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Maryland Federal District Court Grants In Part Insurers’ Motion for Summary Judgment as it Pertained to the Reasonableness of Insurance Claims Settlement

National Union Fire Insurance Company of Pittsburgh, PA., et al. v. Porter Hayden Company, et al.
Civil Nos. CCB-03-3408, CCB-03-3414 (April 11, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In National Union Fire Insurance Company of Pittsburgh, PA., et al. v. Porter Hayden Company, et al., National Union Fire Insurance Company of Pittsburgh, Pa. and American Home Assurance Company (collectively, “the Insurers”) sought summary judgment to bar coverage for settlements made by the Porter Hayden Bodily Injury Trust (“the Trust”), arguing that: (1) those settlements violated the “voluntary obligation” provision and (2) the settlements were unreasonable. Also pending before the court was Porter Hayden Company’s (“Porter Hayden”) motion for summary judgment. After hearing the arguments of the parties, the Honorable District Judge Catherine C. Blake granted in part the Insurers’ motion for summary judgment—as to their ability to challenge the reasonableness of the Trust’s settlements, and denied the motion as to Porter Hayden shouldering the ultimate burden of persuasion to show that the settlements were reasonable. Further, Porter Hayden’s motion was granted in part, as it pertained to whether the Trust paid claimants reasonable values to resolve claims and whether the Insurers had waived their right to object to settlements paid by the Trust, and denied in part, as to the Insurers’ waiver of the voluntary obligation provision.

By way of background, Porter Hayden ceased installing asbestos-containing insulation materials after involvement in thousands of lawsuits for alleged injuries related to asbestos exposure. In March 2002, Porter Hayden filed a petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Maryland. On June 30, 2006, the bankruptcy court confirmed Porter Hayden’s Third Amended Second Modified Plan of Reorganization (“the Plan”). Although the Insurers initially objected to the Plan, they eventually withdrew their objections in exchange for Porter Hayden’s stipulation that confirmation of the Plan would not deprive them of any defenses under applicable non-bankruptcy law. The Plan established the Trust to resolve asbestos claims against Porter Hayden pursuant to Trust Distribution Procedures (“TDP”). The TDP outlined “the qualifications for an asbestos claim, the evidence needed to support the existence of such a claim, standards ranking the relative severity of claims . . . , and an associated schedule of values for each severity-level of claim.” According to the Insurers, Level I nonmalignant claims do not require a showing of physical impairment in the form of decreased lung function. Instead, Level I nonmalignant claims require X-ray changes, which may only reflect the condition of pleural plaques that do not cause pain and have no health significance. The Insurers maintained that these kinds of claims are not compensable in the Maryland tort system. In Maryland, a claim cannot move off the inactive docket without a showing of physical impairment.

In February 2009, before the Trust began resolving claims, Porter Hayden wrote a letter to the Insurers, requesting their assistance in evaluating and resolving claims. The letter indicated that Porter Hayden had already given the Insurers access to submissions through a claims database, provided multiple reports regarding the submissions, and invited their participation in evaluating submissions. Nevertheless, Porter Hayden was providing the Insurers with “one last opportunity” to be involved. Porter Hayden did not hear from the Insurers regarding the resolution of any asbestos claims.

In analyzing the Insurers’ Motion for Summary Judgment, the Maryland district court cited Federal Rule of Civil Procedure 56(a) for the applicable summary judgment standard. That rule provides that summary judgment should be granted “if the movant shows that there is no genuine dispute as to any material fact . . . .” FED. R. CIV. P. 56(a) (emphasis added). Whether a fact is material depends upon the substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,247–48 (1986). Accordingly, “the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment.” Id.

Next, the court addressed the Insurers’ argument that the Trust assumed obligations to claimants without their consent, in violation of the policies’ voluntary obligation provision. The district court rejected this argument, citing to U.S. Fid. & Guar. Co. v. Nat’l Paving and Contracting Co., 228 Md. 40, 48, 178 A.2d 872, 875 (1962), which states:

It is settled law that where there is a denial of liability and a refusal to defend on the part of the insurer . . . , the insured is no longer bound by a provision of a policy prohibiting settlement of claims without the insurer’s consent, or a provision making the insurer’s liability dependent on the obtaining of a judgment against the insured. The insured under such circumstances may make a reasonable compromise of the suit without losing his right to recover from the insurer under the policy.

The federal district court stated that Porter Hayden notified the Insurers of the claims presented to the Trust, but, like the insurers in Nat’l Paving, “the Insurers simply chose not to respond.” Accordingly, the court held that the Insurers waived the voluntary obligation provision, and were not permitted to rely on that provision to disclaim coverage. Nevertheless, although the Insurers were not permitted to disclaim coverage under the voluntary obligation provision, the court determined that they were permitted to challenge the reasonableness of the settlements. The Insurers preserved the right to challenge the settlements’ reasonableness when they entered into the stipulation with Porter Hayden that confirmation of the Plan would not deprive them of any applicable non-bankruptcy law defenses. Moreover, according to the district court, Nat’l Paving held that even an insurer that refuses to defend the insured reserves the ability to challenge the reasonableness of the insured’s settlement. Nat’l Paving, 228 Md. at 48, 178 A.2d at 875 (stating that, “where there is a denial of liability and a refusal to defend on the part of the insurer,” the insured may make a “reasonable compromise of the suit”); see also Gildenhorn v. Columbia Real Estate Title Ins. Co., 271 Md. 387, 394–95, 317 A.2d 836, 840 (1974).

Turning to which party had the burden of proof as to reasonableness, the court determined that the Insurers had the burden of production, but Porter Hayden had the ultimate burden of proof. Applying the reasoning of Port E. Transfer v. Liberty Mut. Ins. Co., 330 Md. 376, 624 A.2d520 (1993), the court recognized the difficulties inherent in requiring a party settling many claims to show the reasonableness of each settlement. Nonetheless, the court could not conclude, based on Port E. Transfer, that the Insurers must shoulder the ultimate burden of persuasion. Accordingly, to the extent that the Insurers’ motion for summary judgment sought a ruling that they may challenge the reasonableness of the Trust’s settlements and that Porter Hayden bore the ultimate burden of persuasion on reasonableness, the motion was granted by the district court. The court stated that it could not, however, determine whether the Trust’s settlements were reasonable or unreasonable as a matter of law. Rather, the court reiterated that the Insurers had the burden of production at trial; and if they satisfied this burden, then Porter Hayden would have the ultimate burden of proof to show the settlements were reasonable. For these reasons, the Insurers’ motion for summary judgment was granted in part and denied in part, and Porter Hayden’s motion for summary judgment—as it pertained to the reasonableness of the Trust’s settlements and whether the Insurers had waived their right to object to those settlements—was granted in part and denied in part.