Lincoln Elec Co v. St. Paul Fire ( 2000 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0152P (6th Cir.)
File Name: 00a0152p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
;

THE LINCOLN ELECTRIC
Plaintiff-Appellee/ 
COMPANY,

Cross-Appellant, 
Nos. 98-4236/4340

>
v. 



ST. PAUL FIRE AND MARINE
Defendant-Appellant/ 
INSURANCE COMPANY,

Cross-Appellee. 
1
Appeal from the United States District Court
for the Northern District of Ohio at Akron.
No. 96-00537—James S. Gwin, District Judge.
Argued: November 2, 1999
Decided and Filed: April 27, 2000
Before: KEITH, NORRIS, and CLAY, Circuit Judges.
_________________
COUNSEL
ARGUED: Clifford M. Sloan, WILEY, REIN & FIELDING,
Washington, D.C., for Appellant. Robert S. Walker, JONES,
DAY, REAVIS & POGUE, Cleveland, Ohio, for Appellee.
1
2 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 39
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
ON BRIEF: Clifford M. Sloan, WILEY, REIN & benefits of a double-auditing system. It was in a position to
FIELDING, Washington, D.C., Thomas P. Kane, act much earlier in order to prevent some of the
OPPENHEIMER, WOLFF & DONNELLY, St. Paul, inconvenience and cost associated with this legal controversy.
Minnesota, for Appellant. Robert S. Walker, Brian F.
Toohey, Mark J. Andreini, JONES, DAY, REAVIS & We affirm the district court’s refusal to award attorney’s
POGUE, Cleveland, Ohio, Michael H. Ginsberg, Peter D. fees on the ground that the recently enacted Ohio statute
Laun, JONES, DAY, REAVIS & POGUE, Pittsburgh, compels that result.
Pennsylvania, for Appellee. Gerald V. Weigle, DINSMORE
& SHOHL, Cincinnati, Ohio, Mary A. Cavanaugh, Dennis R. III.
Lansdowne, SPANGENBERG, SHIBLEY & LIBER,
Cleveland, Ohio, Mitchell F. Dolin, COVINGTON & We affirm in part, reverse in part, and remand the case to
BURLING, Washington, D.C., Thomas J. Quinn, MENDES the district court for further proceedings required to
& MOUNT, New York, New York, for Amici Curiae. implement the holdings in this opinion. We find that the
parties properly raised their arguments on appeal. The district
_________________ court did not commit clear error or legal error in reaching its
determination that St. Paul was liable for failing to adhere to
OPINION the terms of its policies held by Lincoln Electric. The district
_________________ court did not commit clear error or legal error in finding that
St. Paul was liable pursuant to “missing” polices dating from
ALAN E. NORRIS, Circuit Judge. Defendant St. Paul Fire 1945 to1972 that were held by Lincoln Electric. We reverse
and Marine Insurance Company (“St. Paul”) appeals a district the district court with regard to the process it used to reconcile
court judgment and award entered pursuant to a bench-trial the contractual policy relationship of the parties with the long-
verdict for plaintiff, the Lincoln Electric Company (“Lincoln term exposure and delayed manifestation injury claims of the
Electric”). The trial concerned a dispute over products type associated with the “welding-fumes”/“asbestos
liability insurance policies that Lincoln Electric purchased exposure” sort of injury, and direct it to follow the four-step
from St. Paul over the course of several decades. The policies process articulated in this opinion to determine whether any
were altered over time as to the levels of deductibles for 1) adjustments in the base judgment award are needed. We
assessed product-related injury liability and 2) legal costs reverse the district court with respect to the method it used to
associated with litigation stemming from the covered product- calculate prejudgment interest, and direct it to 1) take the
related injuries. The basis for insurance coverage between the corrected base award, 2) add prejudgment interest, which is
parties also changed from an “occurrence” basis (coverage to be calculated using an accrual date of February 22, 1996,
from the date of the injury) to a “claims” basis (coverage and 3) accompany the total judgment award with a clear
from the date of the lawsuit), creating a situation where some written explanation concerning the statistical, mathematical,
claims against Lincoln Electric could simultaneously trigger accounting, and data processing assumptions and procedures
the “occurrence” policy and the “claims” policy. utilized to arrive at the base, prejudgment interest, and final
judgment award figures. We affirm the district court’s
In addition, the parties have had a long-standing decision not to award attorney’s fees to Lincoln Electric.
disagreement about how they should determine when a
particular policy has been triggered by a claim involving a
38 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 3
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
and that is pending in a court of record on that date. Thus, long-term exposure and delayed manifestation injury. This
this case is subject to the new statute because this case was question is of special importance to both parties and to the
commenced prior to the effective date, and remains pending products-liability insurance market. Since the 1970s there has
in a court of record. As the letter suggests, the following been an explosion in class-action suits by welders for medical
provisions from R.C. § 2721.16(A) now govern: problems alleged to have resulted from exposure to asbestos,
manganese, and welding fumes. Lincoln Electric, along with
A court of record shall not award attorney’s fees to any many other similarly-situated industrial entities, has faced
party on a claim for declaratory relief . . . unless a section thousands of these class-action suits. Typically, the suits
of the Revised Code explicitly authorizes [it] or unless allege both harmful exposure for decades and delayed
an award of attorney’s fees is authorized by section manifestation of injury, but do not allege any precise1 moment
2323.51 of the Revised Code, by the Civil Rules, or by of transformation from wellness to infirmity. These
an award of punitive or exemplary damages against the characteristics can result in both the industrial entity and its
party ordered to pay attorney’s fees. insurer having a strong fiscal incentive to manipulate the
“triggering” date. Both parties may do this in order to take
St. Paul’s letter correctly observes that none of the three advantage of what each considers to be the most favorable set
statutory prerequisites is satisfied by Lincoln Electric’s claim of policy terms (e.g., deductibles and assumption of legal
for fees.
Lincoln Electric did not file a written argument in response
to St. Paul’s letter, but did assert at oral argument that section
2721.16(A) does not apply to this case because the statute 1
Exposure, a discrete temporal moment of injurious transformation,
concerns only a declaratory judgment action and Lincoln manifestation, and diagnosis are different concepts and represent events
Electric was suing for breach of contract. We disagree with that may or may not be at different periods of time (although they can
that argument. St. Paul filed in federal district court in occur either simultaneously or in the sequence listed above). “Exposure”
Minnesota seeking declaratory judgment on March 11, 1996, is a physical bodily encounter with a harmful substance, e.g., breathing
and Lincoln Electric responded by filing an action in the asbestos fibers into the lungs. “A discrete temporal moment of injurious
transformation” denotes the precise moment when, for example,
Northern District of Ohio. The Minnesota action was cancerous cells first appear in the exposed lungs. “Manifestation” refers
transferred to the Northern District of Ohio and consolidated to the period of time when the injury becomes susceptible to observation
as a diversity of citizenship action under 28 U.S.C. § 1332, by a reasonable person with an actual opportunity to observe its signs and
and Ohio law was properly applied. Additionally, this court symptoms. Manifestation can also occur when the injury becomes
has not adopted Lincoln Electric’s theory concerning its susceptible to observation by a reasonable person in a position to observe
the signs and symptoms of the injury. For example, if cancer in the lungs
contractual policy relationship with regard to long-term caused by asbestos began to cause unusual pain in the lungs or a coughing
exposure and delayed manifestation injury “welding fume” of blood, manifestation would have occurred even if the injured individual
and “asbestos exposure” claims. It would thus be inaccurate failed at that time to take notice and attach significance to the
to describe St. Paul’s reluctance to cooperate as “wrongful” developments. Finally, “diagnosis” concerns an authoritative attribution
under Allen v. Standard Oil Co., 2 Ohio St. 3d 122, 122, 443 of medical significance to a manifestation of signs or symptoms of an
injury. Most often diagnosis will result from the methodological
N.E.2d 497, 497 (Ohio 1982), even if one assumes that the examinations and informed conclusions of medical professionals. In our
syllabus in Allen is still good law following the new Ohio example, diagnosis would occur when a doctor examines the injured
legislation. Finally, we note that Lincoln Electric enjoyed the person and concluded that lung cancer was indicated by the evident signs
and symptoms.
