Petition for Writ of Certiorari — W. R. Grace & Co.-Conn. v. Maryland Casualty Co.

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os No. Supreme Court, U.S.

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94 661 OCI 1 3 199%

IN THE OFFICE CF THE CLERK

Supreme Court of the Hnited States

OCTOBER TERM, 1994

W.R. GRACE & CO.-CONN..,

Petitioner,

——YV,. =

MARYLAND CASUALTY COMPANY, ROYAL INDEMNITY

COMPANY and AETNA CASUALTY and SURETY COMPANY,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

ANTHONY J. MARCHETTA

Counsel of Record

ROBERT G. ROSE

ELIZABETH J. SHER

PHILIP G. BARBER

On the Brief

PITNEY, HARDIN, KIPP & SZUCH

P.O. Box 1945

Morristown, New Jersey 07962-1945

(201) 966-6300

Counsel for Petitioner

a oe TB ph ER. RI

QUESTIONS PRESENTED

Petitioner seeks a writ of certiorari to review a decision of

the Second Circuit Court of Appeals. The questions presented

are:

1. Whether the Second Circuit’s expansion of diversity

jurisdiction through adoption of a “collision of interests” test

conflicts with this Court’s limitations on federal diversity

jurisdiction as set forth in City of Indianapolis v. Chase

National Bank, 314 U.S. 63 (1941), thereby furthering both a

split among the Circuits in the application of that decision and

the unwarranted expansion of diversity jurisdiction by judi-

cial interpretation.

2. Whether, on review of a summary judgment decision, in

the absence of a factual record, the Second Circuit’s deter-

mination of a disputed issue of material fact violated this

Court’s proscription against improper appellate fact-finding

as expressed in Icicle Seafoods, Inc. v. Worthington, 475 U.S.

709 (1986), and Singleton v. Wulff, 428 U.S. 106 (1976).

PARTIES TO THE PROCEEDING

AND RULE 29.1 STATEMENT

The parties to the proceedings are petitioner W.R. Grace &

Co.-Conn. (“Grace”) and appellee. siaryland Casualty Com-

pany (“Maryland Casualty”), Royal Indemnity Company

(“Royal”), and Aetna Casualty and Surety Company

(“Aetna”).*

Petitioner Grace is a corporation organized under the laws

of Connecticut and is a wholly-owned subsidiary of W.R.

Grace & Co. Grace’s subsidiaries or partnerships, other than

wholly-owned operations, are: A-O Grace Kaustik, Boodin

Partnership, Carbon Dioxide Slurry Systems LP, Grace Ven-

tures Partnership I & II, Healthcare Medical, Immunecare of

Hollywood, Immunecare of Key West, Infusion Systems, New

Bedford Infusioncare, Nippon Dearborn Kabushiki Kisha,

North Suburban Dialysis, OB One & IVtoo, Palm Springs I.V.

Care II, Paramount Coal Company, Pharmacy Direct, Prime-

care Home Health Services, P.T. Grace Specialty Chemicals

Indonesia, Pursue Gas Processing and Petrochemical Com-

pany, Quality Home Care Services of Watertown, NY, Sleep

Diagnostic Associates, Sisters of Charity Home Health Care,

and VNA-NMC Homecare Partnership, Cormix Middle East,

Emirates Chemical, Grace Cocoa Associates, L.P., Grace Off-

shore Turnkey, and Riggers Dialysatoren Produktion Thal-

heim GmbH & Co. K.G.

. In addition, approximately fifteen insurance companies and

more than thirty public entities appeared as amici curiae before the Sec-

ond Circuit. See n.5, infra.

ill

TABLE OF CONTENTS

PAGE

Uy eB | yy | 0 i

LIST OF PARTIES AND RULE 29.1 LIST............ ii

py ee ip ety |. Sa vi

Ne een cke cau pihucnwetinecsunsecnens es l

ied sda ciabessevesc<anennneis I

STATUTORY PROVISIONS INVOLVED............. l

STATEMENT OF THE CASE............ aD 2

A. ‘ee Proceedings Below ................. aia 3

B. The District Court’s Coverage Opinion .. .. 5

C. The Second Circuit’s Decision .............. 6

REASONS FOR GRANTING THE WRIT............. 9

I. THE DECISION BELOW CONFLICTS

SQUARELY WITH THIS COURT’S

HOLDING IN CITY OF INDIANAPOLIS

AND FURTHERS A DIRECT AND

IRRECONCILABLE CONFLICT AMONG

THE CIRCUITS REGARDING THE

PROPER TEST FOR DETERMINING

DIVERSITY JURISDICTION ............... 9

{

PAGE )

A. The Second Circuit’s Decision )

Contravenes the “Primary Purpose”

Test Set Forth in City of

PT eases oa nen boda vivcveess 11

B. The Second Circuit’s Adoption of the

“Collision of Interests” Test Furthers a

Direct and Irreconcilable Conflict Among

the Circuit Courts of Appeals Regarding

the Appropriate Test for Determining

Divereity JUCiSGICtiON. ......<0e.secesess 14

II. THE SECOND CIRCUIT’S DECISION

VIOLATES THIS COURT’S PROSCRIPTION

AGAINST IMPROPER APPELLATE

Oe Por er Ere oe eee 16

A. The Second Circuit’s Disputed Finding

of Fact Was Erroneous On At Least Five

I 69s cece eek esses eae 18

1. The disputed factual issue was not

raised in the district court or in the

COME OF Ivo nnd HeeeGik cs 19

2. The disputed factual issue was

decided in the absence of a full

CVIGOREIALY TOGOEE 6. occ oc cceseesess 21

3. The disputed factual finding was

based on insubstantial and

inappropriate support.............. 22

PAGE

4. The disputed factual finding was

inconsistent with determinations

made on the underlying tort claims

and did not even attempt to reconcile

the probability of inconsistent

SO & bsndn os ye Ree ennecenhe sass: 23

5. The disputed factual finding wa.

made without adequate considera-

tion of, and ultimately in contraven-

tion of applicable New York state

BOE sok douaiks cay bee sinksdopwessceness ye

Cs er i hic os cee nebewaseaccecasntvesisenes exceeds 27

Po) Ee rrr re renee errr TEST Tey la

TABLE OF AUTHORITIES

Cases PAGE

American Fire & Casualties Co. v. Finn, 341 U.S. 6

CISS UT oi ncese en Sake asa 14

American Home Products Corp. v. Liberty Mutual Ins.

Co., 565 F. Supp. 1485 (S.D.N.Y. 1983), aff’d as

modified, 748 F.2d 760 (2d Cir. 1984)............ 6

American Indus. Underwriters Corp. v. Zurn Indus.,

771 BF. Sapp. GPO CW. PA. TPPED cc cnsccescsessss 24

American Motorists Ins. Co. v. Levolor Lorentzen,

Inc., 1988 WL 112142 (D.N.J. Oct. 14, 1988),

appeal dismissed, 879 F.2d 1165 (3d Cir. 1989).. 6

American Motoi ists Ins. Co. v. Trane Co., 657 F.2d

146 CPG Ce Fh kbassdaswansadnea 10, 14

Anderson v. Bessemer City, 470 U.S. 564 (1985)...... 19

Anderson v. Liberty Lobby, Inc., 477 U.S. 242

CADE «oc aviksinsdhcebenneesuceeeeeaee aren 18

Armstrong World Indus., Inc. v. Aetna Casualty & Sur.

Co., 20 Cal. App. 4th 296, 26 Cal. Rptr.2d 35

(1993), review granted, (Jan. 27, 1994).......... 25

Atascadero State Hosp. v. Scanlon, 473 U.S. 234

CODES) x avinivdsp-ccvadesscneenteeen uae 14

Bender v. Williamsport Area School Dist., 475 U.S.

$36 (ISG) os cass cdtatikb ee le 13

Carey Canada, Inc., v. California Union Ins. Co.,

74S BF. Samp. S CD Ae TOPO os vk vacaviccsevesess: 25

Carr v. Corning, 182 F.2d 14 (D.C. Cir. 1950) ........ 20

wet

Vil

PAGE

City of Indianapolis v. Chase Nat’! Bank, 314 U.S.

PEED canes bucckventatveaes i, 2,9, 10, 11, 12, 14, 16

City of New York v. Keene Corp., No. 44559/84 (N.Y.

Sup. Ct. Dec. 2, 1985), aff’d, 129 A.D. 2d 1019,

513 N.Y.S. 2d 1004 (1st Dep’t 1987) ............. 25

Continental Airlines Inc. v. Goodyear Tire & Rubber

Co., 819 F.2d 1519 (9th Cir. 1987) ........ ... 80, 15, 16

Continental Casualty Co. v. W.R. Grace & Co., No.

90-C-1255 (N.D. Ill. filed Mar. 5, 1990) ......... 12

Cooter & Gell v. Hartmax Corp., 496 U.S. 384

aia fnew kas een agaeeeniswateense 18

Dawson v. Columbia Ave. Sav. Fund, S.D. Title & T. Co.,

og eR i ee 12

Dayton Indep. School Dist. v. National Gypsum Co.,

682 F. Supp. 1403 (E.D. Tex. 1988), rev'd on

jurisdictional grounds sub nom. W.R. Grace & Co.

v. Continental Casualty Co., 896 F.2d 865 (Sth

ee cechbakedweds venasedes eens 25

Dolch v. United Cal. Bank, 702 F.2d 178 (9th Cir.

ee eek anwemeny te sinsss oc 10

887 7th Ave. Associated Ltd. Partnership v. AAER

Sprayed Installations, Inc., No. 50460 (N.Y.

App. Div. Ist Dep’t Dec. 7, 1993) ...............- 25

Eikel v. States Marine Lines, Inc., 473 F.2d 959 (Sth

Rs cae pveveeeneeasess ces 10

Employers Ins. of Wausau v. Crown Cork & Seal Co.,

Oe ae Se Cre Gait, BODE) <5 cin ewn nc ccecccses: 6, 10, 15

Fidelity & Deposit Co. of Md. v. City of Sheboygan

Falls, 713 F.2d 1261 (7th Cir. 1983) ............. 14

Vill

PAGE

Fountain v. Filson, 336 U.S. 681 (1949) .............. 21

Greenlee v. Sherman, 142 A.D.2d 472, 536 N.Y.S.2d

tee Sr Cn err ne 26

Hormel v. Helvering, 312 U.S. 552 (1941) ............ 20

Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709

Cah Sid cealhvns «ctw cen kan Fl eae ee een beoes i, 20

Indemnity Ins. Co. v. First Nat’l Bank at Winter Park,

Fia., 351 FZ SED COG Cae. THB? oo vnc cvicce cece. 10

Inwood Laboratories v. Ives Laboratories, 456 U.S.

ae Oia S's 0.58.58 25H RES yO a Leek eenaseeotes 19, 20

Lac d’amiante du Quebec, Ltee v. American Home

Assurance Co, 613 F. Supp. 1549 (D.N.J. 1985),

vacated on other grounds, 864 F.2d 1033 (3d Cir.

SNE inna sss oh ceoieeedeibesenesr hese 25

Lowe v. Ingalls Shipbuilding, 723 F.2d 1173 (Sth Cir.

SOE 5 ibn ie dae kc cdledndadssaabdanarencihedns thaws 10

Luria Bros. & Co. v. Alliance Assurance Co., 780

Fe Se Cols Bas ha ances Han bw aeicks 24

MDU Resources Group v. W.R. Grace & Co., 14 F.3d ©

1274 (8th Cir.), cert. denied, 63 U.S.L.W. 3258

CUE so sirec bake aeishsennd i ea ha etedeeke ns 24

Maine v. Tyler, 477 U.S. 131 (1986)................... 19

Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803)... 13

Marine Midland Serv. Corp. v. Samuel Kosoff & Sons,

Inc., 60 A.D.2d 767, 400 N.Y.S.2d 959 (4th Dep’t

IFT arthritis iia ees 26

Maryland Casualty Co. v. W.R. Grace & Co., 23 F.3d

617 (26 Cin: B99) . 6 odie BL 7, $2, Rov ae; Oks ae

PAGE

Maryland Casualty Co. v. W.R. Grace & Co., 794

F. Supp. 1206 (S.D.N.Y. 1991), rev'd, 23 F.3d

ee OE Sodas snkensuye ceccvsees 1, 6, 12, 25-26

Owens-Illinois, Inc. v. United Ins. Co., 264 N.J. Super.

660, GZS A.24 1 (Aap. Div. 1993) «..00.ccceccese. a

Pierce v. Underwood, 487 U.S. 552 (1988)..........-.. 18

Ridgeway v. Gulf Life Ins. Co., 578 F.2d 1026 (Sth Cir.

| SRE ATS Oy en ert POET eee Te eee 24

River Plate & Brazil Conferences v. Pressed Steel Car

e.g ere ee ee ils SPO ois 8 ob ecneccecwnces 20

Salve Regina College v. Russell, 499 U.S. 225

0) ee rn Perr ote eer eee ee eee 25

Singleton v. Wulff, 428 U.S. 106 (1976)......... i, 19, 20, 21

Stevens v. City of Cannon Beach, ___ U.S. ___, 114

ela vie enn udanedn sks sSeres se 17

Stonewall Ins. Co. v. National Gypsum Co., 86 Civ.

9671 (S.D.N.Y. May 27, 1992), appeal pending,

el es se dive seep edieRaEhe heen des 4a; 29

Sturges Mfg.Co. v. Utica Mut. Ins. Co., 37 N.Y.2d

69, 332 N.E.2d 319, 371 N.Y.S.2d 444 (1975) ... 26

Truck Ins. Exch. v. Ashland Oil, Inc., 951 F.2d 787

I I cag ea cdswd sn datsvencwcedessencsccs: 14

Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp. 1368

I By Bs vo cc vncciceediccccsccccesereceseces 24

United States Fidelity & Guar. Co. v. Thomas Solvent

Co., 955 F.2d 1085 (6th Cir. 1992) ............ 6, 10, 15

United States Fidelity & Guar. Co. v. Wilken Insulation

Co., 144 Ill. 2d 64, 578 N.E.2d 926 (1991)....... 25

Universal Underwriters Ins. Co. v. Wagner, 367 F.2d

OO Se Eli 2 6 oa cn dane dasaveseccdeortbiae: 10, 14

U.S.I. Properties Corp. v. M.D. Constr. Co., 860 F.2d

1 (1st Cir. 1988), cert. denied, 490 U.S. 1065

Ee) Eee Peer ire Sr mon trie ere renyee eer 10, 16

W.R. Grace & Co. v. Continental Casualty Co., 896

a eS eS ae: ee errr on pee 25

Weller v. Navigator Marine, inc., 737 F.2d 1547

CBN Ra IE fa cds Sein k tsb eakencanaloecenstans 10

Zenith Radio Corp. v. Hazeltine Reseach, 395 U.S.

POR UU AN Gea vneneewkoedexccmewinnese dd iuads ven’ 19

Zurn Indus. Inc. v. Acton Constr. Co., 847 F.2d 234

Cees SE oa anh oscccceswesunsarsy savas pedenss 10, 16

Statutes

Bes EN ooo 5 dh nen kann deine bu ccebdoesenisaks ]

eo gk Fee ® pS eee ere rm er enor 1

Oe Weis FR vio oe date dacsdicasusearvewsan eed 1,4

yo Be ae ee rrr rrr err rer ere Terr nt 1

OO OS SO Seer errr irr Serr uae Aa te ]

Fs Wek Rae Ws Gs dn dae bb nasbdetknnsxssencbastenues 3, 19, 20

Bec Ras Oe nx nka 49 dibs tadanneenns sheen cees 18

Other Authorities

John P. Arness and Randall D. Eliason, Jnsurance

Coverage for “Property Damage” in Asbestos

and Other Toxic Tort Cases, 72 Va. L. Rev. 943

C196) oa bic SFP sane i re Fao hoe 23

Note, Janus Was Not a God of Justice: Realignment of

Parties in Diversity Jurisdiction, 68 N.Y.U. L.

PAGE

MENG, TOTS CAPPS ie 6 carves se cbndvsccccrcdvaseesentas 13, 16

OPINIONS BELOW

The opinion below was issued by the Second Circuit on

May 16, 1994, and is reported at 23 F.3d 617. 3a - 28a.' The

opinion and order of the United States District Court for the

Southern District of New York from which that appeal was

taken was entered on March 6, 1991, and is reported at 794 F.

Supp. 1206. 29a - 85a.

JURISDICTION

The Second Circuit’s mandate issued on July 22, 1994, fol-

lowing the denial of Grace’s petition for a rehearing en banc.

The jurisdiction of this Court to review the judgment of the

Second Circuit is invoked under 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

28 U.S.C. § 1332 - Diversity of citizenship; amount in con-

troversy; costs

(a) The district courts shall have original jurisdiction

of all civil actions where the matter in controversy

exceeds the sum or value of $50,000, exclusive of inter-

est and costs, and is between—

(1) citizens of different States. . .

* * *

this title—

(1) acorporation shall be deemed to be a citizen

of any State by which it has been incorporated

and of the State where it has its principal place of

business... .

Citations to the appendix to this petition appear in the form “_a”

throughout this petition.

STATEMENT OF THE CASE

Grace seeks review of the Second Circuit Court of Appeals’

ruling because that decision deviates entirely from this

Court’s precedents on controlling principles of law which pre-

scribe the proper scope of federal diversity jurisdiction and

the limitations on federal appellate fact-finding. In contra-

vention of the “primary purpose” test in realignment cases

established by this Court in City of Indianapolis, the Second

Circuit relied on a less exacting “collision of interests” test

and found that diversity jurisdiction existed in this case. In so

doing, the Second Circuit joined the Seventh and Eighth Cir-

cuits in rejecting the reasoning of City of Indianapolis, more

closely followed by the First, Third, Fifth, Sixth, Ninth and

Eleventh Circuits.

Under the “primary purpose” test, the court determines the

principal purpose or primary issue in the suit and then aligns

the parties according to their position on that issue. Under the

“collision of interests” test, realignment of the parties is

appropriate only if there are no actual conflicts between the

parties, regardless of whether the controversy is related to the

primary matter in dispute.

