Second Circuit limits insurance coverage for asbestos makers.

In a ruling that could affect billions of dollars worth of property damage claims against asbestos manufacturers, the Second Circuit Court of Appeals held in May that only insurance policies in effect at the time asbestos was installed provide coverage for the damage it caused. (Maryland Casualty Co. v. W.R. Grace and Co., No. 91-9322 (2d Cir. amended decision May 16, 1994).)

The case, which has yet to be tried, involves a dispute between W.R. Grace and Co., a major asbestos manufacturer, and several of its insurers. At issue is which insurers must cover property damage claims against Grace by building owners who are seeking to recoup the cost of removing or safely containing the hazardous material.

The Second Circuit's decision reverses a magistrate judge's 1991 ruling that coverage is triggered by the discovery of the damage. Property owners generally did not know that asbestos was harmful until 1973, when the U.S. Environmental Protection Agency banned its use because the agency had found that inhaling asbestos fibers causes cancer. The effect of the 1991 ruling was that only Grace's post-1973 insurance policies would cover the damage claims.

Grace appealed, arguing that coverage should also be available under earlier policies issued by other insurers, even though they were not in effect when the damage was discovered.

The Second Circuit agreed that the magistrate erred in linking coverage to discovery of damage. The three-judge panel said the policies cover damage when it occurs, which it defined as the time of installation.

But rather than adopting Grace's view that coverage should be available under policies issued both before and after 1973, the court held that asbestos manufacturers are covered only under policies in effect when asbestos was installed. "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," Judge Richard Cardamone wrote for the panel. "Once [asbestos is] installed, the damage that [it] inflicts is complete."

Jerold Oshinsky, a Washington, D.C., lawyer who represents Grace, said none of the parties had argued that installation should be the trigger for coverage. "The court decided that on its own," he said.

Grace has filed a petition asking the full court to rehear the case. If the court declines, the company will appeal to the U.S. Supreme Court, Oshinsky said.