4 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 37
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
costs) found at some chronological point along the time-frame defendant insurer about the problem (particularly where there
of a long-standing insurance relationship. is gross negligence, a lack of good faith, or fraud33), and
2) will always begin at or before the date at which the insurer
On appeal, St. Paul asserts that it fulfilled its contractual was served with notice of a court action as to the matter.
obligations and that the district court erred in finding any
liability whatsoever on its part. It contends that the district We remand this case back to the district court to recalculate
court reached its finding of liability by misapplying the prejudgment interest. The district court must first ensure that
voluntary payment and mistake of law doctrine and the course it has reached the correct base amount for the judgment award
of conduct doctrine. St. Paul also argues that the district court by reconciling the contractual policy relationship with long-
applied an incorrect standard of proof when it reached a term exposure and delayed manifestation injury “welding
factual finding for Lincoln Electric concerning the contents of fume” and “asbestos exposure” claims though use of the
“missing” policies covering the years 1945 to 1972. St. Paul calculation process described in the previous section of this
further believes that, even if there was liability on its part, the opinion. The court can then properly calculate prejudgment
district court should have equitably allocated the application interest by using February 22, 1996 as the date of accrual.
of the claims to the various triggered policies rather than
allowing Lincoln Electric to “pick and choose” between 7. Attorney’s Fees and St. Paul’s Breach of Duty to Defend
policies while invoking coverage for each claim. Finally, St. Lincoln Electric
Paul asserts that even if it loses every other issue on appeal,
the judgment award should be reduced because the district On cross-appeal, Lincoln Electric challenges the district
court utilized an incorrect accrual date which resulted in court’s refusal to award it attorney’s fees as the prevailing
exorbitant prejudgment interest. party.
Lincoln Electric asserts that the district court’s judgment Pursuant to FED. R. CIV. P. 28(j), St. Paul filed a letter with
should be upheld because it was not clearly erroneous, and, on the court on October 15, 1999. The letter included a copy of
cross-appeal, takes issue with the district court’s refusal to recently-enacted legislation, OHIO REV. CODE ANN.
award attorney’s fees. § 2721.16(A) (1999). St. Paul correctly pointed out that the
new statute expressly applies to pending cases because it
We affirm in part and reverse in part. governs any Ohio declaratory judgment action or proceeding
that was commenced prior to the effective date of this section,
I.
1. The Pre-1979 (September 1945-79) Relationship 33
According to the district court, St. Paul breached the policies by
implementing a trigger “that was to its benefit and to the detriment of
Lincoln Electric, a manufacturer of industrial products, Lincoln Electric, while at the same time not disclosing to Lincoln Electric
including welding rods, is an Ohio corporation with its other potential triggers of coverage.” At the same time, St. Paul had not
principal place of business in Ohio. St. Paul is a Minnesota breached a duty of good faith because it had acted with “reasonable
corporation with its principal place of business also in that justification” in its treatment of Lincoln Electric’s claims. Had the district
state. By 1979, Lincoln Electric and St. Paul had a court found that St. Paul acted fraudulently or in violation of the duty of
good faith, the date the district court chose for prejudgment accrual might
longstanding commercial relationship stretching back to at well have been appropriate under Ohio law as characterized by approach
least 1945, with St. Paul issuing insurance policies to Lincoln four.
36 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 5
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
To impute accrual of interest before the date at which the Electric on a yearly basis. The James B. Oswald Company
insurer should have known that it was breaching its duty to (“Oswald”), a Cleveland insurance broker, was St. Paul’s
defend is to also effectively impute a contractual term that did agent. Lincoln Electric was a sophisticated business entity,
not exist. Absent explicit agreement to the contrary, business but an unsophisticated insured; it had no risk management
parties in an insurance relationship with a double auditing department and relied upon Oswald and, to a lesser degree, St.
procedure share equally in the risks of possible costs Paul, for expertise in handling liability insurance matters.
associated with mutually undetected mistakes occurring in
the administration of the insurance relationship. Equal In the years leading up to 1979, the policies contained 1) a
sharing of risk exists regardless of whether a particular $5,000 deductible for indemnity costs related to judgments
mistake happens to result in over-payment or under-payment, and settlements from covered injuries, 2) no deductible for2
until or unless either 1) one party explicitly assumes a legal defense costs, and 3) an “occurrence” or “accident”
disproportionate share of the risk contractually, and the basis of insurance. The policies covered “bodily injury . . .
insured incurs actual costs, or 2) the insurer knew or should caused by an occurrence [“an accident, including injurious
have known about the failure to fulfill its duty. Contrary to exposure to conditions, which results, during the policy
the district court’s suggestion, St. Paul was not in breach of period, in bodily injury . . . neither expected nor intended
contract until Lincoln Electric alerted St. Paul about its failure from the standpoint of the insured”].”3 The policies also
to fulfill its duty in February 1996, and St. Paul responded by granted St. Paul an exclusive contractual “right and duty to
refusing to correct the problem.32 St. Paul cannot be deemed defend” Lincoln Electric.
to be in breach of contract whenever it happens to
inadvertently mishandle one of the thousands of claims it The 1970s witnessed an industry-wide explosion of toxic
must process within a business relationship of the kind exposure tort cases, implicating Lincoln Electric and its
considered in this case. This is especially true when, as was welding-rod manufacturing business as a defending litigant in
true here, each party could reasonably have relied upon the thousands of tort cases. Each case was typically brought by
other party to render assistance by utilizing the double- hundreds of welders acting in a class or otherwise cooperating
auditing procedure to detect errors. as a concerted group of litigants. The suits alleged lung
disease and/or cancer and/or neurological problems, all
We emphasize that application of this approach can result arising from decades of exposure to manganese and asbestos
in different dates of accrual depending on the scenario
adopted as true by the factfinder. The date of accrual 1) can
be at or before the date when plaintiff insured notifies 2
An “accident” policy is triggered by allegations of an accident or
event during the policy period. “Occurrence” policies are triggered by
allegations of bodily injury during the policy period. Both occurrence and
32 accident policies provide coverage for liabilities and accidents allegedly
“Breach of contract” is “[f]ailure, without legal excuse, to perform
any promise which forms the whole or part of a contract.” BLACK’S LAW occurring during the policy period, even if the lawsuits are filed years
DICTIONARY 188 (6th ed. 1990). The district court erred in finding a later. According to Lincoln Electric, both types of policies also provide
breach, because St. Paul had a legal excuse for its failure to perform coverage for injuries allegedly resulting from continuous or repeated
some of its promises during the period prior to February 22, 1996. The exposure to harmful conditions.
legal excuse existed because of the double-auditing scheme, the 3
complexity of the contractual arrangement, and the failure of Lincoln According to Lincoln Electric, the duty is triggered by an allegation
Electric to alert St. Paul to the need to correct any problem. of bodily injury, such as exposure to chemicals, during a policy period.
6 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 35
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
in the welding rods dating as far back as the 1930s. The necessary application of the statute. Predicate factual
plaintiffs did not contend that their injuries were attributable determinations will not be disturbed except for an
to any single exposure year, but did allege that each exposure abuse of discretion. The court’s attitude must be
caused injury. manifestly unreasonable, arbitrary or unconscionable;
mere error of law or of judgment is insufficient to
By the late 1970s, the extent of Lincoln Electric’s exposure support reversal on appeal.
to welding fumes cases had become apparent. At the same
time, the products liability insurance market was experiencing The Ohio law set forth above leads us to conclude that the
pressure due to an increasing volume of products liability district court applied most of the31above principles correctly.
lawsuits, including those related to asbestos. A controversy However, the district court erred when it adopted approach
began to emerge over the appropriate “trigger” for insurance one by utilizing the “time between accrual of the claim and
coverage in claims alleging delayed injuries from long-term judgment” for the calculation of interest. The district court
exposure. See, e.g., Stonewall Ins. Co. v. Asbestos Claims correctly reasoned that “Lincoln Electric lost access and use
Management Corp., 73 F.3d 1178, 1195-96 (2d Cir. 1995), of certain funds for the period through December 1997,” but
modified, 85 F.3d 49 (2d Cir. 1996)(discussing various trigger it incorrectly determined that accrual before February 1996
theories). However, St. Paul and Lincoln Electric continued was necessary to “fairly and reasonably compensate those
the renewal of policies and cooperated in the defense of losses flowing from St Paul’s breach.”
welding fumes cases. The concerns of the parties respecting
the emerging trend of lawsuits ultimately led to an August
1979 meeting to negotiate renewal of coverage.