The Second Circuit’s ruling calls attention not only to a

split among the circuit courts of appeals regarding the proper

test for determining the existence of diversity jurisdiction, but

to the increasing uncertainty in the standards for establishing

diversity jurisdiction in multiparty actions at a time when

recent statistics indicate that diversity cases account for

nearly half of all civil trials in federal courts.? This Court’s

2 Statistics from the Administrative Office of the United States

Courts demonstrate the substantial impact of diversity cases on the civil

trial calendar. On a national basis, insurance actions constitute the largest

identifiable category of diversity contract actions for the 12-month period

ending June 30, 1994. Indeed, during that same time period, 6,298 diver-

sity insurance cases were filed compared to a total of 2,091 personal

injury asbestos cases. Civil court calendars are becoming increasingly

congested. In the Southern District of New York, for example, the

guidance is required in this important area of federal subject

matter jurisdiction. The persistent and recurring nature of this

issue and the need for uniform application of a test for resolv-

ing alignment in diversity cases can be effectively resolved

only by the prompt action of this Court.

Grace also seeks review of the Second Circuit’s decision in

which the court reversed the district court’s grant of partial

summary judgment after engaging in improper fact-finding

without a factual record before it. This Court has not hesitated

to use the power of certiorari to correct such injustices caused

by appellate courts which, upon reviewing a grant of sum-

mary judgment in a district court, determine a question of fact

in violation of the “clearly erroneous” standard of review set

forth in Fed. R. Civ. P. 52(a).

The Second Circuit exceeded its authority by deciding an

ultimate factual issue that was not even raised in that court or

in the district court below; was decided in the absence of a

full evidentiary record; was based on insubstantial and inap-

propriate support; was inconsistent with prior judicial deter-

minations of related claims and did not even attempt to

reconcile the probability of inconsistent findings; and was

decided without adequate consideration of and ultimately in

contravention of applicable state law, and despite the fact that

no party objected to the Circuit Court’s own query as to

whether a remand for the development of a factual record

would be proper. The tremendous impact of that decision will

be felt not only by Petitioner, but also by numerous litigants

in the Second Circuit and elsewhere. This Court should not

hesitate to exercise its supervisory powers over the federal

appellate judiciary to correct such an error.

A. The Proceedings Below

In October 1983, Maryland Casualty, which had provided

Grace with comprehensive general liability insurance from

percentage of civil cases over three years old has nearly doubled between

1988 and 1993.

1955 to 1973, commenced a declaratory judgment action

against Grace and Continental Casualty Company (“CNA”) in

the United States District Court for the Southern District of

New York, seeking a declaration of its rights and obligations

to provide insurance coverage for asbestos-related claims.

The suit was a “first-strike” or pre-emptive suit brought by

Maryland Casualty in an effort to gain access to a federal

forum for application of New York substantive insurance law

to multi-million dollar coverage issues involving personal

injury and property damage claims which Grace is facing on

a nationwide basis.

In its complaint, Maryland Casualty alleged that the federal

district court had subject matter jurisdiction pursuant to 28

U.S.C. § 1332(a), diversity of citizenship. At the time the law-

suit was filed, Maryland Casualty was a Maryland corporation

with its principal place of business in Baltimore; Grace was

a Connecticut corporation with its principal place of business

in New York; CNA was incorporated in Illinois, with its prin-

cipal place of business in Chicago. In July, 1984, Maryland

Casualty moved for leave to amend its complaint to seek

declaratory relief against Royal, Aetna, and General Insurance

Company of America (“General”), all of which sold com-

prehensive general liability insurance between 1950 and 1968

to companies acquired by Grace.’

Grace opposed Maryland Casualty’s motion for leave to

amend on the grounds that the addition of Aetna and Royal as

defendants would destroy diversity jurisdiction. Royal was a

Delaware corporation with its principal place of business in

New York; Aetna was a Connecticut corporation with its prin-

cipal place of business in Hartford, Connecticut.

In its opposition to Maryland Casualty’s motion, Grace

observed that although Royal and Aetna were nominally

defendants, their true interests in the lawsuit corresponded to

The companies acquired by Grace were manufacturers and dis-

tributors of products containing asbestos. Prior to 1963, Grace did not

manufacture or distribute any asbestos-related products.

those of Maryland Casualty: all were adverse to Grace in

seeking to deny Grace coverage for its claims to these insur-

ers. Because their interests were identical, and inimical to

Grace’s interest, Grace urged that the defendant insurers prop-

erly be realigned as plaintiffs. Upon realignment, Grace,

incorporated in Connecticut with its principal place of busi-

ness in New York, would no longer be diverse from Aetna or

Royal, and the federal court would be required to dismiss the

matter for lack of subject matter jurisdiction.

In April, 1985, the district court granted Maryland Casualty

leave to amend, while failing to address the issue of subject

matter jurisdiction. In its amended complaint, filed in May,

1985, Maryland Casualty again alleged jurisdiction on the

basis of diversity.

B. The District Court’s Coverage Opinion

Grace, and companies it acquired, manufactured and sold

building products containing asbestos, which were used to

soundproof and fireproof buildings from the 1940s until the

mid-1970s. Subsequently, lawsuits filed against Grace, and

most other manufacturers and installers of building products

containing asbestos, alleged bodily injury caused by these

products and property damage resulting from the presence of

asbestos-containing materials in buildings and sought the

costs of the removal or containment of these products (the

“underlying tort actions”).

Grace sought to be indemnified for any liability it faced in

the underlying tort actions by five insurance companies that

sold it primary comprehensive general liability insurance:

Maryland Casualty, CNA, Aetna, General, and Royal. The

insurers either denied coverage or sent “reservation of rights”

letters asserting that their policies did not provide coverage

for the asbestos-related claims against Grace.

Following cross-motions for partial summary judgment, the

district court, on March 6, 1991, issued an opinion in which

it determined, under New York law, the “trigger” of insurance

coverage for claims of asbestos-related bodily injury and

property damage. With respect to the trigger of coverage for

bodily injury claims, the district court, relying on American

Home Products Corp. v. Liberty Mutual Insurance Co., 565 F.

Supp. 1485 (S.D.N.Y. 1983), aff’d as modified, 748 F.2d 760

(2d Cir. 1984), held that “injury-in-fact” triggered coverage

for asbestos-related bodily injury claims, and further held that

there was an insufficient record of the time as to when such

injury-in-fact occurred. 43a - 44a.

The district court then addressed the issue of trigger of cov-

erage for asbestos-related property damage claims. Grace

sought a “continuous” trigger of coverage, under which every

environmental insurance policy in effect from installation to

removal of the asbestos would provide coverage, while Mary-

land argued for a “manifestation” trigger, under which the

“discovery” of property damage must occur during the policy

period to trigger coverage. 61a. Relying on American

Motorist Insurance Co. v. Levolor Lorentzen, Inc., 1988 WL

112142 (D.N.J. 1988), appeal dismissed, 879 F.2d 1165 (3d

Cir. 1989) (applying New York law), the district court held

that New York would adopt the “discovery” trigger for prop-

erty damage claims. 64a.

C. The Second Circuit’s Decision

Grace thereafter filed a timely appeal on the issue of trig-

ger of coverage. While the appeal was pending, and after two

United States Courts of Appeals dismissed insurance cover-

age cases involving other parties for lack of subject matter

jurisdiction on almost identical realignment issues,* Grace

moved in the Second Circuit for an order vacating the district

court’s decision for lack of subject matter jurisdiction. The

Second Circuit directed Grace to file briefs on the jurisdiction

issue, and Grace complied.

4 See United States Fidelity & Guar. Co. v. Thomas Solvent Co.,

955 F.2d 1085 (6th Cir. 1992); Employers Ins. of Wausau v. Crown Cork

& Seal Co., 942 F.2d 862 (3d Cir. 1991).

TS OE

On September 1, 1993, the Second Circuit issued its deci-

sion on Grace’s appeal. In direct contravention of City of

Indianapolis, the court held that, under a “collision of inter-

ests” test, diversity jurisdiction is satisfied as long as there is

some “actual, substantial controversy, or a collision of inter-

ests” between the parties. 13a. The existence of a conflict

among the insurance companies on issues other than the prin-

cipal issue of whether Grace is entitled to insurance coverage

“produced the required collision of interests to sustain diver-

sity.” 15a. In adopting the “collision of interests” test to

resolve the realignment issue, the Second Circuit concluded

that the “primary purpose” test “is not actually dictated by

Indianapolis,” and that subordinate controversies between the

parties should be considered. In rejecting the primary purpose

test, the court reasoned that “[b]ecause the insurers are of a

single mind to escape liability for paying claims does not

mean that they are not in conflict with one another.” 15a. As

a result of such reasoning, the court ruled “that actual and

substantial controversies exist among the insurers and Grace

to sustain diversity jurisdiction.” 17a.

With respect to Grace’s appeal on the trigger of coverage

for asbestos-related property damage claims, the Second Cir-

cuit rejected the district court’s “discovery” trigger and

adopted an “injury-in-fact” trigger: a policy must respond if

injury or damage takes place during the policy period, regard-

less of when property damage is discovered. 22a. However,

rather than remand on the issue of when “injury-in-fact”

occurs, and without an evidential record before it, the Second

Circuit held that “[o]nce installed, the damage that asbestos

inflicts is complete” and that any subsequent fiber release

“concerns solely the health of those persons who breathe” the

air. 26a. To emphasize its point, the court repeated that prop-

erty damage occurs, in all cases, for all types of products con-

taining asbestos, only upon installation. 26a.

The Second Circuit’s “finding” of fact with respect to the

timing of asbestos property damage was unsupported by any

evidence from the record on appeal, any allegations or evi-

dence in the underlying tort actions, or any determinations of

fact in the underlying tort actions. Moreover, no party, in

either the district court or before the Second Circuit, had

introduced any evidence with respect to the timing of the

occurrence of property damage related to asbestos.

Grace and Royal both filed petitions for rehearing, sug-

gestions for rehearing en banc, and, alternatively, motions for

certifications to the New York Court of Appeals. In their peti-

tions, Grace and Royal sought, inter alia, a remand to the dis-

trict court for a factual hearing as to when the alleged

asbestos property damage occurred in the underlying tort

actions against Grace. In October 1993, the Clerk of the Court

of the Second Circuit polled Maryland Casualty and Aetna to

learn if they would object to a remand to the district court for

a factual hearing to determine “whether the damages incurred

at the time of asbestos installation in a building are ongoing.”

Neither party objected.

Numerous claimants in the underlying tort actions filed

amicus curiae briefs urging rehearing.° They argued that the

Second Circuit’s “finding” that asbestos-related property

damage occurs only upon installation was incorrect as a

matter of fact and inconsistent with the rulings in the under-

lying tort actions which had already found that property dam-

age was caused by actual asbestos fiber release, not mere

installation.

In January 1994, the Second Circuit granted rehearing con-

cerning the trigger of coverage ruling in its September 1993

° The amici included the Attorneys General of thirty-one states,

the District of Columbia, and the Northern Marianas Islands; the New

York State School Board Association; the National School Board Asso-

ciation; Texas Governmental Subdivisions and Independent School Dis-

tricts: additional insurance companies; and various private parties such

as the Asbestos Claims Management Corporation, the certified class rep-

resentative of all colleges and universities in the United States, and the

certified class representatives of all primary and secondary school dis-

tricts in the United States.

EEO EEO

decision, and ordered rebriefing of that issue only. 88a - 89a.

On May 16, 1994, however, the Second Circuit issued an

amended Opinion that is essentially the same as the Septem-

ber 1993 decision, with some non-substantive editing. 3a -

28a. The court did not address, or even mention, any of the

arguments raised by the parties or amici in their submissions

on rehearing. Grace’s petition for rehearing en banc was

denied by the Second Circuit on July 15, 1994. la - 2a. This

petition for certiorari to the Second Circuit was filed on Octo-

ber 13, 1994.

REASONS FOR GRANTING THE WRIT

I. THE DECISION BELOW CONFLICTS

SQUARELY WITH THIS COURT’S HOLDING

IN CITY OF INDIANAPOLIS AND FURTHERS

A DIRECT AND IRRECONCILABLE CON-

FLICT AMONG THE CIRCUITS REGARDING

THE PROPER TEST FOR DETERMINING

DIVERSITY JURISDICTION

This Court has granted certiorari frequently in cases in

which a court of appeals has decided a federal question in a

way that conflicts with applicable decisions of this Court. The

Second Circuit, in applying the “collision of interests” test,

has impermissibly expanded the scope of diversity jurisdic-

tion and has, in effect, condoned the growing practice of

“manufactured” diversity by those interests intent on adju-

dicating their state law claims in a federal forum. In so deter-

mining the realignment of the parties for purposes of diversity

jurisdiction, the Second Circuit misinterpreted and misapplied

Mr. Justice Frankfurter’s “primary purpose” test announced

by this Court in City of Indianapolis over fifty years ago. The

“primary purpose” test, by which parties are aligned accord-

ing to the “principal purpose of the suit,” has been followed

as controlling precedent in the First, Third, Fifth, Sixth, Ninth

and Eleventh Circuits.”®

In addition to the Second Circuit, the Seventh and Eighth

Circuits have also adopted the “collision of interests” or

“actual conflicts” test between the parties,’ such that a direct

conflict has now developed among the circuit courts. The Sec-

ond Circuit’s decision conflicts directly with Courts of

Appeals for the Third and Sixth Circuits which have expressly

rejected the “collision of interests” test in insurance coverage

cases and properly have followed the “primary purpose” test

announced in City of Indianapolis.

This petition presents a critical issue that affects the proper

scope of federal diversity jurisdiction. As multi-party com-

plex litigation proliferates in the federal courts, the practice

of diluting the “primary purpose test” of City of Indianapolis

results in depriving state courts of their jurisdiction over such

matters, and too easily leads to the manufacture of diversity

jurisdiction and to the growing practice of forum shopping

among the federal circuits. It is time for this Court to inter-

cede to stop the expansion of federal diversity jurisdiction

through the manipulation of the realignment of parties in

order to create federal jurisdiction. That problem, as well as

. See, e.g., U.S.I. Properties Corp. v. M.D. Constr. Co., 860 F.2d

1, 4 (Ist Cir. 1988), cert. denied, 490 U.S. 1065 (1989); Employers Ins.

of Wausau v. Crown Cork & Seal Co., 942 F.2d 862, 866 (3d Cir. 1991);

Zurn Indus., Inc. v. Acton Constr. Co., 847 F.2d 234, 237 (Sth Cir. 1988);

Lowe v. Ingalls Shipbuilding, 723 F.2d 1173, 1178 (Sth Cir. 1984); Eikel

v. States Marine Lines, Inc., 473 F.2d 959, 963 (Sth Cir. 1973); Indemnity

Ins. Co. v. First Nat’l Bank at Winter Park, Fla., 351 F.2d 519, 522 (Sth

Cir. 1965); United States Fidelity & Guar. Co. v. Thomas Solvent Co.,

955 F.2d 1085, 1089 (6th Cir. 1992); Continental Airlines v. Goodyear

Tire & Rubber Co., 819 F.2d 1519, 1523 (9th Cir. 1987); Dolch v. United

Cal. Bank, 702 F.2d 178, 181 (9th Cir. 1983); Weller v. Navigator

Marine, Inc., 737 F.2d 1547, 1548 (11th Cir. 1984).

See, e.g., American Motorists Ins. Co. v. Trane Co., 657 F.2d

146, 151 (7th Cir. 1981); Universal Underwriters Ins. Co. vy. Wagner, 367

F.2d 866, 871 (8th Cir. 1966).

the conflict among the circuits and this Court on this ques-

tion, which challenges the statutory limitations on the author-

ity of Article III courts, will continue to recur without this

Court’s prompt intervention.

A. The Second Circuit’s Decision Contravenes the

“Primary Purpose” Test Set Forth in City of

Indianapolis.

In City of Indianapolis, this Court established that when

there is more than one controversy among the parties to a

lawsuit, diversity jurisdiction must be based upon an align-

ment of the parties according to the “principal purpose of the

suit” and the “primary and controlling matter in dispute.” Mr.

Justice Frankfurter, writing for the Court, held that:

To sustain diversity jurisdiction there must exist an

“actual,” . . . “substantial,” . . . controversy between

citizens of different states, all of whom on one side of

the controversy are citizens of different states from all

parties on the other side. . . . Whether the necessary

“collision of interests”. . . exists, is therefore not to be

determined by mechanical rules. It must be ascertained

from the “principal purpose of the suit. . . and the

primary and controlling matter in dispute” .

314 U.S. at 69 (emphasis added) (citations omitted). Thus, a

court should identify the “dominating controversy” in the case,

to which “[e]verything else . . . is incidental,” in determining

whether the parties are aligned properly. /d. at 69, 72. The exis-

tence of incidental claims in addition to the dominating con-

troversy will not change the result.

This Court further held that the determination of diversity

jurisdiction must not be left to the parties:

Diversity jurisdiction cannot be conferred upon the fed-

eral courts by the parties’ own determinations of who are

plaintiffs and who defendants. It is our duty, as it is that

of the lower federal courts, to “look beyond the plead-

ings and arrange the parties according to their sides in

the dispute.”

City of Indianapolis, 314 U.S. at 69 (quoting Dawson v.

Columbia Ave. Sav. Fund, S.D. Title & T. Co., 197 U.S. 178,

180 (1905)).

In this case, the primary and controlling matter in dispute

was accurately stated by the district court: “This case, like

many others across the country, involves a dispute between

an insured and insurers concerning coverage for underlying

asbestos personal injury and property damages cases.” 30a

(emphasis added; footnote omitted).* All of the insurance

companies, whether nominally denominated as plaintiff or

defendant, share the primary goal of avoiding liability to

Grace on its asbestos claims.’ Any claims that the insurance

companies have against each other arise only if, and when,

they are found liable to Grace. Under the “principal purpose”

test adopted by this Court in City of Indianapolis, the insur-

ance companies all should be aligned against Grace, with the

resultant absence of diversity jurisdiction.

. Similarly, after outlining twelve forms of relief that Maryland

Casualty sought solely against Grace, the district court stated, “Maryland

Casualty further requests relief in the form of a judgment ordering Aetna,

Royal and General, to the extent that Grace is able to establish that

those insurers afforded responsive coverage, to reimburse Maryland

Casualty. . . .” 36a (emphasis added).

° The Second Circuit failed to recognize this fact because it deter-

mined, erroneously, that Continental “never has been adverse to Grace

. . .” 15a (emphasis added). To the contrary, Grace and Continental

had adverse interests as a result of Continental’s reservation of rights let-

ter. Also, Continental sued Grace in another court in connection with

asbestos insurance coverage issues. Continental Casualty Co. v. W.R.

Grace & Co., No. 90-C-1255 (N.D. Ill. filed Mar. 5, 1990). Moreover,

even if Continental were properly aligned with Grace, Grace is not

diverse from Aetna and Royal, insurance companies that were opposed

to Grace on all issues in this litigation.

ed alte Si Ble mae teettid Kate

The Second Circuit’s “collision of interests” test cannot be

reconciled with this Court’s holding in City of Indianapolis.

