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(Article from Insurance Law Alert, January 2017)

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The Sixth Circuit ruled that an insurer has no obligation to pay more than its pro rata share of both defense and indemnity for asbestos-related claims, and that an insurer is entitled to reimbursement from the policyholder for any over-payments.  Cont’l Cas. Co. v. Indian Head Indus., Inc., 2016 WL 7321362 (6^th Cir. Dec. 16, 2016).

Continental sought a declaration that it was obligated to pay only its pro rata share of defense and indemnity for asbestos claims against Indian Head.  A Michigan federal district court agreed, ordering allocation based on Continental’s time on the risk.  The Sixth Circuit affirmed.

Although the Michigan Supreme Court has not directly addressed the issue, the Sixth Circuit concluded that Michigan law would reject “all sums” allocation where, as here, policy language limits coverage to bodily injury “during the policy period.”  The court distinguished a Michigan appellate court decision applying all sums, explaining that the policy in that case expressly covered injuries continuing after termination of the policy.  The court further held that pro rata allocation was appropriate for previously-incurred defense costs, rejecting Indian Head’s argument that the duty to defend is incompatible with pro rata allocation.  Although the Sixth Circuit has previously rejected pro rata allocation of defense costs, that case involved future, unknown defense costs that were “not easily apportioned.” 

The court also ruled that Indian Head was responsible for its own damages and defense costs for the post-1987 period in which it had no insurance.  Although Michigan law recognizes an exception to holding a policyholder liable for its own damages when insurance is not available in the marketplace, the court ruled that Indian Head failed to demonstrate that insurance was unavailable after 1987.  Finally, the court ruled that Continental was entitled to reimbursement of excess insurance payments, notwithstanding the lack of a policy provision addressing reimbursement.  The Sixth Circuit predicted that the Michigan Supreme Court would allow reimbursement under an implied-in-fact or implied-in-contract basis where, as here, the insurer expressly and timely reserved its right to reimbursement for uncovered claims.