                                                                                                                           Opinions of the United
2002 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


11-14-2002

Port Auth NY NJ v. Affiliated FM Ins Co
Precedential or Non-Precedential: Precedential

Docket No. 01-2513




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PRECEDENTIAL

       Filed November 14, 2002

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 01-2513

PORT AUTHORITY OF NEW YORK AND NEW JERSEY;
PORT AUTHORITY TRANS-HUDSON CORPORATION
(PATH); APPALACHIAN INSURANCE COMPANY

v.

AFFILIATED FM INSURANCE COMPANY, and all other
Defendants; ICAROM, P.L.C., as Successor in interest to
Insurance Corporation of Ireland (P.L.C.); AFFILIATE FM
INSURANCE COMPANY; ALLIANZ INSURANCE COMPANY,
as Successor in interest to Allianz Underwriters, Inc.;
ALLSTATE INSURANCE CO., as Successor in interest to
Northbrook Excess and Surplus Insurance Company;
AMERICAN CENTENNIAL INSURANCE COMPANY;
AMERICAN HOME ASSURANCE COMPANY; AMERICAN
MOTORISTS INSURANCE COMPANY; AMERICAN
PROTECTION INSURANCE COMPANY; APPALACHIAN
INSURANCE COMPANY; ARKWRIGHT MUTUAL
INSURANCE COMPANY, as Successor in interest to
Arkwright Boston Mfgrs. Mutual Insurance Company;
BIRMINGHAM FIRE INSURANCE COMPANY OF
PENNSYLVANIA; CALIFORNIA UNION INSURANCE
COMPANY; CITIBANK, N.A., as Trustee of Lloyd’s
American Trust Fund; COLUMBIA CASUALTY COMPANY;
CONTINENTAL INSURANCE COMPANY; COVENANT
MUTUAL INSURANCE COMPANY; EMPLOYERS MUTUAL
CASUALTY COMPANY; FEDERAL INSURANCE COMPANY;
FIREMAN’S FUND INDEMNITY CORPORATION;
HARTFORD ACCIDENT & INDEMNITY COMPANY;
HARTFORD FIRE INSURANCE COMPANY; HOME
INDEMNITY COMPANY, THE; INSURANCE COMPANY OF


NORTH AMERICA; INSURANCE COMPANY OF THE STATE
OF PENNSYLVANIA; LEXINGTON INSURANCE COMPANY;
LUMBERMENS MUTUAL CASUALTY COMPANY;
PENNSYLVANIA LUMBERMENS MUTUAL INSURANCE
COMPANY; PROVIDENCE WASHINGTON INSURANCE
COMPANY; RANGER INSURANCE COMPANY; TWIN CITY
FIRE INSURANCE COMPANY; UNITED STATES FIRE &
CASUALTY COMPANY; LONDON MARKET INSURERS
SUBSCRIBING TO LLOYDS POLICIES INCLUDING THE
FOLLOWING: ASSICURAZIONI GENERALI DI TRIESTE E
VENEZIA; BALTICA INSURANCE COMPANY, (U.K.) LTD.,
as Successor in interest to Baltica-Skandinavia Insurance
Company (U.K.) LTD.; BERMUDA FIRE & MARINE
INSURANCE COMPANY LIMITED; BRITISH NATIONAL
INSURANCE COMPANY, Individually and as Successor in
interest to North Atlantic Insurance Company and as
Successor in interest to British National Life Insurance
Society; BRYANSTON INSURANCE COMPANY LIMITED;
CNA REINSURANCE OF LONDON LIMITED; COMPAGNIE
D’ASSURANCES MARITIMES, AERIENNES ET
TERRESTRES, S.A. (C.A.M.A.T.I.); COMPAGNIE
EUROPEENNE D’ASSURANCES INDUSTRIELLES, S.A.; EL
PASO INSURANCE COMPANY LIMITED; ENGLISH AND
AMERICAN INSURANCE COMPANY; EXCESS INSURANCE
COMPANY LIMITED; FOLKSAM INTERNATIONAL
INSURANCE COMPANY LIMITED; INSCO LIMITED;
ICAROM, P.L.C., as Successor in interest to Insurance
Corporation of Ireland (P.L.C.); LLOYDS SYNDICATES
NUMBERED AS FOLLOWS, 2 (C.R. HILL), 4 (B.A.
STEWART), 15 (T.W. OBRIEN), 17 (P.N. CHRISTMAS), 28
(D.K.L. WHITE), 31 (M.F. BAIRD), 33 (I.N. THOMSON), 34
(T.K. HARDING), 40 (A.P. BARTLEET), 42 (P. HUNT), 53
(R.F. ELIOT), 50 (D.A. BEAUMONT), 51 (A. TAYLOR), 52
(P. HUNT), 56 (M.P. MANNING), 65 (P.D. MOREY), 67
(P.D. MOREY), 79 (J.R.L. YOUELL), 80 (S.G. THOMPSON),
87 (A.M. GORSUCH), 89 (M.E. BROCKBANK), 90 (E.A.
MOORE), 98 (B.F. BRUCE), 108 (S.R. FLETCHER), 109
(A.P. TARGETT), 123 (W.M. MICHELL), 127 (A.J.
ARCHER), 142 (D.T. POTTER), 144 (P.M. JOHNSON), 145
(J.R. CHARMAN), 162 (M.D. SEABY), 174 (B.G. BRUCE),

