

sake of efficiency since the difference in the allocation 

percentages would be negligible. 

Judge Coburn disagreed with IMO that the policy language of 

TIG's "outside the limits" fronting policies unambiguously 

requires exhaustion by formal payment. He stated he would 

construe that language consistently with Owens-Illinois and the 

reasonable expectations of the parties to permit exhaustion by 

allocation of indemnity losses rather than by actual payment of 

those losses. Judge Coburn also adopted Judge Muir's conclusion 

that all of TIG's payments pursuant to the IFAs, whether or not 

reimbursed by Transamerica, would count to satisfy the limits of 

the fronting policies. He agreed with Judge Muir that annual 

policy limits would be exhausted by crediting across coverage 

years payments that TIG had previously attributed to one policy 

year to a different underpaid policy year. As a result of his 

calculations, Judge Coburn not only accepted Judge Muir's 

earlier conclusion that the fronting policies had been exhausted 

by the end of 2003, but he found that some of the "outside the 

limits" policies had been exhausted in 1999 and others in 2000. 

IMO complains that not even TIG and Transamerica claimed that 
38 A-6240-10T1

the fronting policies were exhausted earlier than the end of 

2003. 

IMO and amicus curiae also criticize Judge Coburn's 

statements that the expectations of the parties would not make 

sense if the obligation of TIG to pay defense costs far exceeded 

its obligation to provide indemnity coverage under any policy. 

They argue that many liability policies provide for coverage of 

litigation or defense expenses far beyond the indemnification 

limits of the policies, and courts have uniformly recognized the 

enforceability of such policy provisions. See Gen. Accident 

Ins. Co. of Am. v. Dep't of Envt'l Prot., 143 N.J. 462, 464 

(1996) (using the term "cost-exclusive" policies to mean the 

same as our "outside the limits" policies).

We recognize that some of Judge Coburn's statements in his 

oral decision of May 24, 2011, if applied to other types of 

liability coverage, may deviate from the expectations of 

insureds who purchase "outside the limits" policies and pay 

premiums to cover all their litigation expenses. But Judge 

Coburn was not addressing a typical insurance claim for a single 

occurrence and a single insurance policy. He was deciding how 

the allocation model established in Owens-Illinois and CarterWallace should apply to long-tail claims, with many primary and 

excess policies covering years of loss, some of which did not 
39 A-6240-10T1

have defined limits of coverage for defense costs. As Judge 

Coburn stated in his decision, "exhaustion may mean one thing in 

one context [and] it may mean another thing in another context." 

To allay some of the fears expressed by amicus curiae, the 

exhaustion decision in this case is closely tied to its facts. 

We reach no general conclusion that an insurer's obligations to 

cover defense costs and other litigation expenses through an 

"outside the limits" policy is limited by the maximum amount of 

indemnification coverage provided in that policy. 

In the context of crafting a fair though imprecise 

allocation model for long-tail claims, our Supreme Court has 

allowed that a policy term that is contrary to the model may

"drop[] out of the policy." Spaulding Composites, supra, 176 

N.J. at 44. It also suggested that policy terms that are

"inconsistent with the underlying methodology specifically 

adopted in [Owens-Illinois]" may be displaced. Benjamin Moore, 

supra, 179 N.J. at 101. We find no legal error in the trial 

judges' interpretation of the "payment" provision of the 

"outside the limits" policies and their reliance on the 

supervening effect of the Owens-Illinois and Carter-Wallace

allocation methodology.

Challenging the final allocation judgment on a separate 

ground, IMO argues that the payments from TIG that were not 
40 A-6240-10T1

reimbursed by Transamerica were paid out of the direct policies 

pre-dating 1972 and should not be attributed to the fronting 

policies from 1977 to 1986. According to IMO, Judge Coburn 

deviated from Judge Muir's decision in transferring payments 

across policy years, resulting in Judge Coburn's finding that 

TIG had overpaid its obligations by $15.2 million rather than 

the approximately $2.27 million that Judge Muir found.

Judge Muir's legal conclusion, however, was not as IMO 

claims. In responding to IMO's contention that TIG payments 

reimbursed by Transamerica should not be credited to TIG's 

allocations, Judge Muir concluded that Transamerica's payments 

were equally applicable for TIG's exhaustion purposes as were 

TIG's unreimbursed payments. He stated:

[W]ho made the payments to IMO [was] 

irrelevant, just as it would be if TIG went 

out and borrowed money to make the payments. 

That the payments were made and were 

received by IMO as part of the Fronting 

Policy indemnity duty is the only issue of 

concern. I reject any adverse inferences 

IMO projects from the fact Transamerica made 

payments.

But Judge Muir did not limit the transfer of overpayments 

on TIG policies to the years that the fronting policies were in 

effect. The final allocation schedule adopted by the court 

showed some of TIG's policies individually overpaid and others 

individually underpaid. Judge Coburn carried forward to 
41 A-6240-10T1

additional calculations Judge Muir's conclusion that overpaid 

years could be shifted to underpaid years and that IMO should 

not be permitted to retain the total overpayment once the 

allocation schedule was complete and the entirety of TIG's 

obligations was determined. 

TIG's payments totaled more than $30 million. Although 

some of those payments are attributable to the pre-1972 direct 

policies, more than $15 million, according to Judge Muir's 

findings and more than $13 million according to Judge Coburn's 

findings based on a revised allocation schedule, were 

attributable to TIG's fronting policies. There is no dispute 

that TIG made payments that exceeded the aggregate of its OwensIllinois and Carter-Wallace allocations. So, we can say its 

policies were exhausted not just by allocation, but by

allocation combined with payments that exceeded the total amount 

allocated to TIG. 

We also reject IMO's argument that such retrospective 

shifting of payments across coverage years violates the holding 

of Carter-Wallace that prohibits horizontal distribution of 

losses over several policy years. That holding pertains to a 

different question, whether all primary insurance policies over 

the range of coverage years have to be exhausted before the 

coverage obligations of any excess policies attach. Carter-
42 A-6240-10T1

Wallace, supra, 154 N.J. at 324-25. That holding is not 

applicable to the exhaustion decision in this case.

A contrary conclusion on shifting of payments among 

coverage years might provide an incentive for an insurer not to 

pay claims promptly on the chance that a future development in 

the law, or the discovery of additional policies and additional 

responsible insurers, results in a lesser obligation. When TIG, 

acting alone or in conjunction with Aetna and NJM, paid for

IMO's defense expenses in full under the IFAs through 2003, it 

did so without a concession that its payments were the correct 

amount of its allocated responsibility and without waiving a 

right to claim credits when a final allocation was determined. 

As a result of Judge Muir's and Judge Coburn's decisions, 

defense costs are allocated to TIG's fronting policies in 

general conformity with the risks transferred to those policies. 

