STATE OF MINNESOTA
IN COURT OF APPEALS
C5-01-1546, C3-01-1738, C3-01-1741,
C5-01-1742, C4-01-1747, C6-01-1748,
C4-01-1778, C9-01-1811, C0-01-1812,
C1-01-1821, C4-01-1828, C6-01-1829,
C8-01-1850, C2-01-1861, C4-01-1862,
C7-01-1869, C6-01-1894, CX-01-1896,
C1-01-1897, C9-01-1906, C3-01-1917,
C3-01-1920, C7-01-1922, C2-01-1925,
Silicone Implant Insurance Coverage Litigation.
Filed September 24, 2002
Affirmed in part and reversed in part
Toussaint, Chief Judge
Ramsey County District Court
File No. C3001644
Dale I. Larson, Douglas L. Skor, Larson, King, LLP, 2800 Minnesota World Trade Center, 30 East Seventh Street, St. Paul, MN 55101-4922; and
David F. Herr, Gary J. Haugen, Maslon Edelman Borman & Brand, LLP, 3300 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402; and
Robert N. Sayler, Covington & Burling, 1201 Pennsylvania Avenue N.W., Washington, DC 20004 (for 3M Company)
Frederick W. Morris, Robert P. Thavis, Jeffrey A. Eyers, Leonard, Street & Deinard, 150 South Fifth Street, Suite 2300, Minneapolis, MN 55402 (for W. Haagman & Company)
Ted E. Sullivan, William L. Davidson, Lind, Jensen, Sullivan & Peterson, P.A., 150 South Fifth Street, Suite 1700, Minneapolis, MN 55402; and
Edward M. Kay, Clausen Miller, P.C., 10 South LaSalle Street, Chicago, IL 60603-1098 (for Old Republic Insurance Company)
Thomas D. Jensen, Lind, Jensen, Sullivan & Peterson, P.A., 150 South Fifth Street, Suite 1700, Minneapolis, MN 55402 (for Employers Mutual Casualty Company, The Home Insurance Company, Utica Mutual Insurance Co., Mt. McKinley Insurance Co., and Everest Reinsurance Co.)
Sylvia Ivey Zinn, Burke Ellingson, Brendel & Zinn, Ltd., 46 East Fourth Street, Suite 804, St. Paul, MN 55101 (for Columbia Casualty Company, The Continental Insurance Company, and Harbor Insurance Company)
Thomas S. Fraser, Richard D. Snyder, Fredrikson & Byron, P.A., 1100 International Centre, 900 Second Avenue South, Minneapolis, MN 55402; and
Clifton S. Elgarten, Crowell & Moring LLP, 1001 Pennsylvania Avenue, N.W., Washington, DC 20004-2595 (for Century Indemnity Co., ACE Europe, SA-NV, and United States Fire Insurance Co.)
John M. Anderson, Charles E. Lundberg, Christopher R. Morris, Bassford, Lockhart, Truesdell & Briggs, P.A., 3550 Multifoods Tower, 33 South Sixth Street, Minneapolis, MN 55402-3787; and
Paul N. Farquharson, Semmes, Bowen & Semmes, P.C., 250 West Pratt Street, Baltimore, MD 21201 (for Federal Insurance Co.)
John J. McDonald, William M. Hart, Melissa Dosick Riethof, Meagher & Geer P.L.L.P., 4200 Multifoods Tower, 33 South Sixth Street, Minneapolis, MN 55402 (for Westport Insurance Corporation)
Dyan J. Ebert, Quinlivan & Hughes, P.A., 400 South First Street, P.O. Box 1008, St. Cloud, MN 56301 (for TIG Insurance Company)
Dale O. Thornsjo, Johnson & Condon, P.A., 7235 Ohms Lane, Minneapolis, MN 55439-2152 (for Interstate Fire & Casualty Company and Chicago Insurance Company)
Lawrence R. King, Larson & King, 1500 Landmark Towers, 345 St. Peter Street, St. Paul, MN 55102 (for Lakeside Insurance, Ltd. and Seaside Insurance, Ltd.)
