Tales of Foreign Intrigue
What do Thomas the Train and the Abu Graig prison have in common? Both have been the focus of major insurance coverage disputes concerning the extent of extra-territorial liability insurance coverage. In light of our increasingly interconnected international markets, U.S. businesses must consider not only their liability for claims involving imported products but also the need to ensure that appropriate insurance is available to cover these different risks.
In an opinion released on Monday, the Seventh Circuit ruled in ACE American Ins. Co. v. RC2 Corp., No. 09-3032 (7th Cir. April 5, 2010). that an importer of toy trains manufactured in China could not obtain coverage for ensuing product liability claims brought against it in the United States where the policy in question limited coverage to "occurrences" taking place outside the U.S.
RC2 of Oak Brook, Illinois designs and sells toys in the United States that are mainly manufactured in China. Among its more popular offerings were various toy trains inspired by the “Thomas and Friends” books and TV show. In early 2007, the trains were found to be coated with lead paint, leading to a voluntary product recall product recall and numerous ensuing law suits and personal injury claims.
At the time of the events in question, RC2 had parallel lines of coverage, insuring it for U.S. and overseas exposures. Unfortunately for RC2, its domestic insurer had a policy with a lead liability exclusion. Caught between a rock and a hard place, RC2 elected to chase its foreign insurer (ACE) despite the fact that the ACE policy only covered occurrences taking place outside the United States.
At trial, the U.S. District Court ruled that because the negligent manufacture of the Thomas train products had taken place in China the claims arose out an “occurrence” that had taken place, at least in part, within the coverage territory of the ACE policy. Declaring that this was an issue of first impresssion in Illinois, Judge Hart reasoned that "[t]he language of the [policies] refers to Harm that is "caused by an 'occurrence'" and that "here the occurrence is separately identified as being the cause of the Harm" and that the "Harm is not itself part of the occurrence." He found that "It is not required that the Harm take place in the coverage territory but only during the Policy Period. In this situation, the occurrence took place in the coverage territory of China." Accordingly, he awarded RC2 defense costs of $1.6 million plus interest. 568 F.Supp.2d 946 (N.D. Ill. 2008).
These findings were reversed on appeal by the Seventh Circuit. The Court of Appeals ruled that an “occurrence” does not take place until the defendant’s conduct results in injury to the plaintiffs. The court rejected RC2’s contention that an occurrence in the product liability context takes place wherever any antecedent negligent acts take place.
As a preliminary matter, the Seventh Circuit distinguished the meaning of "occurrence" in this context and the role that "occurrence" might play in determining the number of policy limits that such claims might trigger. While acknowledging that Illinois has adopted the “cause” approach for determining the number of occurrences, the Seventh Circuit distinguished these occurrences cases as not involving any issue with respect to the location of the occurrences declaring that, “For our purposes, it is unnecessary to determine whether all of the lead paint exposure alleged in the underlying complaints was the result of a single common cause, and thus a single occurrence, or multiple causes and multiple occurrences. . . What is important is where the occurrence or occurrences, however many there were, took place.”
The Seventh Circuit found that it analysis was complemented by the Fourth Circuit’s opinion last year in CACI Int’l v. St. Paul Fire & Marine Ins. Co., 566 F.3d 150 (4th Cir. 2009). In that case, the court had ruled that St. Paul had no obligation to provide a defense to allegations that a U.S. security firm negligently supervised prison guards, leading to torture and abuse at the notorious Abu Ghraib prison in Baghdad. The St. Paul policy only afforded coverage for occurrences taking place within the United States and its territories. Although a federal district court in Alexandria, Virginia found coverage because some of the negligent training of the insured’s employees occurred in the United States, the Fourth Circuit ruled that it was the location of the injury, not some precipitating cause, that determines the location of the event for purposes of insurance coverage. Id. at 157.
Although both CACI and RC2 involved suits between insurers and policyholders, similar disputes may arise as the result of contribution claims between “domestic” and “foreign” insurers. In one such case, a court in Boston ruled in Hartford Fire Ins. Co. v. CNA Ins. Co. (Europe, Ltd.), No. 07-11140 (D. Mass. January 12, 2010), that the liability insurers of a U.S. subsidiary were not entitled to contribution from the insurer of the UK parent company for sums that they had paid to defend and settle a wrongful death action involving work related injuries suffered by an employee. Judge Tauro ruled that the Combined Liability policy issued to European Color by CNA Europe, which excluded coverage for personal injury claims in the United States unless they arose out “business visits by directors or non-manual employees” did not provide coverage since the domestic insurers (Hartford and Federal) had failed to establish any colorable causal connection between the underlying accident and any visits by the insured’s directors to the United States.
These opinions illustrate the emerging skein of legal and factual problems presented by the intersection of international business dealings and policies that are increasingly separately marketed for domestic and foreign exposures.
