Opinion ID: 758543
Heading Depth: 2
Heading Rank: 3

Heading: the deductible provision

Text: 54 The deductible provision in each American Club policy provides (with an inapplicable exception) that personal injury claims are subject to a deduction in a stated amount with respect to each accident or occurrence. In the 1940s and 1950s, the deductibles varied from $250 to $1,000 per accident or occurrence; in the 1960s, 1970s, and 1980s, they varied from $2,500 to $50,000 (reaching $100,000 in one year). The terms accident and occurrence are not defined in the policies. 55 The parties dispute the proper application of the deductible provision in the circumstances of this case. The Claimants argue that the presence of asbestos on each Prudential vessel constituted a single occurrence, and that a single deductible applies to all bodily injury claims resulting from asbestos exposure aboard a particular ship within each policy year. American Club argues that each Claimant's initial exposure to asbestos within a policy year constituted a separate occurrence. Under this interpretation, each claim would be subject to a full deductible. 56 The bankruptcy court concluded that the occurrence was the presence of asbestos on each [Prudential] vessel during each triggered policy period, and that each P & I policy obligated to indemnify will be able to claim one deductible, irrespective of the number of claims filed against an individual policy. Prudential I, 148 B.R. at 747. The district court reversed and remanded, finding first that the term occurrence is ambiguous: In the broadest sense of its commonly understood definition, therefore, 'occurrence' suggests the presence of the asbestos on board the ships. Under a narrower reading, 'occurrence' might mean each individual mariner's exposure to asbestos. Prudential II, 170 B.R. at 237. The district court noted that the parties had presented some extrinsic evidence of a practical construction of the deductible provision and remanded to the bankruptcy court to develop a fuller evidentiary record. Id. at 239. 57 The bankruptcy court conducted an evidentiary hearing on American Club's practice in interpreting the term occurrences. The court concluded that [t]he preponderance of the proffered evidence does demonstrate that American Club's policy for asbestosis claims resulting from exposure prior to 1989 has been to apply a deductible for each policy year in which a particular seaman worked. Prudential III, 202 B.R. at 19. However, it concluded that Prudential had not acquiesced in this policy. Id. The district court reversed, finding that the bankruptcy court's determination that Prudential had failed to acquiesce in American Club's deductible practice was clearly erroneous. Prudential IV, 209 B.R. at 623, 626. 58 A. Insurance Policy Interpretation Under New York Law 59 As noted above, although the P & I policy is essentially a maritime contract, its interpretation is governed in this case by New York law. Under New York law, an insurance policy is a contract that is construed to effectuate the intent of the parties as expressed by their words and purposes. See American Home Prods. Corp. v. Liberty Mut. Ins. Co., 565 F.Supp. 1485, 1492 (S.D.N.Y.1983), aff'd as modified, 748 F.2d 760 (2d Cir.1984). [U]nambiguous terms are to be given their 'plain and ordinary' meaning. State of New York v. Blank, 27 F.3d 783, 792 (2d Cir.1994). As with contracts generally, a provision in an insurance policy is ambiguous when it is reasonably susceptible to more than one reading. Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691, 695 (2d Cir.1998) (internal quotation marks and citations omitted). The determination of whether an insurance policy is ambiguous is a matter of law for the court to decide. See Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, 136 F.3d 82, 86 (2d Cir.1998). 60 If the policy is ambiguous, extrinsic evidence may be introduced to support a particular interpretation. Kinek v. Paramount Communications, Inc., 22 F.3d 503, 509 (2d Cir.1994). If the extrinsic evidence presents issues of credibility or a choice among reasonable inferences, the decision on the intent of the parties is a job for the trier of fact. See Uniroyal, Inc. v. Home Ins. Co., 707 F.Supp. 1368, 1374-75 (E.D.N.Y.1988). 61 Ordinarily, if an ambiguity arises that cannot be resolved by examining the parties' intentions, ... the ambiguous language should be construed in accordance with the reasonable expectations of the insured when he entered into the contract. Haber, 137 F.3d at 697. Courts in such situations often apply the contra proferentem rule and interpret a policy against the insurer. See, e.g., Westchester Resco Co. v. New England Reins. Corp., 818 F.2d 2, 3 (2d Cir.1987) (per curiam ). Here, however, Prudential was both an insured and an insurer, see Firma C-Trade S.A. v. Newcastle Protection and Indem. Ass'n, [1991] 2 App. Cas. 1 (H.L.1990) (P & I clubs operate on a system of mutual insurance under which the successful claim of one member is paid out of the contributions of, and the calls made on, all the members including himself. Each member is accordingly both an insurer and an insured.), and the contra-insurer rule does not apply in actions by one insurer against another, see United States Fire Ins. Co. v. General Reins. Corp., 949 F.2d 569, 573-74 (2d Cir.1991) (dispute between two insurance companies); Loblaw, Inc. v. Employers' Liability Assurance Corp., 85 A.D.2d 880, 881, 446 N.Y.S.2d 743, 745 (4th Dep't 1981) (dispute between self-insured entity and excess insurer), aff'd, 57 N.Y.2d 872, 456 N.Y.S.2d 40, 442 N.E.2d 438 (1982). 