Robert L. McCollum, McCollum, Crowley, Vehanen, Moschet & Miller, Ltd., Wells Fargo Plaza, 7900 Xerxes Avenue South, Bloomington, MN 55431; and
Norman C. Kleinberg, Hughes Hubbard & Reed LLP, One Battery Park Plaza, New York, NY 10004 (for First State Insurance Company and Twin City Fire Insurance Company)
John M. Anderson, Charles E. Lundberg, Christopher R. Morris, Bassford, Lockhart, Truesdell & Briggs P.A., 3550 Multifoods Tower, 33 South Sixth Street, Minneapolis, MN 55402 (for Executive Risk Indemnity, Inc. and Victoria Versicherung AG)
Jerome B. Abrams, Abrams & Smith, 700 Northstar West, 625 Marquette Avenue, Minneapolis, MN 55402 (for Swiss Reinsurance Company and European General Insurance Company)
Richard A. Kaplan, George O. Ludcke, Daniel C. Bryden, Kelly & Berens, P.A.,0 3720 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for Republic Western Insurance Company)
Considered and decided by Toussaint, Chief Judge, Harten, Judge, and Willis, Judge.
S Y L L A B U S
1. When the underlying litigation leading to an insured’s liability is settled, leaving facts crucial to a coverage determination unresolved, the district court in the coverage action must make findings as to these unresolved coverage issues, which will not be reversed unless clearly erroneous.
2. When damages covered by occurrence insurance take place over more than one policy period, the court will presume the damages are continuous and will allocate them pro rata by time on the risk from initial injury through the time the underlying plaintiffs filed their lawsuit or died.
3. An appellate court will not address moot issues.
4. Insurance policies are interpreted as a matter of law.
5. The issue of when a party has notice of a claim, for the purpose of determining the commencement date for prejudgment interest, is a question of fact.
6. A party that waives coverage for expected-and-intended injuries under a liability policy may not later seek payment for claims for such injuries.
7. Attorney fees and costs incurred in a declaratory-judgment action to determine insurance coverage are not recoverable under Minnesota law absent statutory authorization or breach of a contractual duty to defend.
8. Punitive damages for breach of contract are not recoverable under Minnesota law except in exceptional cases where the breach constitutes or is accompanied by an independent tort.
9. A party whose rights are governed by a valid contract may not obtain equitable relief.
10. A party claiming misrepresentation as a defense to an insurance-coverage claim need not establish that the risk of loss associated with the claim for which coverage is sought is greater than that associated with insuring other risks within the same policy.
O P I N I O N
TOUSSAINT, Chief Judge
In this dispute, the parties seek resolution of insurance coverage and other issues. 3M had been sued by women who claimed that their silicone-gel breast implants, manufactured by 3M, caused them injury. 3M settled the suits and then turned to its liability insurers for coverage. After extensive proceedings, the district court resolved the claims. 3M and the insurers brought separate appeals from the district court’s posttrial orders and final partial judgment, and this court consolidated the appeals.
3M contends that (a) the policies in effect at the time of the implantations provided full coverage to the policy limits; (b) all of the excess policies provided coverage for defense costs; (c) the district court erred in denying its motion to amend its counterclaim to add a claim for punitive damages; and (d) the district court abused its discretion in denying 3M additional equitable relief.
The insurers jointly argue that (a) the policies were triggered shortly before the underlying plaintiffs exhibited overt symptoms of their diseases rather than at the time of implantations; (b) the damages were continuous and should be allocated through the time the underlying plaintiffs filed their lawsuits or died; (c) the judgment-reduction undertaking ought to be enforced; (d) where 3M waived coverage for implant ruptures as excludable expected-and-intended damages, supplemental payments to plaintiffs with both disease and ruptured implants should not be covered; (e) the district court erred in awarding 3M its coverage-action fees and costs; and (f) the district court abused its discretion in instructing the jury on risk of loss and waiver in connection with the insurers’ misrepresentation claim.
Finally, individual insurers argue that as to their particular policies: (a) defense costs were excluded from their excess policies; (b) defense costs were in addition to policy limits; (c) the $5,000 deductible in the relevant underlying layer applied to each implant claim and applied to the excess layers; (d) claims against 3M’s subsidiary that manufactured the implants were not covered because 3M did not give the notice necessary to make the subsidiary a named insured; and (e) the prejudgment interest awarded 3M should be calculated from the date the insurers were presented with a claim for reimbursement.
Because (a) the policies were triggered by injuries occurring both around the time of the implantations and afterwards; (b) damages were continuous, requiring allocation pro rata by time on the risk; (c) the allocation period should end at the time the underlying plaintiffs filed their lawsuits or died; (d) in light of the allocation ruling, this court need not reach the judgment-reduction issue; (e) the district court properly interpreted the defense-cost provisions of the excess policies; (f) the $5,000 deductible applies per claim but does not apply to the excess policies; (g) 3M complied with the named insured provisions; (h) the prejudgment interest should be calculated from the earlier of the dates on which the individual insurers’ policies were reached by 3M’s payment of covered costs or its obligation to pay such costs; (i) 3M waived coverage for excludable expected-and-intended damages for implant ruptures and may not recover for supplemental payments it made for mixed disease and rupture claims; (j) attorney fees are not recoverable absent statutory authorization or breach of a contractual duty to defend; (k) the district court did not err in denying 3M’s motion to add a punitive-damages claim; (l) the district court did not abuse its discretion in denying 3M’s request for additional equitable relief; and (m) the district court’s instruction on risk of loss and waiver was harmless error, we affirm in part and reverse in part.