Once the indemnity limits of the fronting policies were reached 

by allocation, and the prior aggregate payments from TIG 

exceeded those allocations, TIG's coverage was exhausted. The 

alternative, that TIG's responsibility for defense costs would 

remain open indefinitely, would contradict the mandate of OwensIllinois requiring allocation proportionate to the risks 

transferred to the insurer. The trial court correctly construed
43 A-6240-10T1

the "payment" language in the "outside the limits" policies in 

the context of an Owens-Illinois and Carter-Wallace allocation.

IMO further contends that the trial judges ignored the 

insurers' contemporaneous conduct in performing their 

obligations under the policies. It contends that TIG and 

Transamerica made payments for seventeen years after the 1986 

divestiture because they understood their obligations to do so 

under their contracts with IMO. We reject this argument, too.

It hinges on a spreadsheet prepared by a representative of 

Transamerica, which shows that the policies were overpaid in the 

aggregate but not all the individual fronting policies had 

sufficient losses allocated to exhaust them outright. Judge 

Muir rejected the probative value of the spreadsheet as both 

inaccurate in its figures and ultimately immaterial to an OwensIllinois and Carter-Wallace allocation. We defer to the judge's 

rejection of that evidence as evaluated in the context of the 

full record. See Rova Farms Resort, Inc. v. Investors Ins. Co., 

65 N.J. 474, 483-84 (1974).

TIG made payments in good faith pursuant to the IFAs. At 

the time of TIG's payments, allocation pursuant to OwensIllinois and Carter-Wallace had not been mandated or was not 

attempted yet in this matter. The overpayments resulted from 

ongoing development of the law fixing the responsibilities of 
44 A-6240-10T1

the many insurers on the risk. The fact that the timing of 

TIG's payments failed to coincide with loss allocations as 

calculated later was simply an accident of the development of 

the pertinent law. 

It was also a product of IMO's refusal to allow a CarterWallace allocation at an earlier time to replace the IFAs. If 

the court were to decrease IMO's and the excess insurers' 

liability for defense costs at TIG's expense, it would distort 

the parties' relative share of liability in a manner that does 

not accurately reflect the degree of risk each assumed. 

In addition, IMO's "running spigot" theory contradicts the 

dictates of Owens-Illinois and would afford IMO an impermissible 

double recovery of some defense costs already borne by its

primary insurers pursuant to the IFAs. In this case, producing 

a proper allocation pursuant to Owens-Illinois and CarterWallace requires that the fronting policies be construed to have 

been exhausted by allocation and aggregate payment by TIG that 

exceeded the policy limits. 

Finally, Transamerica and TIG offer as an alternative 

ground for affirmance of the exhaustion issue that IMO should be 

barred from raising its "running spigot" theory by the doctrine 

of unclean hands. That doctrine permits the court to refuse 

equitable relief to a "wrongdoer with respect to the subject 
45 A-6240-10T1

matter of the suit," specifically where the party is "guilty of 

bad faith . . . in the underlying transaction." Pellitteri v. 

Pellitteri, 266 N.J. Super. 56, 65 (App. Div. 1993). Thus, a 

court may refuse to hear the wrongdoer's argument, even if 

otherwise meritorious, in the interest of equity and justice. 

Goodwin Motor Corp. v. Mercedes-Benz of N. Am., Inc., 172 N.J. 

Super. 263, 271 (App. Div. 1980). Application of the doctrine 

lies within the trial court's discretion. Pellitteri, supra, 

266 N.J. Super. at 65.

Because IMO had previously insisted that TIG adhere to its 

obligations under the IFAs rather than determine its obligations 

pursuant to the Carter-Wallace methodology, Judge Muir invoked 

the doctrine of unclean hands to bar IMO from contesting the 

shifting of overpayments to TIG's underpaid policies when IMO

pursued a Carter-Wallace allocation in this litigation. The 

judge stated IMO could not reverse course after it filed suit 

and take the position that the IFA payments were voluntarily 

made by TIG and Transamerica and could not be used as credits 

for underpaid years. We agree with the Transamerica defendants 

that the unclean hands doctrine also supports affirmance of 

Judge Muir's exhaustion decision.

In sum, Judge Muir correctly determined that payments by or 

on behalf of a single insurer could be shifted from one policy 
46 A-6240-10T1

year to another to determine exhaustion, and that the TIG 

fronting policies were exhausted by the end of 2003. In 

addition, Judge Coburn's final judgment, which deemed the 

fronting policies exhausted by allocation rather than by payment 

on specific policies, was consistent with the dictates of OwensIllinois.

III.

A.

Coverage Limits of Multi-Year Policies

On cross-appeals, ACE, LMI, and TIG allege error in the 

treatment of multi-year policies in the allocation schedule. 

They contend that the plain language of their multi-year 

policies mandates that a single coverage limit for the entire 

term of the policy should have been used in the allocation 

schedule rather than the full coverage limit for each year the 

policy was in effect. They contend there was no basis for 

relying on extrinsic evidence to interpret the policies, and the 

trial court's acceptance of annualized application of the 

coverage limits results in multiplying the coverage that IMO 

purchased by the number of years the policies were in effect. 

ACE and LMI Multi-Year Policies

ACE and LMI challenge Judge Muir's adoption of the SAM's 

ruling imposing annual occurrence limits on their multi-year 
47 A-6240-10T1

excess policies. ACE contends that policies it issued for 

November 1, 1959, to May 1, 1961; for January 1, 1974, to 

January 1, 1977; and for September 1, 1974, to January 1, 1977, 

provide a single per-occurrence limit for the duration of each 

policy. LMI similarly contends that its multi-year policies 

issued during 1967 to 1976 contain single per-occurrence limits. 

The language addressing the limits of liability differs among 

the policies, but each establishes a liability limit for each 

occurrence (or accident) and sets forth an aggregate limit for 

each annual period. 

IMO does not dispute that the plain language of the 

policies would impose per-occurrence limits on a term rather 

than annual basis, but it sought a blanket ruling that every 

year of a multi-year policy should be treated as if a separate 

annual limit is available for asbestos claims. 

The SAM noted that Owens-Illinois did not resolve this 

issue and that the Supreme Court granted discretion to the 

master appointed by the trial court to develop a formula that 

fairly reflects the risks transferred to insurers or assumed by 

the insured. He reviewed the holdings of Spaulding Composites, 

supra, 176 N.J. at 25; Benjamin Moore, supra, 179 N.J. at 87; 

and Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety 

Co., 978 F. Supp. 589, 608 (D.N.J. 1997), aff'd in part, rev'd 
48 A-6240-10T1

in part, 177 F.3d 210 (3d Cir. 1999), and concluded that it 

would be appropriate to attribute a separate occurrence to each 

year of a multi-year policy. 

On November 18, 2009, Judge Muir affirmed the SAM's

recommendation in a written opinion and conforming order. The 

judge observed: 

Owens-Illinois undergirded its methodology 

with the premise that when progressive 

indivisible injury results from exposure to 

injurious conditions courts may reasonably 

treat the progressive injury "as an 

occurrence within each of the years of a

[comprehensive general liability] policy." 

