number of occurrences in insurance liability...

Number of Occurrences in Insurance Liability Claims Framing the Occurrence Issue to Maximize Policyholder's Coverage or Limit Insurer's Liability Exposure

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WEDNESDAY, APRIL 15, 2015

Presenting a live 90-minute webinar with interactive Q&A

John T. Harding, Jr., Partner, Lewis Brisbois Bisgaard & Smith, Boston

Michael John Miguel, Partner, Kasowitz Benson Torres & Friedman, Los Angeles

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5

THE NUMBER OF “OCCURRENCES” DILEMMA

John T. Harding

Lewis, Brisbois, Bisgaard & Smith LLP

John.Harding@lewisbrisbois.com

Michael John Miguel

Kasowitz Benson Torres & Friedman

mmiguel@kasowitz.com

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“Occurrences”

• An unusual and tricky area of the law.

• Not “is there coverage” but “how much?”

• Small number of cases disguise the breadth of the problem across all lines of coverage.

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WHY is there a “DILEMMA”?

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“Occurrences” Cases Used To Be Rare

• Requires unusual cluster of circumstances: – Insured must be liable

– Policy must afford coverage

– Case doesn’t settle

– Liability must exceed conceded coverage

• Insurers haven’t wanted to take a position. – No consistent “right” position that is always beneficial

– If you are excess today you may be primary tomorrow

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Ripped from the Headlines

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BOSTON BREAKS SNOW RECORD

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Ripped From the Headlines

• Boston Clergy Abuse Scandal Shakes the Diocese

• 9/11

• Two Local Boys Freeze to Death

• Thousands Sue for Defective Drywall Made in China

• Reserves for Asbestos Claims Soar

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Why Is This Now Such An Important Issue?

• Focus is increasingly on indemnity issues.

– Erosion of underlying layers of coverage

• Growing role of SIRS.

• High profile disputes:

WTC

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Why This Issue Matters

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You Can’t “Shake it Off”

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Why Parties Have Avoided Litigating This Issue Until Now

• There’s no one answer that’s “right” all the time.

• Insureds Generally Want Multiple “Occurrences” – Maximize Limits

– But Not If They Have SIRs

– and Not If They Want To “Spike” Excess Layers

• Insurers Generally Want One “Occurrence” – But Not If The Insured Has SIRs

– And Not If They Are Excess Carriers

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The “Gloves” Are Off

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“Occurrence” Players

• Dispute between insurer and policyholder.

• Dispute between primary and excess insurers.

• Dispute between insurer and reinsurer.

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So What is an Occurrence?

• Generally defined by the policy.

• Frequently use the word “accident” to describe an “occurrence” – An “accident” is “an unexpected happening without

intention or design . . . [and i]mplicit in the meaning of 'accident' is the lack of intentionality.” Sheehan Const. Co., Inc. v. Continental Cas. Co., 935 N.E.2d 160 (Ind. 2010).

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A CAUTIONARY TALE

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A Cautionary Tale

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Stonewall Ins. Co. v. Du Pont 996 A.2d 1254 (Del. 2010)

• Very significant case illustrating the dilemmas for policyholders and insurers

• Do “independent causes” = separate “occurrences”?

• Significance of “premises locations”

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MONEY NEVER SLEEPS

• $50 million per occurrence SIR

• Presents a $24 trillion dollar question

• Is the coverage illusory?

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Stonewall v. DuPont

• Defective plumbing systems

• Specific damage at each location where installed

• Different types of defects claimed

• But one overall manufactuing process

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Who Wants to Be a Millionaire

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The Court Speaks

• ARE YOU KIDDING ME???

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“Occurrences”: Determining Factors

Policy Wordings The “Cause” Test External Factors

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Dual Policy Role of “Occurrence”

• “Occurrence” plays two separate roles in CGL or excess policy

1. Insuring Agreement – BI/PD must result from an “occurrence”

– “Occurrence” is basis for insured’s liability

2. Limits of Liability – Exposure to similar conditions is one “occurrence”

– “Occurrence” is cap on insurer’s liability

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Don’t Confuse the “Occurrence” with the “Trigger” of Coverage

“Occurrence” is not the trigger of coverage.

