Missouri Pacific R.R. Co. v. International Insurance Co.

Citation: Not availableDocket: 2-96-1080

Court: Appellate Court of Illinois; May 2, 1997; Illinois; State Appellate Court

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The case involves an insurance coverage dispute between Missouri Pacific Railroad Company (Missouri Pacific), acting on its own behalf and as successor to Chicago and Eastern Illinois Railroad Company and Texas Pacific Railway Company, and four excess general liability insurance carriers: Commercial Union Insurance Company, Federal Insurance Company, International Insurance Company, and Century Indemnity Company. The dispute arises from claims made by thousands of current and former employees of Missouri Pacific for damages related to hearing loss and asbestos-related injuries, resulting from prolonged exposure to hazardous conditions during their employment over a span of 73 years, starting from the 1920s.

Before 1934, Missouri Pacific was self-insured and had no insurance coverage. From 1934 to 1986, it had self-insured retentions totaling over $67 million and purchased insurance policies from the involved insurers between 1957 and 1986. The insurance policies are largely identical and provide coverage for "all sums" resulting from "occurrences" related to personal injury or property damage tied to the insured's business operations. The term "damages" is defined under the policies as part of the "ultimate net loss" provision, which the insurers are obligated to indemnify Missouri Pacific for, based on its legal obligations to pay such damages.

Ultimate net loss refers to the total damages and expenses incurred by Missouri Pacific for each occurrence. "Damages" encompass all amounts Missouri Pacific is legally required to pay due to personal injury or property damage, whether through adjudication or settlement. "Expenses" include reasonable costs related to investigating, settling, and defending claims, such as medical and legal expenses. The term "occurrence" includes either an accident or ongoing exposure to conditions resulting in unintentional personal injury or property damage occurring during the policy's validity.

The "Retained Limit-Other Insurance" clause states that underwriters are liable only for ultimate net loss exceeding either the specified "Retained Limit" or the limits of other applicable liability insurance carried by Missouri Pacific if higher than the retained limit. Missouri Pacific initiated a declaratory judgment action against its insurers, asserting its right to indemnification for noise-induced hearing loss (NIHL) and asbestos exposure claims, claiming these arose from a continuous proximate cause and that damages occurred within the policy years from 1957 to 1986. Missouri Pacific sought to choose a policy period that would provide full indemnification for all incurred sums and argued that it only needed to satisfy one self-insured retention (SIR) per claim type.

Missouri Pacific reported over $79 million in claims related to NIHL and $7.2 million for asbestos exposure. In a summary judgment motion, Missouri Pacific contended that both claim types resulted from a single occurrence, necessitating only one SIR for reimbursement. It also claimed that the insurers were liable for all incurred defense costs under the policy limits. The insurers countered that NIHL claims could be allocated by scientific certainty to specific policy periods and proposed a pro rata allocation method consistent with policy language and Illinois law. They also argued that Missouri Pacific must exhaust all SIRs before implicating the policies, asserting that horizontal exhaustion was applicable due to the self-insured nature across multiple periods. Missouri Pacific countered that self-insurance did not constitute "other insurance," thus disputing the horizontal exhaustion principle. Ultimately, the trial court granted Missouri Pacific's motion for summary judgment on July 18, 1996.

The court determined that all noise-induced hearing loss (NIHL) and asbestos-exposure claims resulted from a single occurrence, requiring Missouri Pacific to satisfy only one self-insured retention (SIR) for each occurrence. The trial court ruled that the insurance policies were entirely liable for the losses, limited only by their coverage limits, and rejected the insurers' motions for summary judgment. It clarified that SIRs do not equate to primary insurance coverage, thus negating the application of horizontal exhaustion principles. Following the court's decision in *Outboard Marine Corp. v. Liberty Mutual Insurance Co.*, the insurers requested clarification and reconsideration of the trial court's allocation methods, advocating for a pro rata, time-on-the-risk approach. The trial court denied these requests but certified two questions for appeal: (1) whether the 'all sums' rule or the pro-rata method applies to coverage allocation for the identified claims, and (2) whether the insured must exhaust all SIRs for each insurance period before seeking coverage from insurers for claims spanning multiple periods. The summary judgment process was outlined, emphasizing that it is appropriate when no material facts are in dispute, and all evidence must be viewed favorably for the nonmoving party. The court is set to review these certified questions.

