National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

This latter type of claim was recently considered by a federal district court in Wisconsin.  The case is an interesting illustration not only of problem that case precedents that help insureds in some cases can present in the SIR context but also of how case law that has arisen in the context of liability insurance may have little application with respect to first party claims.

At issue in  Basler Turbo Conversions v. HCC Ins. Co., No. 08-C-732 (E.D. Wis. March 5, 2009) was a claim by an airplane parts manufacturer for products theft committed by an employee on 33 occasions over a six month period.  As the insured's policy had a $5000 "per occurrence" deductible, Basler argued that the insurer owed it coverage, minus a single deductible.

In a considered decision, District Court Judge Griesbach rejected the insured’s contention that an employee’s “continuous and repeated theft of spare parts from its storage facility constituted a single “occurrence.” In keeping with the Wisconsin Supreme Court’s recent Plenco ruling, the district court declared that the 33 thefts occurring over a six-month period were not so closely linked in time and space as to be treated as a single “occurrence.”

The court also declined to give effect to wording in the policy that defined “occurrence” as involving exposure to conditions, noting that this specific definition of “occurrence” only applied to the term when it appeared in bold face in the policy, which it did with respect to liability provisions but not the first party insurance relied on in this instance. In any event, applying the liability definition of “occurrence” would negate first party coverage since a theft by definition is not an “accident.”

Applying the common and ordinary meaning of “occurrence” as “something that takes place,” the court held that each theft was a separate occurrence. The court rejected the insured’s argument that the thefts were the result of a common scheme noting that it was not the thief’s “modus operandi” or scheme that caused the succession of thefts but separate and independent human actions that were the product of human deliberation and choice separated by significant intervals of time.

While Judge Griesbach observed that this particular finding might prove harsh to the insured in this instance, it would not always result in a reduction of coverage in other cases, it nonetheless held that the finding might in fact reinforce the entire purpose of a deductible as giving the insured an additional incentive to increase security to prevent such thefts from occurring at all whereas limiting the insured’s exposure to a single $5,000 deductible no matter how many instances of loss occurred “would encourage laxness on the part of the insured that would make theft more easy to accomplish.”

As with many of these cases, the facts in Addison were tragic. Fourteen year old Everett Hodgkins and fifteen year old Justice Carr had left home with plans to go fishing. When the boys did not return that evening, a search began. Four days later, the boys were located in an excavation pit near the insured’s home. The sand and clay around the pit was saturated creating, in effect, quicksand. The police concluded that the boys had become trapped in the wet clay and sand and had died of hypothermia. The boys were facing different directions and were in close proximity to each other although a subsequent examination could not conclude exactly when each had died or what the precise cause of death was. The investigators concluded, however, that one had become trapped in the pit and the other had died trying to save him, becoming trapped himself.

The boys’ parents brought a wrongful death action against the property owner alleging that he had allowed an unsafe condition to exist on his property. His homeowner’s insurer (Addison) provided a defense and offered to settle the claims for an amount equal to its policy limits but the families had demanded a separate limit for each boy. The trial court found separate occurrences but the Appellate Court reversed concluding that the boys’ deaths were “so closely linked in time and space as to be considered by a reasonable person as one occurrence.”

The crucial issue in Addison was the party to whom the burden of proof should be assigned. While reaffirming the general rule that a policyholder bears the burden of proving that its claim falls within the coverage of a policy, the Supreme Court held that issue of limits was in the nature of a limitation to coverage for which the insurer bore the burden of proof.

Turning to the issue of “occurrences,” the court distinguished its analysis in Nicor in the instant case. In Nicor, the court found that the issue was the insured’s affirmative act of negligence whereas here the question was the insured’s failure to maintain safe conditions. Nevertheless, the court rejected the insurer’s effort to bundle together separate injuries occurring days or even weeks apart arising out of the same negligent omission, holding that such arguments could leave policyholders unprotected by the limits of their coverage. The court ruled that the insured “could not have intended to expose himself to greater liability by allowing multiple injuries, sustained over an open-ended time period, to be subject to a single, per occurrence limit.”