                                2
176 (C.R. HILL), 179 (R.W.S. LARK), 180 (R.A.F.
MACMILLAN), 182 (A. TAYLOR), 183 (M. ASHLEY), 185
(A.M. GORSUCH), 187 (C.R. HILL), 190 (R.D. HAZELL),
191 (R.D. HAZELL), 202 (R.G. BENNETT), 203 (S.C.
WILMOT-SMITH), 204 (R.A. FIELD), 206 (M.J.H.
MAUGHAN), 207 (S.R.P. EDWARDS), 209 (B.G. ADAMS),
210 (A.G. LEE), 212 (R.J. MC CARTHY), 219 (C.H.A.
SICEY), 231 (J.M.H.P. WETHERELL), 232 (E. PIERI), 239
(S.I. COWLEY), 247 (D.A. POLLOCK), 250 (D.J. FLETT),
256 (G.M. WILLIAMS), 257 (K.R. SMITH), 264 (B.L.
EVENS), 269 (M.H. COCKELL), 275 (J.H. CHAPPELL), 282
(M.J. MARCHANT), 284 (M.J. MARCHANT), 288 (K.A.
LONG), 295 (M.E. SEABY), 299 (A.A. WILLARD), 303 (B.R.
BRANCH), 309 (J.B. HINGHAM), 317 (R.H.M.
OUTHWAITE), 321 (T.G. GREEN), 322 (R.D. ROBERTSON),
331 (R.H. GIBBS), 342 (R.J. BARRY), 358 (B.L. EVENS),
362 (R.J.R. KEELING), 363 (J.J.S. BIRRELL), 368 (A.D.
PILCHER), 375 (R.D. HAZELL), 381 (M.J. HARRIS), 384
(S.J. EDWARDS), 404 (R.A. LISSENDEN), 406 (S.I.
COWLEY), 411, 412 (A.D. PILCHER), 435 (D.P. MANN),
438 (T.R. ANSTEY), 441 (G.C.F. PALMER), 446 (D.A.
BEAUMONT), 447 (D.A. BEAUMONT), 448 (A.M.
ENGLAND), 457 (M.C. WATKINS), 469 (SIMMONDS), 471
(F.J. AUSTIN), 475 (R.J. BROMLEY), 483 (P.R.
CHANDLER), 484 (R.E. THOMSON), 488 (J.R. CHARMAN),
489 (J.R. CHARMAN), 498 (A.B.W. PHILLIPS), 500 (T.J.
PEPPER), 505 (A.J. ARCHER), 508 (J.R. PLANT), 510
(G.D. GILCHRIST), 512 (P.W. MURRAY), 522 (M.B. GRAY),
527 (L.C. TAYLOR), 529 (A.M.C. UNDERWOOD), 535 (G.
DAVIES), 540 (P.F. FAGAN), 544 (A.A. PITT), 545 (T.O.
PITRON), 552 (C.J. MANDER), 584 (C.W. HANKIN), 588
(M.E. BROCKBANK), 590 (R.F.DE L. WILLIS), 595 (C.D.D.
GILMOUR), 602 (D.H. FORREST), 604 (T.G. HALLOWAY),
609 (M.E. DENBY), 613 (M.J. BONDS), 620 (A.M.
ENGLAND), 623 (A.F. BEAZLEY), 635 (B. COLEMAN), 636
(J.D.P. BARNES), 640 (P.L. TOOMEY), 648 (B. COLEMAN),
653 (J.M.H.P. WETHERELL), 660 (J.L. DODSON), 662
(C.W. ROME), 672 (W.C. AGNEW), 685 (B.M. RODDICK),