2. The 1979 Deductible Endorsement and Subsequent 31
Coverage 1979-85 We therefore reject Lincoln Electric’s position with respect to this
issue. Moreover, we note that although St. Paul advocated the correct
In the August 1979 meeting, the parties discussed issues result, it was incorrect in suggesting adoption of approach two (instead of
including control of cases, the “occurrence” date, expenses, approach four) as the rationale for reaching that result.
St. Paul was incorrectly forced to expend or absorb costs related to
the renewal agreement, and premiums. St. Paul insisted upon defense, but both parties were equally responsible for the failure of the
higher premiums, higher deductibles or cost sharing, or a double-auditing system to catch the problem. This was not a situation
combination of these. Several policy proposals were where the insurer had sole access to relevant records or where the insurer
discussed, including one for a combined defense-and- was conducting the only auditing. It was not until February 1996 that
indemnity deductible, but the parties never discussed the Lincoln Electric first proffered its complex theory for recovery and
demanded a reallocation of defense and indemnity payments. Thus, under
language of the $25,000 deductible that eventually became the unique facts of this case, the approach two date “when insurer is made
part of the 1979 policy. Date of occurrence was a major aware that the insured disagrees with how insurer has disposed of the
issue. During the meeting, Lincoln Electric advocated a claim the insured submitted to the insurer about funds expended by
trigger for the occurrence date that would run “from the day insured in defense efforts” happens to coincide with the second prong of
the welder commences welding to [the] day he ceases to be a approach four, which is when “the insurer knew or should have known
that the insurer was not fulfilling its duty to defend.” Since both prongs
under approach four must be satisfied, the date of accrual will always be
pushed back to the date when the latter of the two prongs has been
satisfied. In this case, prong two of approach four produces the same
accrual date as approach two.
34 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 7
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
4
date for payment, and hence interest accrual, may be welder,”
5
while St.
6
Paul countered with a “manifestation
from the date coverage was demanded, the date date” alternative. St. Paul acknowledged Lincoln Electric’s
coverage was denied, the date of an accident, or some position.7 Lincoln Electric asserts that no agreement on
other date. In the context of this case, interest accrued trigger or date of loss was reached.
under R.C. 1343.03(A) on the date at which both A)
the insured was incorrectly forced to expend or absorb No deal of any kind was made at the August 15 meeting.
defense costs, and B) the insurer knew or should have A week later, on August 23, St. Paul sent a letter to Oswald’s
known that it was not fulfilling its duty to defend. CEO describing two options8 for Lincoln Electric, and the
substance of the letter was then communicated to Lincoln
3. Mere denial that one is liable for a debt will not make
a claim unliquidated30 and will not defeat a claim for
prejudgment interest. Prejudgement interest will not
4
be denied merely because a principal amount is Lincoln Electric’s proposed trigger apparently was a hybrid of the
liquidated, unliquidated, or not susceptible to easy “exposure” trigger, which applies those policies in effect at the time of the
ascertainment. Courts do not award interest based exposure to the offending product, and the “continuing injury” trigger,
upon a lack of good faith in the underlying action, the which applies those policies in effect at any time from exposure through
manifestation. Lincoln Electric’s language suggests a continuing injury
insurer’s decision to defend, and/or the nonmovant's trigger that is cut short by the last date at which exposure could have
failure to settle. It makes no difference that the claim occurred. Under Lincoln Electric’s proposal, the concept of exposure
to be defended was not clearly within the defendant’s would have been used to define the limits of coverage rather than as a
policy periods. An arbitration award or verdict is not justification for the substance of provided coverage.
required. Admission or acknowledgment of liability 5
by the defendant insurer is not required. A traditional “manifestation” trigger applies those policies in effect
at the time the injury was manifested.
4. The trial court judge is responsible for identifying the 6
date of accrual. The trial court judge calculates the Lincoln Electric’s view is that St. Paul knew it could not avoid the
amount of prejudgment interest. If a favorable occurrence coverage it had already sold, nor prevent future claims from
triggering those policies. Lincoln Electric asserts St. Paul knew if it left
judgment award has been obtained by plaintiff, Lincoln Electric it could not collect additional premiums to offset losses,
plaintiff has a right under R.C. 1343.03(A) to an thus exacerbating what was already a bad situation for St. Paul.
interest award as a matter of law, and the trial judge
has no discretion not to grant any interest award. 7
The position was acknowledged in a memorializing document which
Although a trial court judge is bound to apply stated:
prejudgment interest principles to the facts as found by
the trial factfinder, the judge makes the additional Establishment of Occurrence. Insured wants it to read from the
day the welder commences welding to day he ceases to be a
predicate factual determinations needed to support any welder. This results in limits applying cumulatively during the
years we provide coverage.
30 8
Even in the case of unliquidated debts, prejudgment interest may One option was “a policy excluding welding fume claims,” while
be awarded under Ohio law if the amount is capable of ascertainment by the other option offered “a policy with a $25,000 combined defense and
mere computation, or is subject to reasonably certain calculations by indemnity deductible for welding fume claims” in return for an additional
reference to existing market value. $548,000 in annual premiums.
8 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 33
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
Electric. The letter included the following language (St. Paul’s argument), “that prejudgment interest should only
(emphasis added): run from February 1996 – the point in time when Lincoln
Electric first demanded a reallocation of defense and
On August 21 . . . we quoted to Insured renewal of this indemnity payments.” The court adopted approach one even
policy at current limits with one exception an annual though “[d]efendants had no way of knowing of the claim,”
premium of $1,200,000 [sic]. The one exception was the and there was a double-auditing procedure in place during the
endorsement relating to a retroactive deductible on each relevant time period to guard against mistakes and fraud. The
claim for $25,000. This is to apply to all fume cases court reasoned that “Lincoln Electric lost access and use of
reported after August 1, 1979. Allocated claims expense certain funds for the period through December 1997,” and that
plus settlements [are] to be included in the deductible. the money would “fairly and reasonably compensate those
All other quota share quotes are withdrawn; however, losses flowing from St Paul’s breach.”
renewal of this policy at current limits, excluding fume
cases, still stands at an annual premium of $652,000. After studying the guidance provided by Ohio law,29 we
We recognize the dispute in application of limits and conclude that prejudgement interest for this case should be
coverage[9] for fumes cases exists. In keeping with these determined in accordance with the following principles:
issues as status quo and without prejudice to either party
on this position, the attached endorsement has been 1. Prejudgement interest is not punitive; it is part of
drafted in an effort to clearly indicate our intention on compensation for damages. Interest makes the
future reported cases if we are to remain with this risk. plaintiff insureds whole for the lost use of their due
We expect the decision from the Insured concerning and payable money during the time required to secure
renewal with us by September 1, 1979 as we cannot ultimate judgment.
continue current coverage beyond this date.
2. The date for when payment is due from an insurer
The parties entered into a new policy, including an varies according to circumstances and the nature of the
endorsement specifying applicable deductibles, and a binder insured interest. Under a particular fact pattern the due
dated September 5, 1979 was issued. The policy addressed
the treatment of future claims as follows: 29
Our synthesis of Ohio precedent is drawn from Landis v. Grange
IN CONSIDERATION of [St. Paul] agreeing to provide Mutual Insurance Co., 82 Ohio St. 3d 339, 340, 695 N.E.2d 1140, 1142
coverage to the Insured [Lincoln Electric] for this policy (Ohio 1998); Royal Electric Construction Corp., 73 Ohio St. 3d at 115-17,
period, the Insured agrees to pay the following deductible 652 N.E.2d at 691-92; Dwyer Electric, Inc. v. Confederated Builders,
Inc., No. 3-98-18, 1998 WL 767442, at *1 (Ohio Ct. App. 1998); Lovejoy
for: Bodily injury liability arising out of inhalation of v. Westfield National Insurance Co., 116 Ohio App. 3d 470, 475-76, 688
toxic chemicals, including, but not limited to fumes and N.E.2d 563, 567 (Ohio Ct. App. 1996); Eagle American Insurance Co.,
gases, which are caused from welding products 111 Ohio App. 3d at 220-22, 675 N.E.2d at 1317-18; Domestic Linen
manufactured, sold, handled, or distributed by the insured Supply & Laundry Co., 109 Ohio App. 3d at 322, 672 N.E.2d at 191;
Outdoor Outfitters, Inc. v. Fireman’s Fund Insurance Co., 98 Ohio
App.3d 733, 736-37, 649 N.E.2d 871, 873 (Ohio Ct. App. 1994); City of
9 Willoughby Hills v. Cincinnati Insurance Co., 26 Ohio App. 3d 146, 146-
According to Lincoln Electric, the “limits and coverage” dispute 48, 499 N.E.2d 31, 32-34 (Ohio Ct. App. 1986); and Turner Construction
existed because, under the exposure or continuous trigger of coverage, Co. v. Commercial Union Insurance Co., 24 Ohio App. 3d 1, 4, 492
multiple policies could be triggered by each welding fume claim. N.E.2d 836, 839 (Ohio Ct. App. 1985).