A careful reading of Mr. Justice Frankfurter’s “governing

principles” on realignment demonstrates that a court must

look only to conflicts in the “principal purpose of the suit”

and the “primary and controlling matter in dispute,” 314 U.S.

at 69, and ignore conflicts that are wholly contingent to or

derivative of the primary claim. See generally Note, Janus

Was Not A God of Justice: Realignment of Parties in Diversity

Jurisdiction, 68 N.Y.U. L. Rev. 1072 (1993).

Grace’s demand for insurance coverage is the principal pur-

pose of the suit and the primary and controlling matter in dis-

pute. The rights and obligations of the carriers to each other

are both contingent and derivative and arise only if a court

determines that Grace is entitled to coverage. Any incidental

disputes between the carriers exist only to the extent that

there is an obligation to provide insurance coverage to Grace,

and are completely dependent upon the primary coverage dis-

pute at issue. As to that issue, all of the carriers oppose

Grace.

The Second Circuit’s adoption of a “collision of interests”

test impermissibly expands the scope of diversity jurisdiction.

As even the Second Circuit concedes, its “collision of inter-

est” test is “broader” and “more flexible” than the “primary

purpose” test. 13a-14a. This Court has made clear, however,

in City of Indianapolis and elsewhere, that a broad and flex-

ible test is undesirable. Federal courts are courts of limited

jurisdiction, empowered to hear cases only as provided for

under Article III of the Constitution and congressional enact-

ments pursuant thereto. Bender v. Williamsport Area School

Dist., 475 U.S. 534, 541 (1986); Marbury v. Madison, 5 U.S.

(1 Cranch) 137, 173-80 (1803).

This Court repeatedly has cautioned that federal courts

must guard against the expansion of diversity jurisdiction by

judicial interpretation: “Due regard for the rightful indepen-

dence of state governments, which should actuate federal

courts, requires that they scrupulously confine their own

jurisdiction to the precise limits which the statute has

defined.” City of Indianapolis, 314 U.S. at 77 (citation omit-

ted) (emphasis added). See also Atascadero State Hosp. v.

Scanlon, 473 U.S. 234, 243 (1985); American Fire & Casu-

alties Co. v. Finn, 341 U.S. 6, 17-18 (1951).

Even fifty years ago, this Court recognized the growing bur-

den placed upon the federal courts by diversity jurisdiction:

The dominant note in the successive enactments of

Congress relating to diversity jurisdiction is one of jeal-

ous restriction, of avoiding offense to state sensitiveness,

and of relieving the federal courts of the overwhelming

burden of “business that intrinsically belongs to the state

courts” in order to keep them free for their distinctive

federal business.

City of Indianapolis, 314 U.S. at 76.

B. The Second Circuit’s Adoption of the “Collision

of Interests” Test Furthers a Direct and Irrec-

oncilable Conflict Among the Circuit Courts of

Appeals Regarding the Appropriate Test for

Diversity Jurisdiction.

Six circuit courts of appeals have adopted the City of Indi-

anapolis “primary purpose” test for determining diversity

jurisdiction, two of them in the same insurance declaratory

judgment context as here. See n.6, supra. Two other circuit

courts of appeals, in addition to the Second Circuit, have

adopted the “collision of interests” test. American Motorists

Ins. Co. v. Trane Co., 657 F.2d 146, 151 (7th Cir. 1981);!° Uni-

versal Underwriters Ins. Co. v. Wagner, 367 F.2d 866, 871

(8th Cir. 1966).

Even the Seventh Circuit has turned away from a strict “colli-

sion of interests” test since deciding Trane. See Truck Ins. Exch. v. Ash-

land Oil, Inc., 951 F.2d 787, 788 (7th Cir. 1992); Fidelity & Deposit Co.

of Md. v. City of Sheboygan Falls, 713 F.2d 1261, 1267 (7th Cir. 1983).

et ee

abe in AS nitty Ree

Notably, the two circuit courts of appeals that have

expressly rejected the “collision of interests” test have done so

in insurance coverage cases that are virtually identical to this

case. In Thomas Solvent, for example, the Sixth Circuit held

that issues of contribution among insurance companies—the

very issue which the Second Circuit used to support its “col-

lision of interests” test—were ancillary to the ultimate issue of

indemnification and could not sustain diversity jurisdiction:

The issue of contribution can only be addressed after the

court has determined which of the various insurers have

a duty to indemnify particular [policyholders]. More-

over, if the insurers are held not to owe a duty to indem-

nify any of the [policyholders], then the issue of

contribution is moot.

955 F.2d at 1090-91. The court emphasized that the determi-

nation of diversity must not be left to the parties themselves:

[I]t is well established that: “[t]he courts, not the par-

ties, are responsible for aligning the parties according

to their interests in the litigation. If the interests of a

party named as a defendant coincide with those of the

plaintiff in relation to the purpose of the lawsuit, the

named defendant must be realigned as a plaintiff for

jurisdictional purposes.”

Id. at 1089 (emphasis in original) (quoting Continental Air-

lines, 819 F.2d at 1523).

Similarly, in Crown Cork, the Third Circuit held that the

principal issue was “simply whether the insurers have obli-

gations to defend and indemnify” the policyholder. 942 F.2d

at 866. Although the insurance companies had advanced

different theories of liability, and some of them had asserted

cross-claims and counterclaims for contribution, “they are

joined in their common goal of avoiding obligations” to the

policyholder. Jd. On this basis, the Third Circuit affirmed

the dismissal for lack of subject matter diversity jurisdiction.

Id. at 866-67."!

The Second Circuit’s adoption of a “collision of interests”

test furthers the split of authority among the circuit courts of

appeals on this fundamental issue of federal diversity juris-

diction. The Second Circuit’s misguided contention that its

decision does not conflict with the “purpose” of City of Indi-

anapolis requires this Court to clarify the appropriate diver-

sity test by granting a writ of certiorari.

II. THE SECOND CIRCUIT’S DECISION VIO-

LATES THIS COURT’S PROSCRIPTION

AGAINST IMPROPER APPELLATE FACT-

FINDING.

This Court has granted certiorari numerous times to rectify

errors created by the courts of appeals when they engaged in

impermissible appellate fact-finding. In this case, the Second

Circuit’s conduct was particularly egregious because, in

reviewing the district court’s summary judgment decision, the

Second Circuit determined a disputed issue of material fact

‘| The Second Circuit distinguished Thomas Solvent and Crown

Cork on the ground that CNA was not adverse to Grace in this action,

while in those cases, “every insurer was antagonistic to the insured.” 15a.

As discussed at note 9, supra, this argument is factually incorrect. Fur-

thermore, the decision erroneously disregards that, apart from CNA,

Aetna and Royal are adverse to Grace, and their presence is sufficient to

destroy diversity. See Note, 68 N.Y.U. L. Rev. at 1117-18 n.287; see also

Continental Airlines, 819 F.2d at 1523, in which the Ninth Circuit applied

the “principal purpose” test in a sua sponte consideration of subject mat-

ter jurisdiction in an action arising out of an accident involving one of the

plaintiff’s aircraft. Citing City of Indianapolis, the Ninth Circuit

realigned one of the plaintiffs, the California supplier, as a defendant.

Moreover, the Second Circuit’s citation of opinions from the First and

Fifth Circuits as authority for the “collision of interests” test reflects a

misreading of those cases. Both U.S.I. Properties Corp., 860 F.2d 1, and

Zurn Industries, Inc., 847 F.2d 234, support application of the “primary

purpose” test.

Stl li tesa St

3 De

which (1) was not raised in that Court or in the district court,

(2) was decided in the absence of any evidentiary record, (3)

was based on insubstantial and inappropriate support, (4) was

inconsistent with prior judicial determinations of the under-

lying asbestos-related property damage claims against Grace

and did not even attempt to reconcile the probability of incon-

sistent findings, and (5) was decided without adequate con-

sideration of, and ultimately in contravention of applicable

New York state law.

The Second Circuit’s decision summarily adjudicated a fac-

tual issue that is critical to, and is established in each of the

underlying tort actions, namely, when the asbestos-related

injuries took place. The Second Circuit’s decision effectively

eliminated the insured’s ability to support its coverage claims

with evidence established through the underlying tort claims

themselves. The decision also impermissibly expanded the

role of summary judgment determinations, a tool that is likely

to become an increasingly desirable and efficient method of

disposing of insurance coverage cases, which are frequently

litigated in federal diversity actions, corresponding to the

rapidly growing number of state-based toxic tort claims for

injuries to persons and property. The Second Circuit’s flawed

decision likely will serve as the basis for future rulings in

other jurisdictions. See Stevens v. City of Cannon Beach,

___ US. __, 114 S. Ct. 1332, 1335-36 (1994) (Scalia, J., dis-

senting from denial of certiorari, noting unfairness of state

court reliance on prior case which itself lacked an evidentiary

foundation). The potential impact of the Court’s decision, not

only on the settlements and judgments reached in the under-

lying tort actions related to this case, but also on the multi-

tude of coverage disputes over asbestos-related property

damage pending throughout the country, cannot be overstated.

The time is ripe to remind and admonish federal appellate

courts that the determination of factual issues that would

otherwise preclude summary judgment is the proper function

of the district court, not the court of appeals. This Court

should exercise its supervisory powers and grant certiorari in

this matter to set forth the appropriate limits of federal appel-

late jurisdiction in this regard.

A. The Second Circuit’s Disputed Finding of Fact

Was Erroneous On At Least Five Grounds.

Circuit courts are permitted to review de novo only ques-

tions of law. Pierce v. Underwood, 487 U.S. 552, 558 (1988);

Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 402-04

(1990). The Second Circuit recited the appropriate limitation

on its function in this case:

In reviewing the grant of summary judgment, substantive

insurance law will determine which facts are material to

the parties’ dispute, and “[o]nly disputes over facts that

might affect the outcome of the suit” will bar summary

judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

248 (1986). Because the adoption of a coverage trigger

is a question of substantive insurance law, we review the

magistrate judge’s grant of such relief de novo.

17a. This express recognition of the standards governing

review of a summary judgment determination was meaningless,

however, since the Second Circuit nevertheless exceeded its

role and engaged in de novo fact-finding.

The limited issue that the district court certified to the Sec-

ond Circuit pursuant to Fed. R. Civ. P. 54(b) involved the pro-

priety of the summary judgment determination below that the

proper trigger of insurance coverage for asbestos-related

property damage claims was manifestation or discovery of an

injury, as opposed to injury-in-fact. That was the only issue

for the Second Circuit to decide as a matter of law, and the

Second Circuit decided that injury-in-fact, not discovery, was

the trigger for property damage claims.

The Second Circuit erred, however, when it went on to

decide a subsidiary and critical issue of fact without a factual

Sn Retail

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record. Rather than announcing the proper legal standard and

remanding to the district court for development of an appro-

priate factual record to which the legal standard should be

applied, the Second Circuit proceeded to determine the ulti-

mate fact issue of when injury-in-fact occurs in connection

with asbestos-related property damage claims, finding that

such injury takes place only upon installation of asbestos in

a building. That factual conclusion, although couched as a

matter of law, was erroneous.

1. The disputed factual issue was not raised in the

district court or in the court of appeals.

This Court repeatedly has refused to allow the federal

courts of appeals to usurp the role of either fact-finder or

principal fact reviewer.'? “[A]ppellate courts must constantly

have in mind that their function is not to decide factual issues

de novo.” Anderson v. Bessemer City, 470 U.S. 564, 573

(1985) (quoting Zenith Radio Corp v. Hazeltine Research,

Inc., 395 U.S. 100, 123 (1969))."?

In Singleton v. Wulff, 428 U.S. 106 (1976), this Court

explained the rule that a federal appellate court generally does

not consider an issue not determined below:

[This rule] is essential in order that parties may have the

opportunity to offer all the evidence they believe rele-

vant to the issues. . . [and] in order that litigants may

not be surprised on appeal by final decision there of

12 See, e.g., Maine v. Tyler, 477 U.S. 131, 145 n.17 (1986); Ander-

son v. Bessemer City, 470 U.S. 564, 573-76 (1985); Inwood Laboratories

v. Ives Laboratories, 456 U.S. 844, 857-58 (1982); Zenith Radio Corp.

v. Hazeltine Research, 395 U.S. 100, 123 (1969).

As stated in the Advisory Committee Notes to Fed. R. Civ. P.

52(a), “[t]o permit courts of appeals to share more actively in the fact-find-

ing function would tend to undermine the legitimacy of the district courts

in the eyes of litigants, multiply appeals by encouraging appellate retrial

of some factual issues, and needlessly reallocate judicial authority.”

issues upon which they have had no opportunity to intro-

duce evidence.

Id. at 120 (quoting Hormel v. Helvering, 312 U.S. 552, 556

(1941)). Singleton concluded that the parties must have the

opportunity to introduce both evidence and legal arguments in

support of their cause, and that the petitioner was justified in

not presenting those arguments to the Court of Appeals and in

assuming, rather, that he would have the opportunity to do so

in the district court should the Court of Appeals agree that he

had standing to pursue his claim. /d.

Likewise, in Icicle Seafoods, Inc. v. Worthington, 475 U.S.

709 (1986), this Court vacated and remanded the Ninth Cir-

cuit’s decision because it contained inappropriate fact-find-

ing. In setting forth the only options that had been available

to the appellate court, the Supreme Court stated:

If the Court of Appeals believed that the District

Court had failed to make findings of fact essential to

a proper resolution of the legal question, it should

have remanded to the District Court to make those

findings. If it was of the view that the findings of the

District Court were “clearly erroneous” within the mean-

ing of Rule 52(a), it could have set them aside on that

basis. If it believed that the District Court’s factual find-

ings were unassailable, but that the proper rule of law

was misapplied to those findings, it could have reversed

the District Court’s judgment. But it should not simply

have made factual findings on its own.

Id. at 714 (emphasis added). See also Inwood Laboratories v.

Ives Laboratories, 456 U.S. 844, 857 n.19 (1982); River Plate

& Brazil Conferences v. Pressed Steel Car Co., 227 F.2d 60, 63

(2d Cir. 1955); Carr v. Corning, 182 F.2d 14, 21-22 (D.C. Cir.

1950).

Although there may be “circumstances in which a federal

appellate court is justified in resolving an issue not passed on

below,” such as where “the proper resolution is beyond any

doubt” or where “injustice might otherwise result,” Singleton,

428 U.S. at 121, courts must be mindful that the Singleton

Court concluded that “injustice was more likely to be caused

than avoided by deciding the issue without petitioner’s hav-

ing had an opportunity to be heard.” Jd. Accord Fountain v.

Filson, 336 U.S. 681, 683 (1949).

2. The disputed factual issue was decided in the

absence of a full evidentiary record.

Unfortunately for Grace, the Singleton Court’s fear that

injustice was more likely to result from a decision made with-

out an opportunity to be heard was realized in this case.

Throughout the proceedings in the district court and on the

initial appeal to the Second Circuit, the parties debated the

legal issue of what triggered property damage insurance cov-

erage, discovery or injury-in-fact. Like the petitioner in Sin-

gleton, no party ever argued the subsidiary factual issue of

when either discovery or injury-in-fact took place because

everyone, including the district court, knew those issues were

inappropriate on summary judgment." In their submissions to

the Second Circuit, mindfu! of the general rule that prohibits

presentation on appeal of facts and issues that were not pre-

sented or considered below, see, e.g., Singleton, 428 U.S. 120,

none of the parties submitted any evidence as to when injury-

in-fact occurs. Rather, they sought remand to the district court

so that the question could be supplemented with evidence,

fully litigated, and decided in that tribunal.

To the parties’ amazement and dismay, having acknowl-

edged that a substantial question remained “concerning cor-

rect application of this trigger, one that depends upon the

definition of property damage,” 23a, and despite the fact-

“ Indeed, in addressing the injury-in-fact trigger for asbestos-

related bodily injury claims coverage, the district court explicitly rec-

ognized differences among the Circuits on that issue and denied summary

judgment, leaving it to the underlying cases to “address related factual

issues concerning the injuries at issue.” 43a - 44a. \

intensive nature of such an inquiry, the Second Circuit pro-

ceeded to define, in the absence of a factual record, how and

when asbestos injures a building, concluding that injury

occurs upon installation of the asbestos. 24a - 25a. Grace and

virtually every other party to the appeal, including more than

forty amici curiae, formally requested a remand and oppor-

tunity to be heard, identifying for the Second Circuit in sum-

mary fashion the evidence developed by plaintiffs in the

underlying tort actions that would be presented on remand in

the district court, including the nature of the plaintiffs’ under-

lying tort claims, expert testimony, and judicial decisions on

those underlying claims that held that asbestos-related prop-

erty damage can and does occur subsequent to installation of

the asbestos.

3. The disputed factual finding was based on insub-

stantial and inappropriate support.

In the absence of a proper evidentiary record, what the Sec-

ond Circuit was forced to rely upon to support its “installation

only” finding was (1) the only known district court case to

adopt an installation-only trigger for property damage insur-

ance coverage, and (2) a partisan journal article prepared by

insurance defense attorneys. 25a - 27a. The case, Stonewall

Insurance Co. v. National Gypsum Co., 86 Civ. 9671 (S.D.N-Y.

May 27, 1992), appeal pending, No. 94-7082, [90a - 129a], is

inappropriate support for the Second Circuit’s conclusion

for many reasons.'> Stonewall confused the time at which

- Stonewall is poor authority because it is inconsistent with

(1) that court’s earlier characterization of the physical nature of asbestos

property damage as happening when fibers are released, 109a - 110a,

(2) its finding that “a continuous trigger theory is not incompatible with

an injury in fact theory,” 119a, n.15, and (3) an injury-in-fact trigger,

which should allow a policyholder to prove, as an issue of fact, that prop-

erty damage occurred during more than one particular policy period. In

addition, Stonewall emphasizes the court’s sharp departure from the

established procedure for examining state law: the district court in

Stonewall also failed to engage in the required analysis of New York law.

See pp. 25-26, infra.

damages are fixed, which that court found to be installation,

with the various times at which property damage can occur,

which triggers coverage. Perhaps more significantly, the

“installation only” finding in Stonewall was based on testi-

monial evidence in the record. 120a. No such evidence was

before the appellate court in this case, and, as a result, no

comfort can be drawn from the Stonewall decision.

With regard to the Arness/Eliason article,’® Arness and

Eliason are attorneys at Hogan & Harston who submitted an

amicus brief to the Second Circuit on behalf of many of

Grace’s excess insurers, advocating the “discovery” trigger.