In 1977, 3M Company acquired McGhan Medical Corporation, which manufactured silicone-gel breast implants. Seven years later, in 1984, 3M sold the business. It has not manufactured or sold breast implants since then, although some products 3M had manufactured were sold by the purchaser of the business in 1985 and perhaps later.
Beginning in 1992, plaintiffs began bringing claims against 3M, alleging that the implants caused various diseases. It is undisputed that many women who received the implants between 1977 and 1985 later became ill with some sort of autoimmune or other systemic disease. They suffered from a wide variety of symptoms, including joint pain and stiffness, muscle weakness, numbness, fatigue, irritable-bowel symptoms, flu-like symptoms, burning, itching, sleep disturbance, and memory loss. Although 3M asserted there was no reliable evidence of medical causation, several plaintiffs obtained large verdicts. 3M, which settled many individual cases and participated in a global settlement, asserts that its defense and settlement costs exceed $1 billion.
From 1977 to 1985, 3M purchased occurrence insurance with coverage of approximately $1.48 billion. Under the occurrence policies, claims can be made after the policy period but coverage is triggered only if bodily injury or property damage occurred during the policy period.
In 1977, Travelers Insurance Co. provided 3M’s primary occurrence policy. From 1978 through 1985, Lakeside Insurance Limited, a “captive” insurance company owned by 3M, provided 3M’s primary occurrence insurance policy. 3M also had layers of excess policies over the primary layer each year. Typically, several different insurers issued policies within the same excess layer, with each providing a percentage or “quota share” of the coverage limit in that layer. These excess occurrence policies were triggered only after the underlying primary policy and lower-level policies in a particular year had been exhausted. They generally adopt the same provisions, or “follow form,” of the relevant primary layer, absent specific exclusions to the contrary. Generally, the excess occurrence policies issued to 3M from 1977 to 1985 do not contain a duty to defend, but they contain differing provisions as to the duty to pay defense costs.
After 1985, due to a change in the worldwide insurance market, occurrence insurance was no longer widely available, and 3M purchased claims-made insurance. Unlike occurrence policies, the insured may make a claim on a claims-made policy only during the policy period. Coverage is further limited on a claims-made policy by the use of a retroactive date, which defines the period during which injury must take place in order to be covered. 3M’s claims-made policies contained retroactive dates of November 27, 1985, May 1, 1986, and January 1, 1986, and were intended to dovetail with the occurrence policies.
In 1992, 3M retained coverage counsel and designated its principal insurance broker as its litigation consultant to help map a strategy for maximizing insurance coverage. In April 1992, 3M reported the implant occurrence to its claims-made insurers. Sixteen months later, in July 1993, 3M notified its occurrence insurers.
In September 1994, three excess insurers initiated this action against 3M and other excess insurers, seeking a declaratory judgment on coverage defenses and trigger, scope, and allocation issues related to the implant cases. The defendant insurers soon became aligned with the plaintiff insurers. 3M counterclaimed for declaratory relief on the same issues and asserted a variety of claims against the insurers, including breach of contract and breach of the implied covenant of good faith and fair dealing.
In October 1995, 3M and the insurers moved for summary judgment on the issue of when actual injury occurred. 3M asserted that injuries began around the time of implantation, while the insurers asserted they began when the underlying plaintiffs first experienced overt symptoms, usually some years after the implant. The district court denied the motions, ruling that the issues of when the injury took place and whether it took place in more than one policy period were questions of fact triable to the court.
In June and July 1996, the court held a “medical trigger” trial to determine when injury occurred for purposes of triggering the occurrence policies. The court found that the injury took place on or about the time of implantation. It adopted a “continuous-trigger theory” and held that the policies would be triggered continuously from date of implant to date of claim or death and that 3M’s losses would be allocated “pro rata by time on the risk” over the period of injury. This ruling meant that the policies that were “on the risk” or in effect over the relevant period of time would each pay a pro rata share of 3M’s losses.