6 B. The District Court's Finding of Practical Construction 62 After concluding that in the absence of a definition of the term occurrence, the deductible provision was ambiguous as applied to this case, the district court based its interpretation of the deductible provision on extrinsic evidence of the parties' practical construction. Because the bankruptcy court's finding that Prudential had failed to acquiesce in American Club's practice was a finding of fact, it could be rejected only if clearly erroneous. See In re Prudential Lines, Inc., 928 F.2d 565, 569 (2d Cir.1991). 63 In rejecting the finding, the district court focused on two facts: (i) Prudential's failure to object to American Club's practice while Prudential was a member of American Club's board of directors; and (ii) Prudential's acceptance of the Club's reimbursement of the Graham claim, which applied multiple deductibles. 7 Prudential IV, 209 B.R. at 626. 64 Under New York law, [i]f ambiguity exists, to show a practicable construction ... there must have been conduct by the one party expressly or inferentially claiming as of right under the doubtful provision, coupled with knowledge thereof and acquiescence therein, express or implied, by the other. Continental Cas. Co. v. Rapid-American Corp., 80 N.Y.2d 640, 651, 593 N.Y.S.2d 966, 971, 609 N.E.2d 506 (1993) (internal quotation marks and citation omitted). Neither of the facts cited by the district court compels a finding that Prudential acquiesced in American Club's practice as a matter of law, and therefore the bankruptcy court's finding was not clear error. 65 As to Prudential's failure to object to the policy during American Club's board meetings, the question of the proper deductible was not discussed by the board until after Prudential left the club in 1986. Up to that time, Prudential submitted very few asbestos claims, and when it did claim indemnification for asbestos loss, it applied a single deductible for each claim, not American Club's practice of applying one deductible for each triggered policy. As Thomas McGowan, American Club's secretary, noted in a September 16, 1987 memorandum to the Board of Directors relating to the deductible practice: Clearly the past [asbestos-related] settlements are insignificant either from the members' or the Association's point of view. Under the district court's analysis, Prudential would be considered to have acquiesced in all American Club practices, even those never discussed by the board; this is implausible. It was not clear error for the bankruptcy court as the trier of fact to infer that Prudential's silence at board meetings did not amount to acquiescence in American Club's deductible policy. 66 As to Prudential's failure to sue American Club over the Graham claim, the district court relied on Continental Casualty, but the case law relied on in Continental Casualty seems to suggest that finding a practical construction ordinarily requires the implementation of the supposed practice on more than one occasion. See, e.g., City of New York v. New York City Ry. Co., 193 N.Y. 543, 548, 86 N.E. 565 (1908) (When the parties to a contract of doubtful meaning, guided by self-interest, enforce it for a long time by a consistent and uniform course of conduct, so as to give it a practical meaning, the courts will treat it as having that meaning, even if as an original proposition they might have given it a different one.) (emphasis added); see also Miller v. Clary, 147 A.D. 255, 127 N.Y.S. 897, 901-02 (N.Y.Sup.Ct 1911) (finding practical construction from practice and acquiescence over 17 years), aff'd, 147 A.D. 255, 131 N.Y.S. 1129 (4th Dep't 1911), aff'd as modified, 210 N.Y. 127, 103 N.E. 1114 (1913); Restatement (Second) of Contracts § 202(4) (1979) (Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.) (emphasis added); id. cmt. g. (The rule of Subsection (4) does not apply to action on a single occasion.). It thus was not clear error for the bankruptcy court to conclude that Prudential had not acquiesced in American Club's deductible practice. C. The Intent of the Parties 67 Notwithstanding our disagreement with the district court's analysis on the factual issue of practical construction, we think that the parties to the American Club policies at issue intended to apply the interpretation advanced by American Club in this litigation, i.e., to treat each initial exposure by a Claimant to asbestos during a policy period as a separate occurrence. That conclusion is based on: (i) the wording of the policies, (ii) the contracting parties' actions prior to the commencement of litigation, and (iii) New York law on the interpretation of the word occurrence. 