Key Points

  • The Third Circuit vacated summary judgment for Hartford on its late-notice defense to GEA's claim for coverage of a $70.102 million asbestos verdict and remanded for further proceedings.
  • Under New Jersey law, an insurer disclaiming coverage for late notice must prove both a breach of the notice provision and a likelihood of appreciable prejudice, and it bears the burden of persuasion.
  • The panel held that Hartford's corporate witness described the claims-handling steps it would have taken but not what settlement it would have reached, leaving only speculative and disputed inferences that cannot support summary judgment.
  • An affidavit from the plaintiffs' counsel about the clients' willingness to settle was hearsay because it was not based on the affiant's personal knowledge.
  • The court declined to assume New Jersey would shift the prejudice burden to the insured and did not reach arguments over breach of the excess policies' notice provisions.

A federal appeals court on Nov. 5 revived a company's bid to make its Hartford insurers cover an asbestos lawsuit that produced a $70.1 million jury verdict. The court held that the insurers offered only speculation that they would have negotiated a better settlement had the company told them about the suit in time.

A three-judge panel of the U.S. Court of Appeals for the Third Circuit vacated U.S. District Judge Brian R. Martinotti's grant of summary judgment to the insurers on their late-notice defense against GEA Mechanical Equipment US Inc. Circuit Judge Rendell wrote the opinion for a panel that also included Chief Judge Chagares and Judge Roth.

The ruling is the second time the Third Circuit has set aside a judgment for the insurers in the dispute, and it turns on what an insurer must prove when a policyholder reports a claim late. Under New Jersey law, a breach of the notice clause is not enough. The insurer must also show a "likelihood of appreciable prejudice," and the panel held that Hartford's testimony about how it would have handled the claim did not show a better outcome.

"Because GEA's liability insurer did not satisfy its burden of establishing appreciable prejudice, we will vacate the District Court's order and remand for further proceedings," Judge Rendell wrote. The opinion is designated not precedential.

The coverage fight grew out of a 2017 personal injury suit by Charles and Constance Thornton. They alleged that Charles Thornton contracted terminal mesothelioma from asbestos in brakes and clutches inside centrifuges or separators that GEA's predecessor sold to his employer.

Settlement talks went nowhere. At a 2018 mediation the Thorntons made a substantial demand, and GEA's minimal counteroffer ended the session. GEA raised its offer on the eve of the June 2019 trial and again at the close of evidence, to roughly half the Thorntons' initial demand, but the Thorntons did not respond. The jury awarded $70.102 million in compensatory damages, and the parties reached a confidential settlement while post-trial motions were pending.

Hartford had issued primary general liability and excess umbrella policies to GEA's predecessor, Centrico Inc., that required timely notice of an occurrence, claim or suit. The opinion refers to First State Insurance Co., Hartford Accident and Indemnity Co. and Hartford Fire Insurance Co. collectively as Hartford. GEA notified Hartford of the Thornton case in August 2019, nearly two months after the verdict but before the final settlement, and filed this coverage suit in New Jersey state court a day later.

After removal to federal court, the district court ruled for the insurers on the late-notice defense. The Third Circuit vacated that ruling in August 2024 for misapplying the prejudice prong of New Jersey's test. On remand, the district court applied the correct test and again ruled for Hartford.

New Jersey's rule traces to the state Supreme Court's 1968 decision in Cooper v. Government Employees Insurance Co. Breach alone is insufficient, the panel wrote, "because New Jersey public policy favors coverage for the insured." Under a test drawn from a 1980 New Jersey Superior Court decision, Morales v. National Grange Mutual Insurance Co., the insurer must show that "substantial rights have been irretrievably lost" and that it likely would have succeeded in defending against the claim.

The panel read that second prong to include success in settling a claim, so an insurer may meet it by showing it could have settled the underlying case for less than the insured ultimately paid. Quoting its own 2001 precedent, the court wrote that "mere conjecture or suspicions may not form the basis for establishing appreciable prejudice."

The district court had credited Hartford's argument that it would have drawn on its databases of other asbestos case outcomes during pretrial negotiations. Such databases "would surely and inevitably increase the likelihood of success in achieving a more favorable result, including in securing a settlement agreement before trial," that court wrote. GEA argued that the judge had relied on Hartford's arguments rather than on evidence that a settlement was likely.

On appeal, Hartford relied on its corporate witness, who testified that with timely notice it would have followed its normal procedures, including requiring periodic updates from retained counsel, reviewing the venue's verdict history and preparing a claim evaluation form. The witness said that process would have shown the Thornton case to be a significant risk exposure, and criticized GEA's counsel's handling of the December 2018 mediation and later talks.

The panel set aside an affidavit from the Thorntons' lawyer about the couple's willingness to settle before trial, holding that "a declaration regarding a client's belief is not based on the personal knowledge of the affiant and is thus hearsay and inadmissible." Without it, Judge Rendell wrote, "we do not know of the Thorntons' willingness to settle for less than their opening demand before trial."

The panel agreed with GEA that Hartford's showing was speculative. Its witness never said what offers the insurer would have made or that its process likely would have produced a better deal. "Hartford focuses on what GEA's counsel did wrong and steps it would take to assess the risk, not on what specific steps it would have taken that would have resulted in a settlement," Judge Rendell wrote. The opinion posed one question the record left open: "would it have approved of an offer in the amount of the Thorntons' opening demand?"

Because the parties disagreed about what inferences could be drawn from Hartford's evidence, the court held, Hartford's motion on the late-notice defense "should be denied."

The panel also declined to follow other states, cited by Hartford, that shift the burden to the insured to disprove prejudice when notice comes late or after liability is fixed. "New Jersey seemingly has not joined these states in moving the burden, and we cannot assume it would," the court wrote.

Erin D. Fleury of K&L Gates argued for GEA. Louis H. Kozloff of Kennedys CMK argued for the insurers.

The case, No. 25-2395, now returns to the district court for further proceedings. The panel did not reach GEA's separate argument that the lower court should have applied New Jersey's allocation law in deciding whether GEA breached the excess policies' notice provisions.