                                3
694 (T.J. HAYDAY), 697 (A.E. BATHURST), 700 (J.R.
CHARMAN), 701 (J.R. CHARMAN), 707 (J.K. SPICER), 722
(F.J. AUSTIN), 724 (S.A. HOLMES), 725 (T.J. KEMP), 727
(M.J. MEACOCK), 730 (E.A. MOORE), 735 (A.F.
JACKSON), 741 (A.J. ARCHER), 744 (T.P. JOHNSON), 750
(A.C. ASHBY), 764 (N.P. COMPTON), 780 (B.F. CAUDLE),
782 (P.N. SLADE), 799 (R.A.G. JACKSON), 800 (J.A.
WESTCOTT), 801 (J.H. DAVIES), 803 (G.W. HUTTON), 807
(R.F.H. WILSHAW), 812 (B.F. BRUCE), 823 (R.J.R.
KNEELING), 829 (B.R. BRUCE), 836 (V.E. EMMES), 842
(B.F. BRUCE), 843 (S.G. THOMSON), 846 (A. TAYLOR),
850 (P.J. HUBERT), 855 (J.P.H. HARRISON), 860 (P.A.
EDWARDS), 861 (M.E. BROCKBANK), 868 (A.J. ARCHER),
880 (M.E. BROCKBANK), 884 (R.W.S. LARK), 900 (B.F.
BRUCE), 901 (H.W. GASCOINE), 904 (M.C. WATKINS),
908 (J.R. CHARMAN), 920 (G.C.F. PALMER), 923 (M.J.
HARRIS), 926 (C.W. ROME), 927 (C.N. MACKINNON), 933
(J.R.L. YOUELL), 937 (J.R.L. YOUELL), 942 (A.J. AVERY),
947 (M.J. HARRIS), 950 (J.C. NEVITT), 960 (B.E.
BEAGLEY), 972 (B.F. BRUCE), 984 (R.A. LISSENDEN),
987 (D.A. BEAUMONT), 990 (M.J. COX), 991 (M.J. COX),
994 (B.P.D. KELLETT), 1014 (G. MC CALL), 1023 (R.K.
WEBB), 1027 (M. F. NEWTON); LIME STREET
INSURANCE COMPANY, as Successor in interest to
Louisville Insurance Company; LUDGATE INSURANCE
COMPANY LIMITED; MUTUAL REINSURANCE COMPANY
LIMITED; ORION INSURANCE COMPANY LIMITED;
PEOPLES INSURANCE COMPANY OF CHINA; RIVER
THAMES INSURANCE COMPANY LIMITED;
SCANDINAVIAN REINSURANCE COMPANY LIMITED;
SCOTTISH LION INSURANCE COMPANY; SIMCOE AND
ERIE GENERAL INSURANCE COMPANY; SOCIETE DE
REASSURANCES DES ASSURANCES MUTUELLES
GRICOLES; SOREMA REINSURANCE COMPANY, as
Successor in interest to Copenhagen Reinsurance
Company (U.K.) Limited; ST. KATHERINE INSURANCE
COMPANY; TERRA NOVA INSURANCE COMPANY
LIMITED; TUREGUM INSURANCE COMPANY; UNIVERSAL
REINSURANCE, as Successor in interest to Bellefonte
Reinsurance Co.; WALBROOK INSURANCE COMPANY;
"WINTERTHUR" SWISS INSURANCE COMPANY; YASUDA
MARINE & FIRE INSURANCE COMPANY (U.K.) LIMITED;
CERTAIN UNDERWRITERS AT LLOYD’S LONDON;

                                4
CERTAIN COMPANIES IN THE LONDON MARKET;
COLERIDGE AND LONDON MARKET COMPANIES
       (District Court No. 91-cv-02907)

APPALACHIAN INSURANCE COMPANY

v.

PORT AUTHORITY OF NEW YORK AND NEW JERSEY,
formerly "THE PORT OF NEW YORK AUTHORITY"; PORT
AUTHORITY TRANS-HUDSON CORPORATION;
       (District Court No. 91-cv-01689)

Port Authority of New York and New Jersey; Port
Authority Trans-Hudson Corporation (PATH),
       Appellants

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. Nos. 91-cv-01689 & 91-cv-02907)
District Judge: Honorable John W. Bissell

Argued September 9, 2002

Before: NYGAARD, ROTH, and WEIS, Circuit Judge s.