68 First, we are not convinced that the deductible provision is ambiguous. Claimants' proposed interpretation is inconsistent with the plain and ordinary meaning of the term occurrence. In Newmont Mines Ltd. v. Hanover Ins. Co., 784 F.2d 127 (2d Cir.1986), we noted that [t]he term 'occurrence' ordinarily is understood to denote 'something that takes place,' especially 'something that happens unexpectedly and without design.'  Id. at 135 (quoting Webster's Third New International Dictionary 1561 (unabridged ed.1981)). The presence of asbestos aboard a vessel cannot be said to take place, any more than in a slip and fall aboard ship the slippery deck can be said to be happening. The presence of asbestos aboard a ship is a condition that from the point of view of the ship, is in some respects a benefit. The unfortunate event causing personal injury is the exposure of people. The Claimants' construction of the term occurrence therefore contradicts the ordinary meaning of the word. 69 Second, even if we were to conclude that the deductible provision is ambiguous, we would still find that the parties to the policy intended American Club's interpretation. Although the evidence cited by the district court does not compel a finding that Prudential acquiesced in American Club's interpretation, it does show something about Prudential's reasonable expectations and intentions under the policy. The New York courts have frequently resorted to the conduct of the parties in determining a contract's meaning, and insurance contracts are no exception to this practice. See American Home Prods. Corp., 565 F.Supp. at 1503. The district court notes with force that no party to the American Club policy (at least prior to this litigation) has ever proposed the Claimants' interpretation of the term occurrence, i.e., a single deductible for all asbestos-related bodily injuries aboard a particular ship. The record evidence reflects that American Club has sought to apply one deductible, per claim, per policy, while Prudential and Farrell Lines, two Club members, interpreted the policies to apply a single deductible to each claim. Thus, although the Claimants attempt to introduce their interpretation as one plausible reading of the policy, this cannot be said to be the expectation or intention of the contracting parties. 70 In dissent, Judge Lay advances spirited arguments on the doctrinal question of the definition of occurrence under New York law (with which we disagree, as explained below). The short answer is that although the contract language is less than clear, it has been illumined by conduct on the part of the signatories that reflects an understanding incompatible with the position urged in this case by the Claimants, who are strangers to the contract. 71 Third, New York law gives some guidance for ascertaining the reasonable expectations of an insured as to number of occurrences. In Arthur A. Johnson Corp. v. Indemnity Ins. Co., 7 N.Y.2d 222, 196 N.Y.S.2d 678, 164 N.E.2d 704 (1959), the New York Court of Appeals sought to define the term accident as it would be understood by the ordinary man on the street or ordinary person when he purchases and pays for insurance. Id. at 227, 196 N.Y.S.2d at 682, 164 N.E.2d 704. The insured had constructed a temporary cinder block wall in front of each of two adjoining buildings as part of an excavation of the buildings. A rainfall of unprecedented intensity flooded the excavation beyond the capacity of the pumps, and the walls were breached within 50 minutes of each other, causing property damage within the two buildings for which the policyholder was held liable. Id. at 225-26, 196 N.Y.S.2d at 680-81, 164 N.E.2d 704. 72 The insurer claimed that the damage to the two buildings resulted from a single accident within the meaning of the policy, and that a single per accident limit of $50,000 applied. The Court of Appeals expressly considered and rejected two tests used by other jurisdictions in determining the number of accidents, including the negligent act or omission test (a single occurrence for all injuries caused by the same negligent act or omission) and the effects test (one occurrence per each person or thing injured). Id. at 227-28, 196 N.Y.S.2d at 682-83, 164 N.E.2d 704. Instead, the court applied the unfortunate event test, holding that the term [accident] is to be used in its common sense of an event of an unfortunate character that takes place without one's foresight or expectation .... an unexpected, unfortunate occurrence. Id. at 228, 196 N.Y.S.2d at 683, 164 N.E.2d 704 (internal quotation marks, citation, and emphasis omitted). The court's examples of the application of the unfortunate event test are indicative: a truck colliding with a freight train and damaging the road and 16 cars was a single occurrence, while an oil well fire that lasted 50 hours and hurled waste on some neighbors but not others, depending on the direction of the wind, was a series of events (important to this conclusion was the fact that the wind was a supervening force). Id. at 228-29, 196 N.Y.S.2d at 683, 164 N.E.2d 704. 