32 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 9
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
law.27 We now consider how Ohio law28 applies to the facts or insured’s vendors on any and all claims first presented
at bar. to the Company on or after August 1, 1979, regardless of
when the claim first arose. . . . $25,000.00 deductible per
There are four points in time that courts could use to claim applicable to the payment of the claim and
determine when prejudgment interest should begin to accrue allocated claims expense.
against an insurer who wrongfully fails to defend on a claim
against an insured: 1) the date when the insured submitted a This same endorsement, providing a $25,000 indemnity-and-
claim to the insurer detailing funds expended in defense defense deductible for all claims reported after August 1,
efforts; 2) the date when the insurer was made aware that the 1979, was included in each policy from 1979 to 1985. The
insured disagreed with the insurer’s disposition of the district court found that by accepting the $25,000 deductible
defense-cost claim submitted to the insured; 3) the date when endorsement, Lincoln Electric understood that it would not be
the insured filed a legal action against the insurer with a court waiving any rights under pre-August 1979 policies and the
or arbiter concerning legal costs; or 4) the date when A) the dispute about the trigger of coverage would be resolved by
insured has been incorrectly forced to expend or absorb maintaining the “status quo.”
defense costs, and B) the insurer knew or should have known
that it was not fulfilling its duty to defend. St. Paul asserts that from 1979 to 1985 an unwavering
course of conduct governed: the post-1979 policies with the
In this case, the district court apparently adopted approach $25,000 indemnity-and-defense deductible applied to cases
one, utilizing the “time between accrual of the claim and filed after August 1, 1979. Throughout this period: (1)
judgment.” The court explicitly rejected approach two Lincoln Electric forwarded each welding claim it received to
St. Paul; (2) St. Paul paid the defense costs and any indemnity
costs; (3) St. Paul submitted a bill to Lincoln Electric for the
27
Courts in Ohio have long recognized a common-law right to
$25,000 deductible for defense and indemnity costs applicable
prejudgment interest, and Ohio has also created an additional statutory to claims reported from 1979 to 1985 (only a $5,000
right to prejudgment interest. Cf. Royal Elec. Constr. Corp. v. Ohio State indemnity deductible for cases reported before August 1,
Univ., 73 Ohio St. 3d 110, 115, 652 N.E.2d 687, 691 (Ohio 1995). Ohio 1979), and (4) Lincoln Electric paid St. Paul the amount
courts have rendered numerous holdings explaining how Ohio billed. Lincoln Electric employed independent auditors to
prejudgment interest statutes are to be interpreted and reconciled with review St. Paul’s statements, forwarded them to a law firm
Ohio common law.
This controversy concerns a plaintiff insured, so the “matter is retained to conduct continuous review, and corrected any
governed by R.C. 1343.03(A), rather than R.C. 1343.03(C).” Eagle Am. errors it perceived. St. Paul also asserts that Lincoln Electric
Ins. Co. v. Frencho, 111 Ohio App. 3d 213, 220, 675 N.E.2d 1312, 1317 knew the claims it submitted alleged exposure before August
(Ohio Ct. App. 1996). The statutory provisions of R.C. 1343.03(A) and 1, 1979, and that St. Paul applied the $25,000 deductible to
1343.03(C) differ in that “R.C. 1343.03(A) provides for interest on such claims when they involved cases reported to St. Paul
money which [sic] becomes due and payable upon any instrument of
writing, including an insurance contract.” Id. at 220-21. after August 1, 1979. Nonetheless, St. Paul observes,
Lincoln Electric did not protest any of the payments. Lincoln
28
The statutory language of “R.C. 1343.03(A) does not specify when Electric has not disputed the existence of the double-auditing
prejudgment interest should begin to run, when it should stop running, or scheme, and the parties agree that no protest about St. Paul’s
whether it should run continuously.” Domestic Linen Supply & Laundry conduct was registered during this time period or at any time
Co. v. Kenwood Dealer Group, Inc., 109 Ohio App. 3d 312, 323, 672
N.E.2d 184, 191 (Ohio Ct. App. 1996).
10 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 31
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
prior to a February 22, 1996 letter faxed to St. Paul by injury claim allocated to a particular year, so that both the
Lincoln Electric. “occurrence-based” and “claims-based” policies are
triggered by a claim where the long-term exposure and
3. The 1979 Deductible Endorsement and Subsequent delayed manifestation injury arose during an “occurrence-
Coverage 1985-96 based” policy year but the claim for that long-term
exposure and delayed manifestation injury was filed during
From 1985 to 1996, the parties changed the policies in two a subsequent “claims-based” policy year, the insured can
significant respects. First, the new policies required Lincoln “pick and choose” between the policies as to that portion
Electric to assume a greater payment obligation. The 1985-87 of the liability which falls within the time-span with the
policies provided a $50,000 deductible applicable to both double-protection from overlapping policies.
indemnity and defense expense costs for “toxic chemical and
fumes” claims; the 1987-90 policies provided a $250,000 We remand this case to the district court for further
self-insured retention applicable to all claims; and the 1990- proceedings necessary to apply these principles, determine
96 policies provided a $2 million self-insured retention. This whether the base judgment award must be adjusted
approach afforded Lincoln Electric substantially higher downwards or upwards, and make any additional required
overall limits for a lower premium. modifications in its resolution of this case.
Second, the policies provided “claims-made,” rather than 6. Date of Accrual for Prejudgment Interest
“occurrence,” coverage, meaning that the policies applied to
claims made within the policy period, instead of applying to St. Paul contends that the district court erred in its
the occurrence of bodily injuries during that policy period, interpretation and application of Ohio prejudgment interest
which would culminate in suits initiated after the policy
period. The policies from 1985-87 also included a
manifestation endorsement, which limited the applicability of
the policies with the higher deductibles and retentions to
claims where the manifestation occurred after August 1, 1985:
The effect of this is to eliminate claims that should be
covered under a previous policy. We won’t cover claims
for injury arising out of inhalation of toxic chemicals,
including but not limited to, fumes and gases[,] which are
caused by the use of welding products manufactured,
sold, handled, or distributed by you or your vendors if the
injury first manifested itself prior to 8/1/85. The date of
manifestation shall be the date the person injured knew
or should have known that the injury had occurred or the
date [it] was medically diagnosed, whichever is earlier.
The 1987-96 endorsements contained substantially similar
language. Unlike the occurrence policies, the possibility of
30 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 11
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
(which may vary even as to separate individual policies any disbursement from the claims-made policies expired at
from the same insurer over time) for deductibles, legal the end of each policy period unless a claim had been filed
costs, and legal defense set forth under each of the policies prior to its expiration.
for each of the policy periods from each of the relevant
entities (and/or under one entity and/or under self- St. Paul asserts that just as from 1979 to 1985, the parties
insurance). To the extent that joint and several liability and continued a consistent course of conduct from 1985 to 1996.
contribution for a particular policy period would normally As to (1) claims reported before 1979, the parties applied a
apply under the law, those doctrines will remain unaltered. $25,000 deductible to both indemnity and defense costs; (2)
However, joint liability and contribution must take into claims made after August 1, 1985, with a manifestation before
account the 26effects of the trigger and allocation that date, the parties applied the $25,000 deductible in
presumptions. accordance with the manifestation endorsement; and (3)
claims made after August 1, 1985, with a manifestation after
4) For the portion of a claim falling within a time span that date, the parties applied the higher deductibles and self-
that is “double-protected” by overlapping insured retentions to indemnity and defense costs. The vast
“occurrence-based” and “claims-based” policies, the majority of underlying claimants alleged manifestation of
insured is entitled to “pick-and-choose” between injury after 1979, with most alleging manifestation after 1984.
policies for the best terms of coverage as to that Throughout this period, St. Paul continued to submit bills for
portion. reimbursement to Lincoln Electric, and Lincoln Electric
continued to consult with its auditors and attorneys and to pay
In circumstances where 1) an insurer has replaced an the sums without protest.