“Occurrence” is the act of the insured (the accident, event or conditions) that results in injury.

– Cause

It is the resulting injury during the policy period that triggers coverage.

– Effect

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I. Policy Wordings

• “Occurrence” Definitions

– Standard CGL: “Conditions”

– Non-Standard: “Happenings and Events”

• Aggregates

• Non-Cumulation and Deemer Clauses

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“Exposure To Conditions”

• “For the purpose of determining the company's liability, all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.”

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“Conditions” Refers to Cause of Injury, Not Basis for Liability

• Koikos v. Travelers, 849 So.2d 263 (Fla. 2003) – Florida Supreme Court rejected Travelers’ argument that

insured’s negligence was “conditions”:

• “The ‘continuous or repeated exposure’ language does not restrict the definition of ‘occurrence’ but rather expands it by including ongoing and slowly developing injuries, such as those in the field of toxic torts….The victims were not “exposed” to the negligent failure to provide security. If the victims were “exposed” to anything, it was the bullets fired from the intruder’s gun.”

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II. Measuring “Occurrences”

• The “Effect” Test – Focus is on the number of persons or property damaged by

insured’s act or omission

– Ostensibly the minority approach nowadays

• The “Cause” Test/Majority Approach – Do diverse injuries or claims share a common cause?

• “Unfortunate Event” Test/Lemony Snicket Rule – Would ordinary insured view diverse claims and injuries as

involving a single “unfortunate event”?

– Principally followed in New York

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What Does “Cause” Mean?

• While most states use a “cause” approach, it has often proven to be an elastic and result-oriented tool.

• Does “cause” mean?

– The “cause” of the insured’s liabilities; or

– The “cause” of the plaintiffs’ injuries?

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“Remote” v. “Immediate” Causes

• No distinction between cause of injury and liability where insured is immediate, physical cause of loss (e.g. auto accident).

• Issues arise, however, where insured is “remote” from accident, as where insured is product manufacturer or distributor or is sued for misconduct of others.

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III. External Factors

• Role of Insured

• Circumstances of Loss

• Coverage Profile

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1. Role of Insured

• Immediate or remote actor?

• Was the insured present at the scene?

• Other intervening causes?

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2. Circumstances of Loss

• Injurious Mechanism

– Did all the injuries result from a single on-going physical process or continuum (e.g. fire, flood)?

• Proximity:

– Did injuries occur around the same time and place?

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3. Coverage Profile

• Do policies have SIRs or deductibles?

– If so, insured is more likely to argue that diverse losses arise out of one “occurrence.”

• Are the limits enough to satisfy the claims?

– If not, insured is likely to press primary insurer to accept claims as separate “occurrences.”

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IV. “Occurrence” Claim Types

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Issue Cuts Across Diverse Claims

• Asbestos

• Auto

• Construction Defect

• Environmental

• Food

• Molestation

• Premises Liability

• Products Claims

• Shootings

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A User’s Guide

• You have to look at the facts

• Don’t jump to assumptions

• Be creative, but don’t be foolish

• There is More to the Issue than Just the “Bottom Line”

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And Always Remember

• To Bring Your Moral Compass

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ASBESTOS CLAIMS

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One Occurrence: “Cause” = Manufacturing

• Colt Industries (high “per occurrence” deductibles)

• Morton-Thiokol (retrospective premiums)

• Treesdale (pro-Insurer)

• Owens-Illinois (marketing of products)

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The Alternative View: Each Individual Claimant is a

Separate “Occurrence”

• LMI v. Superior Court, 53 Cal. Rptr. 3d 154 (Ct. App. 2007)(rejects “remote cause” analysis)

• Met Life v. Aetna, 765 A. 2d 891 (Conn. 2001) (“cause” of injuries was each claimant’s exposure to asbestos fibers)

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The Dramatic Impact

• Appalachian Ins. v. GE, 863 N.E. 2d 994 (N.Y. 2007)

– Each worker = one “occurrence”

– Self-insured primary layer -- no aggregates

– NO RECOVERY FROM EXCESS PROGRAM

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The Pendulum Swings

• Plastics Engineering v. Liberty Mutual, 759 N.W. 2d 613 (Wis. 2009)

