Judge: A Place Of Occurrence Is A Place Of Injury
May 19, 2010
The 7th U.S. Circuit Court of Appeals, interpreting Illinois law, recently held that a commercial general liability policy that excluded coverage for occurrences within the United States, did not apply to lead-paint injuries in the United States caused by the allegedly negligent manufacture of the products in China. ACE American Insurance Co. v. RC2 Corporation, Inc., 2010 WL 1267293 (7th Cir. April 5, 2010).
The insurer, ACE, was represented by Jonathan Hacker of O'Melveny & Myers, Washington, D.C. Barry Levenstam of Jenner & Block LLP, Chicago, represented the insured, RC2.
RC2 designs, produces and markets "Thomas & Friends" toys. In 2007 it recalled certain toys that had been manufactured in China because they contained lead. The recall led to numerous class action lawsuits alleging that the recalled toys were negligently manufactured and tested. The lawsuits were based on products sold and used exclusively in the United States.
RC2 maintained two separate lines of CGL coverage. One covered occurrences within the United States. The second set of policies, issued by ACE, applied internationally but excluded occurrences that took place within the United States. Specifically, the insuring agreement of all the ACE policies provided that the "occurrence" must take place in the "coverage territory," with the latter term defined to include anywhere in the world except the United States.
RC2 first tendered the claims to its domestic insurer. That insurer, however, denied coverage based on policy exclusions applicable to lead paint. RC2 then tendered to ACE which denied coverage based on the fact that the occurrences took place within the United States and therefore outside of the coverage territory. At the same time ACE filed the instant declaratory rights action, and RC2 counterclaimed for coverage.
On cross summary judgment motions, the district court ruled that because the negligent manufacture of the products had taken place in China, which was within the coverage territory, the policies potentially applied and ACE therefore had a duty to defend. The court thus held for RC2 and awarded RC2 defense costs of over $1.6 million.
The parties then settled the underlying indemnity claims, so that the only question remaining was defense costs. ACE took this appeal.
In an opinion by Judge Daniel A. Manion, the 7th Circuit reversed. He began by noting the parties' positions: ACE contended that the occurrence took place in the United States, outside the coverage territory, because the exposure to lead paint and injury took place here; while RC2 argued that the occurrence took place in China where at least some of the negligent acts that caused the harm took place.
Manion observed that the term "occurrence" was defined in the policies as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Under this definition, Manion suggested that ACE's interpretation could be correct, because at least in the context of continuous or repeated exposure to toxic products, "occurrence" refers to the exposure itself. On the other hand, he indicated that the term "accident" has several meanings, which could give rise to an ambiguity, except that the standard language of the ACE policies has to be read against the backdrop of court interpretation.
ACE relied in part on Great American Insurance Co. v. Tinley Park Recreation Commission, 124 Ill. App. 3d 19, 259 N.E.2d 867 (1970), where a boy was injured by fireworks several days after a city recreation commission clean-up crew negligently overlooked them following a fireworks display. While the negligence arguably occurred during the policy period of the liability policy covering the commission, the injury took place after expiration of the policy, and the court held that the accident did not occur until the time of the injury.
A similar result was reached in Cobbins v. General Accident Fire & Life Assur. Corp., 53 Ill. 2d 285, 290 N.E.2d 873 (1972), apparently involving the negligent sale of fireworks to a minor, but where the injury occurred off the premises of the seller, the policy covered only on-premises accidents, and the court found there was no coverage.
Manion said these cases reflected the general approach of most courts in determining the location of an occurrence as the place of the injury.
RC2, on the other hand, argued that an "occurrence" in the product liability context takes place wherever any antecedent negligent acts take place. In support, it relied on Nicor, Inc. v. Associated Electric & Gas Ins. Serv. Ltd., 223 Ill. 2d 407, 860 N.E.2d 280 (2006), in which the Illinois Supreme Court looked to the number of causes to determine whether a series of harms constituted a single or multiple occurrences.
Consistent with Nicor, RC2 contended that since Illinois has adopted the "cause" theory of occurrences, the negligent manufacture of toys in China leads to the conclusion that the relevant "occurrence" took place there as well. Manion, however, distinguished Nicor on the ground that the court there was interested only in determining the number of occurrences, not where the occurrences took place. Neither Illinois nor other jurisdictions, according to Manion, used the "cause" test to determine the location.
Thus, in his view, the "occurrence" that triggered coverage takes place where the actual event that inflicts the harm takes place, and in this case the location is the United States, outside of ACE's coverage territory. Moreover, Manion noted RC2's apparent inconsistency in tendering first to its domestic insurer, on the theory that that insurer provided coverage for domestic occurrences.
He noted further that most product liability claims may be said to have been caused by negligent acts that allegedly occurred both domestically and abroad, and that RC2's construction would render domestic and international policies almost entirely redundant, sweeping domestic events into international policies, and vice versa.
In sum, Manion found that an accident will typically occur when and where all the factors come together at once to produce the force that inflicts injury and not where some antecedent negligent act takes place.
The court therefore reversed and remanded with instructions to enter judgment for ACE.