“occurrence-based” policy with a “claims-based” policy, 2)
there has been no explicit “buy-back” of the old 4. Conflict Between Lincoln Electric and St. Paul
occurrence-based policy or its liabilities by the insurance Concerning the Contractual Insurance Obligations
company, and 3) there is a discrete claim or a portion of a
pro-rated long-term exposure and delayed manifestation As discussed previously, the pre-1979 insurance coverage
was on an “occurrence” basis, meaning the policies covered
“bodily injury . . . caused by an occurrence [“an accident,
26
including injurious exposure to conditions, which results,
In other words, allocation does not preclude application of any during the policy period, in bodily injury . . . neither expected
joint and several liability doctrine which might otherwise be relevant nor intended from the standpoint of the insured”].” A shift
under Ohio law. Allocation relates to the duties of proof, affirmative was then made to a “claims” basis so that 1979-85 coverage
defenses, and duties of production connected with proving the existence
of liability; in contrast, joint and several liability relates to the distribution would apply to “any and all claims first presented to the
of obligations for defendants who are found to share liability. Allocation Company on or after August 1, 1979, regardless of when the
simply precedes application of the joint and several liability doctrine in claim first arose.” Finally, after 1985 coverage was further
the process of liability attribution. If two insurers were found to have altered to include the proviso that “[St. Paul] won’t cover
valid policies for the same year, and the joint and several liability doctrine claims for injury arising out of the inhalation of toxic
validly applied, both insurance companies would be jointly and severally
liable for the portion of the long-term exposure and delayed manifestation chemicals . . . if [the “person injured knew or should have
injury claim which was allocated to the jointly-covered policy period. known that the injury had occurred or the date [it] was
The application of any principles of contribution otherwise relevant under medically diagnosed, whichever is earlier” is] prior to
Ohio law likewise remains unaltered.
12 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 29
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
8/1/85.” After Lincoln Electric hired new counsel in 1995, will be allocated equally over all triggered years.24 In the
sharp differences of view emerged. In the February 22, 1996 absence of special weighting considerations, which require
faxed letter, Lincoln Electric formally requested additional specific proof, assign an equal fractional
reimbursement for monies it believed St. Paul owed it. St. percentage of exposure value to each policy period which
Paul signaled disagreement concerning the significance corresponds to the years of exposure.
properly assigned to the three shifting schemes for coverage
which had been used over time.10 3) Identify the liable legal entity for each triggered
policy governing each year and make a pro-rata
Lincoln Electric informed St. Paul that it believed the pre- allocation of deductibles, legal costs, and legal
1979 policies, with the $5,000 damages-only deductible, defense obligations by looking to the terms associated
should govern any period of exposure in those years, even if with the relevant triggered policies.
the claim was made after the end of the policy term. It
contended that the “continuous injury” trigger of coverage Identify the legal entities obligated to pay for successful
should apply. In application, Lincoln Electric’s position claims that are covered by each of the corresponding policy
would have meant that any policy in effect during the period periods. Unless a policy or group of policies affirmatively
when a claimant alleged exposure could apply, and that policy and explicitly make assurances about absorbing the entire
could then permissibly be the sole applicable policy even if cost of a long-term exposure and delayed manifestation
exposure was alleged to have extended over many years or injury with exposure extending through a time period more
even a vaguely delimited number of decades. Lincoln extensive than the time period for that individual policy or
Electric also contended that it would have the right to pick constituent policy, assign a pro-rata percentage of exposure
and choose among all triggered policies to select the one with value to each legal entity based upon the number of
the most favorable terms, rather than allocating losses corresponding policy periods that the legal entity
equitably across all policies. According to Lincoln Electric, assumed.25 Treat that pro-rata percentage under the terms
24
A “continuing injury” trigger applies those policies in effect at any
time from exposure through manifestation, while an “injury-in-fact”
trigger applies those policies which were in effect at any time when actual
injury occurred. In effect, we find that the proper trigger is a hybrid
between these two triggers. The hybrid is a “flexible continuing injury”
10 trigger that presumes uniformity of injury probability while allowing
It would appear that there were at least four possible theories for
determining which insurance policy coverages had been triggered by a “injury-in-fact” evidence to rebut the presumption and constrict the range
claim alleging delayed injuries from long-term exposure: 1) a traditional of the allocation field. The allocation field is potentially constricted by
“manifestation” trigger, applying those policies in effect at the time the weighting the risk probability distribution and collapsing it down to a
injury manifested; 2) an “exposure” trigger, applying those policies in short time span or even a precise moment of injury.
effect at the time of the exposure to the offending product; 3) a 25
“continuing injury” trigger, applying those policies in effect at any time With respect to legal defense costs, the insurer bears the burden of
from exposure through manifestation; and 4) an “injury-in-fact” trigger, demonstrating that the costs it expended pursuant to a duty to defend were
in which the applicable policies were those in effect at any time actual unduly disproportionate to the allocated portion of the claim that was
injury occurred. See, e.g., Stonewall Ins. Co., 73 F.3d at 1195-96 assigned to the insurer’s particular policy with the triggered duty to
(discussing the various trigger theories). defend.
28 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 13
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
exposure and delayed manifestation injuries by St. Paul admitted that a claim could trigger both an
incorporating a specific and articulated method of trigger occurrence policy and a claims-made policy.11
and calculation. In the absence of clear guidance from the
terms of the contract concerning long-term exposure and St. Paul believes that Lincoln Electric’s interpretation is
delayed manifestation injuries, there is a rebuttable incorrect because of (1) the sweeping language of the
presumption that all exposure prior to diagnosis contributed deductible endorsements (which applied to “any and all
equally to an injury-in-fact; thus, all policies in effect at the claims” presented after a particular date “regardless of when
time of both exposure to the offending product and actual the claim first arose”) and (2) the parties’ consistent conduct
manifestation will be construed to have been triggered. for the prior seventeen years. St. Paul contends that Lincoln
Electric was well aware of the pertinent facts at all relevant
2) Match the alleged years of exposure to corresponding times; Lincoln Electric’s letter explicitly stated that the
periods covered by triggered policies. request for the refund was based solely upon a change in
Lincoln Electric’s legal position on the matter. Additionally,
Identify all years of exposure alleged to have occurred in a St. Paul argues it is self-evident that it could have stopped
lawsuit, and then identify the corresponding policy periods insuring Lincoln Electric. St. Paul asserts that the increase in
(including periods where the insured decided to “go bare” Lincoln Electric’s deductibles and retentions meant that there
with self-insurance). Determine whether special weighting was a division of obligations: (1) Lincoln Electric would pay
considerations exist because 1) a specific “critical an increased amount of defense costs for its aggressive no-
transformation” point was alleged (i.e. where the plaintiff settlements defense strategy, and (2) St. Paul would continue
clearly went from total wellness to clear contraction of to insure Lincoln Electric. Now that Lincoln Electric has
infirmity in a21discrete temporal moment of injurious successfully avoided paying judgments in the lawsuits, St.
transformation23
), or 2) non-uniform levels of exposure22 Paul complains, Lincoln Electric does not need St. Paul’s
were alleged. When the policyholder cannot demonstrate prospective coverage and is attempting to use this litigation to
a discrete temporal moment of injurious transformation shift the payments it made for its defense onto St. Paul.
prior to or contemporaneous with the diagnosis, due to
complex medical facts, the presumption is that the injury 5. The District Court Decision
The district court, following a two-week bench trial, made
voluminous findings of fact and conclusions of law. It
awarded Lincoln Electric $36.5 million in relief, allowing
21 actual damages, prejudgment interest, and additional
This would occur if, for example, there was harmful exposure at declaratory relief. The court denied an award of attorney’s
a level of 20 units for ten years, but on the 11th year an accidental
exposure at 100 units in one day resulted in clear symptoms of a disease fees. The district court made six determinations of major
two days later. significance for this appeal:
22
This would occur if, for example, there was five years of 20-unit
magnitude of exposure and one year of 100-unit exposure.
11
23 The illustration Lincoln Electric uses is that a 1986 claim that a
On remand, both parties should be given an opportunity to allege plaintiff was injured in 1978 would trigger both the 1978 occurrence
facts substantiating the need for special weighting considerations. policy and the 1986 claims-made policy.