[138 N.J. at 478.] The single occurrence 

for multi-year CGL policies contravenes that 

premise and accordingly is unenforceable. 

We agree and affirm the judge's decision. 

First, we note that the cases upon which ACE and LMI rely, 

Diamond Shamrock Chemical Co. v. Aetna Casualty & Surety Co., 

258 N.J. Super. 167 (App. Div. 1992), certif. denied, 134 N.J.

481 (1993), and two unpublished decisions of this court, are not 

on point. Diamond Shamrock predates Owens-Illinois and was 

decided under the laws of New York. Id. at 222-23. As to the 

other cases, in addition to being unpublished opinions with no 

precedential value, R. 1:36-3, they were also decided under the 

laws of other states. These cases do not answer the question of 

whether provisions in policies that apply a single occurrence 
49 A-6240-10T1

limit over multi-year terms contravene the dictates of OwensIllinois.

In Chemical Leaman, supra, 978 F. Supp. at 607-08, the 

United States District Court for the District of New Jersey 

applied Owens-Illinois to the question of multi-year occurrence 

limits. The court stated that the proper construction of OwensIllinois was to "direct treatment of progressive property damage 

as distinct occurrences triggering per-occurrence limits in each 

year of a policy." Id. at 607. It noted that a precedential 

California case, Armstrong World Industries, Inc. v. Aetna 

Casualty & Surety Co., 26 Cal. Rptr. 2d 35 (Ct. App. 1993), 

review granted and opinion superseded sub nom. In re Asbestos 

Insurance Coverage Cases, 866 P.2d 1311 (Cal. 1994), was 

discussed favorably in Owens-Illinois, supra, 138 N.J. at 451, 

455, 475. The United States District Court quoted Armstrong 

World Industries as follows with regard to the proper allocation 

method for multi-year policies: 

"This Court finds that the most equitable 

method of allocation is proration on the 

basis of policy limits, multiplied by years 

of coverage. This method is consistent with 

the policy language in that it takes policy 

limits into consideration . . . This method 

also reflects the fact that higher premiums 

are generally paid for higher 'per person' 

or 'per occurrence' limits. Since some 

policies are in effect for more than one 

year, and injury occurs during every year 

from first exposure until death . . . 
50 A-6240-10T1

[m]ultiplying the policy limits by years of 

coverage results in a more equitable 

allocation than proration based on policy 

limits alone."

[Chemical Leaman, supra, 978 F. Supp. at 

607-08 (emphasis added) (quoting Armstrong

World Industries, supra, 26 Cal. Rptr. 2d at

57).] 

The District Court understood "occurrence" in these cases 

to mean "discrete and separate injury in every year." Id. at

608. It agreed with the commentary in Barry R. Ostrager & 

Thomas R. Newman, Handbook on Insurance Coverage Disputes § 9.04 

(7th ed. 1994), that the decision of the California court in 

Armstrong World Industries supports payment of per-occurrence 

limits for each year of a multi-year policy. Chemical Leaman,

supra, 978 F. Supp. at 608. Accordingly, it found that the 

insurance policies at issue in that case with terms greater than 

one year were "liable up to their respective per-occurrence 

limits for a separate occurrence during each triggered policy 

year in which they were on the risk." Ibid. 

We implicitly endorsed the holding of Chemical Leaman in 

United States Mineral Products Co. v. American Insurance Co., 

348 N.J. Super. 526, 545-46 (App. Div. 2002), a case that

pertained to the issue of policy extensions, not multi-year 

policies. Id. at 529. More generally, we stated, "[I]t is 

clear that underpinning the [Supreme] Court's allocation method 
51 A-6240-10T1

is acceptance of the proposition that losses in an environmental 

damages case must be treated as an occurrence in each of the 

periods covered by a comprehensive general liability policy." 

Id. at 550.

Were it not for the pro-rata methodology adopted in OwensIllinois, each asbestos claim filed against IMO that triggered 

the ACE and LMI policies would be treated as a separate 

occurrence subject to the per-occurrence limit for the entire 

multi-year terms of the policies. The aggregate limits of the 

policies would control the insurers' total liability on the 

claims. Owens-Illinois changed the ground rules and classified 

all asbestos claims made in a year as a single occurrence. If 

all three years were to be viewed as a single occurrence, the 

insured would be deprived of the annual aggregate limits of the 

policies. Because the imposition of per-occurrence limits in 

multi-year policies contravenes the goals of the pro-rata 

methodology established in Owens-Illinois, such limits are 

unenforceable as specifically written. 

Judge Muir's decision adopting annualized application of 

the per-occurrence limits of the ACE and LMI multi-year policies 

is a fairer allocation of the risks transferred and assumed by 

those policies.
52 A-6240-10T1

TIG Multi-Year Policy 

TIG challenges the grant of summary judgment to IMO as to 

the proper interpretation of a three-year policy it issued in 

the 1960s. Specifically, TIG contends that the $2.5-million 

aggregate limit for bodily injury liability should have been 

applied for the full three-year period, not separately for each 

policy year.

IMO initially presented the issue to the special discovery 

master ("SDM") appointed for this litigation, a different 

individual from the SAM. The SDM ruled that the policy language 

was ambiguous in regard to an annual aggregate limit or a single 

limit for the entire three-year period of the policy. He 

further ruled that the only available extrinsic evidence bearing 

on the policy's interpretation was so one-sided in favor of 

IMO's position as to justify the conclusion that the $2.5 

million aggregate limit applied separately in each policy year. 

The trial court subsequently adopted the SDM's ruling.

The relevant facts are that TIG issued a policy that ran

from July 1, 1967, to July 1, 1970. The policy provided bodily 

injury coverage under its Coverage A designation and property 

damage coverage under its Coverage B designation. The 

declarations page described Coverage A as having an aggregate 

products liability limit of $2.5 million and Coverage B as 
53 A-6240-10T1

having limits of $500,000 each for aggregate products, 

operations, protective, and contractual liabilities.

Section 6 of the policy, which addressed products liability 

Coverages A and B, provided that, "[s]ubject to the limit of 

liability with respect to 'each occurrence' the limits of bodily 

injury liability and property damage liability stated in the 

Declarations as 'aggregate products' are respectively the total 

limits of the Company's liability for all damages arising out of 

the products hazard." Section 7, which addressed operations, 

protective, and contractual liability under Coverage B, used

similar language to delineate the boundaries of those coverages, 

but explicitly added in a final, isolated sentence that 

"[a]ggregate limits of liability as stated in the Declarations 

shall apply separately to each annual period" (emphasis added). 

IMO argues that this last-quoted provision creates an ambiguity 

and that TIG's own representatives treated the $2.5 million 

limit as applying annually rather than as a total limit for all 

three years of the policy. 

In response, TIG cites Chubb Custom Insurance Co. v. 