73 In finding that the collapse of the two walls in Johnson constituted two accidents, the court stated: 74 [W]e need only point out that it is agreed that, during a heavy rainfall, a protecting wall collapsed under the water pressure and destruction poured into a building. Almost an hour later, another wall gave way and water flooded another building. There is no suggestion that the collapse of the first wall caused the failure of the second.... In addition, the catastrophe was not the rain--that, in itself, did no harm. It was the breach of the wall letting the rain water in. Furthermore, if the walls were located blocks away from each other on different job sites but subject to the same rainfall, no one could contest that there were two accidents. 75 Id. at 230, 196 N.Y.S.2d at 684, 164 N.E.2d 704. 76 In Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 350 N.Y.S.2d 895, 305 N.E.2d 907 (1973), an insurance policy contained a per occurrence limit and left the word occurrence undefined. The Court of Appeals found no difference between the meaning of the words accident and occurrence, and therefore used the unfortunate event test to conclude that a three-car accident amounted to a single occurrence: Unlike Johnson in which there was a 50-minute elapsed interval between the collapse of the first and the second cellar walls, the two collisions here occurred but an instant apart. The continuum between the two impacts was unbroken, with no intervening agent or operative factor. Id. at 174, 350 N.Y.S.2d at 899, 305 N.E.2d 907. 77 We have expressed the rule of these cases as follows: 78 In determining the number of occurrences for deductible purposes, New York inquires whether multiple claims result from an event of an unfortunate character that takes place without one's foresight or expectation. ... [A]lthough a single occurrence may give rise to multiple claims, courts should look to the event for which the insured is held liable, not some point further back in the causal chain. 79 Stonewall Ins. Co. v. Asbestos Claims Management Corp., 73 F.3d 1178, 1213 (2d Cir.1995) (quoting Arthur A. Johnson Corp., 7 N.Y.2d at 228, 196 N.Y.S.2d at 683, 164 N.E.2d 704) (emphasis added), modified on denial of reh'g, 85 F.3d 49 (2d Cir.1996). In Stonewall, an asbestos manufacturer faced multiple asbestos-related property damage claims resulting from the installation of its asbestos product in many different buildings. The policy wording defined occurrence as an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage, neither expected nor intended from the standpoint of the insured. Id. (internal quotation marks omitted). Drawing upon New York cases that had construed the word occurrence without the benefit of a policy definition, we rejected the insured's argument that all of the claims resulted from a single occurrence, i.e., the manufacturer's decision to manufacture and sell asbestos-containing products. Instead, we held that the installation of asbestos in each building was a separate occurrence because [e]ach installation created exposure to 'a condition which resulted in property damage neither expected nor intended from the standpoint of the insured,' and for each installation, there was a new exposure and another occurrence. Id. 80 Stonewall distinguished Champion Int'l Corp. v. Continental Cas. Co., 546 F.2d 502 (2d Cir.1976), in which we held that claims based on the installation of defective vinyl panels in more than a thousand vehicles arose from a single occurrence, i.e., the insured's delivery of the panels to the manufacturers of the vehicles. Id. at 506. Stonewall explained that the insured in Champion was the wholesaler of the defective product rather than the manufacturer, that the wholesaler was liable upon delivery of the defective product, and therefore that the proper focus was on the sale or delivery rather than the installation of the defective product: 81 In Champion, the insured was exposed to liability merely because it had delivered the defective product; in this case, by contrast, [the insured's] liability, as reflected in the underlying complaints, results not from its delivery of asbestos-containing products, but rather from its manufacture of those products, resulting in the presence of [asbestos-containing materials] each time the products were installed on the property of third parties. Consequently, each location at which [the insured's] products are present, reflecting a separate installation of those products, is the site of a separate occurrence requiring imposition of another deductible. 