– Each claimant = separate occurrence

– Liberty pays through the nose

– Primary and excess/no aggregate

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Building Claims Too

• Stonewall v. Asbestos Claims Mgt., 73 F.3d 1178 (2d Cir. 1995)

– Decision to manufacture wallboard not the “occurrence”

– Each individual installation = “occurrence”

– Policies had a high “per occurrence” deductible

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But GE Doesn’t Solve the Problem

• Mt. McKinley Ins. Co. v. Corning, Inc., 946 N.Y.S.2d 136 (1st Dept. 2012)

• Revisits the issue concerning number of “occurrences” that was the subject of the Court of Appeals’ decision in Appalachian Ins. Co. v. General Elec. Co., 8 N.Y. 3d 162 (2007)

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Framing the Dispute

• Insurers moved for a declaration that each of the asbestos-related claims at issue constituted a separate “occurrence” under the policies.

• Underlying claims arose from two different products:

– Paper-like spacer material used in construction of steel mills

– Unibestos, an asbestos-containing piping insulation

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The Arguments

• Focus of the dispute was whether a separate deductible would apply to each of the subject claims.

• Under Appalachian, New York courts apply the “unfortunate event test.”

• However, parties are free to group incidents based upon other approaches.

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The Policy Language

• “For purposes of determining the limit of the company’s liability, all bodily injury or property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.”

• Indicates an intent that certain types of similar claims be grouped or combined.

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The Result

• Court concluded that the record was not sufficiently developed to resolve the issue on summary judgment.

• Exposures emanating from the same location at a substantially similar time will be considered a single occurrence.

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The Conclusion

• While thousands of claims clearly are not a single occurrence, “any group of claims arising from exposure to an asbestos condition at a common location, at approximately the same time (for example, at the same steel mill or factory), may be found to have arisen from the same occurrence.”

• IN OTHER WORDS, IT ALL DEPENDS

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CLERGY ABUSE

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Diocese of Brooklyn v. National Union, 991 N.E.2d 666 (N.Y. 2013)

• Single plaintiff

• Multiple incidents of abuse over 6 year period

• Church seeks reimbursement of $2M settlement

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Diocese of Brooklyn

• Sought coverage under two policy years

• Insurer seeks a ruling that each incident of abuse is a separate “occurrence” that triggers a separate SIR of $250,000

• New York follows the “unfortunate events” test

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Diocese of Brooklyn

• “Here, nothing in the language of the policies, nor the definition of ‘occurrence,’ evinces an intent to aggregate the incidents of sexual abuse into a single occurrence. . .Applying the unfortunate event test we conclude that the incidents of sexual abuse constituted multiple occurrences. Clearly, incidents of sexual abuse that spanned a six-year period lack the requisite temporal and spatial closeness to join the incidents.”

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Construction Defect Claims

Contractors

Distributors

Manufacturers

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Case Example No. 1 Manufacturers

• Manufacturer sold Periclase plaster product.

• Bills of lading said “For Exterior Use Only” but no similar warning on product container.

• Contractors installed product on interiors of dozens of homes, causing stains and blemish to 28 of them.

• Primary insurer argued “cause” was defective product.

• Excess carrier (Wausau) argued that since not all homes suffered damage, injury not inevitable and therefore each of the 28 applications that did cause injury was the direct “cause” of the insured’s liabilities.

• So was it one “occurrence” or twenty-eight?

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And The Answer Is…

• One.

• Chemstar v. Liberty Mutual, 41 F.3d 429 (9th Cir. 1994) (California law) – Ninth Circuit ruled that there was no intervening proximate

cause after insured’s failure to warn.

• Southern Int’l Corp. v. Poly-Urethane Ind., Inc., 353 So.2d 646 (Fla. App. 1977) – Negligent application of insured’s roof sealing product to

numerous buildings held one ”occurrence”.

• Damage due to product, not application.

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Case Example No. 2

• Product manufacturer or distributor sued for construction defect problems associated with installation of its product in homes.

• Is “occurrence” the installation of the defective product or a defect in the design or manufacture of the product itself?

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And The Answer Is…

• One.