The Supreme Court also addressed similar circumstances that had lead the New Jersey Appellate Division to find one occurrence where two boys had drowned in a swimming pool trying to save each other in Doria v. INA, 509 A.2d 220 (N.J. Super. 1986). The Supreme Court suggested that the Appellate Division’s focus on injuries that occurred closely together in time and space was an appropriate limiting principal consistent with the insured’s reasonable expectations. While finding that the Appellate Court had inappropriately relied on a Doria “time and space” analysis, the Supreme Court refused to find that the insurer had presented facts sufficient to show that the boys’ injuries had occurred closely together in time and space and that the claims must therefore be treated as separate “occurrence.” The Supreme Court refused to find, however, that one of the boys’ efforts to rescue his friend was a “separate intervening act that would necessarily require a separate occurrence.” The court ruled that the separate intervening act must be considered by the insured, not a third party.

The issue of “occurrences” was also considered the following week by the Supreme Court of Wisconsin in Plastics Engineering Co. v. Liberty Mutual Ins. Co., 2009 WI 113 (Wis. January 29, 2008). Plenco sought coverage from Liberty Mutual for thousands of asbestos liability claims arising out of the insured’s sale of products containing asbestos between 1950 and 1983. The Liberty Mutual policies, which had been issued between 1968 and 1988, contained limits of $500,000 per occurrence and $500,000 in the aggregate. Liberty Mutual had also issued umbrella policies during much of this period. The policies in question contained standard CGL language although several contained combined single limits of coverage with non-cumulation language stating that “If an occurrence gives rise to bodily injury or property damage which occurs partly before and partly within the policy period, the liability of the company under this policy for such occurrence shall not exceed $500,000 minus the total of all payments made with respect to such occurrence under a previous policy or policies of which this policy is a replacement.”
 

The issue presented to the Wisconsin Supreme Court was whether the cause of the insured’s liability was the decision to sell products containing asbestos (or failure to warn with respect to such products) of the injuries suffered by each individual client. In keeping with the recent trend in this area, the Wisconsin Supreme Court ruled that the occurrence was the exposure of various claimants to asbestos fibers from the insured’s products. The court rejected Liberty Mutual’s argument that the “continuous or repeated exposure” language in the Limits of Liability required a finding of a single occurrence. Rather, the court ruled that this language limited any individual claimant from arguing that subsequent exposures to asbestos should give rise to a new “occurrence.”
 

Applying a “cause” test, the court refused to find that exposures to separate individuals at different times and places involved a “single, uninterrupted chain of causation.” Rather, the court found that each individual’s exposure was a new “occurrence.”
 

On the other hand, the court upheld the non-cumulation language, holding that it was not an “other insurance” clause subject to the limitations imposed by Wisconsin Statute Section 631.43(1) which bars insurers from using “other insurance” wordings to reduce limits of coverage.
 

The California Court of Appeal (Second Appellate District [Los Angeles]) in 2007 ruled that Truck Insurance Exchange was wrong in asserting that its payment of claims had exhausted its policies’ occurrence limits because, the court held, the occurrence under Truck’s policies was the injurious exposure to asbestos, not the manufacture and distribution of products containing asbestos. London Market Insurers v. Superior Court (Truck Ins. Exchg.) (2007) 146 Cal.App.4th 648 (review denied). Truck’s position had been that all asbestos-related claims in any given year arose from a single occurrence because all the claims had the same underlying cause, i.e., “the design, manufacture and distribution by Kaiser and its subsidiaries of asbestos-bearing products.” The appellate court also concluded that, given its ruling, it could not make a decision on the number of occurrences based on the record before it and remanded the case to the trial court for further proceedings.

On remand, the trial court held that, based on the policies’ language and in light of the stipulated facts, Truck failed to prove the claims could be aggregated and, thus, each claim of asbestos bodily injury was a separate and distinct occurrence under Truck's 19 policies.

Truck’s policies had two different occurrence definitions and aggregating clauses. From 1964 to 1974 the policies had a “one lot” clause which provided that “all damages arising out of one prepared or acquired lot of goods or products” arose out of one occurrence. Truck argued that under this provision, claims from exposure to products produced at the same manufacturing facility should be deemed one occurrence. Based on the appellate court’s decision, the trial court held the focus had to be on the exposure rather than the manufacturing process. Truck had stipulated that the number of product lines was not known and that individual claims could not be connected with particular product lines. Therefore, Truck failed to meet its burden to demonstrate that the “one lot” clause aggregated particular claims.