Prudential Insurance Company of America, 195 N.J. 231, 238 

(2008), among other case law, and argues there is no ambiguity 

in the policy and thus the court may not resort to extrinsic 

evidence to interpret it. TIG contends Section 6 of the policy 
54 A-6240-10T1

is applicable to coverage for bodily injury claims arising out 

of exposure to asbestos and that section's silence with respect 

to annual coverage limits, together with Section 7's explicit 

provision for separate annual limits for property damage, is

clear policy language that can only be interpreted to limit the 

policy's total aggregate limit for the three years to $2.5 

million. According to TIG, the trial court's unwarranted 

interpretation increased the aggregate limit to $7.5 million.

There is support in the case law for TIG's argument that a 

multi-year policy should not be interpreted as having annual 

coverage limits unless the language of the policy provides such 

limits. See Diamond Shamrock, supra, 258 N.J. Super. at 224-25; 

CSX Transp., Inc. v. Commercial Union Ins. Co., 82 F.3d 478, 483 

(D.C. Cir. 1996); Soc'y of the Roman Catholic Church of the 

Diocese of Lafayette & Lake Charles, Inc. v. Interstate Fire &

Cas. Co., 26 F.3d 1359, 1366 (5th Cir. 1994); Hercules, Inc. v. 

AIU Ins. Co., 784 A.2d 481, 495-96 (Del. 2001). But, again, 

these cases were not applying the Owens-Illinois and CarterWallace allocation methodology. 

We do not find legal error in the SDM's and the trial 

court's conclusion that the policy at issue here was 

sufficiently ambiguous that resort to extrinsic evidence should 

be employed to interpret it. The representatives of TIG who had 
55 A-6240-10T1

responsibility for implementing the policy invariably applied an 

annual $2.5 million aggregate limit in their handling of 

pertinent claims and in other communications. 

TIG argues that the actions of those employees were not 

relevant to interpreting the policy because they were not 

involved in drafting or issuing the policy in 1967. They were 

administering the terms of the policy some thirty years later 

without ever having reviewed the clear limitations language of 

the policy. The limitations language of the policy, however, is 

not as clear as TIG claims, and TIG had no witness to contradict 

the interpretation that its own representatives placed on the 

multi-year policy.

We do not find reversible error in the trial court's 

ruling. The court's application of an annual aggregate limit 

for bodily injury to each year of TIG's multi-year policy was 

consistent with the Owens-Illinois and Carter-Wallace allocation 

methodology, and we will not disturb that ruling on appeal. 

B.

"Stub Policies" (Partial-Year Coverage)

The ACE defendants claim that the coverage limit of a "stub 

policy," that is, a policy issued or extended for only part of a 

year, should be pro-rated. They assert that assigning the full 

policy limit for purposes of the Owens-Illinois and Carter-
56 A-6240-10T1

Wallace methodology unfairly allows the insured to increase the

liability limits for which it paid a premium. We disagree.

An ACE policy in effect from February 13, 1976, to January 

1, 1977, provides umbrella liability coverage to a limit of $1 

million for each occurrence, and $1 million annual aggregate. 

ACE contends its coverage limit should be pro-rated to reflect 

the time on the risk, which would be eleven-twelfths (or 0.9167) 

of $1 million.

The SAM found that policies issued or extended for a term 

of less than one year should be treated for purposes of the 

allocation as having a separate annual aggregate limit that will 

be in place for the term of the shortened policy period. Judge 

Muir adopted the SAM's report and recommendation.

In United States Mineral Products, supra, 348 N.J. Super.

at 536-37, we reasoned that an insured who paid a pro-rated 

premium for an additional two weeks of coverage on an excess 

policy identical to that provided by the initial policy would 

expect that such a premium reflected only the insurer's reduced 

time on the risk, not a reduction of the policy's aggregate 

limits. We concluded that the stub policy created an additional 

set of aggregate limits that were available to the insured for 

the term of the policy. Id. at 550. Treating a stub policy as 

providing a pro-rated limit would result in the loss allocated 
57 A-6240-10T1

to the policy being reduced twice, once by its time on the risk 

and a second time by the pro-rating of the policy limit. 

Our holding in United States Mineral Products is clear. If 

the annual aggregate limits of a stub policy are to be prorated, specific language in the policy must so provide. Id. at 

559. Nothing in the ACE policy indicates that the annual 

aggregate limits are pro-rated. 

Judge Muir did not err in attributing the full policy limit 

to the ACE policy for the period of time it insured the risk.

C.

SIRs as Outside the Limits of Policies

ACE contends that the trial court erred in determining that 

IMO's payment of its SIR obligations was outside the coverage 

limits of ACE policies. 

ACE issued two excess umbrella policies to Transamerica and 

its subsidiaries, which were in effect from January 1, 1976, 

through April 1, 1979. They provided a $1,000,000 limit of 

coverage, and also stated: 

$500,000 Combined Annual Aggregate That

Would Otherwise Be Recoverable Hereunder

Shall Be Retained by the Insured in Addition

to the Underlying Set Forth Above.

ACE sought a ruling that the limits of the policies were 

eroded by IMO's retention of $500,000. The SAM issued a written 

report and recommendation concluding that the $1 million annual 
58 A-6240-10T1

limits are not eroded by the retention. He noted that "[i]t is 

long standing custom and practice in the insurance industry to 

distinguish between deductibles and self insured retentions." 

While the limits of a policy are reduced by a deductible, they 

remain intact in the case of a self-insured retention. The SAM 

rejected ACE's argument that the phrase "that would otherwise be 

recoverable" as quoted from the policy demonstrated an intention 

that the $500,000 "retention" would be deducted from the 

coverage limits.

The SAM also observed that ACE's position was weakened by 

its past course of conduct. It had paid its full $1 million 

limit for claims occurring during the 1977-78 policy period. 

Moreover, an ACE claims adjuster stated in a 1980 status report 

that the policy limits were "in excess of a self insured 

retention of the insured of $500,000 each occurrence plus an 

annual aggregate of an additional $500,000 which can be utilized 

only once per year." The SAM found that the adjustor's 

"interpretation of the clause is entirely logical and consistent 

with the reading of the endorsements whereby the word 'retained' 

is given the standard meaning denoting a self insured retention, 

as commonly understood in the insurance industry." 

Judge Muir adopted the SAM's ruling and denied ACE's motion 

for summary judgment with respect to this issue. The final 
59 A-6240-10T1

judgment allocated a total of $1 million each to the two ACE 

policies.

Although the SAM found that the distinction between a 

deductible and a SIR is "black letter insurance law," the issue 

appears not to have been directly addressed by a New Jersey 

court. In fact, we have in the past observed that "[o]ur courts 

appear to have used the terms self-insured retention and 

deductible interchangeably." Moore v. Nayer, 321 N.J. Super.

419, 438-39 (App. Div. 1999), appeal dismissed, 164 N.J. 187 

(2000). However, because Moore was addressing co-insurance and 

did not consider the effect of deductibles or SIRs on policy 

limits, it is not controlling on this issue. 