• Owners Ins. Co. v. Salmonsen, 622 S.E.2d 525 (S.C. 2005) – Class action filed against distributor of “Parex,” a synthetic

stucco product that caused water intrusion to plaintiffs’ homes.

– S. C. Supreme Court ruled that class members’ claims arose out of a single “occurrence” as they were all based on the distribution of an inherently defective product and not because of the negligent distribution of otherwise satisfactory goods.

– “Placing a defective product into the stream of commerce is one occurrence”

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Clear? Not Just Yet…

• New York courts have held in asbestos cases that it is the installation of insured’s product into a building that is the “occurrence” – Stonewall Ins. Co. v. Asbestos Claims Management, 73 F.3d

1178 (2d Cir. 1995)(insurable "occurrence" was not the manufacturer's "general decision" to manufacture wallboard containing asbestos but rather each installation of those wallboards).

– Maryland Cas. Co. v. W.R. Grace and Co., 128 F.3d 794, 799 (2d Cir. 1997) (each installation of asbestos material in a building was a separate "occurrence“)

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Case Example No. 3 Contractors

• After three separate heavy rainstorms, sewage backed up into numerous homeowners’ properties, resulting in claims against the City for failing to properly maintain the municipal drainage system.

• Primary insurer contended that the number of "occurrences" should be determined by reference to the number of storms.

• City argued that the court should look to the specific circumstances of each citizens' claim.

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And The Answer Is… • Neither.

• Home Ind. Co. v. City of Mobile, 749 F. 2d 659 (11th Cir. 1984)(Alabama law). – 11th Circuit adopted an intermediate position, holding that each

discrete causative act of negligence was a separate "occurrence“ no matter how many individual properties were damaged as a result.

• Bethpage Water District v. S. Zara & Sons, 546 N.Y.S.2d 645, 154 A.D.2d 645 (2nd Dept. 1989) – Contractor’s negligent backfilling damaged 250 parts of water main

system.

– Appellate Division of the New York Supreme Court held that claims all involved exposure to "substantially the same general conditions.”

– Note that this result benefited insured since it was only required to pay a single deductible.

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Clear? Not Just Yet…

• Courts may find separate “occurrences” if damage was due to defective work that differs from site to site rather than defect in construction product.

– U.S. Fire v. Safeco Ins. Co., 444 So.2d 844 (Ala. 1983)

• Roof leaked over time due to cracks and deterioration

• Contractor repaired but left section unroofed, causing further leakage.

• Alabama Supreme Court held that failure to maintain roof and contractor's subsequent failure to fix roof were separate "causes.”

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Premises Liability

Photo of bar

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Case Example No. 1

• Plaintiff that had leased space over nightclub, filed suit against landlord complaining that loud music over period of months was a breach of lease’s covenant of quiet enjoyment and habitability.

• Are number of “occurrences” determined by: – Breach of the lease covenant?

– Overall noise experience?

– Individual noisy performances?

– Repeated encores of “Stairway to Heaven”?

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And The Answer Is???

• One

• Peck v. Public Service Mut. Ins. Co., 363 F. Supp. 2d 137 (D. Conn. March 24, 2005)

– Judge ruled that on-going exposure to noise from insured’s nightclub involved exposure to similar conditions.

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Case Example No. 2

• After two unruly patrons were ejected from the insured’s bar, one went to his car and, returning with a gun, shot the other patron.

• Estate sued the bar for dram shop violations and for failing to provide safety.

• Was the fight inside the bar part of the same “occurrence”?

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And The Answer Is???

• One.

• Continental Ins. Co. v. Hancock, 507 S.W.2d 146 (Ky. 1973)

• Kentucky Supreme Court ruled that fight outside the bar was a continuation of the brawl that had begun inside and therefore arose out of the same “occurrence.”

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Case Example No. 3

• Father tore rotator cuff while running to save his boy, who was being mauled by neighbor’s dog.

• Father and son sued for bite wounds and shoulder surgery based on insured’s failure to contain the dog.

• One occurrence or two?

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And The Answer Is???

• Two.

• Hodgson v. Bremen Farmers Mut., 3 P.2d 1281 (Kan. App. 1999) – Court finds that father and son suffered injures due to two different

causes.

