Court Opinion

ID: 2738163
Source: CourtListenerOpinion
Date Created: 2014-09-30 14:07:03.485854+00
Date Added: 2024-06-11T10:33:00.741428
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE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.,
                                        APPROVED FOR PUBLICATION
      Plaintiff-Appellant/
      Cross-Respondent,                     September 30, 2014

v.                                          APPELLATE DIVISION

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-in-
interest to ZURICH AMERICAN INSURANCE
COMPANY, ZURICH INTERNATIONAL LTD.,
ZURICH INSURANCE GROUP, as successor-
in-interest to ZURICH INTERNATIONAL LTD.,
ACE PROPERTY & CASUALTY INSURANCE
COMPANY, as successor-in-interest to
AETNA INSURANCE COMPANY,

      Defendants-Respondents/
      Cross-Appellants,
and
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

                                2          A-6240-10T1
successor-in-interest to ALLIANZ
UNDERWRITERS, INC., ALLIANZ GLOBAL RISKS
US INSURANCE COMPANY, as successor-in-
interest 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-in-
interest 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 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, 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-

                               3             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 successor-
in-interest to ROYAL INSURANCE COMPANY,
ROYAL INDEMNITY COMPANY, as successor-
in-interest to ROYAL INSURANCE COMPANY,
ROYAL INDEMNITY COMPANY, X.L.,
REINSURANCE AMERICA, INC., as successor-
in-interest to SERVICE FIRE INSURANCE
COMPANY, NATIONAL AMERICAN INSURANCE
COMPANY OF CALIFORNIA, as successor-
in-interest to MISSION AMERICAN
INSURANCE COMPANY, PREMIER INSURANCE
COMPANY, S&H INSURANCE COMPANY,
NATIONAL FARMERS UNION PROPERTY AND
CASUALTY COMPANY, as successor-in-
interest 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 September 30, 2014

         Before Judges Yannotti, Ashrafi, and
         St. John.

                               4                       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/cross-
respondent 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

                     5                         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/cross-
appellants 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/cross-
appellants 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).

                     6                         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 so-

called long-tail environmental losses, beginning with Owens-

                                 7                            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

                                8                            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)

                                  9                         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.

                                 10                        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

                                11                          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).

                                  12                           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

                                13                          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

                                 14                         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.

                                  15                        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

                                16                          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 pre-

1972 direct policies and to the 1977 through 1986 fronting

policies.

                                17                          A-6240-10T1
Owens-Illinois and Carter-Wallace

    The New Jersey Supreme Court's 1994 decision in Owens-

Illinois, 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 Carter-

Wallace, 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.

                                18                         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

                                19                         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.

                                20                         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

                                 21                          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

                                22                          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, cross-

claims, 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

                                 23                          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 cross-

appealed, 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

                                  24                          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

                                25                          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.

                                 26                        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

                               27                               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.

                                28                          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.

                                 29                        A-6240-10T1
    Before we address this argument, we will review Owens-

Illinois, 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

                                30                          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

                                    31                          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

                                 32                           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 Owens-
         Illinois, as clarified by our decision
         today, represent the presumptive rule for
         resolving the allocation issue among primary
         and excess insurers in continuous trigger
         liability cases unless exceptional
         circumstances dictate application of a
         different standard.

         [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]

                                33                          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 Owens-
         Illinois 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

                                 34                         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

                               35                           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

                                36                          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

                                37                          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 Carter-

Wallace should apply to long-tail claims, with many primary and

excess policies covering years of loss, some of which did not

                               38                           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

                                39                           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

                                 40                         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 Owens-

Illinois 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-

                               41                           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 Owens-

Illinois requiring allocation proportionate to the risks

transferred to the insurer.   The trial court correctly construed

                                42                          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 Owens-

Illinois 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 Owens-

Illinois 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

                                  43                           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 Carter-

Wallace 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 Carter-

Wallace 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

                                 44                         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

                                  45                         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 Owens-

Illinois.

                               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

                                  46                        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

                                47                          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

                                 48                         A-6240-10T1
limit over multi-year terms contravene the dictates of Owens-

Illinois.

    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 Owens-

Illinois 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 . . .

                                   49                       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

                                  50                         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 Owens-

Illinois, 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.

                                  51                         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

                                52                             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

                                 53                        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 Carter-

Wallace 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

                                  54                         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-

                                55                          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

                                56                         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 pro-

rated, 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

                                  57                         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

                                58                          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

                                  59                        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

                                60                           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 Owens-

Illinois, supra, 138 N.J. at 477, prohibiting the insurers in

that case from re-litigating already-settled claims after

                                  61                         A-6240-10T1
refusing to defend them.   We agree with that decision.   Allowing

excess insurers to contest coverage is not feasible for long-

tail, 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

                                 62                         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).]

                                63                          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 Owens-

Illinois 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 Owens-

Illinois, 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.

                               64                           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.

                                  65                          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.

                                  66                        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 Owens-

Illinois 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

                                67                         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.

                                 68                      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

                                  69                         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");

                                70                          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 Owens-

Illinois.   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

                                 71                           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).

                                  72                          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

                               73                         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.

                                  74                           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.

                                  75                         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

                                 76                           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

                                77                          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

                                78                          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

                                79                          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 mass-

tort 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.

                                  80                            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.

                               81                           A-6240-10T1