In July 1997, the district court sua sponte reversed its continuous-trigger ruling based on its interpretation of Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724 (Minn. 1997), a then-recent case that addressed allocation issues. The insurers moved to reconsider, providing the court with the transcript from the medical-trigger trial and citing to the underlying evidence. In November 1997, the court reinstated its prior trigger and allocation decisions, finding the record demonstrated continuing injuries.
On January 6, 1998, the predecessor district court judge was appointed to the court of appeals and a successor judge was appointed to preside. 3M then moved to clarify the trigger and allocation rulings. The court ultimately revised the ruling to provide that allocation ended on December 31, 1985, the last date that any occurrence policies were in effect, rather than the date the underlying plaintiffs filed their lawsuits or died.
Early in the case, 3M had stated that it was not seeking coverage for expected-and-intended damages relating to mechanical failures of the implant, specifically, rupture of the implant. In 1997, the parties addressed whether 3M was entitled to reimbursement for supplemental payments to global-settlement claimants whose implants had ruptured and who suffered disease. The court held that 3M had disavowed such claims when it “voluntarily narrowed the issue * * * to exclude mechanical claims.” 3M later asked the court to reconsider the ruling. The court interpreted the prior order as not resolving this specific reimbursement issue and held that 3M had not disclaimed coverage for specific payments for rupture made to women who also asserted disease claims.
A four-month jury trial on 3M’s breach-of-contract claims and certain insurer coverage defenses, including misrepresentation, began in October 1999. The first phase addressed coverage defenses, which the jury ultimately rejected. The second phase addressed 3M’s breach claims. At the end of the trial, the court granted the insurers’ directed-verdict motions, finding, among other things, that although 3M had established a prima facie case for breach, it had not presented a viable damages theory to support a breach claim. The court then discharged the jury over 3M’s objection.
The insurers then asked the court to enforce 3M’s judgment-reduction undertaking. Early in the litigation, ACE and XL, two of the claims-made insurers who provided coverage to 3M after 1985, moved to dismiss, citing policy provisions requiring 3M, in relevant part, to obtain their dismissal from any action filed by another insurer by filing a judgment-reduction undertaking. 3M filed that undertaking, and the trial court dismissed ACE and XL on that basis. The court denied the insurers’ request to enforce the judgment-reduction undertaking, finding that the claims-made insurers were not liable for any implantations performed before the policies’ retroactive dates.
In April 2000, 3M resurrected its breach claims by filing a postverdict motion for “further declaratory relief.” 3M requested an award of its coverage-action fees and costs based on the same implied-covenant claim that the court had just resolved against it. It also requested further equitable relief.
In an order issued in September 2000, the court made general findings about the insurers’ conduct as a group, particularly before the coverage action commenced in 1994, and concluded that the insurers had repudiated their contracts and breached the implied covenant of good faith and fair dealing. The court awarded 3M attorney fees and costs as an equitable remedy for the insurers’ breach of the implied covenant. The court apportioned 3M’s fees and costs among all the insurers in the program, including insurers that had settled or become insolvent. But the court declined to grant 3M any substantive monetary or equitable relief. The court had also previously declined to allow 3M to amend its pleadings to seek punitive damages.
At issue at different stages of the proceedings was whether, under the occurrence policies, the insurers were liable to 3M for defense costs incurred in the underlying actions. Various insurers sought rulings that their policies excluded coverage of defense costs or that their coverage of defense costs should be included within policy limits, rather than in addition to limits. Most of these motions were ultimately denied.
In May 2001, the court entered its order for partial final judgment, which included monetary judgments against most of the remaining insurers. The $169,340,679 in judgments against the insurers remaining in the case break down as follows: indemnity, $123,030,541; defense costs, $22,456,112; and prejudgment interest, $23,854,026. These appeals followed.
I. Did the district court err in ruling that coverage was triggered shortly after implantation, based on a finding injury first occurred at that time?
II. Did the district court err in ruling that damages were continuous from time of implantation and should be allocated pro rata by time on the risk through December 31, 1985, the last date of the occurrence policies?
III. Did the district court err in denying the occurrence insurers’ motion to enforce 3M’s judgment-reduction undertaking?
IV. Did the district court err in its rulings on coverage of defense costs?
V. Did the district court err in ruling that the $5,000 deductible in the primary Lakeside policy applied as a single deductible each policy year and did not survive the exhaustion of the primary policy?
VI. Did the district court err in rejecting First State Insurance Co.’s claim that its policies did not provide coverage for 3M’s subsidiary that manufactured the implants because 3M failed to comply with the notification requirement as to named insureds?