– Rejects insurer’s argument that father’s injury would not have occurred but for emergency suffered by son.

But see:

• Doria v. INA, 509 A.2d 220 (N.J. Super. 1986) (incident in which two boys drowned while one tried to save the other arose out of the same “occurrence”).

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Case Example No. 4

• Insured owned a swimming pool that he failed to secure.

• A neighbor’s child fell in the pool, while taking a shortcut across the property.

• His friend also drowned while trying to save his companion.

• One occurrence or two?

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And The Answer Is?

• One.

• In Doria v. INA, 210 N.J. Super. 67, 509 A.2d 220 (1986), the Appellate Division ruled that injuries to two boys arose out of one “occurrence” where harm resulted from same cause and was closely linked in time and space.

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But Not So Fast…

• What if the circumstances of the loss are unknown? – Addison Ins. Co. v. Fay, 905 N.E.2d 747 (Ill. 2009)

• Two boys died of hypothermia in wet sand on a neighbor’s property.

• While stating that the two deaths might well have involved a single “occurrence” if the injuries had occurred closely together in time and space, the court found that it was impossible to prove how the boys died.

• As the insurer had failed in its burden of proof, the Illinois Supreme Court held that the claims must be treated as involving separate “occurrences.”

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Products Claims

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Batch Clauses

• Older policies provided that losses involving a single lot or “batch” of the insured’s products are one “occurrence.”

• Controversy persists as to whether these clauses only apply to defective manufacture or should also extend to design defect or inherently dangerous products.

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Current (Bermuda) Forms: Integrated “Occurrence” Clauses

• Allows insured to designate common claims from a product as single “occurrence” even if injuries span multiple periods.

• But limited to that specific policy year.

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Proposed “Causes” of Products Claims

• Insured Manufacturer’s Decision To Market Defective Product or Failure to Warn of Dangers Posed By Dangerous/Defective Product – One “occurrence” per type of product

• Plaintiffs Injured Under Similar Circumstances – One “occurrence” per year

• Individual Circumstances of Disease or Injury – One “occurrence” per plaintiff.

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Single “Occurrence” Rationale

• These are “occurrence” policies.

• Business purpose of policy is to provide coverage for what insured did or didn’t do.

• Circumstances beyond insured’s control shouldn’t determine availability of coverage.

• Where insured is a “remote actor” (e.g. manufacturer), what was last act over which insured had any control: – Decision to manufacture

– Failure to warn

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Multiple “Occurrence” Rationale

• “Causes” of tort claimant’s injuries are too dissimilar; dispersed in time, place and manner of injury to be grouped together.

• Focus should be on the manner in which each individual was injured.

• Is there a “signature” injury?

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Case Example No. 1

• Cows died after insured sold farmers cattle feed into which he had accidentally mixed PBB fire retardant instead of feed supplement.

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Should number of “occurrences” be determined by:

– Number of dead cows?

– Number of unhappy farmers?

– Number of shipments?

– Defective product?

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And The Answer Is?

• Number of shipments.

• Michigan Chemical Corp. v. American Home Assur. Corp., 728 F.2d 374 (6th Cir. 1984)

• Sixth Circuit ruled that because PBB had been introduced into some shipments and not others, it was the individual shipments of contaminated cattle feed by the manufacturer that were the cause.

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Case Example No. 2

• Insured sold contaminated bird seed to eight dealers, who in turn sold the seed to numerous individual pet owners.

• Should number of “occurrences” be determined by – Number of dead birds?

– Distributors’ sales to bird dealers?

– Insured’s sales to distributors”

– Defective product?

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And The Answer Is?

• Insured’s sales to distributors (8).

• Maurice Pincoffs Co. v. St. Paul Fire & Marine Ins. Co., 447 F.2d 204 (5th Cir. 1971). – Fifth Circuit ruled in Louisiana case that governing “cause” was

insured’s sales to dealers since that was the last event over which the insured had any control.

– Focus is on “cause” of the insured’s liability, not cause of birds’ deaths.

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Manufacturer Claims

• Claims against manufacturers are more likely to be treated as one “occurrence” where based on something intrinsic to the product itself.