However, even those authors take the position that, because

of differences in products containing asbestos and building

conditions “property damage coverage issues are extremely

fact-oriented.” Id. at 978-79.

4. The disputed factual finding was inconsistent

with determinations made on the underlying tort

claims and did not even attempt to reconcile the

probability of inconsistent findings.

The inappropriateness of the Second Circuit’s controversial

factual finding is exacerbated by its failure to consider the

evidence developed by the plaintiffs in the underlying tort

actions against Grace and the nature of the asbestos-related

liability imposed upon Grace in those cases. The Court’s deci-

sion is, in fact, directly contrary to the ev idence presented by

plaintiffs in the underlying tort actions regarding the nature

and timing of the alleged asbestos property damage—evi-

dence that includes the underlying tort complaints and state-

ments of the Environmental Protection Agency that were

relied upon by the underlying tort plaintiffs—as well as the

decisions in those cases that have ruled on the nature of

asbestos property damage and the timing of that damage.

16 John P. Armess and Randall D. Eliason, /nsurance Coverage for

“Property Damage” in Asbestos and Other Toxic Tort Cases, 72 Va. L.

Rev. 943 (1986).

The available record from the underlying tort actions con-

firms that, in the vast majority of cases involving buildings

made with materials containing asbestos, the courts, includ-

ing New York courts, require evidence of release of asbestos

fibers as proof of property damage due to asbestos. Grace

enumerated and discussed these cases extensively in its

rehearing brief. The Second Circuit’s contrary and arbitrary

finding disregarded Grace’s arguments, as well as the evi-

dence presented by plaintiffs and relied on by the courts in

the underlying tort actions.'’

The Second Circuit’s finding also violated the established

principle of insurance law that coverage is dependent upon

the nature of the underlying claim, not upon an independent

determination of the claim in the coverage action. See, e.g.,

Luria Bros. & Co. v. Alliance Assurance Co., 780 F.2d 1082,

1091 (2d Cir. 1986); Uniroyal, Inc. v. Home Ins. Co., 707 F.

Supp. 1368, 1378 (E.D.N.Y. 1988). Concerned that policy-

holders not be placed in the untenable position of inconsistent

rulings in the underlying tort and insurance coverage cases,

courts have held that insurance companies can be bound by

the judgments and settlements in the underlying cases. See,

e.g., Luria Bros., 780 F.2d at 1091; Ridgeway v. Gulf Life Ins.

Co., 578 F.2d 1026 (Sth Cir. 1978); American Indus. Under-

writers Corp. v. Zurn Indus., 771 F. Supp. 690, 701 (W.D. Pa.

1991); Uniroyal, Inc., 707 F. Supp. at 1378. The Second

Circuit’s decision undermines this established practice and

- The anomaly between the Second Circuit’s decision and Grace’s

liability in the underlying tort actions is made apparent by the decision

in MDU Resources Group v. W.R. Grace and Co., 14 F.3d 1274 (8th Cir.),

cert. denied, 63 U.S.L.W. 3258 (1994). The Eighth Circuit held that the

North Dakota statute of limitations did not begin to run until the property

owner was aware that asbestos in the building posed an actual hazard.

The court reasoned that “the injury for which asbestos plaintiffs are being

recompensed is the contamination of their buildings and not the mere

presence of asbestos.” Jd. at 1279. That decision cannot be reconciled

with the Second Circuit’s decision that equates injury only with “mere

presence” of asbestos at installation.

creates the anomaly in which the coverage dispute is not log-

ically linked to the underlying tort actions, but is a separate,

independent action that neither reflects nor evaluates Grace’s

liability in the underlying tort actions.

5. The disputed factual finding was made without

adequate consideration of, and ultimately in con-

travention of applicable New York state law.

The Second Circuit also failed to analyze de novo the dis-

trict court’s legal conclusions based on state law, contrary to

this Court’s instruction in Salve Regina College v. Russell,

499 U.S. 225, 233 (1991). The Second Circuit neither ana-

lyzed nor applied New York law to the trigger of coverage

question. That analysis would have revealed that the court’s

finding was contrary to New York law, which instructs that

the release of asbestos fibers occurring after installation can

cause property damage. See City of New York v. Keene Corp.,

No. 44559/84 (N.Y. Sup. Ct. Dec. 2, 1985), aff’d, 129 A.D.2d

1019, 513 N.Y.S. 2d 1004 (1st Dep’t 1987). 141a - 149a. See

also 887 7th Ave. Associated Ltd. Partnership v. AAER

Sprayed Installations, Inc., No. 50460 (N.Y. App. Div. Ist

Dep’t, Dec. 7, 1993).'* 130a - 140a. This law was fully briefed

The Second Circuit’s inattention to relevant New York law is

exacerbated by the Court’s failure to seek guidance from extensive, anal-

ogous case law from other courts, many of which have determined that

asbestos property damage claims trigger insurance policies subsequent

to installation. See, e.g., Carey Canada, Inc. v. California Union Ins. Co.,

748 F. Supp. 8 (D.D.C. 1990); Owens-Illinois, Inc. v. United Ins. Co., 264

N.J. Super. 460, 625 A.2d 1 (App. Div. 1993); Armstrong World Indus.,

Inc. v. Aetna Casualty & Sur. Co., 20 Cal. App. 4th 296, 26 Cal. Rptr. 2¢

35 (1993), review granted, (Jan. 27, 1994). See also United States

Fidelity & Guar. Co. v. Wilken Insulation Co., 144 Ill. 2d 64, 578 N.E.2d

926 (1991); Lac d’Amiante du Quebec, Ltee. v. American Home Assur-

ance Co., 613 F. Supp. 1549 (D.N.J. 1985), vacated on other grounds,

864 F.2d 1033 (3d Cir. 1988). Grace itself has been a party to cases with

such favorable holdings. See, e.g., Dayton Indep. School Dist. v. National

Gypsum Co., 682 F. Supp. 1403 (E.D. Tex. 1988), rev ’d on jurisdictional

grounds sub nom. W.R. Grace & Co. v. Continental Casualty Co., 896

F.2d 865 (Sth Cir. 1990).

ania

by the parties and discussed in the district court opinion.

61a - 63a. However, the Second Circuit ignored it entirely,”

abandoning the entire body of relevant New York law in favor

of the Stonewall case, which also failed to give proper atten-

tion to New York law. See pp. 22-23 & n.15, supra.

The Second Circuit’s result-oriented “finding” dramatically

illustrates the need for this Court’s intervention. This Court

should insure the right of all parties to have a full and fair

hearing, with facts to be decided on a fully-developed record.

Given this Court’s repeated proscriptions against appellate

court usurpation of the fact-finding and fact-reviewing roles

of district courts, the Second Circuit should not be permitted

to dispense with those roles altogether and assume the posi-

tion of both judge and jury.

a The other New York cases cited by the Second Circuit, Sturges

Mfg. Co. v. Utica Mutual Ins. Co., 37 N.Y.2d 69, 332 N.E.2d 319, 371

N.Y.S.2d 444 (1975), and Marine Midland Serv. Corp. v. Samuel Kosoff

& Sons, Inc., 60 A.D.2d 767, 400 N.Y.S.2d 959 (4th Dep’t 1977), address

the question of what property is damaged by the installation of a defec-

tive component which may fail in the future but does not otherwise con-

taminate or physically damage the product or building into which it is

incorporated. The issue in those cases was whether the “own product”

exclusion applied, not when property damage occurred. The Second Cir-

cuit neglected to cite New York cases that have rejected an installation

trigger. See, e.g., Greenlee v. Sherman, 142 A.D.2d 472, 536 N.Y.S.2d

877 (3d Dep’t 1989).

CONCLUSION

Because the two issues presented here implicate the federal

courts’ subject matter jurisdiction under Article III of the

Constitution, as well as those federal rules of procedure that

were designed to safeguard litigants’ Seventh Amendment

rights, Grace respectfully requests that its petition for a writ

of certiorari be granted to review the judgment of the United

States Court of Appeals for the Second Circuit.

Respectfully submitted,

Anthony J. Marchetta

Counsel of Record

PITNEY, HARDIN, Kipp & SZUCH

P.O. Box 1945

Morristown, NJ 07962-1945

(201) 966-6300

Attorneys for Petitioner W.R.

Grace & Co. -Conn.

On the Petition:

Robert G. Rose

Elizabeth J. Sher

Philip G. Barber

DATED: October 13, 1994

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Docket No. 91-9322

FILED: MAY 19, 1994

AMENDED

At a stated Term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in

the City of New York, on the 16th day of May, one thousand

nine hundred and ninety-four.

Present: HON. THOMAS J. MESKILL, Chief Judge*

HON. J. EDWARD LUMBARD,

HON. RICHARD J. CARDAMONE,

Circuit Judges.

MARYLAND CASUALTY COMPANY,

Plaintiff-Appellee,

W.R. GRACE AND COMPANY,

Defendant-Appellant,

CONTINENTAL CASUALTY COMPANY; AETNA CASUALTY &

SURETY COMPANY and GENERAL INSURANCE COMPANY

OF AMERICA, ,

Defendants,

’ After oral arguments but before the decision was rendered, Chief

Judge Meskill stepped down as Chief Judge and is now a Senior Circuit

Judge of the United States Court of Appeals for the Second Circuit.

ROYAL INDEMNITY COMPANY; AETNA CASUALTY and

SURETY COMPANY,

Defendants-Appellees.

Appeal from the United States District Court for the South-

ern District of New York.

This cause came on to be heard on the transcript of record

from the United States District Court for the Southern District

of New York and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now hereby ordered,

adjudged and decreed that the judgment be and it hereby is

reversed and the action remanded for further proceedings con-

sistent with the opinion of this Court.

GEORGE LANGE III

George Lange III, Clerk

By: EDWARD J. GUARDARO

Edward J. Guardaro

Staff Attorney

ISSUED AS MANDATE ON 22 JULY 94

[AMENDED]

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 11—August Term 1992

(Argued September 30, 1992

Decided September 1, 1993)

(Petition for Rehearing Granted January 11, 1994)

(Opinion Amended May 16, 1994)

Docket No. 91-9322

MARYLAND CASUALTY COMPANY,

Plaintiff-Appellee,

——

W.R. GRACE AND COMPANY,

Defendant-Appellant,

CONTINENTAL CASUALTY COMPANY; AETNA CASUALTY

& SURETY COMPANY and GENERAL INSURANCE

COMPANY OF AMERICA,

Defendants,

ROYAL INDEMNITY COMPANY; AETNA CASUALTY

AND SURETY COMPANY,

Defendants-Appellees.

Before:

MESKILL, Chief Judge,*

LUMBARD and CARDAMONE, Circuit Judges.

Asbestos products manufacturer appeals from the judg-

ment of the United States District Court for the Southern

District of New York (Bernikow, M.J.) holding that insur-

ance coverage was triggered by building owners’ dis-

covery of asbestos hazard and granting summary

judgment in favor of insurers. On appeal, we hold that (1)

parties to this litigation should not be realigned to destroy

diversity jurisdiction; and (2) insurance coverage is trig-

gered by installation of asbestos in buildings.

Reversed and remanded.

RANDY PAAR, New York, New York (Jerold

Oshinsky, Jordan Stanzler, Anderson Kill

Olick & Oshinsky, P.C. New York, New

York, of counsel), for Defendant-Appel-

lant W.R. Grace & Co.

LAURA A. FOGGAN, Washington, D.C. (James

P. Anasiewicz, Nancy J. Lemay, Wiley,

Rein & Fielding, Washington, D.C., of

counsel), for Plaintiff-Appellee Maryland

Casualty Company.

* After oral argument but before the decision was rendered, Chief

Judge Meskill stepped down as Chief Judge and is now a Senior Circuit

Judge of the United States Court of Appeals for the Second Circuit.

CARL J. PERNICONE, New York, New York

(James P. Donovan, Robert L. Joyce, Wil-

son, Elser, Moskowitz, Edelman &

Dicker, New York, New York, of coun-

sel), for Defendant-Appellee Royal

Indemnity Company.

JAMES E. ROCAP, III, Washington, D.C. (Jay

L. Alexander, Miller, Cassidy, Larroca &

Lewin, Washington, D.C.; Kaare Phillips,

Grais & Phillips, New York, New York,

of counsel), for Defendant-Appellee

Aetna Casualty and Surety Company.

Edward M. Shaw, New York, New York (Still-

man, Friedman & Shaw, P.C., New York,

New York; William J. Bowman, Donald

C. Brown, Jr., James P. Ruggeri, Hogan

& Hartson, Washington, D.C., of coun-

sel), filed a brief on behalf of Hartford

Accident & Indemnity Company and First

State Insurance Company as Amici

Curiae.

R. Nicholas Gimbel, Philadelphia, Pennsyl-

vania (Jill A. Douthett, Hoyle, Morris &

Kerr, Philadelphia, Pennsylvania, of

counsel), filed a brief on behalf of

National Gypsum Company as Amicus

Curiae.

Thomas J. Quinn, New York, New York

(Eileen T. McCabe, Stephen T. Roberts,

Mendes & Mount, New York, New York,

of counsel), filed a brief on behalf of

Rayment and London Market Companies

as Amicus Curiae.

Gerald V. Weigle, Jr., Cincinnati, Ohio

(Stephen G. Schweller, Trudy Weiss

Craig, Gregory A. Harrison, Dinsmore &

Shohl, Cincinnati, Ohio; Marcia B.

Golden, Boston, Massachusetts, of coun-

sel), filed a brief on behalf of Liberty

Mutual Insurance Company as Amicus

Curiae.

Wilson M. Brown, III, Philadelphia, Penn-

sylvania (Paul H. Saint-Antoine, Drinker

Biddle & Reath, Philadelphia, Pennsyl-

vania; Peter N. Hillman, Susan J.

Leskowitz, Chadbourne & Parke, New

York, New York; James W. Christie,

James A. Pabarue, Catherine C. Olanich,

Clark, Ladner, Fortenbaugh & Young,

Philadelphia, Pennsylvania; Philip C.

Stahl, Katherine E. Rakowsky, Grippo &

Elden, Chicago, Illinois, of counsel), filed

a brief on behalf of Lumbermens Mutual

Casualty Company, American Motorists

Insurance Company, American Manu-

facturers Mutual Insurance Company,

Republic Insurance Company, Commer-

cial Union Insurance Company, and

Fireman’s Fund Insurance Company as

Amici Curiae.

CARDAMONE, Circuit Judge:

The subject of this appeal is asbestos, a hazardous

material found in public and private buildings every-

where. The presence of this substance has precipitated

widespread litigation against its manufacturers, which

have looked to their insurance carriers to defend and

indemnify them. Before us on this appeal are a former

manufacturer of asbestos products and the insurance com-

panies that insured it. Here, the legal maxim volenti non

fit injuria—that is no injury which is done with the

injured party’s consent—does not apply even though the

owners had asbestos installed in their buildings. The

maxim is inapt because neither the owners nor the indi-

viduals actually harmed by its carcinogenic effects con-

sented to their injuries. The question before us instead

centers on the bottom-line issue of who ultimately is

liable in damages and litigation expenses to the owners of

buildings contaminated with this mineral fiber. To resolve

that question, we must make an initial legal determination

as to when injury occurs to such a building.

BACKGROUND

We set forth first the background facts. W.R. Grace &

Co.-Conn. (Grace), and companies it later acquired, man-

ufactured and sold asbestos building products. These

products were used for soundproofing and fireproofing

buildings from the 1940s until 1973 when the U.S. Envi-

ronmental Protection Agency (EPA) prohibited asbestos

sales because inhalation of asbestos fibers caused serious

health problems, particularly cancer. Grace then experi-

enced a flood of litigation. As of May 31, 1989, 17,411

individual lawsuits had been filed against it for personal

injuries caused by asbestos products, and building own-

ers had filed another 212 lawsuits for property damage

caused by the presence of asbestos in their buildings and

its subsequent removal or containment.

The instant litigation began as-a declaratory judgment

action in October 1983 in the United States District Court

for the Southern District of New York. There the parties

agreed, pursuant to 28 U.S.C. § 636(c) (1988 & Supp. III

1991), to refer the matter to U.S. Magistrate Judge

Leonard Bernikow. Plaintiff Maryland Casualty Co.

(Maryland)—which had sold comprehensive general lia-

bility insurance to Grace from 1955 to 1973—-sued defen-

dant Grace and its current primary insurer, defendant

Continental Casualty Co. (Continental), to obtain a judi-

cial declaration as to what obligation, if any, Maryland

owed to defend or indemnify Grace in the thousands of

underlying asbestos lawsuits. Jurisdiction was premised

on diversity of citizenship. In April 1985 Maryland suc-

cessfully added three other defendants, Royal Indemnity

Co. (Royal), Aetna Casualty & Surety Co. (Aetna), and

General Insurance Co. (General). Each of these defen-

dants had sold primary insurance to asbestos manufac-

turers and distributors acquired by Grace between 1963

and 1967. Prior to 1963 Grace itself did not manufacture

or distribute any asbestos products.

The insurance companies, with the exception of Con-

tinental, dispute when they insured Grace or its acquired

companies. Continental has insured Grace from 1973 until

the present; Maryland, Continental’s immediate prede-

cessor, insured Grace from 1955 to 1973. Grace contends

that the following other insurance was also issued: Royal

supposedly insured Zonolite Co., an asbestos manufac-

turer acquired by Grace in 1963, from 1950 to 1963; Gen-

eral is argued to have insured a Grace predecessor,

Vermiculite Northwest Inc., betwoen 1961 and 1966; and

Grace asserts Aetna insured three Grace predecessors,

California Zonolite Co., Ari-Zonolite Co. and Western

Mineral Products Co., from 1951 to 1970.

In June 1987 the parties, with the exception of Conti-

nental, cross-moved for summary judgment on 13 sepa-

rate issues. Grace and Continental reached a settlement in

July 1990. In a 75-page opinion dated March 1, 1991 the

magistrate judge granted summary judgment on several

matters, including the issue of insurance covering the

property damage lawsuits. Most of the insurance policies

sold to Grace and its predecessors had based coverage on

an “occurrence” of property damage during their effective

dates, except for Royal’s policies that based coverage on

“accidents.” This distinction was not relevant, according

to the magistrate judge, because “Royal agree[d] to be

bound by whatever trigger of coverage the court

endorse[d].”

Applying New York law, which the parties agree con-

trols interpretation of all the insurance contracts, the mag-

istrate judge adopted a “discovery trigger” for property

damage coverage. Damage to property did not “occur,”

nor was insurance coverage triggered, the trial court

explained, under the terms of the insurance policies until

the building owner discovered, first, that there was

asbestos in the building and, second, that it was haz-

ardous. In nearly all the property damage cases building

owners did ne‘ discover the dangers of asbestos until the

early 1970s when the EPA and other federal agencies

alerted the public to its hazardous nature.

