Sixth Circuit Applies Pro-Rata Allocation for Michigan, Allows Reimbursement U.S. Court of Appeals for the Sixth Circuit, December 16, 2016

Indian Head acquired a gasket manufacturing company that had for some time produced gaskets containing asbestos and continued to manufacture and sell such gaskets for five years after the acquisition. Shortly after acquiring the manufacturing company, Indian Head purchased three consecutive liability insurance policies from Continental Casualty Company. Later, Indian Head was sued in thousands of lawsuits for asbestos-related injuries.

The Continental policies had an exclusion precluding coverage for any liability assumed “under any contract or agreement” except for an “incidental contract,” defined as a contract related to the conduct of the insured’s business. Continental argued that the acquisition contract was not an incidental contract because the liability for asbestos-related injuries related to the business of Indian Head’s predecessor, not Indian Head. On the other hand, Indian Head argued that the liability related to its business because the acquisition agreement was executed before the effective dates of the Continental policies. The court agreed with Indian Head, ruling that the Continental policies applied to asbestos-related injuries that occurred during the policy periods.

The next issue was whether the losses for asbestos-related injuries would be allocated based on an “all sums” approach or a “pro-rata” approach. The court held that pro-rata allocation applied, citing numerous federal cases applying a pro-rata approach under Michigan law in the absence of any Michigan Supreme Court precedent. Additionally, the court relied on the language of the Continental policies, which expressly disclaimed coverage for injuries continuing after the policy period ended.

Finally, the court held that Continental was entitled to reimbursement for previous payments made in excess of its pro rata share of defense and liability costs. Indian Head argued that Continental was not entitled to such reimbursement because the policies did not provide for it. But the court held that reimbursement was available under an implied-in-fact contract because Continental had (1) timely and explicitly reserved its rights to reimbursement, and (2) provided sufficient notice of the specific possibility of reimbursement to Indian Head.

Read the full decision here.

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