(Filed: November 14, 2002)

       Carlene V. McIntyre, Esquire
        (ARGUED)
       Hugh H. Welsh, Esquire
       Milton H. Pachter, Esquire
       Michael D. Driscoll, Esquire
       Shirley J. Goldstein, Esquire
       Ezra I. Bialik, Esquire
       Dolores J. Ostaszewski, Esquire
       Law Department
       The Port Authority Of New York and
        New Jersey
       One Madison Avenue, 7th floor
       New York, NY 10010

       Attorneys for Appellants

                                 5
       Kenneth W. Erickson, Esquire
        (ARGUED)
       Matthew M. Burke, Esquire
       Jane E. Willis, Esquire
       David M. Stringer, Esquire
       Ropes & Gray
       One International Place
       Boston, Massachusetts 02110-2624

       Attorneys for Appellees,
       Coleridge and London Market
       Companies, Icarom, P.L.C., Lexington
       Insurance Company, Baltica
       Insurance Company, CNA
       Reinsurance of London Limited,
       Compagnie D’Assurances Maritimes
       Aeriennes Et Terrestres, S.A.,
       Compagnie Europeenne D’Assurances
       Industrielles S.A., Excess Insurance
       Company Limited, Folksam
       International Insurance Company
       Limited, Insco Limited, River Thames
       Insurance Company Limited, Scottish
       Lion Insurance Company, Simcoe and
       Erie General Insurance Company, St.
Katherine Insurance Company, Terra
Nova Insurance Company Limited,
Turegum Insurance Company,
"Winterthur" Swiss Insurance
Company, Yasuda Fire & Marine
Insurance Company, Certain London
Market Companies and Assicurazioni
Generali, S.p.A.

Gregory R. Haworth, Esquire
Duane, Morris LLP
744 Broad Street, Suite 1200
Newark, New Jersey 07102-3389

Attorneys for Appellee,
Coleridge and London Market
Companies

                          6
Matthew S. Ponzi, Esquire
Thomas B. Orlando, Esquire
Foran Glennon Palandech & Ponzi
150 South Wacker Drive, 11th Floor
Chicago, IL 60606

Attorneys for Appellee,
United Fire & Casualty Company

Richard M. Mackowsky, Esquire
Michael R. McCarty, Esquire
Cozen & O’Connor
1900 Market Street
The Atrium
Philadelphia, PA 19103

Andrew S. Amer, Esquire
Simpson, Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017

Attorneys for Appellees,
Hartford Fire Insurance Company
and Hartford Accident & Indemnity
Company

Stuart Cotton, Esquire
Jeffrey S. Weinstein, Esquire
Mound, Cotton, Wollan &
 Greengrass
One Battery Park Plaza, 9th Floor
New York, NY 10004

Attorneys for Appellees,
American Home Assurance Company,
Birmingham Fire Insurance Company
of Pennsylvania, Insurance Company
of the State of Pennsylvania,
Lexington Insurance Company and
Providence Washington Insurance
Company
                                7
       H. Richard Chattman, Esquire
       Podvey, Sachs, Meanor, Catenacci,
        Hildner & Cocoziello
       One Riverfront Plaza
       The Legal Center, 8th Floor
       Newark, NJ 07102

       Attorney for Appellee,
       Affiliated FM Insurance Company

       Peter E. Kanaris, Esquire
       Lawrence D. Mason, Esq.
       Daar, Fisher, Kanaris & Vanek
       200 South Wacker Drive, 33rd Floor
       Chicago, IL 60606

       Attorneys for Appellees,
       Allianz Insurance Company,
       Continental Insurance Company,
       Employers Mutual Casualty
       Company, Federal Insurance
       Company and Home Indemnity
       Company

       Jerrald H. Hochman, Esquire
       Siegal & Napierkowski
       220 Lake Drive East, Suite 304
       Cherry Hill, NJ 08002

       Attorney for Appellee,
       Insurance Company of North America

OPINION OF THE COURT

WEIS, Circuit Judge.

The District Court held that unless asbestos in a building
was of such quantity and condition as to make the
structure unusable, the expense of correcting the situation
was not within the scope of a first party insurance policy
covering "physical loss or damage." We agree and will
affirm.

Plaintiffs, the Port Authority of New York and New Jersey
and its subsidiary, the Port Authority Trans-Hudson

                                8
Corporation, own numerous facilities in New York and New
Jersey that incorporated asbestos products in their
construction. Alleging asbestos contamination, plaintiffs
filed suit for damages in the New Jersey state courts
against the defendants, a number of insurance companies
that had first-party policies on the various structures. The
case was removed to the United States District Court for
the District of New Jersey.

Plaintiffs seek recovery for expenses incurred in
conjunction with the abatement of asbestos-containing
materials in their structures such as the World Trade
Center complex in New York and Newark International
Airport in New Jersey. The plaintiffs contend that physical
damage has occurred in these structures as a result of the
"presence of asbestos," "threat of release and reintrainment
of asbestos fibers," and the "actual release and
reintrainment of asbestos fibers."