The magistrate judge reaffirmed adoption of this trig-

ger in orders dated July 8, 1991 and October 22, 1991.

Application of the discovery trigger obligates only Con-

tinental, which as noted has insured Grace from 1973 to

cetacean iain

10a

the present date, and relieves all the earlier insurers of any

liability. According to the trial court’s October 22 order,

“Grace presented no evidence of the discovery of property

damage during Maryland’s policy period,” so Maryland

was relieved of any coverage obligation even though it

had insured Grace from 1955 to 1973. The financial con-

sequences of this decision are substantial. According to

Grace, as of early 1992 it had spent $184.6 million to set-

tle claims or satisfy judgments in property damage

asbestos lawsuits and $194.8 million to defend itself in

such suits. Continentai has exhausted the limits of its

insurance coverage by paying $117 million in defense

costs and $70 million in indemnity to Grace.

As a result of the March 1, 1991 decision, Royal and

Maryland requested entry of final judgments on the prop-

erty damage trigger issue. These judgments from which

Grace subsequently filed this appeal, were entered pur-

suant to Fed. R. Civ. P. 54(b) on November 19, 1991. In

addition to its 1990 settlement with Continental, Grace

and Maryland reached a settlement in December 1991, but

Maryland still is a party to the appeal because its liability

to the other insurers depends upon the coverage trigger we

ultimately adopt. During a February 1992 trial to deter-

mine whether Aetna had sold insurance to any Grace pre-

decessors, Aetna also settled with both Grace and

Maryland. The Aetna-Maryland settlement is contingent

on the continued validity of a March 13, 1992 judgment

of the magistrate judge dismissing all the other insurers’

claims against Aetna.

On this appeal Grace challenges the adoption of the dis-

covery trigger for property damage as a matter of New

York law. Royal and Maryland advocate the discovery

trigger because its adoption relieves them of liability in

the underlying property damage lawsuits against Grace.

lla

Grace also renews a challenge to subject matter juris-

diction that impacts, among other things, the Aetna-Mary-

land settlement. We discuss the jurisdiction issue first.

DISCUSSION

I Subject Matter Jurisdiction

Diversity jurisdiction requires that every plaintiff on

one side of acivil action be a citizen of a different state

than every defendant on the other side. See 28 Ae i te

§ 1332; 1 James W. Moore et al., Moore ’s Federal Prac-

tice 4 0.71[5.-2] (2d ed. 1993). A corporation’s citizenship

is deemed to be that of the state in which it is incorpo-

rated and that of the state where it has its principal place

of business. See 28 U.S.C. § 1332(c). As the action cur-

rently is aligned, plaintiff Maryland is a Maryland citizen.

None of the defendants is a citizen of that state.

But defendant Grace contends the parties should be

realigned so that it stands alone against all the insurers.

Such realignment would destroy diversity and deprive the

federal courts of jurisdiction over this controversy

because Grace, a Connecticut corporation doing business

in New York at the start of this litigation, is not diverse

from Aetna, a Connecticut citizen, or Royal, a Delaware

corporation doing business in New York at the time the

complaints were filed. According to Grace, realignment is

appropriate because the insurance companies are united in

a common effort to deny it insurance coverage in the

avalanche of asbestos litigation filed against it. That this

challenge to subject matter jurisdiction has been renewed

by Grace nearly a decade after the litigation began is

unexceptional because jurisdiction may be raised at any

time during the course of litigation. See Fed. R. Civ. P.

12a

12(h)(3); see also 1 Moore et al., supra, 9 0.74[1], at 764-

65.

The relevant focus for determining diversity is the par-

ties’ citizenship when suit is commenced. See Anderson v.

Watt, 138 U.S. 694, 702-03 (1891). The legal principles

governing this subject were succinctly summarized by the

Supreme Court in /ndianapolis v. Chase Nat’l Bank, 314

US. 63 (1941), where Justice Frankfurter wrote: “Diver-

sity jurisdiction cannot be conferred upon the federal

courts by the parties’ own determination of who are plain-

tiffs and who defendants. It is our duty . . . to ‘look

beyond the pleadings and arrange the parties according to

their sides in the dispute.’ . . . Litigation is the pursuit of

practical ends, not a game of chess. Whether the neces-

sary ‘collision of interests,’ . . . exists is therefore not to

be determined by mechanical rules. It must be ascertained

from the ‘principal purpose of the suit,’ . . . and the ‘pri-

mary and controlling matter in dispute’. . . .” Id. at 69-

70; see also | Moore, et al., supra, 4 0.74[1], at 771 (“The

purpose of realignment is to ensure that the case truly

involves the kind of adversarial relationship constitu-

tionally required in a case or controversy in the federal

courts.”). Other courts applying the /ndianapolis standard

have focused on different phrases of the above-quoted

passage, and as a result different tests have evolved.

Grace urges us to look to the single, primary purpose of

Maryland’s lawsuit. It argues that a lawsuit must be dis-

tilled to its single-issue essence for realignment purposes,

and the parties must then “be aligned in accordance with

the primary dispute in the controversy, even where a dif-

ferent, legitimate dispute between the parties supports the

original alignment.” United States Fidelity & Guar. Co. v.

Thomas Solvent Co., 955 F.2d 1085, 1089 (6th Cir. 1992);

see also Employers Ins. of Wausau v. Crown Cork & Seal

13a

Co., 942 F.2d 862, 864 (3d Cir. 1991); Continental Air-

lines, Inc. v. Goodyear Tire & Rubber Co., 819 F.2d 1519,

1523 & n.2 (9th Cir. 1987).

The insurance companies advocate a broader “collision

of interests” test. Under this test courts require the exis-

tence of an actual, substantial controversy, or a collision

of interests, see Indianapolis, 314 U.S. at 69, but the con-

flict may in some cases concern an issue other than the

so-called primary issue in dispute. See generally U.S.1.

Properties Corp. v. M.D. Constr. Co., 860 F.2d 1, 4-5 (Ist

Cir. 1988), cert. denied, 490 U.S. 1065 (1989); Zurn

Indus., Inc. v. Acton Constr. Co., 847 F.2d 234, 237-38

(Sth Cir. 1988); American Motorists Ins. Co. v. Trane Co.,

657 F.2d 146, 151 (7th Cir. 1981); Farmers Alliance Mut.

Ins. Co. v. Jones, 570 F.2d 1384, 1387 (10th Cir.), cert.

denied, 439 U.S. 826 (1978); Universal Underwriters Ins.

Co. v. Wagner, 367 F.2d 866, 870-71 (8th Cir. 1966). This

approach is more flexible because it permits courts decid-

ing whether diversity exists to consider the multiple inter-

ests and issues involved in the litigation.

We adopt the collision of interests test to resolve the

realignment question. Although not having had occasion

to adopt an explicit standard, we have stated that the /ndi-

anapolis rule requires realignment of parties “according

to their real interests so as to produce an actual collision

of interests.” Lewis v. Odell, 503 F.2d 445, 447 (2d Cir.

1974). Further, several district courts within this Circuit

have employed the collision of interests approach when

realigning parties. See Syms, Inc. v. IBI Sec. Serv., Inc.,

586 F. Supp. 53, 56 (S.D.N.Y. 1984); American Mut. Liab.

Ins. Co. v. Flintkote Co., 565 F.. Supp. 843, 846-47

(S.D.N.Y. 1983); Irving Trust Co. v. Century Export &

Import, S.A., 464 F. Supp. 1232, 1241 (S.D.N.Y. 1979).

l4a

The primary purpose approach is not actually dictated

by Indianapolis because though the facts of that case

involved only a single controversy among the litigants

involving the enforceability of a 99-year lease, the

Supreme Court did not intend that all cases be forced into

a single-issue posture. See Zurn Indus., 847 F.2d at 237.

Indianapolis deliberately considered additional, subor-

dinate controversies raised by the parties opposed to

realignment and found that they were in fact non-issues.

See 314 U.S. at 73 n.3. Such discussion would have been

wholly irrelevant were the realignment inquiry to concern

only the primary purpose of the litigation. See Travelers

Indem. Co. of Ill. v. Metropolitan Life Ins. Co., 798 F.

Supp. 156, 158 (S.D.N.Y. 1992).

Again, the collision of interests approach is consistent

with the Supreme Court’s chief concern in /ndianapolis

that parties not manipulate alignment to manufacture

diversity jurisdiction. That Court directs us to examine

“the realities of the record” to discover the “real interests”

of the parties. Indianapolis, 314 U.S. at 69. And, realign-

ment is, of course, a fact-specific inquiry. The broader test

we embrace does just this in its practical examination of

the entire record, while the primary purpose test ignores

“actual and substantial ancillary or secondary issues to the

primary issue.” Thomas Solvent, 955 F.2d at 1089.

The purpose in realigning parties is to make sure that

there is a bona fide controversy between, as the statute

commands, citizens of different states. In applying the

collision of interests test therefore we must be mindful

that actual and substantial conflicts in fact existed at the

initiation of the lawsuit. Hypothetical conflicts manu-

factured by skillful counsel must not control because such

an approach would reintroduce the notion of gamesman-

ship so disparaged by the Supreme Court.

15a

In its effort to defeat diversity jurisdiction, Grace

insists that the insurers are united in their efforts to deny

Grace coverage. It states that inter-insurer disputes con-

cerning contribution and indemnity are collateral because

they will exist only to the extent that insurance coverage

is established. This characterization of the facts we think

ignores the practical reality of the litigation. Because the

insurers are of a single mind to escape liability for paying

claims does not mean that they are not in conflict with

one another. In fact, the disputes among the insurers have

been significant from the start of the lawsuit and produced

the required collision of interests to sustain diversity.

Maryland’s amended complaint suggests adversity

among the insurers with the allegation that its liability “is

directly affected by the interpretation of the rights and

duties of Grace (or its predecessor companies) and each of

the defendant insurers under their respective contracts of

insurance.” Disunity among the insurers is established

further because Continental, Grace’s current insurer, never

has been adverse to Grace and, in fact, is actively pursu-

ing a $60 million counterclaim against Maryland to be

indemnified for money it paid to Grace. Continental, in

addition, has filed cross-claims against Royal, Aetna and

General. The existence of these claims suggests that

realignment would be inappropriate even under the pri-

mary purpose test. Those courts that have employed the

primary purpose test to realign parties in declaratory judg-

ment insurance actions have relied on the fact that every

insurer was antagonistic to the insured. See Thomas Sol-

vent, 955 F.2d at 1091; Crown Cork, 942 F.2d at 866.

Concededly, each insurer—other than Continental-—had

a goal of escaping liability to Grace. But this interest does

not eclipse the equally compelling interest each has to

avoid liability to one another. See Trane, 657 F.2d at 150;

l6a

Irving Trust, 464 F. Supp. at 1241. The insurance com-

panies never doubted that some among their number

would be held liable on their policies to Grace. But with

millions of dollars at stake, which of them must pay or

how far back coverage would extend inevitably pitted

each insurer against all the others. Cf. Lumbermens Mut.

Casualty Co. v. Connecticut Bank & Trust Co., 806 F.2d

411, 414 (2d Cir. 1986) (affirming stay of federal insur-

ance action in favor of pending state suit because “the

determination of [insured’s] coverage dispute with any

particular insurer necessarily impacts upon the timing of

the obligations of the other insurers”). Realignment

hinges on those issues that divide the parties, not on those

on which they agree. See American Motorists, 657 F.2d at

151.

Although the discovery trigger adopted by the magis-

trate judge relieves all insurers except Continental of lia-

bility, at the start of this litigation no insurer could have

known what trigger would be applied and how far back in

time that trigger would reach to make different insurers

liable. The interest of the earlier insurers was only that

coverage be triggered after their particular policies had

expired, and this interest obviously did not extend to

whether the next insurance company in line had to pay.

Recognizing that we examine collision of interests from

the perspective of the lawsuit’s initiation, the current pos-

ture of the parties nonetheless confirms that the insurers

were at all times adverse. Although Maryland and Grace

have settled, Maryland continues its suit against Royal,

Continental and General. This fact belies Grace’s con-

tention that the insurers’ adversity only comes into play

once the fact of coverage is established because only Con-

tinental is presently liable to Grace for property damage

claims. Hence, in applying the collision of interests test to

}

17a

determine realignment, we hold that actual and substan-

tial controversies exist among the insurers and Grace to

sustain diversity jurisdiction.

II Insurance Coverage Trigger

When it granted summary judgment, the magistrate

judge ruled that the discovery trigger for property damage

claims controlled as a matter of New York law. Under its

ruling “the discovery of damage must occur during the

policy period” in order to trigger the insurers’ obligation

to defend and indemnify Grace. Because Grace did not

allege that any building owners in the underlying lawsuits

discovered the presence and the hazard of asbestos in

their structures before 1973 (Continental, as noted, has

been the only insurer of Grace since 1973), there

remained no material issue of fact regarding the insurers’

obligation to defend or indemnify Grace in these disputes,

that is, they had no such duty, and summary judgment was

entered against the manufacturer denying coverage.

In reviewing the grant of summary judgment, substan-

tive insurance law will determine which facts are material

to the parties’ dispute, and “[o]nly disputes over facts that

might affect the outcome of the suit” wi!l bar summary

judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

248 (1986). Because the adoption of a coverage trigger is

a question of substantive insurance law, we review the

magistrate judge’s grant of such relief de novo.

We think that property damage insurance should be

treated the same as insurance for bodily injury, which

under New York law is governed by an “injury-in-fact”

trigger. The relevant language in the insurance policies

supports a damage-in-fact trigger for property damage

18a

claims. From adopting such a damage-in-fact trigger, it

follows that insurers are obligated on the risk undertaken

when asbestos was installed in the buildings involved in

the underlying lawsuits against Grace. The reasons for

which we reach that conclusion are sét forth in the dis-

cussion that follows.

A. Policy Language

Because the question before us is one of contract inter-

pretation, we begin by examining the language of the dis-

puted insurance policies. The policies provide for

“occurrence” coverage and, though their language varies

slightly, their definitions of “occurrence” are similar. In

this connection, we observe that throughout this litigation

Royal repeatedly represented that it would be bound by

the interpretation of an “occurrence trigger.” It is now too

late for it on appeal to attempt to change course and rely

instead on accident-based language in its policies.

Thus, the meaning of the word occurrence is important

because how that word is defined will determine what

event will trigger the insurers’ obligation to defend and/or

indemnify Grace. See Abex Corp. v. Maryland Casualty

Co., 790 F.2d 119, 124 (D.C. Cir. 1986). The following

language from Maryland insurance policies issued

between 1961 and 1967 is representative:

“Occurrence” means either an accident or a contin-

uous or repeated exposure to conditions which result

during the policy period in injury to or destruction of

(a) property including the loss of use thereof which

is accidentally caused and (b) tangible or physical

property, including the loss of use thereof. All dam-

ages arising out of such exposure to substantially the

Ee a RN ery nen re

19a

same general conditions shall be considered as aris-

ing out of one occurrence.

The above language incorporates a definition of property

damage. The meaning of property damage is critical to

our analysis because “for there to be coverage, there must

be an occurrence, and for there to be an occurrence there

must be property damage as defined in the policy.” John

P. Arness and Randall D. Eliason, Insurance Coverage for

“Property Damage” in Asbestos and Other Toxic Tort

Cases, 72 Va. L. Rev. 943, 951 (1986). The 1961-67

Maryland policy, the Royal policy and the General policy

all define property damage as “injury to or destruction of

property, including the loss of use thereof.” The 1967-73

Maryland policy defines property damage simply as

“injury to or destruction of property.”

‘ 1. Occurrence

We turn first to the definition of occurrence. The mag-

istrate judge—in a portion of its decision not appealed—

adopted the injury-in-fact trigger for bodily injury claims

under the Grace policies. This test obligates insurers on

the risk when injury—as opposed to either exposure to

disease-causing elements or diagnosis of injury—in fact

began. The trial court relied on two federal cases inter-

preting New York law and adopting the injury-in-fact trig-

ger for bodily injuries in the context of asbestos and

pharmaceutical product liability, Abex, cited earlier, and

American Home Prods. Corp. v. Liberty Mut. Ins. Co., 748

F.2d 760 (2d Cir. 1984) (American Home 1). See also Con-

tinental Casualty Co. v. Rapid-American Corp., 80 NY2d

640, 651 (1993) (New York Court of Appeals in an insur-

ance coverage dispute for asbestos bodily injury claims

applied the injury-in-fact trigger, “which rests on when

the injury, sickness, disease or disability actually began,”

20a

whether discovered or not); Cortland Pump & Equip. Inc.

v. Fireman's Ins. Co., 194 AD2d 117, 121 (3d Dept. 1993)

(adopting injury-in-fact trigger for an insurance contract

covering property damage claims).

Both of the cases relied on by the trial court interpreted

standard insurance policy language providing coverage on

an “occurrence” basis, see Abex, 790 F.2d at 121; Amer-

ican Home I, 748 F.2d at 762, and found the contract lan-

guage to be unambiguous. See Abex, 790 F.2d at 127;

American Home I, 748 F.2d at 764. Interpretation of

unambiguous contract language does not bring extrinsic

evidence into play. See Seiden Assocs., Inc. v. ANC Hold-

ings, Inc., 959 F.2d 425, 428 (2d Cir. 1992). Because lan-

guage of the disputed insurance polices is unambiguous,

we need not consider arguments by Grace, Maryland and

Royal with respect to extrinsic evidence of the drafters’

intent.

We recognize of course that contracting parties may

elect to define “occurrence” one way in the context of

bodily imiury and another way in the context of property

damage. Although the insurers urge that we treat the

occurrence definition for property damage differently than

for bodily injury, their contracts have not done so. In the

1967-73 Maryland policies, for example, the same defi-

nition of occurrence is used for both types of injury, and

at least some of the insurance issued by General uses the

same definition of occurrence for both property damage

and bodily injury. Moreover, the distinction the insurers

seek is addressed more properly in the definition of prop-

erty damage itself.

The language in the definitions of occurrence at issue is

indistinguishable from that viewed as demanding appli-

cation of the injury-in-fact trigger. See Rapid-American,

2la

80 NY2d at 651-52; Abex, 790 F.2d at 125-27; American

Home I, 748 F.2d at 764-65; Cortland Pump & Equip.,

194 AD2d at 121. By the plain language of the policies,

injury must result during the policy period, but it need not

be discovered during that time. See Continental Casualty

Co., 80 NY2d at 650-51; American Home Prods. Corp. v.