VII. When the district court awarded 3M prejudgment interest, was it clearly erroneous in determining the dates on which 3M gave the insurers sufficient notice of the amount due and in determining that further demands for payment would have been futile?
VIII. Did the district court err in ruling that 3M did not waive coverage for supplemental payments for rupture given to the underlying plaintiffs who also suffered disease?
IX. Absent statutory authorization or breach of a contractual duty to defend, did the district court err in awarding 3M its coverage-action fees and costs on a finding that the excess insurers breached the implied covenant of good faith and fair dealing?
X. Did the district court err in denying 3M’s request to amend its counterclaim to add a claim for punitive damages?
XI. Did the district court abuse its discretion in denying 3M additional
XII. Did the district court abuse its discretion in instructing the jury on risk of
loss and waiver in connection with the insurers’ misrepresentation claim?
In reviewing an appeal from a declaratory judgment, findings of fact will not be reversed unless clearly erroneous, while issues of law will be reviewed de novo. Minn. Ctr. for Envtl. Advocacy v. Big Stone County Bd. of Comm’rs, 638 N.W.2d 198, 202 (Minn. App. 2002), review denied (Minn. Mar. 27, 2002). “Insurance coverage issues are questions of law for the court.” State Farm Ins. Cos. v. Seefeld, 481 N.W.2d 62, 64 (Minn. 1992).
The underlying plaintiffs—women who received silicone-gel breast implants between 1977 and 1985 that were manufactured by 3M—sued 3M on the theory that the implants caused various diseases. 3M, which denied that there was any causal connection, nonetheless settled many such lawsuits after several plaintiffs in implant litigation obtained large verdicts.
3M then turned to its liability insurers, whose occurrence policies were in effect between 1977 and 1985. It asserted that for purposes of coverage the injuries occurred around the time the women received their implants. The insurers, however, claimed that injuries occurred shortly before the women experienced overt symptoms of their diseases, which was often years after the implant. Because the implants took place while the occurrence insurers’ policies were in effect, but most of the overt symptoms arose after the policies expired, resolution of this issue was determinative of coverage in most cases. After a trial on this “trigger” issue, the district court ruled in favor of 3M, holding that injuries first occurred around the time of the implant.
The insurers contend that the court erred as a matter of law in holding that injuries occurred, for purposes of coverage under the occurrence policies, shortly after implantation. They assert that this ruling is inconsistent with the scientific fact—accepted by both the insurers and 3M—that implants do not cause disease. They argue the court should have held that injuries occurred shortly before the underlying plaintiffs experienced overt symptoms.
The occurrence policies provide indemnity for “all sums” that 3M becomes legally obligated to pay as damages as a result of an “occurrence,” typically defined as “an accident, event or happening, including injurious exposure to conditions, which results, during the policy period, in bodily injury” that is “neither expected nor intended” by the insured. To establish or trigger coverage, “an insured must demonstrate that damage ‘occurred’ while the policy was in effect.” N. States Power Co. v. Fid. & Cas. Co., 523 N.W.2d 657, 659-60 n.3 (Minn. 1994) (quotation omitted). An occurrence takes place not when the policyholder engages in the wrongful act, “but the time the complaining party was actually damaged.” Singsaas v. Diederich, 307 Minn. 153, 156, 238 N.W.2d 878, 880-81 (1976). Consequently, if the damage occurs outside of the policy period, the policy does not provide coverage. See id. at 155, 238 N.W.2d at 880-81 (holding that policy did not provide coverage where negligent repair of lift in elevator occurred during policy period, while resulting injury occurred after policy was canceled).
As a preliminary matter, it should be noted that the question of when injury first occurred was not previously decided in the litigation between 3M and the underlying plaintiffs. In some situations, critical coverage issues may not be resolved in the actions underlying the insured’s liability for a judgment. See, e.g., Brown v. State Auto. & Cas. Underwriters, 293 N.W.2d 822, 825 (Minn. 1980) (holding that where issue of intent to injure was not necessary or essential issue in previous action it was nevertheless material fact for litigation in coverage action). Such is the case here, where the insured first settled with the plaintiffs and then sought coverage from its liability insurers. Whether the “occurrence” is covered by the policies remained to be resolved. Jostens, Inc. v. CNA Ins./Cont’l Cas. Co., 403 N.W.2d 625, 629-30 (Minn. 1987), overruled on other grounds, NSP, 523 N.W.2d at 664. The issue of coverage “is distinct from the issue of whether a settlement is reasonable.” Id. In such coverage disputes, the courts may have to “determine what injuries arose under the policies and are thus indemnified.” Id. at 630.