New Jersey courts have recognized that an insured's 

deductible erodes the policy limits. See Benjamin Moore, supra,

179 N.J. at 105-06; cf. Am. Nurses Ass'n v. Passaic Gen. Hosp., 

98 N.J. 83, 88-89 (1984) (explaining why a deductible does not 

constitute "other insurance"). On the other hand, federal 

courts have stated clearly that a SIR does not reduce the limits 

of an insurance policy. In In re September 11th Liability 

Insurance Coverage Cases, 333 F. Supp. 2d 111, 124 n.7 (S.D.N.Y. 

2003), the United States District Court explained the 

distinction between SIRs and deductibles:

A SIR differs from a deductible in that a 

SIR is an amount that an insured retains and 
60 A-6240-10T1

covers before insurance coverage begins to 

apply. Once a SIR is satisfied, the insurer 

is then liable for amounts exceeding the 

retention, less any agreed deductible. 

Barry R. Ostrager & Thomas R. Newman, 

Handbook on Insurance Coverage Disputes 

§ 13.13[a] (12th ed. vol.2, 2004). . . . 

In contrast, a deductible is an amount that 

an insurer subtracts from a policy amount, 

reducing the amount of insurance. With a 

deductible, the insurer has the liability 

and defense risk from the beginning and then 

deducts the deductible amount from the 

insured coverage.

[Ibid. (citation omitted).]

See also Rite Aid Corp. v. Liberty Mut. Fire Ins. Co., 414 F. 

Supp. 2d 508, 517 (M.D. Pa. 2005) (a SIR transforms a primary 

policy into an excess policy covering amounts in excess of the 

SIR); Gen. Star Nat'l Ins. Corp. v. World Oil Co., 973 F. Supp.

943, 949 (C.D. Cal. 1997) (same); Jeffrey E. Thomas & Aviva 

Abramovsky, 4 New Appleman on Insurance Law § 31.02[7][d] (2012) 

(once a SIR is satisfied the insurer is liable for amounts 

exceeding the retention less any agreed deductible).

Here, the $500,000 "retained by the insured" would reduce 

the coverage limit from $1 million if it is a deductible, but 

leave the $1 million intact if it is a SIR. In the policies, 

the $500,000 is described as an amount to be retained by the 

insured. The word "deductible" appears nowhere in the relevant 

provisions. The endorsements also use the specific terms 

"retained" and "retention." "[T]he words of an insurance policy 
61 A-6240-10T1

should be given their ordinary meaning . . . ." Longobardi v. 

Chubb Ins. Co. of N.J., 121 N.J. 530, 537 (1990). The more 

general phrase "otherwise recoverable" does not change the 

meaning of the words used in the policies to mean deductible.

As to ACE's argument that the SAM should not have 

considered extrinsic evidence of the parties' intent, that 

ground for the SAM's ruling was included as a secondary 

rationale. Moreover, the conduct of the parties does provide an 

important source for deriving their intent as to the meaning of 

an insurance contract. Am. Home Prods. Corp. v. Liberty Mut. 

Ins. Co., 565 F. Supp. 1485, 1503 (S.D.N.Y. 1983), aff'd as 

modified, 748 F.2d 760 (2d Cir. 1984). 

The assignment of $1 million limits to the subject ACE 

policies was not error in the allocation schedule. 

IV.

A.

Allocation Preceding Coverage Determinations

ACE and LMI, joined by other excess insurers, challenge 

Judge Muir's decision at the 2009 excess insurers' trial that 

coverage issues would not be re-litigated for each individual 

asbestos claim. Judge Muir relied on language in OwensIllinois, supra, 138 N.J. at 477, prohibiting the insurers in 

that case from re-litigating already-settled claims after 
62 A-6240-10T1

refusing to defend them. We agree with that decision. Allowing 

excess insurers to contest coverage is not feasible for longtail, multi-claim coverage cases and would compromise the 

allocation methodology mandated by the Supreme Court.

Ordinarily, the insured "bears the burden of establishing 

that a claim lies within [a] policy's scope of coverage." 

Shaler ex rel. Shaler v. Toms River Obstetrics & Gynecology 

Assocs., 383 N.J. Super. 650, 662 (App. Div.), certif. denied, 

187 N.J. 82 (2006). ACE and LMI argued from the outset that IMO 

must satisfy its burden of establishing that claims it had paid 

were covered under the terms of the ACE and LMI policies. 

Judge Muir first observed that IMO and the insurers that 

had participated in its defense had adopted reasonable 

procedures for settling only claims for which IMO potentially 

faced liability. At the time of that observation, about 75,000

asbestos-related claims had been filed against IMO, of which IMO 

had settled approximately 15,000 and obtained dismissal of about 

30,000. IMO began to notify the excess insurers of the claims 

in 1989 and offered to make its claim files available to them 

for inspection. Meanwhile, the excess insurers declined to 

involve themselves in defense of the claims. They chose their

course of action although they had the right, explicitly stated

in their policies, to associate in the defense. Judge Muir 
63 A-6240-10T1

considered this "continuing indifference" to be "tantamount to a 

refusal [by the excess insurers] to involve themselves in 

presented-claims defense." 

A primary insurer that refuses its obligation to defend 

claims against its insured without first timely challenging 

coverage forfeits the right to hold an insured to that burden at 

a later time. Griggs v. Bertram, 88 N.J. 347, 363-64 (1982). 

Excess insurers, on the other hand, generally have no duty to 

participate in the defense and may rely on the good faith of the 

primary insurer in settling claims against the insured. CNA 

Ins. Co. v. Selective Ins. Co., 354 N.J. Super. 369, 383-84

(App. Div. 2002).

In Owens-Illinois, supra, 138 N.J. at 477, the Court 

distinguished long-tail coverage cases from the norm in the 

insured's burden of proving coverage for each claim. It stated:

Because the defendants refused to involve 

themselves in the defense of the claims as 

presented, they should be bound by the facts 

set forth in plaintiff's own records with 

respect to the dates of exposure and with 

respect to the amounts of settlements and 

defense costs. Those losses for indemnity 

and defense costs should be allocated 

promptly among the companies in accordance 

with the mathematical model developed, 

subject to policy limits and exclusions. We 

stress that there can be no relitigation of 

those settled claims.

[(Citation omitted and emphasis added).]
64 A-6240-10T1

Judge Muir understood this last directive of the Court as 

applying with equal force to primary and excess insurers to bar 

them from contesting coverage of claims. He stated that OwensIllinois was a watershed decision delineating "the response 

required of excess insurers to their insureds' liability for 

asbestos related injuries sustained over decades," and, 

moreover, that it was a "critical point that divides past case 

law principles from its doctrines." 

Applying the language used by the Supreme Court in OwensIllinois, Judge Muir concluded that where insurers, primary or 

excess, "refused" to avail themselves of the right to associate 

in defense of claims against the insured, they "should be bound 

by facts set forth in the insureds' records with respect to 

amounts of settlements and defense costs" and could not 

otherwise "relitigate the settled claims."

