## Facts

- National Gypsum Company manufactured asbestos-containing products for decades and faced extensive bodily injury and property damage claims.
- National Gypsum maintained multi-layer liability insurance through 1985, after which asbestos claims were excluded.
- The policies generally covered damages caused by an “occurrence,” defined to exclude injury or damage “expected or intended from the standpoint of the insured.”
- Numerous insurers and National Gypsum (later reorganized so that Asbestos Claims Management Corporation handled the asbestos liabilities) disputed whether and how the policies responded to the asbestos claims.
- The insurers filed a multi-party declaratory judgment action in the Southern District of New York concerning coverage, exclusions/defenses, number of occurrences, and allocation across many policy years.
- The district court largely found coverage, rejected broad “expected or intended” and known-loss defenses, and adopted a pro rata (“years and limits”) allocation method for long-tail liabilities.
- Multiple insurers appealed and ACMC cross-appealed.

## Issues

1. Whether asbestos-related injuries and damage were excluded as “expected or intended” by the insured, and whether the test was subjective or objective.
2. Whether the known-loss (loss-in-progress) doctrine barred coverage based on the insured’s knowledge of asbestos risks or claims before policy inception.
3. Which party bore the burden of proof on the “expected or intended” exclusion and known-loss defense.
4. Whether insurers had to prove expectation/intent on a product-by-product basis rather than by generalized proof about asbestos.
5. Whether the district court properly admitted and relied on employee testimony regarding corporate knowledge and intent.
6. How to determine the number of “occurrences” and allocate indemnity obligations across multiple triggered policy years for long-tail bodily injury and property damage.

## Decision

- The Second Circuit largely affirmed the district court’s coverage determinations in favor of ACMC/National Gypsum, while modifying certain aspects of the allocation and related rulings.
- The court upheld the finding that most asbestos-related injuries were not “expected or intended” by the insured within the meaning of the occurrence-based policies, applying a largely subjective standard.
- The court upheld placing the burden on insurers to prove the applicability of the “expected or intended” exclusion and the known-loss defense.
- The court approved limiting known-loss to circumstances where specific claims had been filed or specifically asserted (e.g., by demand letter) before inception of the particular coverage.
- The court approved requiring insurers to make a product-specific showing of expectation/intent for injuries attributed to particular asbestos-containing products.
- The court sustained evidentiary rulings admitting employee testimony bearing on corporate knowledge and intent.
- The court substantially approved pro rata allocation of long-tail loss across triggered years and applicable limits; a later rehearing opinion clarified and slightly adjusted aspects of that allocation without abandoning the pro rata framework.

## Legal Principles

- “Expected or intended” injury exclusions in occurrence-based liability policies generally require proof that the insured actually anticipated the relevant harm; a purely objective “should have known” standard was rejected on this record.
- The insurer bears the burden to prove that an exclusion applies and to establish affirmative coverage defenses such as known loss.
- Known-loss principles do not bar coverage based on general awareness of a risk; they apply narrowly when the insured had specific knowledge of a particular loss or claim already in progress or asserted before policy inception.
- For complex product-related liabilities, expectation/intent may require product-by-product proof rather than generalized proof about a hazardous substance.
- Long-tail bodily injury and property damage that occur over multiple years may trigger multiple policy periods, supporting allocation of indemnity obligations across years on a pro rata basis reflecting time on the risk and policy limits.
- Trial courts have substantial discretion on admissibility and weight of testimony concerning corporate knowledge, including testimony derived from long-term familiarity with records and internal practices.

## Conclusion

The Second Circuit largely upheld coverage for long-tail asbestos liabilities, requiring insurers to prove subjective expectation or intent to invoke exclusions, limiting known-loss to specifically asserted pre-inception claims, and endorsing pro rata allocation of indemnity across triggered policy years, with later clarification on allocation details.


Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178 (2d Cir. 1995)