To support their claims, plaintiffs point to the existence
of friable asbestos in some of their buildings. Once an
asbestos product reaches the friability stage, it may be
crumbled by vibrations or hand pressure and it continues
to deteriorate into separate fibers. In this condition, the
asbestos becomes more susceptible to dispersion in the air
and poses an increased risk to human health. Plaintiffs cite
this as a documented problem at Newark Airport, where
insulation had to be removed from pipes around the
heating and ventilating units. In other locations, asbestos
fibers were actually released during the performance of
routine building functions, the renovation of existing
structures, and demolition projects.

In the mid-1980s, the plaintiffs undertook a renovation
program to remove asbestos products from portions of the
World Trade Center. Pursuant to OSHA regulations,
plaintiffs augmented their abatement policy by conducting
regular surveys of asbestos-containing materials and
employing air monitoring procedures. During these
activities, maintenance and construction workers were
subjected to stringent safety requirements, including
mandatory protective clothing and equipment. However, air
samples taken in each location did not reveal the presence
of asbestos fibers exceeding EPA standards.

                                9
Even after the World Trade Center was severely damaged
by a truck bomb in 1993, extensive air sampling tests
indicated that, except for the occasional "spikes of higher
levels," the existing conditions were not problematic.
Relying on these tests, plaintiffs continually assured their
employees, as well as current and prospective tenants, that
the buildings were safe and within regulatory limits.

The Port Authority’s policy on the asbestos present was
to "manage [it] in place and to abate it only when required."
The record in the District Court established that none of
the plaintiffs’ structures violated applicable regulations,
and asbestos levels inside the buildings were comparable to
background levels on the streets. In the more than 1,000
locations alleged to contain asbestos or an imminent threat
of its release, plaintiffs assert claims for 69 abatement
projects, which the record shows had been carried out in
only 13 instances. During this time, all of plaintiffs’
structures continued in normal use.

Plaintiffs made claims against the defendants under their
first-party insurance policies which contained one of the
following statements of the perils within their scope of the
policies:
        "ALL RISKS of physical loss or damage occurring
       during the period of this policy including loss of
       revenue and business interruption, are insured
       against, except as otherwise specifically excluded.

        ALL RISKS of physical loss or damage occurring
       during the period of this policy including loss of
       revenue . . . are insured against, except as otherwise
       specifically excluded.

        ALL RISKS of direct physical loss or damage
       occurring during the period of this policy including loss
       of revenue . . . are insured against, except as otherwise
       specifically excluded."

The policies define "loss occurrence" as a"loss or
combination of losses caused by all risks of physical loss or
damage subject to the perils excluded arising out of one
single event. . . . or a loss by any peril or combination of
perils insured against arising out of a single event." The

                                10
periods covered in the policies were from 1971 to 1991.
Unlike usual contracts of adhesion, the manuscript policies
issued by the defendants were drafted by plaintiffs with the
aid of counsel and insurance professionals, and, in some
respects, negotiated with the underwriters.

In view of the number of claims and complexity of the
case, the District Court divided the litigation into three
stages. The first was limited to such preliminary
determinations as timeliness of notice and suit limitations
in various policies. Some of the defendants were dismissed
at the conclusion of this initial phase and no appeal has
been taken from those rulings.

The second stage of the litigation was to "encompass all
issues relating to whether, and if so, to what extent,
physical loss or damage happened at a time for which an
insurer is responsible under a policy." In order to simplify
the proceedings, and at the suggestion of the parties, the
Court designated six buildings of the World Trade Center
and nine at Newark International Airport as test structures.
The third stage was to have been devoted to determining
the monetary loss. Because the District Court entered
summary judgment in favor of all defendants, however, it
did not reach the third stage.

The District Court framed the issue as whether coverage
was "triggered in the first instance, without regard to
language excluding certain risks of loss." Finding that the
language of the policies was unambiguous, the Court
determined that the only question that needed to be
decided was whether the insured had suffered "physical
loss or damage."

The plaintiffs have the burden to establish that their
structures were, in fact, physically damaged in order to
trigger coverage. See, Koppers Co. v. Aetna Cas. & Surety
Co., 98 F.3d 1440, 1446 (3rd Cir. 1996); Cobra Products
Inc. v. Federal Ins. Co., 722 A.2d 545, 549 (N.J. Super. Ct.
App. Div. 1998). In resolving the issues before it, the Court
concluded that "it is important to differentiate between the
authorities generated by [first-party and third-party]
coverage." Where, in the District Court’s opinion, "the
central issue is a fundamental one delimiting the scope of

                                11
coverage under a first party insuring agreement. . .. .
[t]here is more than adequate justification to seek guidance
only from first party precedent."

