Ontario Court of Appeal Rejected Application of American Stonewall Principle

The court of appeal rejected the application of the American Stonewall Principle and refused to pro-rate deductibles even where deductibles were larger than the pro-rated payout for ‘long-tail’ claims.

Goodyear Canada Inc. v. American International Companies, [2013] O.J. No. 2746, June 13, 2013, Ontario Court of Appeal, J.I. Laskin, E.A. Cronk and A. Hoy JJ.A

From 1969 to 1973, the insured manufactured and exported a product containing asbestos to customers in the United States. Asbestos litigation erupted in the 1970’s and 1980’s in which the insured was named as a defendant or third party in many U.S. lawsuits. The claims were ‘long-tail’ injury claims involving damages for bodily injury sustained over many years due to exposure to asbestos. The timeframe for bodily injury potentially spanned from 1969 to the present.

Occurrence-based insurance policies had been issued to the insured between 1969 and 1980. The insured sued its property and casualty insurers on risk between 1969 and 1980. Under the wording of the policies, it was arguable that each insurer could be held jointly and severally liable for “all sums” that the insured was found liable to pay in respect of the U.S. claims. The policies also contained “per claim” deductibles which the insured had to pay before the policies were required to respond. From 1980 to 1985, the insured was fully self-insured and there was a US territorial exclusion in its Canadian-based policies. The principal dispute between the insured and the insurers concerned whether there was coverage under the policies for asbestos injury found to have occurred after 1985.

The insured argued that from 1985 onward, it was unable to obtain insurance coverage at commercially reasonable rates for asbestos related liability in the United States as the insurance industry had stopped underwriting such risks. The insured relied on the “Stonewall Principle” and contended that the insurers should be liable for any asbestos injuries occurred after the coverage cut-off in 1985. In Stonewall, the Second Circuit Court of Appeals accepted that an industry-wide coverage cut-off for asbestos related injuries occurred in 1986. The court held that insurers who had provided coverage prior to 1986 were collectively responsible for claims involving continuing asbestos injuries that occurred after the cut-off time.

The motion judge held: (i) coverage cut-off occurred from 1986 onwards; (ii) the Stonewall Principle did not apply and the insured was obligated to self-insure for any asbestos-related injury found to have occurred after 1985; (iii) the insured’s argument that the deductibles under the policies should be prorated to accord with the proration of coverage was rejected; and (iv) the insured’s decision to transfer all risk for products sold in the U.S. to the U.S. insurance market and/or its self-insured retention on its liability policies after 1980 did not affect its self-insurance obligation.

The insured applied to appeal rulings (ii) and (iii). The insurer argued that if (iii) was overturned, then it sought to appeal finding (iv).

The court of appeal refused to import the Stonewall Principle into Ontario law based on four grounds. First, the principle is inconsistent with the express terms of the policies. It would be unfair to find the insurers obligated to compensate injured plaintiffs for bodily injuries sustained from 1986 to present, long after the expiry of the policies. Second, the acceptance of the Stonewall Principle in the U.S. is uneven and far from universal. Third, the policy considerations weighed against adopting the principle. There is no right to insurance. Finally, the court held the pro-rata allocation and continuous trigger theory were constructed to promote fairness. Even if the pro-rata payout did not exceed the insured’s deductible, this was something the insured bargained for and it was not unfair. A similar analysis was made to reject the insured’s argument that the deductibles should be prorated. The appeal was dismissed.

This case was originally summarized by Djuna M. Field and originally edited by David W. Pilley of Harper Grey LLP.

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