The trial court determined that both NIHL (Noise-Induced Hearing Loss) and asbestos-exposure claims are classified as a single occurrence, granting summary judgment in favor of Missouri Pacific. The ruling, based on Zurich precedent, established that insurers are liable for all sums related to each occurrence within the limits of their policies, covering damages from personal injury or property damage arising from the insured's business operations. The policies define "occurrence" as either an accident or continuous exposure leading to unexpected personal injury or property damage during the policy term. 

Insurers contend that a genuine issue exists regarding the allocation of NIHL claims to specific policy periods, arguing the trial court erred in imposing liability for all sums without considering the allocation. They propose that if damages cannot be allocated, the court should adopt a pro rata allocation method. Conversely, Missouri Pacific asserts that the "all sums" provision mandates full liability from each insurer for damages linked to NIHL or asbestos injuries, advocating for joint and several liability regardless of the coverage periods.

The court must interpret the insurance policy as a whole, considering the risk and purpose of coverage, and must apply the plain and ordinary meaning of the terms. If policy language is ambiguous, it will be interpreted in favor of the insured.

Policies indemnify Missouri Pacific solely for personal injuries occurring within the policy period. The insurers are bound to cover "all sums" Missouri Pacific is legally obligated to pay for damages resulting from an "occurrence," defined as an accident or continuous exposure leading to personal injury while the policy is active. Missouri Pacific's interpretation, which suggests the insurers should indemnify it for all noise-induced hearing loss (NIHL) damages irrespective of when they occurred, misinterprets the policies' clear language. The insurers are only liable for injuries arising from occurrences during the policy term.

The court references a prior decision, Outboard Marine, which similarly concluded that insurance obligations are limited to damages occurring within the policy period. As for whether NIHL damages can be allocated to specific policy periods, the court finds it premature to make that determination. A genuine issue of material fact exists regarding the allocation of these damages, supported by expert opinions indicating that NIHL can occur during active exposure to noise and can be measured over time. Evidence submitted by the insurers, including affidavits and expert witness disclosures, underlines this uncertainty. The court also dismisses Missouri Pacific's claim that evidence regarding NIHL allocation was not presented to the trial court, confirming that such evidence was indeed part of the record.

The trial court's decision to grant summary judgment in favor of Missouri Pacific regarding the allocation of damages was found to be erroneous, leading to a remand for further proceedings. On remand, the parties will have the chance to present evidence concerning whether Noise-Induced Hearing Loss (NIHL) can be measured and allocated to specific policy periods with reasonable medical and scientific certainty. If it is determined that NIHL damages cannot be allocated to particular policy periods, the court should use a pro rata, time-on-the-risk allocation approach, as established in the case of Outboard Marine. This case involved a continuous occurrence of contamination over a long period, resulting in unallocable losses across multiple policy periods, which necessitated a similar allocation method. The reliance of Missouri Pacific on the Zurich case was deemed misplaced, as that case's application of a "triple trigger" theory does not preclude the use of the pro rata method outlined in Outboard Marine. The Zurich court's rejection of a pro rata approach was based on its specific facts and does not establish a blanket prohibition against such an allocation method in other contexts. The primary conclusion is that the parties must be allowed to explore the possibility of measuring and allocating NIHL damages appropriately.

If NIHL claims cannot be allocated, the court will apply the pro rata, time-on-the-risk allocation method as established in *Outboard Marine*. The parties' discussions primarily focused on NIHL claims, but the reasoning extends to both NIHL and asbestos-exposure claims. 

The second key issue is whether Missouri Pacific must exhaust all self-insured retentions (SIRs) for each insurance coverage period before seeking coverage from insurers, given that both NIHL and asbestos claims span multiple periods with differing SIR amounts. Insurers argued in their summary judgment motions that Missouri Pacific could not implicate policies until all SIRs were exhausted, a position the trial court rejected based on *USX Corp. v. Liberty Mutual Insurance Co.*, concluding that Missouri Pacific's SIRs were not equivalent to "other insurance," thus requiring only one SIR to be exhausted per occurrence.