82 Stonewall, 73 F.3d at 1214. 83 Under New York law, multiple injuries are grouped as a single occurrence when they arise out of the same event of unfortunate character and occur close in time with no intervening agent. Applying this test, we conclude that all asbestos-related bodily claims against Prudential resulting from exposure to asbestos on a particular ship cannot be attributed to a single occurrence. In Stonewall, we found that installation of the asbestos was the final link in the causal chain leading to a manufacturer's liability for property damage. Id. at 1213; see also Maryland Cas. Co. v. W.R. Grace and Co., 23 F.3d 617, 627 (2d Cir.1993) (holding that installation of asbestos results in immediate property damage). Claimants seek to hold Prudential liable for bodily injury and the last link in the causal chain leading to Prudential's liability for bodily injury was exposure to asbestos. Each Claimant was separately exposed to asbestos at different points in time. Therefore, the injuries arise from multiple occurrences. 8 84 This conclusion is consistent with the few cases that both (i) use an approach similar to New York's in defining occurrence and (ii) have addressed the number of occurrences underlying multiple personal injuries from exposure to asbestos at the same location. See, e.g., Commercial Union Ins. Co. v. Porter Hayden Co., 116 Md.App. 605, 698 A.2d 1167, 1210 (Md.1997) (There is an absolute dearth of appellate case law dealing with the meaning of 'occurrence' or 'accident' in the context of establishing policy limits in asbestos personal injury litigation.). In Commercial Union Insurance Co., the insured was an insulation contractor in the business of selling and installing insulation which until the 1970s contained asbestos and the policies at issue contained per accident or per occurrence policy limits. The court was therefore required to address 85 whether 1) each claimant who was injured by exposure to asbestos constituted a separate occurrence (or accident), or 2) [the plaintiff's] decision to install asbestos-containing insulation during a policy period was itself a single occurrence (or accident), regardless of how many persons may have been injured as a result of that single occurrence. 86 Id. at 1210. The court followed the reasoning of Judge Brown in a California asbestos proceeding: 87 The common thread running through the California cases is that an occurrence or accident is associated with the time of injury. This leads to the conclusion that the cause of injury which determines the number of occurrences undoubtedly refers to the immediate rather than the remote cause of injury. As the court stated in Maples [v. Aetna Casualty and Surety Co.], supra, 83 Cal.App.3d , 647-48, 148 Cal.Rptr. 80 [ (1978) ], in reference to both California and out-of-state cases on the timing of occurrences or accidents: 88 [T]his seemingly unbroken line of authority find[s] that the term accident unambiguously refers to the event causing damage, not the earlier event creating the potential for future injury.... 89 The event causing damage in the asbestos-related bodily injury cases is exposure to asbestos fibers.... Since each individual claimant has a unique work history, each claimant's exposure must be viewed as a separate occurrence. 90 Id. at 1211 (quoting Asbestos Insurance Coverage Cases, Judicial Council Coordination Proceeding No. 1072, Statement of Decision Concerning Phase IV Issues, at 9-16 (Super. Ct. San Fran. Jan. 24, 1990), aff'd in part and reversed in part on other grounds sub nom. Armstrong World Indus. v. Aetna Cas. & Sur. Co., 26 Cal.Rptr.2d 35, 20 Cal.App.4th 296 (Ct.App.1993)); see also Babcock & Wilcox Co. v. Arkwright-Boston Mfg. Mut. Ins. Co., 53 F.3d 762, 767-68 (6th Cir.1995) (holding that policy defining occurrence as any happening or series of happenings, arising out of ... one event meant that each claimant's exposure to asbestos was a separate occurrence; rejecting insured's contention that decision to use asbestos in boilers was the single occurrence), cert. denied, 516 U.S. 1140, 116 S.Ct. 973, 133 L.Ed.2d 893 (1996). 9 91 It might be argued that if exposure is the occurrence, each period of exposure of each Claimant (or even each breath) is a separate occurrence. American Club does not make this argument and therefore does not seek to apply multiple deductibles to each Claimant in each policy period. In any event, liability attaches following the first exposure; each Claimant's first exposure in the policy period is the final unfortunate event which causes injury, gives rise to the policyholder's potential liability, and triggers the policy; the Claimant's later exposures are a continuation of the same occurrence. 10 92 We hold that each claim arose from a separate occurrence, and a single deductible is applicable to each claim.