14 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 27
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
1) A “continuous trigger” applied to the term “occurrence,” 1) Determine what kind of trigger applies.
and any policy in effect from exposure to diagnosis or
death was applicable to the claim. The face of the20contract governs where the policy terms
unambiguously contemplate coverage of long-term
2) The post-1979 endorsements did not control the
disposition of claims filed after August 1, 1979, but
instead the pre-1979 policies were applicable because 20
they were not modified by the post-1979 endorsements. “All claims” language on the face of the policy is not dispositive
and does not inherently preclude or resolve possible ambiguity. “All
This was due to the plain language of the endorsements, claims” language in a policy means “all claims” legally deemed to have
and “[e]ven if the endorsements were susceptible [to] St. triggered a policy under its policy period occurrence language. Policy
Paul’s interpretation” St. Paul had not “proved that its language concerning the qualitative dimensions of the risk of loss must be
interpretation is the only reasonable one.” construed together with other policy language setting forth temporal
dimensions of the risk of loss, along with any contractual or legal
3) St. Paul breached the policies by implementing a trigger guidelines governing reconciliation of multiple sources for policy
outlays.
“that was to its benefit and to the detriment of Lincoln Long-term exposure and delayed manifestation injury claims trigger
Electric, while at the same time not disclosing to Lincoln individual policies by virtue of a legal presumption. The presumption
Electric other potential triggers of coverage.” At the allows insureds to avoid the arduous task of proving a discrete temporal
same time, St. Paul had not breached a duty of good faith moment of injurious transformation in order to prove there was a
because it acted with “reasonable justification” in its recoverable injury. Since a legal presumption must be utilized in order to
treatment of Lincoln Electric’s claims. recognize any trigger of the policy whatsoever, the trigger is activated by
operation of law only with respect to the risk of loss that is circumscribed
by the qualitative and temporal limits set forth in the policy. If, instead of
4) Lincoln Electric could choose and apply the most relying upon the benefit of a legal presumption regarding trigger, Lincoln
favorable policy from all those triggered by a particular Electric chose to offer direct proof that all (or a disproportionate portion)
claim, rather than allocating the costs equitably among all of the long-term exposure and delayed manifestation injuries occurred
triggered policies. In practical terms, this meant that the during one policy period (e.g., 1973), Lincoln Electric could on that basis
court was allowing Lincoln Electric to apply, to the allocate more of the risk of loss to that particular policy. Under this
option, Lincoln Electric would be free of the constraints concerning
extent possible, all claims under the 1973 policy, because allocation which attend use of the legal presumption to trigger the
1973 was the earliest year for which Lincoln Electric policies. Likewise, since the “[t]he insurer’s liability is not ‘joint and
could produce an insurance policy and show yearly several’, it is individual and proportionate,” Forty-Eight Insulations, 633
policy terms granting a favorable $5,000 indemnity-only F.2d at 1225, any insurer in St. Paul’s position is free to rebut the default
deductible. The district court’s analysis resulted in presumption by offering specific proof that the risk of loss should be
allocated away from certain policies because injury should be properly
$23,537,313 in damages for Lincoln Electric, nearly $21 weighted to other time periods outside those policies.
million of which was attributable to legal defense costs. The principles explained are reached through a set of rebuttable
presumptions which relate to duties of proof, proof of affirmative
5) Prejudgment interest was calculated to accrue from the defenses, and duties of production. See id. at 1222. Either the insurer or
time when Lincoln Electric made payments to St. Paul, the insured may compel “conventional” insurance law treatment of long-
seventeen years prior to the judgment, instead of from the term exposure and delayed manifestation injury claims by forgoing the
use of rebuttable presumptions and undertaking the necessary effort and
date Lincoln Electric challenged the payments in the costs needed. Theories of coverage and allocation should “parallel the
February 1996 letter to St. Paul. The interest award theory of liability,” id. at 1218, 1224-25, in order to assure that neither the
insurer nor the insured may have their proverbial cake and eat it too.
26 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 15
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
implementing a trigger “that was to its benefit and to the increased the judgment by more than fifty percent of the
detriment of Lincoln Electric, while at the same time not base award, at an exact amount (after the district court
disclosing to Lincoln Electric other potential triggers of lowered the amount by $471 to conform with a statutory
coverage.” The district court further held that Lincoln amendment) of $12,993,367.
Electric could choose and apply the most favorable policy
from all those triggered by a particular claim, rather than 6) The district court rejected Lincoln Electric’s request for
allocating the costs equitably among all triggered policies. In attorney’s fees.
practical terms, that meant Lincoln Electric would be allowed
to apply claims to the 1973 policy whenever possible, because II.
1973 was the year when it enjoyed a favorable $5,000
indemnity-only deductible. The district court’s analysis 1. Standard of Review and Ohio Law Concerning Contract
resulted in $23,537,313 in damages for Lincoln Electric, Interpretation
nearly $21 million of which was attributable to legal defense
costs. “We review for clear error the findings of fact made by the
district court after a bench trial; the court’s legal conclusions
We are persuaded that the Ohio Supreme Court would we review de novo.” Davies v. Centennial Life Ins. Co., 128
adopt principles in harmony with the compelling rationale F.3d 934, 938 (6th Cir. 1997). The district court’s application
articulated in Forty-Eight Insulations, 633 F.2d at 1222, of state law is reviewed de novo. Leavitt v. Jane L., 518 U.S.
1224-25 (Michigan law). The district court’s holding in this 137, 145 (1996); International Ins. Co. v. Stonewall Ins. Co.,
case ran contrary not only to Forty-Eight Insulations, but also 86 F.3d 601, 604 (6th Cir. 1996).
to the deference accorded in that opinion to the basic
principles undergirding the product-liability insurance market, “Generally, contract terms are to be given their ordinary
such as risk calculation, risk management, and bargained-for- meaning. . . . When the terms of the contract are clear on their
exchange. Consistent with the rationale of Forty-Eight face, the court has no need to construe the evidence otherwise.
Insulations, the district court on remand should apply the . . . Parol evidence is admissible only if the terms of the
following general principles in resolving the dispute at bar: contract are ambiguous and then only to interpret, but not to
contradict, the express language.” Ohio Historical Soc’y v.
General Maintenance & Eng’g Co., 65 Ohio App. 3d 139,
146, 583 N.E.2d 340, 344 (Ohio Ct. App. 1989). “The
question of whether the language of a written agreement is
ambiguous [i.e., requires extrinsic evidence in addition to the
language within the four corners of the document to ascertain
contract meaning] is one of law.”12 Parrett v. American Ship
12
Extrinsic evidence can become a consideration before an ambiguity
has been identified from the face of the contract as a matter of law, in the
limited sense that such evidence can assist the court in determining
whether, as a matter of law, two plausible interpretations exist in the
manner necessary to give rise to the existence of an ambiguity. Key v.
16 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 25
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
Bldg. Co., 990 F.2d 854, 858 (6th Cir. 1993)(Ohio law); Ohio 5. Reconciliation of the Contractual Policy Relationship
Historical Soc’y, 65 Ohio App. 3d at 146, 583 N.E.2d at 344. with Long-Term Exposure, Delayed Manifestation Type
“If a contract is clear and unambiguous . . . there is no issue of Claim
of fact to be determined.” Inland Refuse Transfer Co. v.
Browning-Ferris Indus. of Ohio, 15 Ohio St. 3d 321, 474 The most complex question in this case, of course, involves
N.E.2d 271, 272-73 (Ohio 1984)(per curiam). “However, the how the unique characteristics of long-term exposure and
interpretation of such language, once held to be ambiguous, delayed manifestation injury claims can be reconciled with
is a factual issue turning on the intent of the parties.” Parrett, the various coverage provisions that emerged during the long-
standing contractual insurance relationship between the
parties. The question encompasses several component issues:
1) what kind of “trigger” applies for the policies covering
Allstate Ins. Co., 90 F.3d 1546, 1548-49 (11th Cir. 1996)(Florida welding-fumes claims; 2) what impact does the switch from
law)(emphasis added)(“Under ordinary principals of contract “occurrence” to “claims” policies have in light of the “status
interpretation, a court must first examine the natural and plain meaning of quo” preservation of positions between the parties as to the
a policy's language. . . . [U]nless and ambiguity exists, a court should not
resort to outside evidence or the complex rules of construction to construe type of trigger; 3) how should a claim be handled if it
the contract. . . . Moreover, in determining whether a contract is occurred during the time-span of the “occurrence-based”
ambiguous, the words should be given their natural, ordinary meaning, policy, but then was filed as a claim against the insured during
. . . and ambiguity does not exist simply because a contract requires a subsequently active “claims-based” policy; 4) as a general
interpretation or fails to define a term . . . . If, on the other hand, a court proposition, what relationship exists between various insurers,
determines that the terms of an insurance contract are ambiguous, or
otherwise not susceptible to a reasonable construction, a court may look different policies from the same insurer, and self-insurers over
beyond the contractual language to discern the intent of the parties in time with respect to a single long-term exposure and delayed
making the agreement. In general, ambiguities in contracts are construed manifestation injury claim; and 5) when is an insured allowed
against their drafters.”); Press Mach. Corp. v. Smith R.P.M. Corp., 727 to “pick and choose” among terms of different policies in
F.2d 781, 784-85 (8th Cir. 1984)(Missouri law)(emphasis added)(“In circumstances where those multiple policies are triggered by
determining whether a contract is ambiguous, the court must consider the
whole instrument and the natural and ordinary meaning of the language. a long-term exposure claim.