ACE and LMI contend they have a right as excess insurers

but no affirmative duty to associate in IMO's defense. They add

that Owens-Illinois neither imposed any such duty nor otherwise 

limited the right of excess insurers to demand that their 

insured bear its normal burden of establishing coverage for each 

claim made against their policies. 

As this court's underlying opinion in Owens-Illinois noted, 

both primary and excess policies were involved in that case. 
65 A-6240-10T1

Owens-Illinois, Inc. v. United Ins. Co., 264 N.J. Super. 460, 

467, 477 (App. Div. 1993), rev'd in part, 138 N.J. 437 (1994). 

The Supreme Court did not explicitly condition its directive 

prohibiting re-litigation of coverage issues to the primary 

insurers' affirmative duty to defend. Rather, the Court stated:

"In future cases, insurers aware of their responsibility under 

the continuing-trigger theory might minimize their costs by 

assuming responsibility for or involving themselves in the 

defense of the actions . . . ." Owens-Illinois, supra, 138 N.J.

at 478 (emphasis added). 

It stands to reason that accommodating a challenge to 

coverage in tens of thousands of individual claims would not 

only prove daunting but would compromise the integrity of the 

framework Owens-Illinois offers for efficient and equitable 

allocation of losses among policies. As we have stated, policy 

terms and traditional principles applicable to ordinary coverage 

litigation must bend insofar as they conflict with application 

of the Owens-Illinois framework. Benjamin Moore, supra, 179 

N.J. at 104. The Court could thus impose a greater obligation 

on the part of excess insurers than specifically stated in their 

policies to participate in the insured's defense, or risk losing 

the right to challenge coverage decisions.
66 A-6240-10T1

Nor is our conclusion inequitable. IMO put the excess 

insurers on notice of the thousands of claims against it, and

Owens-Illinois put them on notice of the necessity of 

participating in order to preserve their right to challenge 

coverage determinations. 

The trial court appropriately gave effect to a plainly 

stated directive of Owens-Illinois — that insurers who have 

declined to associate in the defense of claims against the 

insured may be precluded from later challenging coverage. 

B.

Duty to Defend Uncovered Claims

ACE argues that the court erred in determining that defense 

costs incurred by IMO in connection with uncovered asbestos 

claims are recoverable under policies that limit defense 

reimbursement to costs paid as a consequence of a covered 

occurrence. ACE contends the majority of its policies are 

ultimate net loss policies that only obligate it to indemnify 

IMO where IMO itself becomes obligated by adjudication or 

compromise to pay for a covered occurrence. Relying on case law 

from other jurisdictions, ACE maintains that courts interpreting 

similar policy language have held that the duty to indemnify 

defense costs arises only when the costs are incurred in 

connection with covered claims. 
67 A-6240-10T1

LMI advances the same argument, although its policies 

differ from the ACE policies. However, both excess insurers' 

policies use the same definition of ultimate net loss. LMI 

argues that the ultimate net loss provision makes the existence 

of an actually covered claim, and not just a potentially covered 

claim, a prerequisite for indemnification of defense costs. It 

asserts that requiring IMO to segregate defense costs and to 

identify those utilized for actually covered claims would have 

no impact on the allocation process, and it would not be overly 

difficult to apportion defense costs after the allocation is 

completed. 

IMO responds that the excess insurers' policies promise to 

pay for the costs of defending liabilities arising from covered 

"occurrences," not covered "claims." It emphasizes that OwensIllinois defines an "occurrence" to be the decision to 

manufacture asbestos-containing products, not the exposure of a 

specific claimant to an asbestos product. 

IMO further asserts that the excess insurers have relied on 

cases that are not pertinent to the proper definition of 

occurrence, and that the differences between the law of New 

Jersey and the law of New York and other states as to the nature 

of a covered occurrence distinguish the holdings of the case law 

cited by ACE and LMI. IMO argues that the trial court's refusal 
68 A-6240-10T1

to parse defense costs between covered and uncovered claims 

accords with the realities of defending mass tort claims, where 

the effective defense of meritless claims is part and parcel of 

the defense of covered claims. 

A representative provision of the many policies involved 

provides that the insurer will indemnify the insured: 

for all sums which the [in]sured shall be 

obligated to pay by reason of the liability: 

(a) imposed upon the [in]sured by law, or

(b) assumed under contract or agreement . . 

. for damages on account of: (i) Personal 

Injuries . . . caused by or arising out of 

each occurrence . . . as defined in the 

Underlying Umbrella Policies . . . .

[(Emphasis added).]

 

A representative underlying policy covers damages and expenses 

for the insured's "ultimate net loss," which it defines as: 

the total sum which the insured, or any 

company as his insurer, or both becomes 

obligated to pay by reason of personal 

injury . . . either through adjudication or 

compromise . . . expense for . . . lawyers . 

. . and investigators and other persons and 

for litigation, settlement, adjustment and 

investigation of claims and suits which are 

paid as a consequence of any occurrence 

covered hereunder . . . .

[(Emphasis added).]

 

The excess insurers argue that the phrase "be [or becomes] 

obligated to pay" absolves them of paying for defending against 

claims that are dismissed or adjudicated to be without merit. 
69 A-6240-10T1

 In a written report and recommendation dated March 27, 

2008, the SAM ruled that "[t]he common straightforward reading 

of the language is that indemnification for defense related 

expenses must be related to an occurrence. If there is no

occurrence then there can be no covered damages." He observed 

that New Jersey law defines the occurrence as IMO's decision to 

sell asbestos products, and concluded that all of IMO's defense 

expenses flow from that decision. He therefore recommended that

the court deny the excess insurers' motion and find that IMO is 

entitled to receive indemnity for all its defense expenses.

On the request of LMI and ACE for reconsideration, the SAM 

noted: "Mass-tort asbestos claims are defended very differently 

from the average claims," and some defendants choose to try 

questionable cases to a conclusion in order to send a deterrent 

message to the plaintiffs' bar. He also noted that applying 

LMI's and ACE's interpretation of an occurrence to each 

individual claim would present a significant practical 

challenge, in that it would impose an unworkable burden on IMO 

and require the expenditure of substantial judicial resources. 

He added:

It is extremely difficult to see how 

adjudicating LMI's policies' provision to 

indemnify defense costs for only covered 

claims would not hijack the allocation 

process. While IMO should be required to 

demonstrate that a claim does fall within a 
70 A-6240-10T1

given policy year, to require an evidentiary 

process on thousands of claims to determine 

their linkage to defense costs would be 

unworkable and unmanageable. It would seem 

extremely difficult to connect every defense 

payment to a claim and to make a second 

determination that the claim is, indeed, a 

covered claim.

Judge Muir adopted the SAM's reasoning and ruling by an 

order dated November 4, 2009. 

Both the excess policies and the underlying policies 

obligate the insurers to pay for damages arising out of an 

"occurrence." In Owens-Illinois, supra, 138 N.J. at 447, where

the insurers' policies had coverage and ultimate net loss 

provisions virtually identical to those in this case, the Court 

recited our conclusion that the manufacture and sale of the 

asbestos-containing product should be regarded as the single 

occurrence triggering liability for asbestos-related injuries or 

damage. Id. at 445-46 (citing Owens-Illinois, supra, 264 N.J. 