Liberty Mut. Ins. Co., 565 F. Supp. 1485, 1495 (S.D.N_Y.

1983) (American Home II), modified, 748 F.2d 760 (2d

Cir. 1984).

New York courts also have held that injury must result

during the insurance period to trigger coverage under

occurrence-based policies. For instance, in National

Casualty Ins. Co. v. City of Mount Vernon, 128 AD2d 332,

334 (2d Dep’t 1987), the Appellate Division had before it

a policy that defined occurrence in language similar to

that contained in the policies before us and that applied

both to bodily injury and property damage claims. Reject-

ing the contention that an injury’s cause must take place

during the policy period, the court held that the injuries or

damages resulting from the causative event must occur

during the policy term for it to provide coverage. /d. at

336. Accord Van Wyck Assocs. v. St. Paul Fire & Marine

Ins. Co., 115 Misc. 2d 447, 450 (N.Y. Sup. Ct. 1982)

(“[T]he policy does not include mere exposure to ‘con-

ditions’ existent during the policy period, but rather

focuses on the ‘result’ in ‘bodily injury’ during the policy

period.”), aff'd, 95 AD2d 989 (2d Dep’t 1983); American

Motorists Ins. Co. v. E.R. Squibb & Sons, Inc., 95 Misc.

2d 222, 223 (N.Y. Sup. Ct. 1978) (“[C]overage is predi-

cated not on the act which might give rise to ultimate lia-

bility, but upon the result.”). But see Allstate Ins. Co. v.

Colonial Realty Co., 121 Misc. 2d 640, 641 (N.Y. Sup. Ct.

1983) (holding that infant’s exposure to lead-based paint

chips was an occurrence).

22a

The time at which injury was discovered was not at

issue in these cases, but implicit in their holdings is the

notion that injury can exist, or “result,” independently of

discovery or discoverability. Cf. Schultheis v. Centennial

Ins. Co., 108 Misc. 2d 725, 727 (N.Y. Sup. Ct. 1981)

(construing variant occurrence definition and holding that

“{ajny fair reading of the policy . . . requires the con-

clusion that the covered risk does not depend on injury

being discovered within the policy period”). We have

stated, discussing personal injuries, that “[discoverabil-

ity] need not coincide with the actual occurrence of

injury; to add the requirement that an injury be [discov-

erable] limits the scope of the ‘injury-in-fact’ trigger-of-

coverage clause in a way that is not justified by the

policies’ language.” American Home I, 748 F.2d at 765-

66. Consequently, under the occurrence definitions here at

issue Coverage is triggered upon the existence of property

damage independent of its discovery.

In reaching a contrary conclusion, the magistrate judge

relied on an unpublished New Jersey district court opin-

ion applying New York law. It believed that the standard

occurrence definition requires a discovery trigger in the

property damage context and distinguished American

Home I’s adoption of the injury in fact trigger on the

ground that that case concerned bodily injury. The trial

court reached this conclusion even though the disputed

polices define occurrence in the same manner for both

property damage and bodily injury. It also found that

“{gliven the long periods of time involved and the diffi-

culty of measuring the exact time that damage to property

might occur,” the first discovery standard provided insur-

ance Carriers with more certainty. We think this reasoning

flawed; first, because it fails to consider the plain lan-

guage of the insurance policies and, second, as discussed

ed Pi eile cam :

23a

in a moment, proper application of the injury-in-fact trig-

ger does not create unduly burdensome uncertainty for

carriers.

2. Property Damage

Thus, the definition of occurrence requires acceptance

of an injury-in-fact trigger—perhaps better termed a dam-

age-in-fact trigger here—in Grace’s coverage disputes

with its insurers. There remains a substantial question

concerning correct application of this trigger, one that

depends upon the definition of property damage. Only by

clarifying the way in which asbestos injures a building

can it be determined at what point actual damage occurs.

The insurance policies define property damage as

“injury to or destruction of property, including the loss of

use thereof.” Under this definition, the injury to property

need not be a physical injury. Acknowledging this, Royal

and Maryland insist damage to property relates only to its

market value, which suffers no decline until the owner

discovers asbestos is present. Thus, according to these

insurers, discovery of asbestos is the proper occurrence of

property damage even under the damage-in-fact trigger.

We are unable to agree with this proposition.

A reduction in marketability serves as a measure of

damages, but it does not constitute an injury to property

itself. Rather, it is an effect of injury. Under proper anal-

ysis, an event causes injury to property, and this injury in

turn causes a decline in market value. In other words, the

“decrease in market value merely reflects the recognition

that something bad has happened to the building[, and

that] ‘something bad’ is the incorporation of the defective

product.” Arness and Eliason, supra, at 955-56. Ignoring

this point, Maryland avers that “property” is a legal

24a

abstraction and may suffer no damage other than a decline

in the value of the legal rights tied to real estate. Royal

suggests that lost market value affects only the property

owners and actually is “wholly independent” of physical

change in the property itself. Not only common sense but

the underlying lawsuits belie these specious arguments.

Building owners seek to remedy conditions directly con-

cerning their structures either by removing or encapsu-

lating asbestos. In making such changes, the owners will

affect the buildings’ market values. The damage that

building owners are seeking to “undo” is not the fact that

they discovered asbestos, but the fact of its incorporation

in their buildings.

We rule therefore that damage-in-fact occurs upon

installation in buildings of products containing asbestos.

In interpreting an occurrence-based insurance policy that

defined property damage as “injury to or destruction of

tangible property,” the New York Court of Appeals held

that incorporation of a defective product into another

product inflicts property damage. See Sturges Mfg. Co. v.

Utica Mut. Ins. Co., 37 NY2d 69, 72-73 (1975); see also

Marine Midland Servs. Corp. v. Samuel Kosoff & Sons,

Inc., 60 AD2d 767, 768-69 (4th Dep’t 1977); Eljer Mfg.,

Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805, 812 (7th Cir.

1992) (applying New York law), cert. denied, 113 S. Ct.

1646 (1993). Market value is relevant only to the extent

that the damage, i.e., the incorporation of asbestos prod-

ucts, must cause a decrease in market value of the entire

product, here the building. See Sturges, 37 NY2d at 71;

see also Arness and Eliason, supra, at 955-56.

We agree with the insurers when they insist that con-

cepts of bodily injury may not be imported wholesale into

the property damage context. Some types of property

damage—such as the gradual contamination of earth and

(meme

s ii Toe ete

25a

groundwater by leaking landfills—may be analogous to

the slow progression of diseases such as asbestosis and

cancer. See, e.g., New Castle County v. Continental Casu-

alty Co., 725 F. Supp. 800, 809 (D. Del. 1989), aff'd in

part and rev'd in part, 933 F.2d 1162 (3d Cir. 1991).

Other sorts of situations, like the installation of asbestos

building products, create a different kind of actual injury

to property. These different circumstances must be care-

fully considered in attempting to determine when damage-

in-fact occurs.

We fulfill this requirement by holding that installation

of asbestos is an occurrence of damage-in-fact and trig-

gers the insurance coverage in effect at that time. The

actual injury to property—the presence of the asbestos

hazard—occurs upon installation and exists regardless of

whether it yet has been discovered by the building own-

ers. See Stonewall Ins. Co. v. National Gypsum Co., No.

86 Civ. 9671, 1992 WL 123144, at *14 (S.D.N.Y. May 27,

1992).

This is a case where measurable and compensable prop-

erty damage has occurred, though not yet ascertained by

the property owner. See American Home II, 565 F. Supp.

at 1498. In fact, even where courts have adopted discov-

ery triggers for property damage, they have acknowledged

that damage actually existed before it was discovered. See

Mraz v. Canadian Universal Ins. Co., 804 F.2d 1325,

1328 (4th Cir. 1986); American Home Assurance Co. v.

Libbey-Owens-Ford Co., 786 F.2d 22, 29 (1st Cir. 1986).

In those cases—concerning respectively the slow leaking

of hazardous waste and the failure of a building’s win-

dows over an extended period of time—the difficulty of

determining when damage ii. fact occurred influenced the

trigger decision. In contrast to those factual situations, it

is relatively easy—certainly not unduly burdensome—to

26a

determine at what point Grace’s products were installed in

the various buildings.

Next, it must be decided whether the injury to property

continues after the discrete event of asbestos installation.

If property damage is ongoing, then it is possible to trig-

ger several successive insurance polices because the dam-

age-in-fact occurs over a time continuum. See McGroarty

v. Great Am. Ins. Co., 36 NY2d 358, 365-66 (1975). If

such is the rule then injury need not be reduced to a sin-

gle event fixed in time. See Mount Vernon, 128 AD2d at

337. But asbestos property damage is unlike the gradual

leaking of hazardous waste from a landfill or the gradual

cracking and shifting of a building’s foundation. Once

installed, the damage that asbestos inflicts is complete.

The underlying plaintiffs contend that asbestos fibers are

constantly released and re-entrained into a building’s

atmosphere, creating further property damage. If such

deterioration in fact exists, its damaging effect concerns

solely the health of those persons who breathe the con-

taminated air. No further property damage occurs because

the need to remove or encapsulate the asbestos, which

occurred upon the product’s installation, remains

unchanged. See Arness and Eliason, supra, at 972-73; see

also Stonewall, 1992 WL 123144, at *17.

In their advocacy of a discovery trigger for asbestos

property damage, the insurers also promote the need for

certainty and a “bright-line test.” Holding that damage-in-

fact occurs only upon installation of asbestos products

meets the goals of providing certainty for contracting par-

ties and reducing administrative costs. Maryland nonethe-

less asserts that the discovery trigger is superior in this

regard because it “helps to ensure that those policies were

underwritten and issued when sufficiently current infor-

mation was available to enable insurers to perform their

ee eae

27a

predictive function, and to set premiums accordingly.”

This approach improperly would penalize Grace, a man-

ufacturer that contracted and paid for insurance before

1973, because of the insurers’ relative lack of informa-

tion. Moreover, the very function of occurrence insurance

recognizes the latent nature of the damages insured

against and the possible insidious hazards of a manufac-

turer’s products. American Home II, 565 F. Supp. at 1496;

see also Eljer, 972 F.2d at 809 (“Once a risk becomes a

certainty—once the large loss occurs—insurance has no

function.”’).

Consequently, we hold that damage-in-fact occurs to

property at the time asbestos products are installed, and

injury to property does not continue after that event.

Insurers on the risk at the time of installation are obli-

gated under their policies with Grace.

B. Application of Trigger

The damage-in-fact trigger requires an examination of

each underlying claim to determine when property dam-

age—the installation of asbestos—occurred. See American

Home I, 748 F.2d at 765. Importantly, the burden will

remain with Grace to prove the existence of coverage.

Abex, 790 F.2d at 129-30. Generally, the insured must

prove the cause of the occurrence, the result, and that the

result occurred during the policy period. American Home

11, 565 F. Supp. at 1497. We are mindful of the fact that

the occurrence policies at issue contemplate an injury

resulting from a preceding cause, see American Home I,

748 F.2d at 764, but in the case of asbestos property dam-

age, cause and effect are very close in time. On remand

therefore the trial court must examine the facts of the

underlying lawsuits to determine at what time Grace's

28a

asbestos products were incorporated into the various

buildings that allegedly suffered property damage.

CONCLUSION

The federal courts have jurisdiction over this litigation

because a sufficient collision of interests exists among the

insurers to defeat Grace’s request for realignment of the

parties that would eliminate diversity. On the merits, we

adopt the damage-in-fact trigger for the occurrence of

property damage under Grace’s insurance policies and

reverse the magistrate judge’s entry of summary judgment

on this issue after it applied a discovery trigger for cov-

erage. The case is remanded to that court for further pro-

ceedings consistent with this opinion.

29a

UNITED STATES DISTRICT COURT

S.D. NEW YORK.

March 6, 1991.

No. 83 Civ. 7451 (SWK).

THE MARYLAND CASUALTY COMPANY,

Plaintiff,

— \

W.R. GRACE AND COMPANY, Continental Casualty Company,

Royal Indemnity Company, Aetna Casualty & Surety

Company, and General Insurance Company of America,

Defendants.

Insurer sought declaratory judgment that it had no obliga-

tion to defend and indemnify insured in actions to recover for

asbestos-related bodily injury and property damage. Insured

filed counterclaim. Insurer added as defendants insurers for

corporations acquired by insured. Motions for summary judg-

ment were filed. The District Court, Bernikow, United States

Magistrate Judge, held that: (1) coverage for bodily injury

claims was triggered upon injury in fact; (2) coverage for

property damage claims was triggered upon discovery; (3)

policies issued to insured, acquiring corporation, did not pro-

vide coverage for preacquisition activities of acquired cor-

porations; and (4) insurers for acquired corporations were

required to defend acquiring corporation.

Motions granted in part and denied in part.

30a

Laura A. Foggan, Wiley, Rein & Fielding, Wash-

ington, D.C., for Maryland Cas. Co.

Randy Paar, Anderson, Kill Olick & Oshinsky, P.C.,

New York City, for defendant W.R. Grace &

Co.

Stuart C. Levene, Ford Marrin Esposito & Wit-

meyer, New York City, for defendant Conti-

nental Cas. Co.

James P. Donovan, Wilson, Elser, Moskowitz, Edel-

man & Dicker, New York City, for defendant

Royal Indem. Co.

James E. Rocap, III, Miller, Cassidy, Larroca &

Lewin, Washington, D.C., for defendant

Aetna Cas. & Sur. Co.

Albert D. Brault, Brault, Graham, Scott & Brault,

Rockville, Md., for defendant General Ins.

Co. of American.

OPINION

BERNIKOW, United States Magistrate Judge:

This case, like many others across the country, involves a

dispute between an insured and insurers concerning coverage

for underlying asbestos personal injury and property damages

cases.' The parties’ motions for partial summary judgment are

now before the court.”

' This case was referred to the undersigned with the consent of the

parties, pursuant to 28 U.S.C. § 636(c).

All parties but defendant Continental Casualty Company

(“CNA”) have moved for summary judgment.

a i

‘

a es tts ae

3la

BACKGROUND

Maryland Casualty Company (“Maryland”) initially

brought this declaratory judgment action, based on diversity

of citizenship, against W.R. Grace & Co. (“Grace”) and CNA,

concerning its obligations to defend and indemnify Grace

under Maryland’s comprehensive general liability (“CGL”)

insurance policies issued to Grace between 1955 and June 30,

1973, in regard to asbestos-related bodily injury and property

damage lawsuits. These underlying lawsuits are “part of the

national ‘asbestos scene, an unparalleled situation in Amer-

ican tort law,’ in which many thousands of personal injury

claims have been filed ‘against asbestos manufacturers and

producers.’ ” Racich v. The Celotex Corp., 887 F.2d 393, 394

(2d Cir.1989) (quoting In re School Asbestos Litigation, 789

F.2d 996, 1000 (3d Cir.), cert. denied, 479 U.S. 852, 107 S.Ct.

182, 93 L.Ed.2d 117 (1986)).

As of November 3, 1987, over 6,400 asbestos-related law-

suits have been filed against Grace for bodily injury arising

out of exposure to asbestos or asbestos-containing products

manufactured or sold by Grace or its predecessors. Posner

November 13, 1987 affidavit at ] 19. Grace has also been

sued in 134 cases that seek damages for property damage

resulting from asbestos-containing products that were

installed in various buildings throughout the country from the

mid-1940’s until the 1970’s. Posner June 1, 1987 affidavit at

q 14.

In its answer, filed on January 27, 1984, Grace asserted var-

ious counterclaims including those seeking a declaratory

judgment regarding Maryland's duty to defend and indemnify.

On April 30, 1984, Grace started an action against the Royal

Indemnity Company (“Royal”) in the District of Columbia

Superior Court for the same declaratory relief it sought

against Maryland. Grace later amended its District of

Columbia complaint to add Aetna Casualty and Surety Co.

(“Aetna”) and the General Insurance Company of America

(“General”) as defendants. On June 21, 1984, Maryland suc-

32a

cessfully moved in this court to join Royal, Aetna and Gen-

eral as additional defendants.

Grace, a Connecticut corporation, with its principal place

of business in New York, is primarily engaged in the chemi-

cal business on a worldwide basis and in energy-related nat-

ural resource activities. Posner 5-29-87 affidavit at § 3.

Maryland, a Maryland corporation, has its principal place of

business in Baltimore, Maryland.

CNA, an Illinois corporation, has its principal place of

business in Chicago, Illinois. Royal is a Delaware corpora-

tion, with its principal place of business in Charlotte, North

Carolina. Aetna, a Connecticut corporation, has its principal

place of business in Hartford, Connecticut. General is incor-

porated in the State of Washington and has its principal place

of business in Seattle, Washington. Maryland, CNA, Royal,

Aetna and General are engaged in the business of providing

and underwriting insurance, including the extension of lia-

bility insurance coverage. Of the five insurers, only Maryland

and CNA issued policies to Grace itself. The other carriers

allegedly issued policies to companies subsequently acquired

by Grace.

Grace, in its own name, purchased policies from Maryland

from 1955 to 1973, though Maryland denies that it provided

continuous coverage for that period. Maryland notes that

Grace has produced no primary policies in effect during the

early years of the alleged period of coverage. The policies for

the period from June 30, 1962 through June 30, 1970, Mary-

land asserts, are incomplete and, in some cases, fragmentary.

Thus, Maryland has placed in issue the extent of its obligation

to Grace for any asbestos-related claims arising before the

periods for which any policies or policy fragments have been

discovered and for the period as to which no complete poli-

cies have been discovered. Grace contends that it has located

the originals of the policies, which include the missing pages,

thus resolving Maryland’s argument about missing pages.

Maryland also notes that its policies with Grace were nego-

tiated in New York City between its own representatives and

33a

those of Grace. The policies, Maryland adds, were not the

standard forms used in the insurance industry, but were indi-

vidually tailored and negotiated “manuscript” policies, whose

provisions were authored by Grace or by its brokers, and not

by Maryland. Nonetheless, as Grace notes, a comparison of

Maryland’s policy language with the standard comprehensive

general liability (“CGL”) forms shows that the language is

essentially the same.’ Indeed, the managing director of the

broker, Marsh & McLennan, Inc., involved in the negotiation

and placement of the Maryland policies sold to Grace from at

least June 30, 1961, through June 30, 1973, stated in an affi-

davit that the policies from June 30, 1961 to June 30, 1967

? Under the Maryland-Grace policies, Maryland agrees:

Coverage A—Bodily Injury Liability To pay on behalf of

the insured all sums which the insured shall become legally obli-

gated to pay as damages because of bodily injurv, sickness or

disease, including death a any time resulting therefrom, sus-

tained by any person and caused by accident.

