Chubb v. Travelers grudge match costs asbestos victims $500 mln

March 5, 2012

If it weren’t for the $500 million that won’t go to asbestos victims as a result of the enmity between Chubb Insurance and Travelers Insurance, this story would be a funny O. Henry-esque lesson in the ironies of litigation. But there’s nothing funny about plaintiffs losing out on $500 million they’ve been counting on since 2004, especially because they had absolutely nothing to do with the loss. What we have here is a cautionary tale of the unintended consequences that abound in long-running, complex litigation.

On Thursday, as Jon Stempel reported for Reuters, U.S. District Judge John Koeltl of Manhattan federal court ruled that a 2004 settlement between Travelers and asbestos victims who long ago brought suits against the insurer was unenforceable. In a 32-page opinion that makes a valiant effort to streamline one of the most complicated records you’ll ever see, Koeltl concluded that the preconditions of the settlement were not satisfied because Travelers hadn’t been released from all the claims the deal was supposed to resolve.

To understand why, we have to back up to 2004. That’s when Travelers decided it was cheaper, in the long run, to buy peace with people asserting asbestos claims deriving from Travelers’ coverage of Johns Manville than to continue insisting the insurance company was absolved from liability through an $80 million contribution to the Manville Trust in 1986. Travelers agreed to put up a total of $445 million to settle with three groups of plaintiffs. As a condition of the settlement, Travelers insisted on a final court order releasing it from any asbestos-related claims.

That’s when Chubb entered the story. Chubb was concerned that its potential contribution and indemnity claims against Travelers would be barred by the 2004 settlement. Its lawyers at Cozen O’Connor filed an objection to the deal in Manhattan federal bankruptcy court, arguing that the court didn’t have subject-matter jurisdiction to enjoin future claims against Travelers and that it hadn’t received constitutionally sufficient notice of the previous 1986 deal.

It took another five years for the case to work its way through the district court, the 2nd Circuit Court of Appeals, and, amazingly, the U.S. Supreme Court. In 2009, the Supreme Court waded into the jurisdictional and historical mire of the suit. Its June 2009 opinion was a near-complete victory for Travelers and its lead lawyer, Barry Ostrager of Simpson Thacher & Bartlett. The high court ruled that the direct suits against Travelers were barred by the court orders issued back in 1986, just as Travelers had always argued. The justices also said that the bankruptcy court had jurisdiction to “interpret” the 1986 orders in a way that permitted the 2004 settlements to be approved.

The one snag in the Supreme Court’s opinion, according to Koeltl’s ruling Thursday, was that the justices didn’t decide whether any particular claimant was bound by the 1986 orders. The court remanded Chubb’s due process claim to the 2nd Circuit, which — lo and behold — concluded in a March 2010 decision that Chubb was not subject to the bar on suits against Travelers because it hadn’t been notified of the 1986 court orders.

The 2nd Circuit seemed to entertain the hope that the 2004 settlements would nonetheless remain in place, but the appeals court wasn’t counting on Simpson Thacher’s knack for grabbing victory from the jaws of defeat. Ostrager, along with Simpson partner Andrew Frankel, reasoned that the appellate ruling invalidated the 2004 deal because the settlements depended on Travelers receiving a final release from all claimants. Travelers refused to fund the settlements, and the claimants went to bankruptcy court to compel the insurer to pony up.

Manhattan federal bankruptcy judge Burton Lifland ruled that Travelers was still required to abide by the settlement. He also tacked on about $65 million in interest, bringing the total value of the deal up to $500 million.

The district court, however, found that Lifland was wrong. The 2nd Circuit’s ruling on Chubb meant that the deal was no longer on the terms Travelers had agreed to, Koeltl wrote. “[The appellate decision] exposed Travelers to contribution and indemnity claims from Chubb and potentially other insurers,” the judge concluded.” This is less protection than that for which Travelers bargained and for which it was willing to pay nearly $500 million.” Lifland had been concerned about fairness to the asbestos claimants, but Koeltl said that concern was misplaced: “New York law is clear that subjective notions of fairness or equity are not a permissible basis for a court to rewrite a contract or to excuse compliance with conditions precedent.”

And besides, Koeltl said, it would “skew the equities” to require Travelers to pay $500 million “for relief to which it was already entitled under the 1986 orders and for which it had already paid in 1986. While Travelers was willing to pay the additional $500 million to obtain complete peace through a clarification that any and all claims against it related to its handling of asbestos claims were enjoined, including contribution and indemnity claims by all potential insurers, this is not the relief Travelers obtained following (the 2nd Circuit ruling).”

Ironic, right? Especially because in the 25 years since the 1986 order, Chubb hasn’t brought asbestos indemnity claims against Travelers. Chubb’s theoretical due process protection comes at a very steep price for asbestos victims. (I’m sure, however, that we haven’t seen the last of this case. Who knows what the 2nd Circuit will do when it gets another crack at things.)

I called lawyers for the claimants, who are represented by Milberg; Goldberg Kohn; and Stutzman, Bromberg, Esserman & Plifka. None got back to me. I also reached out to Chubb’s lawyers at Cozen O’Connor but didn’t get a substantive response. Travelers counsel Ostrager declined comment.

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