Flintkote Co. v. Aviva PLC
2016 U.S. Dist. LEXIS 46090, 177 F. Supp. 3d 1165, 2016 WL 1298861 (2016)
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Rule of Law:
Under California law, an insurer's obligation to indemnify an asbestos bankruptcy trust, where policies cover sums the insured is "obligated to pay" by law, is limited to the actual payment percentage distributed by the trust to claimants, not the higher liquidated value of the claims. Additionally, California Insurance Code § 1616 mandates that nonadmitted foreign insurers that cause an action to be filed in California must post a bond.
Facts:
- Flintkote Company (Flintkote), a Delaware corporation headquartered in California, manufactured and distributed building materials containing asbestos fibers.
- Aviva PLC, Aviva International Insurance, Ltd., and The Ocean Marine Insurance Company Limited (Aviva) are London-based insurance companies that issued asbestos liability insurance policies to Flintkote.
- In the 1980s, Flintkote and other asbestos producers resolved industry-wide coverage litigation through the Wellington Agreement, which established the Asbestos Claims Facility to handle claims.
- In 1989, Aviva, which was not an original signatory to the Wellington Agreement, entered into a separate settlement agreement with Flintkote (the “1989 Agreement”) that incorporated many provisions of the Wellington Agreement.
- Flintkote filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware on May 1, 2004.
- As a result of Flintkote's bankruptcy, The Flintkote Trust was created under 11 U.S.C. § 524(g) to channel, administer, resolve, and pay pending and future asbestos bodily injury claims through Trust Distribution Procedures (TDPs).
- The TDPs assign nominal "Scheduled Values" or "Maximum Values" to asbestos claims based on disease level, but claimants are actually paid a reduced "payment percentage" of that nominal value, which may be adjusted by Trustees based on factors including available assets.
- The insurance policies at issue state that Aviva will "indemnify the Assured for all sums which the Assured shall be obligated to pay by reason of the liability... imposed upon the Assured by law... for damages on account of: (i) Personal injuries."
Procedural Posture:
- Flintkote Company filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware on May 1, 2004.
- From 2006 to 2012, Flintkote and Aviva mediated their coverage disputes.
- On December 24, 2012, Aviva moved the Delaware Bankruptcy Court to lift the automatic stay, intending to file a declaratory relief suit in the Northern District of California.
- One week before the scheduled hearing on Aviva’s motion, Flintkote preemptively filed for identical declaratory relief in Delaware District Court.
- Flintkote subsequently filed a motion to compel arbitration in Delaware District Court.
- Aviva filed a motion to dismiss or, in the alternative, to transfer venue in the Delaware District Court.
- The Delaware District Court granted Flintkote’s motion to compel arbitration and dismissed as moot Aviva’s motion for summary judgment and motion to dismiss or transfer.
- The Third Circuit Court of Appeals reversed the Delaware District Court’s order compelling arbitration.
- Aviva then renewed its motion to dismiss or transfer venue in the Delaware District Court.
- The Delaware District Court, finding that Flintkote engaged in an anticipatory filing to avoid California law, transferred the case to the United States District Court for the Northern District of California.
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Issue:
Does an insurer's contractual obligation to indemnify an insured for sums "obligated to pay" by law require payment of the full liquidated value of asbestos claims or only the reduced payment percentage set by a § 524(g) bankruptcy trust under California law, and must such an insurer post a bond under California Insurance Code § 1616?
Opinions:
Majority - Susan Illston
No, an insurer's contractual obligation to indemnify an insured for sums "obligated to pay" by law requires payment only of the reduced payment percentage set by the § 524(g) bankruptcy trust, not the full liquidated value of asbestos claims, under California law. Furthermore, the nonadmitted foreign insurer must post a bond under California Insurance Code § 1616. The court first determined that California law governed the dispute, finding that Flintkote's headquarters and the principal location of the insured risk were in California, and noting that a parallel Wellington Agreement arbitration had also applied California law. The court rejected Flintkote’s argument for a “national common law” and found that its previous arguments in favor of California law and its strategic filing in Delaware to avoid adverse California precedent solidified California as the proper forum's choice of law. Applying California law, the court found the case to be squarely dictated by Fuller-Austin Insulation Co. v. Highlands Ins. Co., which held that an insurer’s indemnity obligation to an asbestos bankruptcy trust is limited to the actual payment percentage disbursed by the trust, not the nominal liquidated value of the claims. The court determined that Flintkote's Trust Distribution Procedures (TDPs) were functionally indistinguishable from the Claims Resolution Procedures in Fuller-Austin, both contemplating potential future adjustments to the payment percentage but not guaranteeing increased payments to claimants even with additional insurance proceeds. The court rejected Flintkote’s argument that Aviva had contractually waived this position, distinguishing between coverage defenses (which were waived by the Wellington Agreement) and the fundamental scope of the insuring agreement. Finally, the court ruled that Aviva, as a nonadmitted foreign insurer that successfully moved to transfer the action to California, was mandatorily required to post a bond under California Insurance Code § 1616, as it failed to demonstrate that any statutory exception applied.
Analysis:
This case reinforces the precedent set by Fuller-Austin, clarifying that under California law, an insurer's liability to an asbestos bankruptcy trust is tied to the actual payments made to claimants, not the potentially higher nominal liquidated value of claims. This limits the potential 'windfall' to trusts by preventing insurers from paying more than what the trust is truly 'obligated to pay' given its payment structure. The ruling will likely impact future negotiations and litigation between § 524(g) trusts and their insurers, particularly within California, by anchoring indemnity obligations to the practical realities of trust distributions rather than theoretical claim values. It also solidifies the mandatory nature of California Insurance Code § 1616, ensuring that nonadmitted foreign insurers involved in litigation they initiated or caused in California provide financial security to protect California insureds.