Coverage B—Property Damage Liability To pay on behalf of

the insured all sums which the insured shall become legally obii-

gated to pay as damages because of injury to or destruction of

property, including the loss of use thereof, caused by accident.

Exh. #B, tab 1, to Maryland’s Memo in Support of Motion. Endorsements

deleted the words “and caused by accident” and substituted the word

“occurrence” for the word “accident” under Coverage A. /d. at tab 2.

The standard CGL policy requires an insurer to indemnify an insured

for all damages that result from “bodily injury or property damage to

which [the] policy applies caused by an occurrence.” See, e.g., Abex

Corp. v. Maryland Casualty Co., 790 F.2d 119, 122 (D.C.Cir. 1986).

In1966, the insurance industry redrafted the standard CGL policy.

American Home Products Corp. v. Liberty Mutual Ins. Co., 565 F.Supp.

1485, 1501 (S.D.N.Y.1983), aff’d as modified, 748 F.2d 760 (2d

Cir.1984). Prior to 1966, CGL policies covered liability, as set forth

above in Coverage A, because of bodily injury caused by accident. Id.

“The word ‘accident’ suggested an intent to cover only sudden, unex-

pected, but identifiable events.” Jd. The industry substituted the word

“occurrence” for the word “accident” and “expressly provided that an

occurrence included any injury or damage that resulted, not only from an

accident, but also from injurious exposure over an extended period.” /d

34a

were standard form CGL policies, not drafted by Grace. See

Keating November 16, 1987 affidavit at 4 3. He recognized

that the policies from June 30, 1967 to June 30, 1973, were

“manuscript” policies, but, he added, the language contained

in them was taken from the standard form CGL policy.‘ /d. at

q 4.

With respect to the other insurers, Grace alleges that it, or

various asbestos companies that it acquired, purchased CGL

policies from Royal for all or part of the period from April 1,

1950 to April 1, 1963 and from May 26, 1967 to March 26,

1968. As for General, Grace alleges that General sold CGL

coverage to Vermiculite Northwest, a company acquired by

Grace in 1966, from June 1, 1961 to June 1, 1967. Grace also

contends that Aetna sold CGL policies to companies acquired

by Grace from January 31, 1951 until January 1, 1970. Grace

does not possess copies of these policies, but asserts it has

secondary evidence proving the existence of this coverage.

Lastly, CNA directly sold CGL coverage to Grace from 1973

to the present.

In regard to the motions for partial summary judgment,

Maryland requests relief in the form of a judgment declaring

that:

(i) Maryland Casualty has no duty to indemnify or

defend Grace for periods as to which the existence and

terms of Maryland Casualty-Grace policies have not

been proven by clear and convincing evidence;

(ii) Maryland Casualty has no duty to indemnify or

defend Grace (a) under pre-1963 policies or (b) for lia-

bility involving products of any company acquired by or

merged with Grace until after the date on which such

company was acquired by or merged with Grace and

insured under a Maryland Casualty policy;

The affidavit of an underwriter at Maryland, which indicates that

the 1967-73 policies were manuscript policies, see second Galli affidavit

at J 2, does not undermine the Keating affidavit.

35a

(iii) Maryland Casualty has no duty to indemnify or

defend Grace for liability for asbestos-related bodily

injury claims as to which injury in fact occurred outside

Maryland Casualty’s policy periods,

(iv) Defense costs in each asbestos-related bodily injury

case against Grace must be shared by all insurers as to

which responsive policies have been proven except

where it can determined that the injury in fact occurred

outside of the policy period or periods of an insurer or

that the claimed injury could not have resulted from

exposure to a product manufactured by an insured under

the relevant policy or policies;

(v) Maryland Casualty has no duty to indemnify or

defend Grace for liability for asbestos-related claims for

equitable or declaratory relief or any relief other than the

award of damages;

(vi) Maryland Casualty has no duty to indemnify or

defend Grace for liability for claims against Grace by

school districts or other building owners (“school

asbestos cases”) seeking to recover the costs allegedly

incurred, or to be incurred, by them in testing their build-

ings for the presence of asbestos insulation, and removing

or encapsulating such insulation or taking other prophy-

lactic or preventive measures with respect to such buildings

and such claims do not seek compensation for property

damage;

(vii) Maryland Casualty has no duty to indemnify or

defend Grace for liability for school asbestos cases to

recover for strictly monetary injuries not constituting

compensation for property damage;

(viii) Maryland Casualty has no duty to indemnify or

defend Grace for liability for school asbestos cases to

recover for damage to Grace’s products;

36a

(ix) Maryland Casualty has no duty to indemnify or

defend Grace for liability for school asbestos cases

because those cases seek to recover for hazards that were

discovered or manifested subsequent to any Maryland

Casualty policy periods;

(x) Any duty of Maryland Casualty to indemnify Grace

for any asbestos-related property damage claims that

may be found by the Court is limited by policy endorse-

ments restricting liability for “continuous discharge

.of. . . materials”;

(xi) Maryland Casualty has no duty to indemnify Grace

for liability for injuries that were not “unexpectedly,”

“unintentionally,” or “accidentally” caused including,

but not limited to, the City of Greenville case;

(xii) Maryland Casualty has no duty to indemnify Grace

for any award of punitive damages, sanctions, fines or

penalties imposed upon Grace.

Maryland Casualty further requests relief in the form of a

judgment ordering Aetna, Royal and General, to the extent

that Grace is able to establish that those insurers afforded

responsive coverage, to reimburse Maryland Casualty for past

costs of defending Grace in the asbestos-related bodily injury

cases against Grace and to share with Maryland Casualty and

CNA in those expenses in the future, except where it can be

determined that the injury in fact occurred outside the policy

period or periods of any insurer or that the claimed injury

could not have resulted from exposure to a product manu-

factured by an insured under the relevant policy or policies.°

" Maryland has participated in the defense of Grace in underlying

bodily injury actions. CNA provided or paid for Grace’s defense in the

underlying actions through July 31, 1990, when it exhausted the indem-

nity limits of all its applicable primary policies. CNA estimates its costs

for defending Grace have exceeded $100 million. Recently, CNA moved

to amend its answer to assert the defense that its policy limits have been

exhausted and to assert counterclaims against Maryland and cross-claims

against Royal, Aetna and General for indemnity and contribution for the

costs it paid in providing Grace with defenses in the underlying actions.

37a

Grace has moved for partial summary judgment seeking a

declaration that each of the policies sold by Maryland, Royal

and General is obligated to indemnify Grace for asbestos-

related property damage claims if the policy was in effect dur-

ing any portion of the continuous damage process, from the

first installation of the asbestos products through containment

or removal. Grace seeks a similar declaration from the same

insurers concerning asbestos-related bodily injury claims if

the policy was in effect during any portion of the continuous

injury process from first inhalation of asbestos fibers through

manifestation of the asbestos-related disease.

Grace also seeks summary judgment requiring the carriers

to pay all past, present and future defense costs. Further,

Grace seeks a declaration that any triggered policy provides

full and complete defense and indemnity coverage. In addi-

tion, Grace requests judgment against Maryland, Royal and

General, jointly and severally, for the monies already

expended by Grace to defend the asbestos-related cases, and

to satisfy any judgments or settlements in those cases. Grace

has not filed any claims against CNA and its motion for sum-

mary judgment is not directed against CNA.

Royal seeks partial summary judgment, declaring that

Grace is not entitled to any CGL coverage issued by Royal to

one of Grace’s predecessor companies, the Zonolite Company

(“Zonolite”). Royal never issued any policies to Grace. Royal

also moves for summary judgment declaring that its defense

obligation will terminate upon the exhaustion of the limits of

its pre-1966 policies. Should the court find that Royal owes

Grace a defense, Royal seeks guidance concerning the proper

trigger of coverage for the asbestos-bodily injury cases pend-

ing against Grace.

Aetna seeks partial summary judgment declaring that Grace

is not entitled to a defense under a policy issued to a prede-

cessor company until it is shown that the claimant alleges

injury or damage arising out of asbestos products distributed

by that predecessor company. Aetna seeks similar relief

regarding its duty to indemnify Grace. Aetna also requests a

38a

declaration that the Illinois statute limiting the time during

which actions may be brought by or on behalf of dissolved

corporations bars Grace from seeking coverage under policies

that may have been issued to California Zonolite Company

(“California Zonolite”) and Ari-Zonolite Company (“Ari-

Zonolite’”’). Aetna, like Royal and General, did not issue any

policies to Grace. Grace alleges that Aetna issued policies to

three predecessor companies of Grace, i.e., California Zono-

lite, Ari Zonolite and Western Mineral Products (“Western

Mineral”). No party, however, has produced copies of any of

these policies and Aetna disputes the existence of the policies.

It seeks summary judgment in the event the policies are

shown to exist. We have not considered those issues unique to

Aetna. They will be considered when, and if, Grace estab-

lishes the existence of the policies. A number of issues, how-

ever, that concern Aetna involve the other insurers and the

determination of those issues will affect Aetna.

General seeks summary judgment on Grace’s cross-claim,

which asserts that General is obligated to fully defend and

indemnify Grace under policies issued to General’s former

insured, Vermiculite—Northwest, Inc. (“Vermiculite—North-

west”). Like Royal and Aetna, General seeks a declaration

that it has no duty to Grace until Grace shows that the under-

lying claims implicate a product of Vermiculite—Northwest.

The insurers, other than CNA, also ask for a declaration

that, to the extent the underlying suits do not seek damages,

no coverage is afforded for them under the policies at issue.

In other words, coverage does not apply, according to the

insurers, to suits that seek other forms of relief, such as

declaratory or equitable relief.

DISCUSSION

Summary Judgment

The general principles concerning summary judgment have

become familiar. Fed.R.Civ.P. 56(c) authorizes summary judg-

ment when there is no genuine issue as to any material fact

ait

nme

‘,

Yee «

‘64

39a

and the moving party is entitled to a judgment as a matter of

law. The moving party bears the burden of showing the

absence of a genuine issue of material fact. Celotez Corp. v.

Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91

L.Ed.2d 265 (1986). And all factual inferences, and ambi-

guities, are drawn against the moving party. Ramseur v. Chase

Manhattan Bank, 865 F.2d 460, 465 (2d Cir.1989). The

court’s function on a motion for summary judgment is not to

try issues of fact, but to determine whether there are any gen-

uine issues of fact for trial. Anderson v. Liberty Lobby, Inc.

477 U.S. 242, 249, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202

(1986). Furthermore, under Rule 56(e), “[w]hen a motion for

summary judgment is made and supported as provided in this

rule, an adverse party may not rest upon the mere allegations

or denials of the adverse party’s pleading, but the adverse

party’s response, by affidavits or as otherwise provided in this

rule, must set forth specific facts showing that there is a gen-

uine issue for trial.”

Trigger of Coverage for Bodily Injury Claims

The first issue the parties raise concerns the trigger of cov-

erage for bodily injury claims. The insurer “on the risk” at the

triggering time must provide coverage. Eagle-Picher Indus-

tries v. Liberty Mutual Ins. Co., 523 F.Supp. 110, 111

(D.Mass. 1981), modified on other grounds, 682 F.2d 12 (Ist

cir. 1982). This issue “usually arises when several different

insurers have, in sequence, insured a company whose products

caused injuries at different or uncertain times.” Uniroyal, Inc.

v. Home Ins. Co., 707 F.Supp. 1368, 1387 (E.D.N.Y.1988).

Maryland argues that the bodily injury claims and, for that

matter, the property damage claims, fall outside its policy

periods and, thus, its policies are not triggered.

Citing Keene Corp. v. Ins. Co. of North America, 667 F.2d

1034 (D.C.Cir.1981), cert. denied, 455 U.S. 1007, 102 S.Ct.

1644, 71 L.Ed.2d 875 (1982) (“Keene”), Grace argues that all

policies on the risk during the continuous bodily injury pro-

cess, from first exposure to asbestos through manifestation of

40a

the asbestos-related disease, must pay in full Grace’s legal

liability for all asbestos-related bodily injury claims and law-

suits against Grace. In Keene, the court rejected the mani-

festation theory, which requires manifestation of injury during

the policy period, as the only trigger of coverage in delayed

manifestation cases. /d. at 1046. Inhalation exposure (expo-

sure to asbestos dust) and exposure in residence (the subse-

quent development of the disease) also trigger coverage, the

Keene court found. /d. The Keene court concluded that once

triggered, each policy on the risk covered the insured’s lia-

bility. Jd. at 1048.

In American Home Products Corp. v. Liberty Mutual Ins.

Co., 565 F.Supp. 1485 (S.D.N.Y.1983), aff'd as modified, 748

F.2d 760 (2d Cir. 1984) (“AHP”), however, Judge Sofaer,

applying New York law,° reyeeted the conclusions reached in

Keene. Instead, Judge Sofaer determined that actual injury

triggers coverage. /d. at 1489. Grace argues that AHP does

not apply here because that case involved six different phar-

maceutical products, not asbestos. See AHP, supra, 565

F.Supp. at 1490 n. 1. If any doubt existed as to AHP’s appli-

cability to asbestos in New York, Abex Corp. v. Maryland

Casualty Co., 790 F.2d 119, 124-25 (D.C.Cir.1986), put it to

rest. The same court that decided Keene, after examining the

applicable New York case law applied AHP to asbestos. /d. at

125. The court also noted that Keene did not purport to apply

® Maryland contends that New York law governs this case with

respect to its policies with Grace. Maryland notes that Grace has its prin-

cipal place of business in New York and the policies were obtained

through a New York broker and issued, delivered and administered

through Maryland’s New York office. See W.R. Grace & Co. v. Conti-

nental Casualty Co., 896 F.2d 865, 873 (Sth Cir.), reh'g denied, (Sth Cir.

1990); W.R. Grace & Co. v. Hartford Accident and Indemnity Co., 407

Mass. 572, 555 N.E.2d 214, 221 (1990). Grace disputes that New York

law governs, but says that the result is the same, regardless of whether

New York’s law controls. Nevertheless, Grace cites, for the most part

New York cases. Thus, we apply New York law to the Maryland—Grace

issues. See Alfin, Inc. v. Pacific Ins. Co., 735 F.Supp. 115, 118 (S.D.N.Y.

1990).

SSS

4la

New York law. /d. at 124. Not only that, the Abex court’s own

reading of the policy language, which it termed unambiguous,

agreed with the result in AHP. Still, Grace contends that Abex

should have relied on New York state cases, and not on AHP.

Grace makes much of National Casualty Ins. Co. v. City of

Mount Vernon, 128 A.D.2d 332, 515 N.Y.S.2d 267 (2d Dep’t

1987), decided after Abex. Mount Vernon, Grace says, applied

a continuous trigger, citing Keene. In Mount Vernon, a dispute

about coverage, the underlying action concerned a suit against

the city for false arrest and false imprisonment. The insurance

company in that case denied coverage to the city because the

arrest at issue occurred about a year and a half before the pol-

icy’s effective date of January 1, 1983. The court found, how-

ever, that the insurance company had a duty to defend and

indemnify the city for the damages sustained by the claimant

in the underlying suit as a result of his incarceration on and

after January |, 1983 until his release, some seven days later.

515 N.Y.S.2d at 271. This finding by the Appellate Division

modified the lower court’s ruling that required the insurance

company to defend and indemnify without regard to the pol-

icy date. What is more, the Appellate Division said: “the

operative event triggering exposure, and thus resulting in cov-

erage under the policy, is the sustaining of a specified injury

during the policy period.” /d. at 270.

The principal dispute in Mount Vernon concerned the mean-

ing of the term “occurrence.” The Appellate Division rejected

the insurance company’s position that the term refers to the

precipitating event—the arrest—that gave rise to the injury.

515 N.Y.S.2d at 270. The Mount Vernon policy language, like

the language here, said that occurrence means an event that

results in personal injury sustained during the policy period.

Id. Therefore, the court was not concerned with whether the

causative event happened before or during the policy period.

Id. The policy did not require that the injury resulting from

that event occur at one fixed time. /d. Nor did the policy dis-

tinguish between injuries that are continuous and the move

common type of injuries that are not. /d. See also Keene, 667

42a

F.2d at 1049. The Appellate Division cited Keene—with a

“cf.”—for the proposition that the failure to distinguish

between continuous and non-continuous injury has particular

significance because of express policy language that injury

can be caused by “ ‘continuous or repeated exposure to con-

ditions.’ ” Mount Vernon, 515 N.Y.S.2d at 270 (quoting pol-

icy); see also Keene, 667 F.2d at 1049 n. 31.

Thus, we do not read Mount Vernon’s reference to Keene as

an adoption of its continuous trigger theory. Moreover, Mount

Vernon, as noted, held that a specified injury during the pol-

icy period triggers coverage, see W.R. Grace & Co. v. Con-

tinental Casualty Co. (“W.R:. Grace & Co.”), 896 F.2d 865,

876 (Sth Cir.), reh’g. denied, (Sth Cir.1990)—a result con-

sistent with AHP’s injury-in-fact trigger.

Grace also argues that other New York State cases support

a continuous trigger theory. Nevertheless, Abex considered

most of the cases Grace cites’ and found that, though these

cases did not offer a “unambiguous embrace” of the injury-in-

fact theory, they were far more consistent with that theory

than with the continuous trigger. Abex, 790 F.2d at 126. Sim-

ilarly, the court in Aetna Casualty & Surety Co. v. Abbott Lab-

oratories, Inc. (“Abbott”) 636 F.Supp. 546, 550 (D.Conn.

1986), a case involving the drug DES and some policies cov-

ered by New York law, applied AHP’s injury-in-fact trigger.

More recently, Judge Weinstein observed that the federal

courts applying New York law adopt the injury-in-fact theory

under a comprehensive general liability policy. Uniroyal, Inc.

v. Home Ins. Co., 707 F.Supp. 1368, 1387-88 (E.D.N.Y.1988).

And even more recently, the Fifth Circuit noted that New

York follows the injury-in-fact theory. W.R. Grace & Co., 896

F.2d at 875-76. Accordingly, we find that injury-in-fact trig-

gers coverage in New York.

7 Abex recognized that Allstate Ins. Co. v. Colonial Realty Co.,

121 Misc.2d 640, 468 N.Y.S.2d 800 (Sup.Ct., Queens Co. 1983), cited by

Grace, adopted the exposure theory, but felt that this lower court decision

did not send a clear signal in the face of other courts’ doubts concerning

that theory. Abex, 790 F.2d at 126 n. 33.

43a

Grace argues, however, that extrinsic evidence is necessary

to interpret the policy language at issue. The disparate con-

structions placed by courts on the same policy language,

according to Grace, shows ambiguity as a matter of law.