. . . [T]he court's role is to determine the intention as manifested . . . by the
document. In that inquiry, however, the court is justified in considering Ohio law provides no dispositive guidance on these issues.
more than the mere words of the contract. The surrounding Ohio law is very sketchy even with respect to the component
circumstances at the time of contracting and the positions and actions of issues just mentioned. In this case, we are faced with the
the parties are relevant to the judicial interpretation of the contract.”). additional task of reconciling the overall calculation scheme
Obviously, the natural and ordinary meaning of language, reasonable
construction of a contract, surrounding circumstances, and positions and in a cohesive fashion, and no Ohio statute or Ohio Supreme
actions of the parties are issues that cannot be weighed in a vacuum. See Court decision squarely addresses the question. Erie R. Co.
Bunnell Med. Clinic, P.A. v. Barrera, 419 So. 2d 681, 683 (Fla. Dist. Ct. v. Tompkins, 304 U.S. 64 (1938).
App. 1982)(emphasis added)(“A latent ambiguity has been defined as one
where the language in a contract is clear and intelligible and suggests a As stated earlier, the district court held that the post-1979
single meaning, but some extrinsic fact or extraneous evidence creates a endorsements did not control the disposition of claims filed
need for interpretation or a choice between two possible meanings . . .
[and extrinsic evidence becomes] admissible to show the intent of the after August 1, 1979, but instead the pre-1979 policies were
parties”). Thus, the district court may take cognizance of extrinsic applicable because they were not modified by the post-1979
evidence in order to determine whether a factfinder need consider parol endorsements. St. Paul breached the policies by
evidence in construing the contract.
24 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 17
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
4. Standard of Evidence Required for Proving the Existence 990 F.2d at 858; Ohio Historical Soc’y, 65 Ohio App.3d at
and Terms of Alleged “Missing” Insurance Policies 146, 583 N.E.2d at 344. “The meaning of [ambiguous] terms
. . . will not be overturned on appeal absent a showing that the
The district court cited three federal district court decisions trial court abused its discretion.” Id. at 147.
from other circuits, each dealing with non-Ohio law, in
support of its conclusion that a preponderance of the evidence As to the scrutiny applied to a district court’s application of
standard should be used to determine whether Lincoln the parol evidence rule under Ohio law, this court has
Electric had carried its burden to prove the existence and previously noted, Construction Interior Sys., Inc. v. Marriott
terms of the alleged “lost” insurance policies covering the Family Restaurants, Inc., 984 F.2d 749, 754 (6th Cir. 1993),
years from 1945 to 1972. The court then found sufficient that:
evidence to meet the preponderance of the evidence standard.
St. Paul challenges both the standard used and the nature of [w]here the parties, following negotiations, make mutual
the evidence employed by contending that the standard should promises which thereafter are integrated into an
be clear and convincing evidence and impermissible evidence unambiguous written contract, duly signed by them,
was considered. courts will give effect to the parties' expressed intentions.
. . . Intentions not expressed in the writing are deemed to
A perusal of the various cases cited by the parties and the have no existence and may not be shown by parol
district court verifies that there is no dispositive statute or evidence. . . . Even where a contract is not fully
Ohio Supreme Court case on point. However, the district integrated, parol evidence cannot be admitted if its effect
court did adopt a standard that makes practical sense, appears will be to vary or contradict any matter that is specifically
to represent the majority rule, and can be said to reasonably covered by the written terms of the contract. . . . There
anticipate the Ohio Supreme Court’s position. Two cases that can be no implied promises in a contract in relation to
deal with Ohio law appear to be in accord with the district any matter that is specifically covered by the written
court’s holding: Miller v. MIF Realty L.P. (In re Perrysburg terms of the contract . . . Interpretation of written contract
Marketplace Co.), 208 B.R. 148, 158 (N.D. Ohio 1997), and terms is a matter of law for initial determination by the
Household Finance Corp. v. Johnson, 56 Ohio App. 2d 14, 15, court, . . . the job of interpretation is turned over to the
381 N.E.2d 215, 216 (Ohio Ct. App. 1978). fact finder [only when the relevant contract language is
determined by the judge to be ambiguous.]
We conclude that the district court correctly relied upon the
preponderance of the evidence standard. When that standard Finally, should this court determine that the contract in this
is applied we are unable to say that the district court’s factual case involved an ambiguity, it should be mindful of a final
finding in support of the “missing policies” was clearly principle of Ohio law:
erroneous.
In interpreting the contract herein, the additional terms
supersede the original terms to the extent the two are
contradictory. If the additional terms are ambiguous,
then we are to give effect to the additional terms but we
are to interpret them consistently with the original terms
to the extent possible. . . . Accordingly, our construction
18 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 23
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
of the contract should attempt to harmonize all the district court seemed to find that Lincoln Electric’s
provisions rather than produce conflict in them. . . . To acquiescence to St. Paul’s processing of the claims was
that end, no provision of the contract should be ignored attributable to a lack of awareness rather than to a conscious
as inconsistent if there exists a reasonable interpretation manifestation of implicit approval concerning execution of
which [sic] gives effect to both. . . . Moreover, to the the contract. The district court implicitly found that Ohio’s
extent we encounter an ambiguity in the contract, that voluntary payment and mistake of law doctrine did not apply
ambiguity must be construed against the drafting party. because Lincoln Electric’s payments did not carry the fully-
informed consent necessary to constitute “voluntary”
Ottery v. Bland, 42 Ohio App. 3d 85, 87, 536 N.E.2d 651, 654 payment. The district court also found there was no “buy
(Ohio Ct. App. 1987); see also McKay Mach. Co. v. Rodman, back” of Lincoln Electric’s policies by St. Paul. The district
11 Ohio St. 2d 77, 79, 228 N.E.2d 304, 307 (Ohio 1967); court was not clearly erroneous18 in its interpretation of the
Franck v. Railway Exp. Agency, Inc., 159 Ohio St. 343, 345- evidence concerning the relationship19 between the parties.
46, 112 N.E.2d 381, 383 (Ohio 1953). Thus, we cannot overrule the district court’s resultant refusal
to adopt St. Paul’s version of an alleged course of conduct
The above principles underscore the need for this court to and to apply the voluntary payment and mistake of law
reach an initial determination regarding whether there was doctrine. St. Paul remains liable for failing to adhere to the
ambiguity in the original written policy. We conclude that terms of policies held by the Lincoln Electric.
there was no ambiguity.13 As a consequence, this court must
scrutinize most of the district court’s disposition of this case
as a question of law under the de novo standard. To the
extent that material facts for this case must be derived from
findings of the district court, we rely upon those findings of
fact because we are unable to say that the court committed
clear error. Aside from the errors specifically identified in
18
this opinion, we also cannot say that the district court St. Paul points out that there was evidence the district court could
committed legal error. have used to find for its version of the facts. However, the court did not
commit clear error because its interpretation of the evidence is plausible.