Acknowledging that no controlling case on point existed,
the Court reasoned that "physical loss or damage" could be
found only if an imminent threat of asbestos release
existed, or actual release of asbestos resulted in
contamination of the property so as to nearly eliminate or
destroy its function, or render it uninhabitable. The mere
presence of asbestos, on the other hand, was not enough to
trigger coverage.

The Court determined that the plaintiffs had failed to
introduce evidence of "physical loss or damage" sufficient to
survive summary judgment. Notably, the Court observed
that "a significant portion of the [plaintiffs’] claimed losses
arise from the presence of asbestos, unaccompanied by
even the suggestion of actual release or imminent threat of
release of asbestos fibers." Of the plaintiffs’ locations where
proof of release was shown, the Court noted that the
continued and uninterrupted use of the buildings without
any indication of elevated airborne asbestos level, coupled
with the plaintiffs’ own assurances of public safety, "belie
the existence of contamination to the extent required to
constitute physical loss or damage." Finally, the Court
concluded that the plaintiffs cannot create a material issue
"based on imminent threat of release of asbestos
manifested during the years 1978 to 1991 if it has failed to
abate the purported threat to date."

The Port Authority has appealed, asserting that the
District Court adopted an incorrect standard for"physical
loss" and misconstrued first-party and third-party
insurance case law. Moreover, the plaintiffs argue that they
produced ample proof that there was physical loss or
damage attributable to asbestos in the insured properties.
The defendants contend that plaintiffs failed to show
physical loss or damage to its buildings and that the
District Court correctly relied on first-party insurance law
and principles rather than third-party coverage standards.

In reviewing the grant of summary judgment, we must
affirm if the record evidence submitted by the non-movant

                                12
"is merely colorable or is not significantly probative."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50
(1986). The non-movant "may not rest upon mere
allegations, general denials, or . . . vague statements."
Quiroga v. Hasbro, Inc., 934 F.2d 497, 500 (3d Cir. 1991).
When opposing a motion for summary judgment, the party
bearing the burden of persuasion in the litigation is
obligated "to identify those facts of record which would
contradict the facts identified by the movant." Childers v.
Joseph, 842 F.2d 689, 694-95 (3d Cir. 1988).

The case before us presents issues of state law. Because
the plaintiffs’ properties lie in both New York and New
Jersey, the law of either state could be applicable to various
structures. However, there appears to be no substantive
difference in the law of the two states and the parties do
not advance conflict of laws issues.

The fundamental differences between liability policies and
first-party contracts make the multitude of appellate court
opinions in third-party asbestos personal injury suits
unhelpful in resolving the issues presented in this case.
The primary aim of third-party insurance is to defend and
indemnify insureds against liability for claims made against
them as a result of their own conduct. First-party coverage,
on the other hand, protects against loss caused by injury to
the insured’s own property. Wholly different interests are
protected by the two distinct forms of coverage.

Moreover, the parties to each form of insurance contract
assume vastly different roles. In the third-party setting, the
insurer and insured may generally be considered allies, but
in the first-party context, the insured and carrier are placed
in an adversarial position. We are persuaded that the time-
honored distinction between the two types of insurance
coverage is valid and should be maintained. See Great
Northern Ins. Co. v. Mt. Vernon Fire Ins. Co., 708 N.E.2d
167, 170 (N.Y. 1999); Winding Hills Condo Ass’n. v. North
American Specialty Ins. Co., 752 A.2d 837, 840 (N.J. Super.
Ct. App. Div. 2000).

New Jersey courts, along with many others, have
explicitly recognized this differentiation when defining the
scope of coverage under an insuring agreement. Third-party

                                13
coverage is routinely determined by the "continuous trigger"
standard, meaning that a loss occurs continuously from
occurrences of the incident causing the damage to its
manifestation. This outcome is justified by the"law’s
solicitousness for victims of mass toxic torts . . . and is
entirely consistent with choosing that conceptually viable
trigger theory affording the greatest ultimate redress."
Winding Hills, 752 A.2d at 840.

That justification and outcome do not, however, transfer
to the first-party setting. In that context, the"manifest
trigger" provides the appropriate standard by which to
measure the occurrence of a loss, that is, that the loss
occurs only in the policy period in which it is revealed.
"Public rights" are of less relevance and the ability of the
insured to assure his protection by obtaining full coverage
each policy year mandates adherence to the stricter rule.
Winding Hills, 752 A.2d at 840.

Because this distinction carries over to framing the
definition of property damage, the difference between first
and third-party insurance affects a court’s interpretation of
the policy language. Unlike liability policies, where the
public interest in compensation for injured third-parties is
a strong factor, in a first-party policy, the extent to which
insured persons may protect themselves is a matter that
rests in their own determination and judgment. As a result,
the relationship between the insurer and insured and the
incidence of property damage in first-party matters are
generally determined by reliance on traditional contract
principles.