Grace further notes that it did not draft the disputed language.

Following Abex and AHP, however, we find the policy lan-

guage is unambiguous. Grace maintains that AHP did not

involve asbestos. Nevertheless, Abex involved asbestos and

the court there said:

The plain language of the definition of “occurrence”

used in the CGL policy requires exposure that “results,

during the policy period, in bodily injury” in order for an

insurer to be obligated to indemnify the insured. The

unambiguous meaning of these words is that an injury—

and not mere exposure—must result during the policy

period.

790 F.2d at 127 (emphasis in original);* see also AHP, 748

F.2d at 765. Thus, extrinsic evidence need not be considered.

On the question of when injury in fact occurs, Grace argues

that the asbestos-related bodily injuries in the underlying cases

are inherently continuous, and, thus, even under AHP, each

carrier on the risk at any time between first exposure and man-

ifestation has the duty to indemnify. Maryland, for its part,

urges that we follow Judge Sofaer’s approach of establishing

the timing of injury in fact on a case-by-case basis in the

underlying actions. See AHP, 565 F.Supp. at 1509. We agree

with Maryland. Though Grace argues that the etiology of

asbestos-induced diseases is well known, the issue, according

§ The CGL policy in Abex defined “occurrence” as follows: “an

accident, including injurious exposure to conditions, which results, dur-

ing the policy period, in bodily injury or property damage neither

expected nor intended from the standpoint of the insured.” 790 F.2d

at 122. In the present case, the typical policy defines “occurrence” as “an

event, or continuous or repeated exposure to conditions, which un-

expectedly causes injury during the policy period.” Exh. A. to 6-1-87

Posner affidavit. These two definitions contain no meaningful differ-

ences. Other policies in this case contain similar language.

44a

to the Abex court, has split the circuits. Abex, 790 F.2d at 127

n. 36. Abex contrasted Insurance Co. of N.Am. v. Forty-Eight

Insulations, Inc., 633 F.2d 1212, 1218 (6th Cir.1980), clari-

fied, 657 F.2d 814, (6th Cir. 1981), cert. denied, 454 U.S.

1109, 102 S.Ct. 686, 70 L.Ed.2d 650 (1981), which observed

that injury, in the sense of tissue damage, occurs shortly after

the initial inhalation of asbestos fibers, with the view of

Eagle-Picher Indus. Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12,

19 (1st Cir.1982), cert. denied, 460 U.S. 1028, 103 S.Ct. 1279,

75 L.Ed.2d 500 (1983), that even sub-clinical injury to the

lung does not occur simultaneously with the inhalation of

asbestos. /d.

In AHP, Judge Sofaer also recognized the difficulty in deter-

mining the onset date of asbestos injury. Commenting about

the usefulness of collateral estoppel on medical issues to prove

when injury occurred, Judge Sofaer excluded asbestos from

the operation of that doctrine. See 565 F.Supp. at 1509. He

said: “Unlike the variable manner in which injuries are caused

by asbestos fibres, other products may produce specific con-

sequences at particular times” /d. Accordingly, summary judg-

ment is inappropriate on the issue, the resolution of which is

better left to the underlying cases. See AHP, 565 F.Supp. at

1509; Abbott, Civil No. H-82-843 (JAC) slip op. at 2 (D.Conn.

September 11, 1987); Abbott, 636 F.Supp. at 551. In those

cases the courts will likely address related factual issues con-

cerning the injuries at issue. Abbott, slip op. at 2.

With regard to those cases that have settled, the court hear-

ing the coverage dispute—this court— should determine the

date of the injury in fact. Abbott, 636 F.Supp. at 551-52. In

Abbott, the court directed the parties confer to develop a pro-

cedure for resolution of the settled cases. Jd. at 551. The pre-

sent parties should do the same. The fact of settlement,

though, does not create coverage. In other words, an insurer

has no duty to indemnify a settled claim excluded by the pol-

icy. Uniroyal, 707 F.Supp. at 1379. The duty to indemnify

requires a covered loss under the policy. Servidonz Con-

struction Corp. v. Security Insurance Co., 64 N.Y.id 419,

45a

423, 488 N.Y.S.2d 139, 143, 477 N.E.2d 441, 445 (1985); see

W.R. Grace & Co., 896 F.2d at 874 (citing Servidone),;

Uniroyal, 707 F. Supp. at 1379 (citing Servidone). In deter-

mining whether a settled claim involves a covered loss—from

the actual facts, not the pleadings—the burden rests with the

insurer to show that the claim was not within the policy cov-

erage. Servidone, 488 N.Y.S.2d at 143, 477 N.E.2d 445: Bur-

roughs Wellcome Co. v. Commercial Union Ins. Co., 713

F.Supp. 694, 699 (S.D.N.Y.1989). An argument can be made

that placing the burden on the insurer only applies to cases,

like Servidone, involving a policy exclusion. 488 N.Y.S.2d at

143, 477 N.E.2d at 445. But the first paragraph of the Servi-

done opinion, which summarizes the court’s holding, imposes

no such limitation. 488 N.Y.S.2d at 140, 477 N.E.2d at 442.

Burroughs Wellcome, too, did not limit its finding. 713

F.Supp. at 699; see also Uniroyal (Servidone “never held that

an otherwise covered claim, once settled, must be proven

anew by the insured.”) 707 F.Supp. at 1379.

On the duty to defend, the insured’s burden is not great.

Grace is entitled to a defense if the complaints in the under-

lying actions “ ‘permit proof’ of the facts establishing cov-

erage or if the complaints do not exclude the possibility that

injury-in-fact occurred during the policy period. Only if the

insurers establish, ‘as a matter of law, that there is no pos-

sible factual or legal basis on which the insurer might even-

tually be obligated to indemnify,’ would they escape their

duty defend [Grace].” Abex, 790 F.2d at 129 (footnotes omit-

ted) (emphasis in Original); see also Avondale Indus. Inc. y.

Travelers Indemn. Co., 887 F.2d 1200, 1205 (2d Cir. 1989),

reh’g denied, 894 F.2d 498 (2d Cir.) (per curiam), cert.

denied, 496 U.S. 906, 110 S.Ct. 2588, 110 L.Ed.2d 269

(1990). Thus, the insurers must Satisfy their obligation to

defend Grace. Id. “This obligation will continue until the

insurers establish that, as a matter of law, there is no Possi-

bility that they will have to indemnify [Grace].” Jd. For those

policies, then, that Grace has proven, or will prove, Maryland

must provide a defense, see Abex Corp. v. Maryland Casualty

46a

Co., No 82-2098, slip op. at 2 (D.D.C. April 6, 1990), pro-

vided those policies have been triggered applying the injury

in fact trigger.

As for allocating defense costs among the insurers, which

Maryland urges, those costs should be apportioned equally.

Federal Insurance Co. v. Cablevision Systems Development

Co., 836 F.2d 54, 57 (2d Cir.1987); Abex Corp. v. Maryland

Casualty Co., No. 82-2098, slip op. at 3 (D.D.C. April 5,

1990). Nonetheless, summary judgment appears premature

because the existence of coverage concerning all the insurers

remains an open issue. See Proof of Existence of Terms of

Polices, infra.

Coverage for Knowing Misconduct

Maryland seeks summary judgment declaring that it has no

duty to indemnify Grace for injuries that were not uninten-

tionally caused. Grace, on the other hand, seeks a declaration

that any triggered policy provides full and complete defense

and indemnity coverage, and that no portion of this liability

can be allocated to Grace. Maryland contends that Grace has

no coverage for losses due to Grace’s knowing misconduct.

Thus, Maryland maintains that it has no duty to indemnify

Grace for expected injuries. Most liability insurance policies

provide coverage only for bodily injury or property damage

that the insured neither expects nor intends, Maryland says. In

regard to the Maryland policies, this exclusion, set forth in

special, hand-crafted endorsements, provides in more cate-

gorical terms, Maryland argues, that coverage is afforded only

for injuries “unexpectedly,” “unintentionally” or “acciden-

tally” caused.’

In particular, Maryland seeks summary judgment that it has

no duty to indemnify for any liability imposed upon Grace in

City of Greenville v. W.R. Grace & Co., No. 85-1693-14

An endorsement, for example, states “ ‘Occurrence’ means

an event, or continuous or repeated exposure to conditions, which un-

expectedly causes injury during the policy period.” Exh. B, tab 2 to

Maryland’s Memorandum in Support of Motion (filed under seal)

(emphasis added).

47a

(D.S.C., complaint filed June 21, 1985). After a jury trial in

that case, the court awarded $6.4 million in compensatory

damages and $2 million in punitive damages against Grace. In

Greenville, the court in an amended order, commented that

Grace knew of the hazard of asbestos in buildings when it

sold its asbestos products to the city. City of Greenville v.

W.R. Grace & Co., 640 F.Supp. 559, 566 (D.S.C.1986), aff'd,

827 F.2d 975 (4th Cir.1987), reh’g denied, 840 F.2d 219 (4th

Cir.1988).

Grace argues that the pre-1967 policies contains no require-

ment that the property damage be accidental, unexpected or

unintentional. Grace refers to that portion of the endorsement

that defines “occurrence” to mean

either an accident in or a continuous or repeated expo-

sure to conditions which result during the policy period

in injury to or destruction of—

(A) Property including the loss of use thereof which

is accidentally (sic) caused and

(B) Tangible or physical property, including the loss

of use thereof.

Exh. B, tab 5 to Maryland’s Memorandum of Law in Support

of Motion. Grace points out that sub-part B contains no “acci-

dental” qualification for any claim involving “tangible or

physical property” and that a building damaged by its prod-

uct is tangible or physical property. Maryland disputes that

the underlying claims concern “injury to or destruction of. . .

tangible or physical property.” These claims, if coverage

exists at all, says Maryland, would fall under sub-part A,

which requires an accidentally caused loss of use. Grace

notes, though, that the very endorsements provide for the

deletion from the insuring agreement of the words “caused by

accident.”

In any event, the endorsement also provides that “such

insurance as is afforded by this endorsement does not apply to

Property damage caused intentionally by or at the direction of

48a

the insured.” /d. at tab 5 (emphasis added). Thus, these poli-

cies do not provide coverage for intentional property damage.

Turning to the 1967 to 1973 policies, Grace acknowledges

that they provide coverage when an occurrence “uninten-

tionally causes injury to or destruction of property.” /d. at

tab 6. Nevertheless, Grace points to the “liberalization” clause

in these policies, which provides that when the provisions of

the later policies vary from the earlier policies, the insured

has the option to have the earlier terms and conditions apply.

Since the prior policies contain language providing coverage

for unintentional property damage, the liberalization clause

has no effect on this issue. Thus, the ’67 to ’73 policies, like

the earlier ones, do not provide coverage for intentional prop-

erty damage. Thus, Maryland is entitled to summary judgment

declaring that it has no duty to indemnify Grace for liability

for injuries that were not unintentionally caused.

Even if the policies provide no coverage for intentional

injury, Grace argues that Maryland ignores the distinction

made by the courts between an intentional act and an inten-

tional injury. See City of Johnstown, N.Y. v. Bankers Standard

Ins. Co., 877 F.2d 1146, 1152 (2d Cir.1989). Maryland argues

that even under City of Johnstown, losses arising from

asbestos-related claims against Grace fall outside the cover-

age because they were not accidental, unexpected or unin-

tended. The relevant issue, as Grace argues, is not whether the

policyholder willfully committed the act, but whether the pol-

icyholder intended the resulting damage. /d. li: other words:

It is not enough that an insured was \varned that damages

might ensue from its actions, or that, once warned, an

insured decided to take a calculated risk and proceed as

before. Recovery will be barred only if the insured

intended the damages, or if it can be said that the dam-

ages were, in a broader sense, “intended” by the insured

because the insured knew that the damages would flow

directly and immediately from its intentional act.

Id. at 1150 (citations omitted).

49a

Maryland has submitted evidence indicating that Grace

knew of the dangers of asbestos as early as 1956. See Kerst

declaration and documents filed thereunder under seal. For

example, Maryland has submitted evidence that Grace was

aware of the hazards of asbestos-containing products, and had

developed an asbestos-free insulation product, yet continued

to sell asbestos-containing Monokote until such sale was pro-

hibited by EPA regulation in 1973. See letter from Maryland's

counsel, Aug. 8, 1988 and exhibits filed under seal. Maryland

has submitted a considerable amount of evidence on this

issue. Grace disputes the existence of evidence showing that

Grace believed, or that it was generally accepted, that

asbestos products, once installed, caused property damage.

Maryland, by its evidence, hopes to show that Grace intended

the consequences of its actions. This evidence raises factual

issues that bar summary judgment for Grace’s claim that it is

entitled to full and complete defense and indemnification on

the triggered policies.

In regard to Greenville, though, the court did not consider

whether Grace intended to cause the damage alleged in that

case. Indeed, in Dayton Independent School District v. National

Gypsum Co., 682 F.Supp. 1403, 1408 n. 14 (E.D.Tex. 1988),

reversed on other grounds, sub. nom, W.R. Grace & Co..

supra, the court found that the Greenville decision only

addressed whether the jury could have properly found that

Grace’s negligence warranted punitive damages, not whether

Grace intended to cause property damage, when it sold

asbestos-containing materials. Thus, the Greenville jury did

not find that Grace intended to cause property damage, the

court added. /d. We agree with the Dayton court's reading of

Greenville, particularly in view of City of Johnstown.

Maryland argues that a distinction should be drawn between

policies, like the present ones, that require injury or damage

be “unexpectedly cause[d]” and the “expected or intended”

language of other policies, which is more inclusive. See

Borg-Warner Corp. v. Liberty Mutual Ins. Co., No. 88-539

(Sup.N.Y., Tompkins Co. Jan. 24, 1991), slip op. at 34. Even

os ae

50a

though the policies in City of Johnstown contained the

“expected or intended” language, the ruling there suggests

that it would encompass the Maryland policy language. As the

Second Circuit said:

[T]o exclude all losses or damages which might in some

way have been expected by the insured, could expand the

field of the exclusion until virtually no recovery could be

had on insurance. This is so since it is mishaps that are

‘expected’—taken in its broadest sense—that are insured

against.

877 F.2d at 1150 (emphasis in original).

Thus, Maryland’s motion for summary judgment is denied

concerning Greenville.

Punitive Damages

Maryland argues that it has no obligation to indemnify

Grace for any judgments awarding punitive damages against

Grace or for any sanctions, fines or penalties imposed against

Grace. Citing Public Serv. Mut. Ins. Co. v. Goldfarb, 53

N.Y.2d 392, 442 N.Y.S.2d 422, 425 N.E.2d 810 (1981), and

Hartford Accident & Indem. Co. v. Village of Hempstead, 48

N.Y.2d 218, 422 N.Y.S.2d 47, 397 N.E.2d 737 (1979), Mary-

land notes that New York courts have long held that under no

circumstance may an insurer indemnify an insured for puni-

tive damages. These holdings are based on public policy rea-

sons. Village of Hempstead, 422 N.Y.S.2d at 51-52, 397

N.E.2d at 741-42. Public policy aside, Maryland argues that

its policy language limits coverage to bodily injury or prop-

erty damages and punitive damages do not fall within either

category.

__In response, Grace contends that New York baw does not

control the issue of coverage for punitive damages. In the

absence of any choice of law provision in the policies or other

countervailing considerations, Grace says, the question of

insurability is usually decided by reference to the law of the

state that imposed the punitive damages—in regard to the state

that imposed the punitive damages—in regard to the Greenville

Sla

case, South Carolina. In South Carolina, Grace submits, Mary-

land’s policies cover the punitive damage award in Green-

ville. Carroway v. Johnson, 245 S.C. 200, 139 S.E.2d 908,

910 (1965). But even in New York, Grace adds, coverage

depends on the precise nature of the punitive damage award.

Grace submits that an award based on non-intentional or

vicarious liability would be covered in New York. See Village

of Hempstead, supra, 422 N.Y.S.2d at 50, 397 N.E.2d at 740.

The New York Court of Appeals has now resolved the

issue. In Home Ins. Co. v. American Home Products Corp., 75

N.Y.2d 196, 551 N.Y.S.2d 481, 484, 550 N.E.2d 930, 933

(1990), that court applied its earlier holdings in Goldfarb and

Hartford to out-of-state judgments. Thus, in New York, pub-

lic policy prevents an insurer from reimbursing an insured for

punitive damages awarded against the insured in an out-of-

state judgment. The Court of Appeals also indicated that an

award of punitive damages is not limited to intentional con-

duct but may involve wilful or wanton negligence or reck-

lessness. 551 N.Y.S.2d at 485, 550 N.E.2d at 934.

Grace argues, however, that because of the similarity in the

law of Illinois, the state of the underlying judgment, and New

York, in Home Insurance, it was appropriate to apply New

York policy to the Illinois judgment. Under Illinois law, puni-

tive damages “may only be awarded upon a showing that a

tort has been ‘committed with fraud, actual malice, deliber-

ate violence or oppression, or when the defendant acts will-

fully, or with such gross negligence as to indicate a wanton

disregard of the rights of others * * *.’ ” Home Insurance

Co., 551 N.Y.S.2d at 485, 550 N.E.2d at 934 (citations omit-

ted). In South Carolina, the state of the Greenville judgment,

on the other hand, says Grace, mere gross negligence justifies

an award of punitive damages. Kennedy v. Columbia Lumber

& Mfg. Co., Inc., 299 §.C. 335, 384 S.E.2d 730, 737 (1989).

Because punitive damages may be awarded in South Carolina

for conduct less egregious than what would support a punitive

award in New York, Grace contends, the reasoning of Home

Insurance Co. does not apply to the award in Greenville.

52a

Nevertheless, the Fourth Circuit in Greenville stated that

under South Carolina law, “punitive damages may be recov-

ered when a tortfeasor acts willfully, wantonly, or in reckless

disregard of the rights of another.” City of Greenville, 827

F.2d at 983. This language differs very little, if at all, from the

language quoted above in Home Insurance Co. relating to IIli-

nois law on punitive damages. But even if South Carolina has

a less stringent test for an award of such damages, the con-

duct the jury found Grace guilty of fits with the confines of

the “more stringent” Illinois law. See id. at 982.'° In short, the

conduct of Grace, as found in City of Greenville, would sup-

port an award of punitive damages in New York. Home Insur-

ance Co., 551 N.Y.S.2d at 486, 550 N.E.2d at 935.

Accordingly, we find that New York public policy prevents

Maryland from reimbursing Grace for its actions in Green-

ville. Maryland’s motion for summary judgment on this issue

is granted. The parties ha

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