San Francisco Trial Court Is First California Court To Adopt The Wallace & Gale Approach To Asbestos Operations Claims

In what is the first trial court ruling in California on the issue, to our knowledge, the San Francisco Superior Court on January 31, 2013 issued a ruling adopting the Wallace & Gale approach to the completed operations issue for asbestos claims. The decision was issued by San Francisco Superior Court Judge John E. Munter in Phase III of Plant Insulation Co. v. Fireman’s Fund Insurance Co., et al., a multi-phase declaratory relief action pending in San Francisco.

Plant distributed and installed asbestos-containing insulation products in Northern California starting in the 1950s. As asbestos claims against Plant mounted, Plant ultimately filed for bankruptcy, and a Plan of Reorganization became effective in November 2012. At the same time the bankruptcy action was pending (it is now in front of the Ninth Circuit), the insurance contract interpretation issues have been litigated in state court in front of Judge Munter.

Judge Munter’s Phase III decision (which is tentative and subject to the parties’ objections), addressed whether asbestos claims against Plant are subject to the completed operations and products aggregate limits in the policies, or whether they are “operations” claims for which no aggregate applies. This issue has been addressed previously in this blog, and is often referred to as the “Wallace & Gale” issue among insurance lawyers, based on a Fourth Circuit decision In re Wallace & Gale Co. (4th Cir. 2004) 385 F.3d 820. The issue arises from the fact that many CGL policies, including Plant’s policies, provide aggregate limits only for claims arising from certain types of hazards—typically Products and Completed Operations. Injuries arising from an insured’s ongoing operations are arguably not subject to an aggregate limit. Therefore, to the extent an asbestos claimant’s injury is the result of exposure during the insured’s operations, the claim arguably is not subject to an aggregate cap.

Like the policyholder in Wallace & Gale, Plant argued essentially that “once an operations claim, always an operations claim,” contending that if a claimants’ continuing injury was originally caused by operations, it remains an operations exposure through all subsequently triggered policies. Judge Munter rejected this argument, explaining:

The flaw in Plant’s argument is that it completely ignores the definition of “bodily injury” in the policies….[T]he term “bodily injury” is specifically defined as “bodily injury, sickness or disease sustained by any person which occurs during the policy period.” The completed operations hazard applies to “bodily injury…arising out of operations…if the bodily injury…occurs after such operations have been completed or abandoned…” Taken together, with each definition shedding light on the other, the plain and unambiguous language of the policies expressly provides that the completed operations hazard applies when the bodily injury takes place during the policy period occurs after the insured’s operations have been completed or abandoned….For purposes here relevant, what matters is the timing of the bodily injury during a given policy period.

The Court applied a similar analysis to the products hazard provision, concluding that a claim for bodily injury falls within the product hazard provision if: (1) it arises out of the named insured’s products; (2) the bodily injury that occurs during the policy period occurs away from premises owned or rented by the named insured; and (3) such bodily injury occurs after physical possession of products was relinquished to others. As the Court explained, “[t]he plain and unambiguous policy language makes the timing of the bodily injury during the policy period the operative event that controls the application of the products hazard, not the source or cause. The source or cause of the bodily injury during the policy period is simply irrelevant to the analysis.”

In reaching its holdings, the Court rejected a number of well-worn policyholder arguments, including that the Court’s holding is inconsistent with the “all sums” provision, that it is subject to the “abandoned or unused materials” exception (an argument previously discussed in this blog), that it collides with substantive tort law, and that it is contradicted by extrinsic evidence.

Significantly, the Court also held that the insured has the burden of proof regarding the applicability of the completed operations and products hazard provisions. Going forward, the insured may only overcome the burden of proof by demonstrating that the asbestos bodily injury claim asserted against it is not subject to the aggregate limits.

Judge Munter’s decision is tentative. Watch this blog for further developments.

Full disclosure: Duane Morris represents certain of the prevailing excess insurers in this case.