In Asbestos Coverage Case, Sixth Circuit Adopts Pro Rata Allocation – and Upholds Restitution to Insurer

The U.S. Court of Appeals for the Sixth Circuit, in a case involving asbestos liabilities, has affirmed a Michigan district court’s decision that pro rata allocation was the appropriate method to use to allocate damages and costs under an insured’s policies and has affirmed the district court’s decision requiring the insured to pay approximately $2.4 million in restitution to its insurer.

In 1984, Indian Head Industries, Inc., acquired Detroit Gasket & Manufacturing Co. and agreed to assume its liabilities. Indian Head operated Detroit Gasket from 1984 to 1989, while it manufactured and sold automotive gaskets containing asbestos. Numerous claimants brought lawsuits against Indian Head alleging bodily injury from exposure to the asbestos-containing products manufactured by Indian Head and its predecessor.

In 1994, Indian Head began submitting these lawsuits to the insurance company from which it had acquired insurance policies from 1984 to 1987. For a number of years, the insurer fulfilled Indian Head’s requests without reserving any rights, applying the insurance coverage to tens of thousands of lawsuits brought against Indian Head.

In October 2005, the insurer stated in a letter to Indian Head that it was not obligated to cover all defense and indemnification amounts but, rather, that it only had to “pay its pro rata share.” It also included a reservation of rights in the letter that listed the right to seek reimbursement for excess payments.

Thereafter, the insurer filed a complaint in the U.S. District Court for the Eastern District of Michigan, seeking a declaratory judgment of its rights and responsibilities under Indian Head’s insurance policies.

The district court found that Indian Head’s insurer had to provide only a pro rata share of indemnification damages and defense costs, and that Indian Head had to pay the insurer approximately $2.4 million in restitution for overpayments the insurer had made.

Indian Head appealed to the Sixth Circuit.

The Sixth Circuit’s Decision

The circuit court, applying Michigan law, agreed with the district court that the pro rata method of allocation to damages incurred by Indian Head was the appropriate method to use to allocate damages and costs under the Indian Head policies, and it upheld the restitution award.

In its decision, the circuit court rejected Indian Head’s contention that the policies required the application of the “all sums” method of allocation and decided that the pro rata method of allocation was appropriate. It pointed out that the policies provided that the insurer only was obligated to cover “all sums” for injuries that occurred during the policy period. “The scope of the coverage,” the Sixth Circuit said, could “not be considered without this important limitation.” The policy language, when taken in its entirety, supported the application of the pro rata method of allocation, the circuit court declared.

The circuit court also ruled that pro rata allocation was appropriate for previously incurred defense costs. Because they already had been incurred and stipulated to by the parties, it was “readily possible to determine each party’s prorated shares,” the Sixth Circuit stated. As a result, it found, the district court had not erred in prorating those costs.

Finally, the Sixth Circuit upheld the district court’s decision granting the insurer reimbursement of its previous excess payments.

It acknowledged that the Michigan Supreme Court had yet to rule on whether an insurer was entitled to reimbursement where its policy did not provide for that. The circuit court then found, however, that an implied contract existed between the insurer and Indian Head providing for reimbursement, given that the insurer had expressly reserved its rights in a letter “that plainly stated to Indian Head” that it would seek reimbursement. The district court had only granted the insurer reimbursement for claims brought after the reservation of rights, the Sixth Circuit noted, concluding that it was proper for the district court to find the insurer entitled to reimbursement as an implied contract existed between the two parties.

The case is Continental Cas. Co. v. Indian Head Industries, Inc., No. 15-2217 (6th Cir. Dec. 16, 2016).