Super. at 503). Our opinion, in turn, had relied on the 

reasoning of the District Court in Owens-Illinois, Inc. v. Aetna 

Casualty & Surety Co., 597 F. Supp. 1515, 1525 (D.D.C. 1984), 

which held that "the number of injuries or claims, even if 

temporally removed from their causes, are irrelevant when 

determining the number of occurrences." See also In re 

Integrity Ins. Co., 214 N.J. 51, 69-70 (2013) (the majority of 

courts have adopted a "cause test" for defining "occurrences"); 
71 A-6240-10T1

U.S. Mineral Prods., supra, 348 N.J. Super. at 542 (manufacture 

and sale of asbestos-containing product constitutes single 

occurrence triggering liability).

The same result must follow here in the context of proving 

coverage for each individual claimant. The excess insurers' 

obligation to cover IMO's ultimate net losses, which include 

defense costs, was triggered when IMO manufactured and sold 

asbestos-containing products and claimants became injured by 

those products. IMO's decision to trade in such products 

resulted in IMO paying damages to claimants following litigation 

or settlement. Under the terms of the excess insurance 

policies, LMI and ACE are required to indemnify IMO for the sums 

it expended in defending all those claims.

The conclusion that the excess insurers must reimburse IMO 

for defense costs even if some of them were incurred to defend 

uncovered claims is also compelled by another aspect of OwensIllinois. As the SAM noted, the need to segregate and classify 

defense costs according to each individual claim would greatly 

complicate the already complex allocation process. Challenges 

among the parties as to whether particular claims were covered 

or uncovered would increase litigation and require additional 

judicial attention. The reason the Court developed the pro-rata 

methodology was to reduce the litigation costs and judicial 
72 A-6240-10T1

inefficiencies attendant to resolving insurance coverage for 

long-term environmental damages. Owens-Illinois, supra, 138 

N.J. at 474. Adopting the process that the excess insurers 

suggest would directly contravene those objectives. 

The unpublished and out-of-state decisions cited by the 

excess insurers are not controlling. None of them applies an 

analysis based on the principles articulated in Owens-Illinois.

We affirm the trial court's ruling that defense costs are 

subject to allocation even if a portion of them ultimately were 

devoted to defending against claims that were determined not to 

be covered under the insurance policies.

V.

Denial of Jury Trial

IMO contends that the court erred in denying its demand for 

a jury trial on the legal issues in the case for which it sought 

money damages. More specifically, IMO argues that the court 

improperly relied on the relief sought in IMO's original 

complaint. It further argues that claims for future costs did 

not predominate the Phase I and II trials, and that the court 

misapplied the holding of Ciba-Geigy Corp. v. Liberty Mutual 

Insurance Co. (In re Environmental Insurance Declaratory 

Judgment Actions) ("In re Environmental"), 149 N.J. 278 (1997). 
73 A-6240-10T1

IMO sought a jury trial on its TARM and bad faith claims 

against the Transamerica defendants and on its bad faith denial 

of coverage claims against other insurers, for which it sought 

compensatory and punitive damages. The Transamerica defendants 

moved to strike IMO's jury demand, arguing that IMO's claims 

were predominately equitable, that all the claims that sought 

money damages were ancillary to IMO's declaratory judgment and 

specific performance claims, and that relevant case law 

supported dispensing with a jury in the complex circumstances of 

this litigation. 

Judge Muir reviewed the substance of the original complaint 

and each amended complaint filed by IMO. He stated that the 

equitable or legal nature of a lawsuit is primarily determined 

by the remedies sought in the original complaint. Cf. Mantell 

v. Int'l Plastic Harmonica Co., 141 N.J. Eq. 379, 383-89 (E. & 

A. 1947) (parties cannot amend a pleading to change the 

jurisdiction of the court hearing the case). Relying on the 

holdings of Mantell and Boardwalk Properties, Inc. v. BPHC 

Acquisitions, 253 N.J. Super. 515 (App. Div. 1991), the judge 

determined that IMO's predominant claims were for specific 

performance in the future and for a declaration that defendant 

insurers were obligated to provide coverage for future 
74 A-6240-10T1

indemnification and defense costs. As a result, no right to a 

jury attached to IMO's pleadings. 

"Failure to grant a constitutionally guaranteed right of 

jury trial is not amenable to the harmless error rule." 500 

Columbia Tpk. Assocs. v. Haselmann, 275 N.J. Super. 166, 171 

(App. Div. 1994). Thus, the trial court's ruling may not be 

disregarded if IMO had a right to a jury trial protected by our 

State Constitution.

IMO does not have a right to a jury trial unless such a 

right is in fact found in our State Constitution or in a 

statute. Ins. Co. of N. Am. v. Anthony Amadei Sand & Gravel,

Inc., 162 N.J. 168, 175 (1999). "Without statutory 

authorization, a right to trial by jury does not attach to a 

claim if the claim did not exist at common law." In re 

Environmental, supra, 149 N.J. at 298. 

The Declaratory Judgment Act, N.J.S.A. 2A:16-50 to -62, 

dictates the specifics of declaratory relief but does not 

provide a right to a jury trial. In re Environmental, supra, 

149 N.J. at 292. Furthermore, "[d]eclaratory judgment actions 

were unknown at common law." Ibid. "In a declaratory judgment 

action, the right to a jury trial depends on whether the action 

is the counterpart to one in equity or law." Ibid. 
75 A-6240-10T1

In general, a jury trial is available in an action at law, 

but not in an action in equity. Id. at 291. To determine 

whether an action is legal or equitable, the court must consider 

the remedies requested by the complaint. Weinisch v. Sawyer, 

123 N.J. 333, 344 (1991). It must look to "the historical basis 

for the cause of action and focus on the requested relief." Id.

at 343; accord In re Environmental, supra, 149 N.J. at 293; Wood

v. N.J. Mfrs. Ins. Co., 206 N.J. 562, 575 (2011). How the 

parties classify the matter is irrelevant; the court must 

examine the substance of the allegations and the relief sought. 

Wood, supra, 206 N.J. at 576. 

IMO alleges that its third amended complaint contained 

prominent and independent claims for money damages, which gave 

it a right to a jury trial. It adds that some claims first made

in the third amended complaint did not arise until six months 

after the original complaint was filed, and those allegations 

could not have been included in the original filing. Therefore, 

it argues, Judge Muir should not have focused on the declaratory 

relief IMO sought in its original complaint.

When equitable issues or defenses are presented, the matter 

of whether a jury trial should be granted is left to the 

determination of the judge. Sun Coast Merch. Corp. v. Myron 

Corp., 393 N.J. Super. 55, 86-87 (App. Div. 2007), certif. 
76 A-6240-10T1

denied, 194 N.J. 270 (2008). Pursuant to the doctrine of 

ancillary jurisdiction, if a complaint presents a primarily 

equitable action but also includes causes of action at law, the 

court of equity can assume jurisdiction over the legal issues. 