• Cargill, Inc. v. Liberty Mutual Ins. Co., 488 F. Supp. 49 (D. Minn. 1979), aff’d, 621 F.2d 275 (8th Cir. 1980) – Multiple sales of contaminated nutrient medium were held to

constitute one “occurrence” based on theory that all the ensuing claims were caused by a change in the nutrient formula.

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Consistency Isn’t The Problem

• Dow Chemical Corp. v. Associated Indemnity Corp., 727 F. Supp. 1524 (E.D. Mich. 1989) – Property damage arising out of the installation of “Sarabond” mortar

product in buildings. Judge Churchill ruled that each installation of Sarabond in a separate building was a separate “occurrence” since the manner of injury occurred differed from site to site.

• Associated Indemnity Corporation v. Dow Chemical, 814 F. Supp. 613 (E.D. Mich. 1993). – Defects in one of Dow’s resin products required the replacement of

a vast natural gas pipeline network. Judge Churchill ruled that the claims arose from an inherently defective product, so one “occurrence.”

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Environmental Claims

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Relevant Scenarios

• Sources of Contamination

• Number of Sites

• Identity of Claimants

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Certain Underwriters at Lloyd’s v. Southern Natural Gas,

2013 WL 324933 (Alabama 6/28/13)

• PCB contamination due to spills of fluids at 13 of 38 stations operated with gas pipeline from TX to GA

• One “occurrence”

• One pipeline = one cause

• Impacts were disparate over time and location

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Single Site Claims

• Separate Spill Incidents

• Types of Pollutants

• Separate Operating Units

• Discrete Areas of Contamination

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Case Examples

• Northern States Power v. Fidelity & Casualty Co. of N.Y, 523 N.W. 2d 657 (Minn. 1994): Repeated discharges over time = one “occurrence”

• FMC v. Plaisted, 61 Cal. App. 4th 1132 (Cal. Dist. 1998): Site as a whole is a single occurrence

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More Cases

• Boston Gas Co., d/b/a/ KeySpan Energy New England v. Century Indemnity, No. 02-12062 RXZ (D. Mass. 2005): Rejects sub-site analysis

• Alcoa v. Aetna, 998 P.2d 856 (Wash. 2000): Different areas = different occurrences

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Multiple Site Claims

Can multiple sites be aggregated based on:

• Disposal of specific chemical

• Trans-shipments between sites

• EPA treatment as a single investigation

• Common ownership or operation

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Case Examples

• Con Ed v. Employer’s Insurance of Wausau, 1997 U.S. Dist. Lexis 18486 (S.D. N.Y 1997): Rejects claim that pollution at separate sites can be aggregated even though EPA linked the sites and they were resolved under a single Consent Decree.

• “Unfortunate event” test does not apply where sites are geographically separate.

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More Dirty Deeds

• DuPont v. Allstate, 693 A. 2d 1059 (Del. 1997): Manufacturing facility and off-site landfill are not a single “occurrence”

• Endicott Johnson v. Liberty Mutual, 928 F. Supp. 176 (N.D. N.Y. 1996): Dumping at each site is a separate “occurrence”

• Domtar v. Niagara Fire Ins. Co., 563 N.W. 2d 724 (Minn. 1997): Rejects claim that six sites should be aggregated as an integrated business unit

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Insurers Do it Too

• Indiana Gas Co. v. Aetna, 951 F. Supp. 773 (N.D. Ind. 1996):

– Rejects insurer’s claim that MGP sites should be aggregated on the basis of a common “cause” so as to limit coverage to a single policy

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General Rule

One Site = One Occurrence

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In Conclusion

• Case law construing the number of “occurrences” is for the most part:

1. Confusing

2. Extremely fact specific

3. Result oriented

4. Inconsistent even within individual states

5. All of the above

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How Do You Avoid the Landmines

• You Have to Consider More than Just the “Bottom Line”

• Focus on the Facts, Not Just Legal Theories

• Trying to “Maximize” or “Minimize” Coverage is Not Always the Best Bet

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You Need A Moral Compass

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Don’t Come in Like a Wrecking Ball

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And The Answer Is???

Questions

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