The district court held a seven-day bench trial on the sharply disputed issue of when actual injury occurred to the underlying plaintiffs. The court issued an order on July 11, 1996, containing extensive findings. It first noted the difficulty of resolving the factual issue of when the injury occurred, in light of the uniform opinion of the testifying experts “that silicone gel breast implants do not cause systemic disease.” Nonetheless, the court found it undisputed that the underlying plaintiffs suffered symptoms of systemic disease, that these diseases were bodily injuries covered by 3M’s liability policies, and that legal causation for purposes of the policies was assumed.
The court’s findings describe the body’s formation of a capsule around the implant and the two hypotheses on what occurs thereafter. All of the experts at trial agreed that after certain normal immune responses to the implant, including acute and chronic inflammatory response and capsule formation around the implant, the body was then immunologically normalized and no systemic disease resulted. The other hypothesis, which the underlying plaintiffs espoused and which is held by other physicians and scientists, was that an abnormal autoimmune response occurred and that systemic disease symptoms appeared. The court noted that even though the experts at trial rejected the latter hypothesis, some of them provided sufficient scientific information from which the plausibility of the hypothesis could be inferred. For purposes of the coverage issue, therefore, the court accepted the second hypothesis of an abnormal autoimmune response as more likely true than not.
While 3M and the insurers differed on when the injury occurred, they all based their arguments on the premise that “the immune system reacts immediately to the presence of a foreign substance in the body.” The insurers’ experts argued that this rapid-response injury occurred shortly before overt symptoms appeared. 3M’s experts asserted that the often insidious immune-system diseases might not become symptomatic for many years after the injury.
The court made specific findings, based on the record, that the injury occurred at about the time of the implant and described the mechanism by which it occurred:
Leaked silicone is in contact with body tissues from the time of implant until the formation of the protective capsule, a period of several weeks. Silicone is bioreactive during that period and more likely than not that is the period during which cellular abnormality is produced. Thus, “bodily injury” within the purview of the trigger language occurs at or about the time of implant.
The greater weight of the evidence, in the context of the undisputed fact of systemic disease symptoms and the assumed fact of legal causation and the necessary inference of the occurrence of an abnormality, supports the conclusion that the leaking silicone gel is the cause, the cellular damage is the injury, and the disease symptoms are the effects. Such cellular damage is determinable, constitutes the underlying bodily harm without which there would be no manifestation in the form of disease symptoms, and satisfies the “actual injury” legal standard for trigger.
The insurers explicitly state that they do not challenge these findings as clearly erroneous but instead argue that the court erred as a matter of law. They contend that the district court’s error lay in assuming a causal link between the implants and disease when, in fact, no such relationship exists. Because there is no causal relationship, they argue, the cellular-injury mechanism used to explain that causal relationship similarly does not exist.
The insurers do not contest that there was actual injury to the implant plaintiffs. They reject the district court’s cellular-injury theory, however, and cite evidence indicating that once autoimmune disease begins (often years after the implantation), it typically produces overt symptoms in a matter of weeks or months. They assert that it was therefore possible, with reasonable medical certainty, to identify these first disease symptoms by examining the plaintiffs’ medical records and to determine when the cellular-level injury that triggered coverage occurred. The injury would have occurred, the insurers assert, shortly before the overt disease symptoms were observed.
We re-emphasize that we are not addressing the issue of liability between the implant plaintiffs and 3M. Instead, we are addressing the issue of coverage for the liability 3M incurred as a result of the lawsuits. Further, although neither 3M nor the insurers agreed with the plaintiffs’ theory that silicone implants caused disease, that was the theory on which the plaintiffs obtained their settlements. And, as 3M points out, as a result of this theory, 3M incurred more than $1 billion in implant liabilities. The district court, finding the issue of trigger hotly contested and unresolved by the underlying litigation, properly held a trial on the issue. See id. Based on conflicting testimony, the court found as fact that injury occurs on a cellular basis shortly after implant. We hold that the district court properly applied the law and was not clearly erroneous in its findings.
After the resolution of the trigger issue, the question of allocation of damages among insurers arose. The district court ultimately ruled that the damages were continuous from the time of implant and should be allocated pro rata by time on the risk, with the allocation period ending on December 31, 1985, the last date that any of the occurrence policies was in effect.
3M challenges the determination that the damages were continuous; it contends that the damages arose from the discrete event of implantation and argues that any policies in effect at that time should pay up to the policy limits, under an “all sums” theory. The insurers agree with the district court that the damages were continuous, but they argue that the allocation period should end not on December 31, 1985, but on the date that the underlying plaintiffs filed their lawsuits or died, whichever occurred earlier.