19
For example, we do not disturb the district court’s conclusion, on
13 its findings of fact or law, that post-August 1979 $25,000 deductibles did
This dispute between the parties did not arise because there was not purport to eliminate coverage under pre-August 1979 policies, and
objective latent uncertainty at the time of contract formation with respect that the post-1979 deductibles were ineffective to exclude or restrict
to the inherent meaning of words used to express the agreement. Rather, coverage. The August 1979 to August 1980 policy deductible did not
this dispute centers upon how the law should apply to a contract with exclude coverage for welding fume claims under all earlier accident and
clear meaning that has proven inadequate in the context of environmental occurrence policies. The endorsement itself stated it would apply only to
change. See Insurance Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 the policy to which it was attached; it mentions no other policies. Further,
F.2d 1212, 1217, 1219 (6th Cir. 1980). The policies were internally each pre-August 1979 policy required that any changes be made only by
unambiguous when viewed through the lens of original expectations and “endorsement issued to form a part of [each] policy.” Once policies were
the scheme the parties believed they were creating. In hindsight, however, sold, the insurer could not alter them without buying them back. St. Paul
the policies now reveal the fact that, at the time of the early policy has never even alleged that they purchased the policies back with a quid
agreements, neither party contemplated their future encounter with long- pro quo monetary exchange. The district court apparently found that St.
term exposure and delayed manifestation injury claims. Paul never purchased the old policies back.
22 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 19
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
A valid “written changes only” provision preempts 2. Preservation of Issues in District Court for Subsequent
consideration of course of performance. In contrast, course of Appeal
conduct can be considered in certain respects notwithstanding
a “written changes only” contractual provision, because the Lincoln Electric suggests that St. Paul’s “voluntary
series of acts in question are evaluated only as evidence payment” and “equitable allocation”14 arguments have been
regarding a continuity of the purpose captured16by the original forfeited because they were not argued to the district court
contractual terms at the time of formation. Contrary to prior to its judgment. We are unpersuaded. Our examination
Lincoln Electric’s assertions, it was within the province of the of the motions, the district court opinion, and the briefs
district court to consider course of conduct evidence to divine suggests that all issues in the appeal of this complex matter
the parties’ intent. have been properly raised. All of the various points of
operative fact were raised before the district court, and the
St. Paul’s theory that it is free of liability nonetheless falls parties were sufficiently thorough in proffering to the district
short, because St. Paul fails to acknowledge that a course of court their concerns, differences of opinion, preferred sources
conduct analysis rests upon preliminary conclusions which are of precedent, recommendations for interpretations of law and
predicated upon preliminary factual determinations.17 The fact, and positions regarding the proper award.
district court was free to ascertain whether a course of
conduct existed. If the court found there was a course of 3. Existence of St. Paul’s Liability Towards Lincoln
conduct, it had the prerogative to decide whether it evidenced Electric for Non-Compliance with Policy Terms:
specific contractual intent suggesting the existence of a Reconciliation of Doctrines Concerning Course of
contractual ambiguity, and/or fully-informed consent and Conduct, Written Changes Only Provisions, Policy Buy-
voluntary payment by Lincoln Electric. Back, and the Voluntary Payment/Mistake of Law
Doctrine
Apparently the district court did not find the series of acts
in this case sufficient to compel the interpretation of As an initial proposition, St. Paul asserts that the district
contractual intent and meaning that St. Paul advocates. The court erred in finding that it had any liability whatsoever. St.
Paul believes that an understanding reached with respect to
any and all claims filed after August 1, 1979 dictated that the
16 post-1979 endorsements controlled the disposition of claims
Consideration of a course of conduct is permissible because silence filed after August 1, 1979. St. Paul notes that 1) from 1979-
can sometimes reflect the contracting parties’ contemporaneous belief that
the original contract terms are being honored. Cf. United States v. 1996, Lincoln Electric forwarded to St. Paul thousands of
Hoosier, 542 F.2d 687 (6th Cir. 1976)(per curiam)(silence as an claims that included allegations of exposure before 1979;
admissible party admission under FED. R. EVID. 801(d)(2)(B)). The 2) from 1979-1996, with respect to those claims, St. Paul
existence of such a contemporaneous belief would suggest a particular applied post-1979 deductibles and retentions; and 3) from
contract meaning. That meaning, in turn, would preclude the existence of 1979-1996, for those claims, Lincoln paid the post-1979
an ambiguity and/or clarify a facially ambiguous term.
deductibles and retentions.
17
Since a course of conduct is “a series of acts over a period of time,
however short, evidencing a continuity of purpose,” cf. Leydon, 260 Cal.
Rptr. at 254 (emphasis added), it is clear that the impact of a course of
conduct can be identified only after a factfinder determines from the 14
evidence what acts took place and what purpose accompanied those acts. “Equitable allocation” is also known as “horizontal allocation.”
20 Lincoln Electric Co. v. St. Paul Nos. 98-4236/4340 Nos. 98-4236/4340 Lincoln Electric Co. v. St. Paul 21
Fire and Marine Insurance Co. Fire and Marine Insurance Co.
St. Paul contends that a seventeen-year course of conduct conduct” with “course of performance.”15 “Course of
of payment without protest should bar Lincoln Electric’s performance” is defined as “[t]he understandings of
request for a refund. According to St. Paul, the Ohio performance which develop by conduct without objection
voluntary payment and mistake of law doctrine prevents between two parties during the performance of an executory
Lincoln Electric from attempting to recover voluntary contract.” BLACK’S LAW DICTIONARY 352 (6th ed. 1990)
payments on a policy on the basis of a claimed mistake of (emphasis added); cf. U.C.C. § 2-208(1) (1994). “Course of
law, a new legal position, or a new construction of a contract. conduct,” in contrast, is generally understood to denote “a
St. Paul characterizes Lincoln Electric’s February 22, 1996 series of acts over a period of time, however short, evidencing
letter concerning the multiple trigger theory as being a continuity of purpose.” Cf. Leydon v. Alexander, 212 Cal.
disallowed under Ohio law. In response, Lincoln Electric App.3d 1, 4, 260 Cal. Rptr. 253, 254 (Cal. Ct. App.
asserts that St. Paul never purchased the old policies back 1989)(quoting California statutory definition)(emphasis
from Lincoln Electric. It argues that it continues to enjoy that added).
coverage because no consideration supported any alleged
agreement to rescind coverage from the older policy terms.
15
“Course of performance” and “course of conduct” are terms
We are considering an insurance policy scheme that was distinct in modern usage not only from each other, but from the term
1) negotiated between entities with sophisticated business “course of dealing.” U.C.C. § 2-208(2), 2-309 cmts. 1, 5 (1994).
expertise and resources, and 2) implemented under “Course of dealing” denotes “a sequence of previous conduct between the
continuous monitoring by two separate teams of auditors and parties to a particular transaction which is fairly to be regarded as
establishing a common basis of understanding for interpreting their
counsel acting for each party. Given this context, St. Paul expressions and other conduct.” U.C.C. § 1-205(1) (1994). Thus, course
correctly invokes the proposition that “[w]here a course of of dealing concerns some aspects of the portion of a total course of
conduct removes an ambiguity in the written terms of an conduct which might happen to have existed previous to or
agreement, the rule of practical construction should take contemporaneous with initial contract formation (a course of conduct may
precedence over the rule that a contract of insurance is conceivably extend from a time previous to initial contract formation to
a time subsequent to contract formation). Cf. U.C.C. § 2-309 cmt. 5
construed against its drafter.” William C. Roney & Co. v. (1994). “Course of dealing” and “course of performance” are defined
Federal Ins. Co., 674 F.2d 587, 590 (6th Cir. 1982). A course with reference to the moment of initial contract formation, and thus they
of conduct illuminates the specific nature of the relationship cannot overlap with each other but can overlap with the course of
between the parties, resolving questions concerning the conduct. Of course, when there is a writing intended by the parties as a
existence of ambiguity and thus obviating the need to resort final expression of their agreement with respect to such terms as are
to defaults provided by the general rules of contract included therein, courts must generally look to see if state law forbids
having such terms “contradicted by evidence of any prior agreement or of
construction. Id. a contemporaneous oral agreement.” Cf. U.C.C. § 2-202 (1994). The
parol evidence rule concerns attempts to modify, alter, or supplement a
Lincoln Electric counters that the course of dealing between written contract, using evidence of operative facts in existence before or
the parties cannot be considered in reaching a resolution of during contract formation. With many types of contracts the course of
this case, because all of the policies in question before and dealing may be considered even when the parol evidence rule is found to
after 1979 included “written changes only” provisions. apply. U.C.C. § 2-202(a) (1994).
In this case, we have not been pointed to any part of the record
Lincoln Electric’s position implicitly confuses “course of suggesting that the district court took account of a course of performance
or course of dealing instead of considering the possibility of a course of
conduct. Thus, we need not reach any further discussion concerning the
relationship between course of conduct and the parol evidence rule.