The insurers contested this ruling, referencing *United States Gypsum Co. v. Admiral Insurance Co.*, asserting that Missouri Pacific must horizontally exhaust all underlying coverage, including SIRs, before accessing coverage under excess policies. They argue this is based on two premises: the unique nature of excess insurance and the explicit language of the policies. The insurers claim that horizontal exhaustion principles should apply to all cases involving excess insurance, regardless of whether the underlying coverage consists of primary insurance, fronting policies, or SIRs. They maintain that allowing Missouri Pacific to bypass this requirement would blur the lines between primary and excess coverage, potentially enabling manipulation of recovery sources. Under Illinois law, all underlying coverage must be exhausted before accessing excess coverage, as established in *United States Gypsum Co.* and *Illinois Emcasco Insurance Co. v. Continental Casualty Co.*, with the rationale that excess coverage entails a lower premium due to reduced risk.

United States Gypsum established that a self-insured entity must exhaust all applicable primary insurance coverage before seeking excess insurance. The court emphasized that Gypsum could not manipulate its coverage to avoid absorbing costs associated with its self-insured status, which would allow it to selectively pursue recovery from certain excess insurers while leaving primary insurers unburdened. The decision highlighted that allowing "vertical exhaustion" would blur the lines between primary and excess insurance, contrary to established principles. This reasoning aligns with the ruling in Outboard Marine, which stated that a policyholder cannot transfer liability for uninsured periods to excess carriers, reinforcing that self-insurance equates to taking on all associated risks. Consequently, Missouri Pacific must also exhaust its self-insured retention (SIR) before seeking coverage from insurers, consistent with the precedents set in both United States Gypsum and Outboard Marine. The insurers argue that the policies' "other insurance" provisions necessitate exhausting all primary policies across multiple periods, supporting the principle of horizontal exhaustion.

Insurers argue that the policies include Self-Insured Retentions (SIRs), while Missouri Pacific contends that SIRs function as deductibles and do not qualify as "other insurance" under the policies. The policies stipulate that underwriters are liable only for the amount exceeding either the 'Retained Limit' or the limits of other insurance, necessitating the exhaustion of available insurance before the insurers must contribute. A critical aspect of the policies is that if the insured opts to self-insure the retained limit, they have the same obligations to the underwriters as a primary insurer has to excess insureds, despite the non-standard nature of this insurance.

The central issue is whether SIRs are considered "other insurance." The court in United States Gypsum held that horizontal exhaustion was required due to the "other insurance" provision in excess policies, indicating that liability would only attach once all underlying coverage, including self-insurance, was exhausted. Following this precedent, it is concluded that Missouri Pacific must exhaust one SIR per occurrence per policy period before seeking coverage from the insurers, as SIRs are akin to the fronting insurance referenced in Gypsum.

Additionally, Missouri Pacific's reliance on USX Corp. v. Liberty Mutual Insurance Co. is deemed inappropriate, as that case did not address horizontal exhaustion or a provision that explicitly included SIRs. The conclusion states that Missouri Pacific must horizontally exhaust a full SIR per occurrence per policy period prior to accessing coverage under the policies.

Lastly, Commercial Union claims it is entitled to summary judgment, arguing that there is no justiciable controversy since the claimed damages do not reach the inception of its policy, implying that its coverage cannot be implicated.

The court declines to address the justiciability argument in this appeal, which is governed by Rule 308. Under this rule, the trial court certifies specific questions for the appellate court's review, limiting the scope of the appeal to those certified questions (Lewis v. Norfolk, Western Ry. Co. 269 Ill. App. 3d 483, 487 (1995)). The parties raised various issues in their motions for summary judgment, including single occurrence, all sums, horizontal exhaustion, and justiciability. However, the trial court only certified questions regarding all sums and horizontal exhaustion. Consequently, the court will not consider justiciability, adhering to the certification limitations established in McMichael v. Michael Reese Health Plan Foundation, 259 Ill. App. 3d 113, 116 (1994). The court notes that if its resolutions on the certified questions impact the trial court's previous ruling on justiciability or any other matter, the parties can seek reconsideration from the trial court. The questions have been answered, and the case is remanded for further proceedings consistent with this decision. Judges Inglis and Rathje concur.