If the damages are the result of a single discrete event, only the policies on the risk at that time are triggered and it is not necessary to allocate damages. SCSC, 536 N.W.2d at 318. But when damages occur over more than one policy period, courts will apply an “actual injury” or “injury-in-fact” theory in determining which policies are “on the risk.” NSP, 523 N.W.2d at 662. The essence of this theory “is that each insurer is held liable for only those damages which occurred during its policy period; no insurer is held liable for damages outside its policy period.” Id. Further, the court will presume the damages are continuous, unless an insurer can show that damages did not occur during its policy period. NSP, 523 N.W.2dat 664. “Each triggered policy therefore bears a share of the total damages proportionate to the number of years it was on the risk relative to the total number of years of coverage triggered.” Id. at 663 (citation omitted).
“The proper scope of coverage also will depend on the facts of the case.” Domtar Inc., v. Niagara Fire Ins. Co., 563 N.W.2d 724, 733 (Minn. 1997). In environmental contamination cases, when the origins of the damages “are uncertain or indivisible and the property damage is continuous,” the insurers are consecutively liable. Id. at 732 (citation omitted). This is limited to “those difficult cases in which property damage is both continuous and so intermingled as to be practically indivisible that NSP properly applies.” Id. at 733. It provides a “judicially manageable way” for trial courts to adjudicate certain pollution-coverage disputes when it is difficult to determine the event, occurrence, or damage giving rise to legal liability. Id. In contrast, if environmental contamination “arises from discrete and identifiable events,” only the policies on the risk provide coverage. Id. In SCSC, the jury found the damage arose from the single spill, although the leaching of chemicals from the spill into the groundwater in subsequent years caused damage. 563 N.W.2d at 318. Only the policies at risk at the time of the spill were triggered. Id.
Here, the district court made specific findings of fact regarding the continuous nature of the damages. The court emphasized that mere leakage of silicone was not the injury. It found that new bodily injury in the form of new cellular abnormalities occurred on an ongoing basis as cells came in contact with leaked microdroplets of silicone.
Unlike SCSC where there was one spillage of a contaminant that for some time afterward leaked into and damaged the soil, the mere leakage of the silicone into the system is not the injury. Rather, it is an autoimmune bioreaction with the silicone in the system that leads to a cell distortion that constitutes the injury. If such bioreaction occurs, it occurs at the time of implant but it also occurs at various times thereafter. The initial autoimmune response begins the injury process. As cells later come into contact with the silicone and provoke an autoimmune response, new cell distortions, and hence new injuries, occur. It is impossible to tell when any particular injury occurs. This is precisely the situation that requires the application of a continuous trigger.
The district court specifically found that putting an implant in the body was not the injury or the injury-causing event. Instead, the court found that the injury-causing event was the continuous leakage of silicone that comes into contact with the body’s cells, causing incremental cellular damage and eventually producing disease. Even though the successor judge seemed to be leaning toward an interpretation similar to SCSC, the finding of continuous damage remained. We agree that, under the district court’s explicit findings as to the mechanism by which the injury occurred, this is a continuous-damage case requiring allocation.
3M next analogizes this injury to that in a typical personal injury case. In such an action, if the claimant seeks damages for future pain and suffering, the insurer cannot avoid or reduce coverage on the theory that future injuries are outside of its policy period. The insurers respond that this was the type of scenario arguably the subject of the predecessor judge’s decision, finding that implantation was the discrete event causing injury, which decision was later withdrawn. However, the predecessor judge ruled in a subsequent order, which found damages to be continuous, that this was not the case, because new contact with the leaking silicone produced new bodily injury over time.
Relying on the NSP reasoning, 3M argues that when other relevant factors—policy language, the parties’ intent or reasonable expectations, canons of construction, and public policy—are considered, it is entitled to full coverage under the occurrence policies in effect at the time of the implantation or, in the alternative, under each such policy in effect from the date of implantation to the date of claim. See NSP 523 N.W.2d at 661 (citing these factors). 3M also asserts that the policy language does not specifically authorize allocation, which is a judicially created concept. It cites evidence that insurance-industry drafters rejected proposals to include pro rata provisions in the policies and argues that the court in NSP did not consider such information. Finally, 3M asserts that its reasonable expectations are supported by the fact that most courts in other jurisdictions have concluded that occurrence policies in effect during any part of the period in which continuing damages have occurred must provide full coverage.