Wood, supra, 206 N.J. at 575. 

In Lyn-Anna Properties v. Harborview Development Corp., 145 

N.J. 313 (1996), the Court held that the chancery court has 

ancillary jurisdiction over legal issues to the extent that 

those are "incidental or essential to the determination of some 

equitable question." Id. at 330 (quoting Shaw v. G.B. Beaumont 

Co., 88 N.J. Eq. 333, 336 (E. & A. 1917)). When a complaint 

seeks both legal and equitable remedies, the court must consider 

the nature of the controversy in addition to the requested 

relief. Id. at 331. If the predominant relief is equitable, 

then the legal issues are ancillary and may be decided in a 

bench trial. Id. at 330. If a legal claim is not incidental or 

essential to the predominant equitable remedy, then it should be 

severed and transferred to the Law Division. Ibid. 

Furthermore, the court may strive to dispose of all matters 

in a controversy in a single action if it can do so without 

violating a litigant's constitutional or statutory rights. 

Massari v. Einsiedler, 6 N.J. 303, 313 (1951). In Boardwalk 

Properties, supra, 253 N.J. Super. at 526-27, we stated that the 
77 A-6240-10T1

Chancery Division can decide both legal and equitable issues and 

provide appropriate remedies. We also stated that matters 

triable without a jury under the Constitution of 1844 are 

similarly triable without a jury under the Constitution of 1947. 

Id. at 527-28. 

When legal claims arise from controversies that are 

independent of the equitable action, they should be tried 

separately before a jury. Ibid.; see, e.g., N.J. Highway Auth.

v. Renner, 18 N.J. 485, 488-89 (1955). The court should examine 

the legal claims and determine if they are "so intertwined with 

the equitable issues that the legal issues" fall within the 

equity court's jurisdiction to decide them without a jury. 

Boardwalk Properties, supra, 253 N.J. Super. at 528. 

Here, the original complaint focused on declaratory relief, 

although it also included prayers for compensatory and punitive 

damages. Primarily, IMO sought the court's aid in defining and 

fixing the obligations of Transamerica and TIG in relation to 

the 1986 Distribution Agreement. The crux of the complaint was 

the alleged "imminent" exhaustion of the TIG insurance policies. 

The defense costs and indemnification payments that IMO sought 

were in connection with pending or future asbestos cases. 

The second amended complaint named several dozen excess 

insurers, but IMO still sought the same declaration of rights as 
78 A-6240-10T1

its original complaint and, further, a declaration of rights of 

IMO and the obligations of Transamerica in connection with the 

excess insurers. For the most part, the asbestos claims in 

dispute were either ongoing or future claims. 

The twenty-four counts of the third amended complaint did 

not change the primary relief sought. IMO's bad faith claims 

were rooted in the alleged wrongful abandonment of its defense 

and the failure to notify IMO in advance that certain insurance 

policies were about to be exhausted. Again, IMO was concerned 

that defendants failed or "will fail" to fulfill their 

obligations under the insurance contracts, and have refused or 

"will refuse" to defend and indemnify IMO against asbestos 

claims filed in New Jersey and other states. 

All of IMO's pleadings sought declarations about the future 

obligations of defendants. Any alleged claims of bad faith, 

wrongful abandonment, breach of fiduciary duty, or tortious 

interference stem from whether the contractual rights alleged by 

IMO in fact existed. From the outset and throughout the 

litigation, IMO's complaints were mainly equitable. 

Although additional causes of action for money damages may 

have arisen after the filing of the initial complaint, those 

claims are still intertwined with the primary events and the 

allegations presented in the original complaint. See Eckerd 
79 A-6240-10T1

Drugs of N.J., Inc. v. S.R. 215, Rite-Aid Corp., 170 N.J. Super.

37, 42-43 (Ch. Div. 1979). As we have stated, they are linked 

to the question of whether or not the Transamerica defendants

and the excess insurers had an obligation to provide ongoing or 

future defense and indemnification, and an earlier notice of 

exhaustion. 

IMO argues that none of its claims fell within the 

exceptions to the right to a jury trial as stated in In re 

Environmental, supra, 149 N.J. at 291-300. In that case, the 

plaintiff was seeking a judgment declaring that the insurers 

were required to indemnify and defend for future costs of an 

environmental remediation action. Id. at 286. The issue on 

appeal was whether a constitutional right to a jury trial 

existed in a declaratory judgment action involving claims 

against insurers for breach of contract and recovery of future 

costs where the plaintiff also sought compensatory damages for 

past costs. Ibid. 

The case was complex. It involved dozens of insurance 

companies and estimated future costs that exceeded $1 billion. 

Id. at 288-89. The Supreme Court observed that the action was 

at its root a request for specific performance of the insurance 

contracts because the plaintiff wished to be placed in the 

position it would have enjoyed had the insurers performed on the 
80 A-6240-10T1

insurance contracts. Id. at 293-95. In addition, specific 

performance was an appropriate remedy because several of the 

alleged breaches had not yet occurred, leaving the insured's 

damages incalculable. Id. at 296. Therefore, the plaintiff did 

not have a right to a jury trial. Id. at 287, 295. A court of 

equity could decide any ancillary legal issues and award money 

damages for past losses. Id. at 295. 

Similarly in this case, there was no right to a jury trial 

because IMO's complaints presented a unique and complex masstort insurance coverage case focused on a declaration of the 

parties' rights and obligations and on the specific performance 

of insurance contracts as so declared. In fact, the Court in In 

re Environmental observed that the predominance of equitable

issues combined with the complexity of the subject matter 

distinguished that case from other insurance actions. Id. at 

298. The same is true here.

IMO's breach of contract and bad faith claims grew out of 

the same dispute and were intertwined with its equitable claims. 

They were based on the same facts and proofs as the claims for 

declaratory judgment and specific performance. They were 

properly and economically adjudicated within the equity court's 

ancillary jurisdiction. Wood, supra, 206 N.J. at 575. 
81 A-6240-10T1

Additionally, this case is different from Ward v. Merrimack 

Mutual Fire Insurance Co., 312 N.J. Super. 162, 167-69 (App. 

Div. 1998), because Ward was a coverage case where the primary 

remedy sought was money for damages already incurred. The 

plaintiff was not making claims for any future or ongoing 

injury. Ibid. 

We conclude that Judge Muir did not err as a matter of law 

when he denied IMO's demand for a jury trial and decided the 

equitable matters and the ancillary legal issues by means of 

bench trials.

[At the court's direction, the remainder of this

opinion has been redacted for purposes of 

publication. See R. 1:36-2(d) (guidelines for 

publication). The full opinion is available on 

the Rutgers Newark School of Law website at 

http://njlaw.rutgers.edu/collections/courts/

search.php.]

Affirmed.