This approach is particularly important when construing
first-party, ‘all risks’ policies. Under such policies, the
insurer agrees to pay for all fortuitous losses that are not
excluded under the contract. It is worthy of note, though,
that in the insurance industry, "all risks" does not mean
"every risk." As Judge Friendly remarked in Aetna Casualty
Ins. & Surety Co. v. Yates, 344 F.2d 939, 940 (5th Cir.
1965), "[t]he description of the policy as‘All Risks’ is rather
a misnomer since it contains fourteen lettered exclusions
. . . ." Accord, Intermetal Mexicana S.A. v. Insurance Co. of
North America, 866 F.2d 71, 75 (3d Cir. 1989). Moreover,
"[a] loss which does not properly fall within the coverage

                                14
clause cannot be regarded as covered thereby merely
because it is not within any of the specific exceptions. . . ."
10 Couch on Insurance 148:48 (3d ed. 1998).
Consequently, the responsibility under a first-party‘all
risks’ policy must be determined by the terms and
conditions of the contract.

The scarcity of case law addressing asbestos
contamination under first-party insurance contracts
extends to both New York and New Jersey jurisprudence.
Counsel for both parties have diligently searched for helpful
precedents. However, after examining their results and
conducting our independent analysis, we are left with a few
cases from other states, including a number of reported
trial court opinions which, of course, have no precedential
standing. Most of the appellate court opinions discussing
insurance and asbestos speak to general liability policies
which, we conclude, are inapplicable to first-party policies.
See, e.g., Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp.,
73 F.3d 1178 (2d Cir. 1995); United States Fid. & Guar. Co.
v. Wilkins Insulation Co., 578 N.E.2d 926 (Ill. 1991).

Plaintiffs have cited two first-party appellate decisions
referring to asbestos contamination of an apartment
building, Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563
N.W.2d 296 (Minn. Ct. App. 1997) and in a later stage of
that same litigation, Sentinel Mng. Co. v. Aetna Cas. &
Surety Co., 615 N.W.2d 819 (Minn. 2000). In those cases,
plaintiffs sought recovery under their first-party‘all risks’
policy "not for the mere presence of [asbestos containing
materials] in the buildings, but for the release of asbestos
fibers and resultant contamination." Sentinel , 563 N.W.2d
at 300.
The Sentinel Courts concluded that asbestos
contamination can constitute a direct, physical and
fortuitous loss under an "all-risks" first-party insurance
policy. In order to meet this standard, plaintiffs had to
prove not only the presence of asbestos, but that the
contamination presented a health hazard to the building’s
tenants and as such seriously impaired the building’s
function. Sentinel, 615 N.W.2d at 826. Although the
buildings in question remained occupied without significant
abatement activity, the proof of actual release of asbestos

                                15
fibers on carpeting and other surfaces was considered to be
enough to trigger the insurance coverage.

Plaintiffs also rely on Board of Educ. v. Int’l. Ins. Co., 720
N.E.2d 622 (Ill. App. Ct. 1999). That case permitted
recovery for the removal of friable asbestos from a school
building under a first-party insurance policy. However, that
court’s rationale is considerably weakened by its reliance
on the definition of physical loss in United States Fid. &
Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926 (Ill.
1991), an insulation case involving a general liability policy
and not first-party coverage.

Defendants call our attention to Leafland Group II v.
Insurance Co. of North America, 881 P.2d. 26 (N.M. 1994).
In that first-party policy dispute, the insured claimed loss
of value of an apartment complex caused by the presence
of asbestos containing materials. These components,
however, were in the buildings when they were purchased
by the insured. In denying recovery, the New Mexico
Supreme Court noted that no incident or occurrence during
the time the policy was in effect caused direct loss or
damage to the structures. The Court commented that" ‘all
risks’ first-party insurance coverage . . . does not protect
against losses that are certain to happen." Leafland, 881
P.2d at 28.

Defendants also cite Pirie v. Federal Ins. Co. , 696 N.E.2d
553 (Mass. App. Ct. 1998), where plaintiffs sought first-
party coverage for lead paint removal. The Court concluded
that an internal defect in a building does not amount to an
actual physical loss, and, as a result, the costs associated
with eliminating lead paint from the house were not
covered. In reaching this decision, the court cited similar
results in asbestos cases. See, e.g., Great Northern Ins. Co.
v. Benjamin Franklin Sav. & Loan Ass’n, 793 F. Supp. 259
(D. Or. 1990), aff ’d, 953 F.2d 1387 (9th Cir. 1992).