The supreme court in NSP considered most of these factors 3M cites in reaching its decision and ruling that continuous damage must be allocated pro rata by time on the risk. While allocation is a creature of judicial construction, we are bound to follow the supreme court’s interpretation of law. 3M—apparently contrary to the holdings of NSP and Domtar—asks this court to hold that when policies are triggered, the insurers must pay all costs under each policy up to the policy limits, rather than as allocated pro rata based on time on the risk. In light of the supreme court’s definitive rulings on this issue, 3M cannot prevail.
3M next argues that once triggered by injury during the policy period, 3M’s policies promise to indemnify 3M for “all sums” that 3M “becomes legally obligated to pay as damages.” 3M contends that, at a minimum, it is reasonable for insureds such as 3M to expect coverage on that basis under the policies in effect on the dates of implantations. But the supreme court has specifically rejected this approach in cases involving continuing damages. Domtar, 563 N.W.2d at 731-32; NSP, 523 N.W.2d at 662.
Having affirmed the district court’s decision that damages were continuous, requiring allocation pro rata by time on the risk, we address the insurers’ challenge to the district court’s decision that the end date of the allocation period is December 31, 1985, the last date the occurrence policies were in effect. When damages occur over multiple policy periods, it is deemed “a continuous process in which the property damage is evenly distributed over the period of time from the first contamination to the end of the last triggered policy (or self-insured) period.” NSP, 523 N.W.2d at 664. This period is not limited only to times when insurance policies are in effect; in NSP, the allocation period included times when NSP had insurance, had no insurance, and had insurance with different limits or self-insured retentions. Id. at 659, 662-63 & n.7. While the length of the allocation period was not at issue in NSP, the supreme court referred to the end of the allocation period as being the time of “discovery, cleanup or whenever the last triggered policy period ended.” Id. at 663-64.
Later, the supreme court addressed more specifically the time over which damages should be allocated. Domtar, 563 N.W.2d at 731. In Domtar, the damages began in 1933 and cleanup efforts began in the 1990s, but the company could produce proof of insurance only between 1956 and 1970. Domtarargued that the losses should be allocated only over the 15 years during which insurance coverage was triggered and not for the entire period over which damages occurred. Id. The supreme court rejected the argument, holding that the insurer was liable “for that period of time it was on the risk compared to the entire period during which damages occurred.” Id. at 732.
Applying this rule of law to the facts as found by the district court--that damages began upon implantation and were continuous--the damages should be allocated from implantation through the date the underlying plaintiffs’ lawsuits were filed or the plaintiffs died. The district court, however, basing its decisions on equitable considerations, held that the allocation period should end December 31, 1985, the last date the occurrence policies were in effect. It reasoned that 3M had transferred risk to the insurers by purchasing the insurance and that 3M had the reasonable expectation that damages occurring during the policy periods would be covered. The district court concluded that allocating after 1985 would ignore insurance marketplace realities, establish a disincentive to purchase insurance by injecting uncertainty of claim resolution, and construe policies in such a way that would lessen prospects for compensation of injured victims.
NSP and Domtar, however, achieve equity by spreading the risk consistent with the “actual-injury” trigger. Further, NSP and Domtar specifically rejected arguments that the timing of the triggering injuries should be based on the amount of insurance purchased; both declined to exclude periods in which there was no insurance from the pro rata allocation period. Domtar, 563 N.W.2d at 733; NSP, 523 N.W.2d at 664. Applying the law clearly set out in NSP and Domtar, the insurers are liable for their time on the risk in proportion to the entire period over which damages occurred; there is no precedent for the district court’s equitable considerations on this point. Under the findings in this case, the damages must be allocated from the time of implantation through the time the underlying plaintiffs filed their lawsuits or died, whichever occurred earlier. Therefore, the district court’s decision to end the allocation period on December 31, 1985, is incorrect as a matter of law and is reversed.
TIG Insurance, an occurrence insurer, separately briefed the issue of the allocation order, arguing against the district court allocation scheme. Our decision reversing the district court decision on allocation resolves TIG’s challenge.
The occurrence insurers challenge the district court’s denial of their motion to enforce 3M’s judgment-reduction obligation. After 1985, occurrence policies were generally unavailable. 3M then obtained claims-made policies from four companies: Seaside Insurance Company (Seaside), a “captive” insurer that was wholly owned by 3M; X.L. Insurance Company (XL); A.C.E. Insurance Company (ACE); and Bowring Excess Slip (BES). Seaside, the primary insurer, settled with 3M. XL and ACE, both named parties in this action, also settled with 3M. BES was not made a party to the action.