We thus find ourselves with a diversity case in which
applicable state law provides no guidance and the parties
rely on appellate decisions from jurisdictions having no
relationship with the entities involved in this dispute. Our
task is, therefore, one of prediction of what may eventually
become the law of the states that are most concerned with
the subject matter.

                                16
A court must interpret the language of an insurance
policy according to its plain and ordinary meaning.
Ambrosio v. Affordable Auto Rental, Inc., 704 A.2d 572, 575
(N.J. Super. App. Div. 1998); Intermetal Mexicana, 866 F.2d
at 76. Although New Jersey Courts generally read policies
in favor of the insured, they "should not write for the
insured a better policy . . . than the one purchased."
Walker Rogge, Inc. v. Chelsea Title & Guar. Co., 562 A.2d
208, 214 (N.J. 1989). One of the frequently cited reasons
for interpreting language in favor of the insured is that
insurance policies are generally contracts of adhesion,
which offer little choice to the purchaser. This justification,
though, has little application in this case. As is often the
situation with large, knowledgeable business firms, the
contracts were manuscript policies negotiated and drafted
by the insured. See Fenwick Mach, Inc. v. A. Tomae & Sons,
Inc. 401 A.2d 1087 (N.J. 1979).

In ordinary parlance and widely accepted definition,
physical damage to property means "a distinct,
demonstrable, and physical alteration" of its structure. 10
Couch on Insurance 148:46 (3d ed. 1998). Fire, water,
smoke and impact from another object are typical examples
of physical damage from an outside source that may
demonstrably alter the components of a building and
trigger coverage. Physical damage to a building as an entity
by sources unnoticeable to the naked eye must meet a
higher threshold. The Colorado Supreme Court in Western
Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Co.
1968), concluded that coverage was triggered when
authorities ordered a building closed after gasoline fumes
seeped into a building’s structure and made its use unsafe.
Although neither the building nor its elements were
demonstrably altered, its function was eliminated.

In the case before us, the policies cover "physical loss,"
as well as damage. When the presence of large quantities of
asbestos in the air of a building is such as to make the
structure uninhabitable and unusable, then there has been
a distinct loss to its owner. However, if asbestos is present
in components of a structure, but is not in such form or
quantity as to make the building unusable, the owner has
not suffered a loss.1 The structure continues to function --
_________________________________________________________________

1. It is conceivable that asbestos contamination could make one
apartment in a complex uninhabitable but not affect the other units.

                                17
it has not lost its utility. The fact that the owner may
choose to seal the asbestos or replace it with some other
substance as part of routine maintenance does not bring
the expense within first-party coverage.

The District Court concluded that "physical loss or
damage" occurs only if an actual release of asbestos fibers
from asbestos-containing materials has resulted in
contamination of the property such that its function is
nearly eliminated or destroyed, or the structure is made
useless or uninhabitable, or if there exists an imminent
threat of the release of a quantity of asbestos fibers that
would cause such loss of utility. The mere presence of
asbestos, or the general threat of future damage from that
presence, lacks the distinct and demonstrable character
necessary for first-party insurance coverage.

We agree with the District Court’s articulation of the
proper standard for "physical loss or damage" to a
structure caused by asbestos contamination. The
requirement that the contamination reach such a level in
order to come within coverage limitation establishes a
reasonable and realistic standard for identifying physical
loss or damage. The effect of asbestos fibers in such
quantity is comparable to that of fire, water or smoke on a
structure’s use and function. A less demanding standard
would require compensation for repairs caused by the
inevitable deterioration of materials used in the
construction of the building. This outcome that would not
comport with the intent of first-party ‘all risks’ insurance
policy, but would transform it into a maintenance contract.
See 80 Broad St. Co. v. U.S. Fire Ins. Co., 389 N.Y.S.2d 214
(N.Y. Sup. Ct. 1975), aff ’d, 54 A.2d 888 (N.Y. App. Div. 1st
Dep’t. 1976).

We thus find ourselves in agreement with the District
Court’s ruling that plaintiffs’ inability "to produce evidence
concerning the manifestation of an imminent threat of
asbestos contamination" forecloses the existence of a viable
_________________________________________________________________

There would be a loss in that instance, as there would be if one
apartment had been damaged by fire leaving the others untouched.
However, that situation is not presented in the case before us.

                                18
claim. Although the plaintiffs demonstrated that many of its
structures used asbestos-containing substances, those
buildings had continuous and uninterrupted usage for
many years. The mere presence of asbestos or the general
threat of its future release is not enough to survive
summary judgment or to show a physical loss or damage to
trigger coverage under a first-party ‘all risks’ policy.

Accordingly, the judgment of the District Court will be
affirmed.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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