From 1974 to 1983, the Truck policies had a “premises deemer” clause which provided that exposure to substantially the same general conditions “at or emanating from each premises location” was one occurrence. Truck argued all claims were one occurrence as they arose from exposure to products produced at the same Kaiser manufacturing facility or, alternatively, because them were due to the same corporate decision (or multiple corporate decisions from the same location) to place asbestos in products.  The trial court was not persuaded. Relying on Judge Ira Brown’s decisions from the coordinated asbestos proceedings in 1990, the court held that the premises location in a deemer clause could not refer to the plant from which the products were shipped or distributed since that is not where the exposure to asbestos occurred. Furthermore, Truck stipulated that it could not connect the claimant’s injuries to a particular plant. As to the corporate decision argument, the appellate court already decided that was not the correct focus, since it was not the exposure to asbestos. Besides, there was no evidence of one decision to incorporate asbestos into all Kaiser products.

ACE, having paid three $300,000 limits to settle silica cases against Flexo, claimed exhaustion and attempted to pass the baton to Cincinatti.  The excess insurer demurred and sued ACE for bad faith, claiming that it owed another $1.8 million.  The Hamilton Country trial court agreed and, on appeal, so did the First Appellate District.

As a preliminary matter, the Ohio Court of Appeals ruled that the ACE policies were ambiguous because, in the absence of an annualization clause or other clarifying clause, "aggregate" could be applied "per policy" or "per year."  As a result, the court held that the trial court had not erred in considering extrinsic evidence to clarify the issue (as with New York and a handful of other states, Ohio follows the rule that ambiguity will not automatically be construed against the drafter if it can be clarified by resort to extrinsic evidence).  In this case, the court held that the extrinsic evidence supported the excess insurer's contention that the aggregate limit applied annually.  In particular, the court took note of the fact that Aetna Property & Casualty had been a "Bureau company" and that during this pre-ISO period, the IRB policy manual provided that aggregate limits in multi-year policies apply annually.

The Court of Appeals also rejected ACE's argument that these claims all arose out a single "occurrence," that being the insured's manufacture and sale of a defective product.  The court observed that, unlike asbestos cases, there was nothing intrinsically harmful about a mask:  the mask did not harm anyone, it merely failed to protect them against silica exposures.   Far from accepting ACE's reliance on the "deemer" clause in its policies, the Court of Appeals ruled that the exposure to conditions language required that each claim be treated separately.  The court cautioned against the "blanket judicial application" of tests for numbering "occurrences," however.

While ruling in favor of Cincinatti, the court refused to find that ACE's coverage positions were adopted in bad faith given (while archly observing that it was "feckless").

This case illustrates the interesting interplay between "occurrence" and aggregate wordings.  Most later ISO CGL forms contain language stating that the aggregate applies on an annual basis but are silent with respect to whether the same is true of  the "occurrence" limit.  For the most part, courts have ruled that this reflects an intention to have the "per occurrence" limit apply to the policy as a whole.

This ruling is seemingly at odds with the view of most other courts that have addressed this issue.  For the most part, courts have ruled that in the absence of an "annualization" clause, limits  apply once per policy, not once per year. See Society of Roman Catholic Church of Diocese of Lafayette, Inc. v. Interstate Fire and Cas. Co., 126 F.3d 727, 742 (5th Cir. 1997); Diamond Shamrock Chemicals Company v. Aetna Cas. & Sur. Co., 609 A.2d 440 (N.J. App. 1992); Hercules, Inc. v. Aetna Cas. & Sur. Co., 748 A.2d 481, 495 (Del. 2001) and CSX Transportation, Inc. v. Commercial Union Ins. Co., 82 F.3d 478, 483 (D.C. Cir. 1996).  But see, Chemical Lehman Tank Lines v. Aetna Cas. & Sur. Co., 978 F. Supp. 589, 606 (D.N.J. 1997), rev'd on other grounds, 177 F.3d 210 (3d Cir. 1999).

This case is an interesting illustration of the dilemma that insurers face in missing policy cases wherein the very absence of policy documentation may rob the insurer of the ability to raise otherwise viable policy defenses based on exclusions or limitations to coverage.  If you can't prove what the limits of coverage are, how do you ever exhaust?  Nevertheless, some courts continue to hold that it is the insurer's burden in a missing policy case to prove the existence of exclusions or other limitations to coverage.

Finally, what's with all the crankiness ("gnashing of teeth"??) about having to decide hard cases.  Only two weeks ago, Justice Willets of the Texas Supreme Court grumbled in a concurring opinion in Mid-Continent v. Liberty Mutual about all the "fiendishly difficult" high stakes insurance issues that the Fifth Circuit was saddling them with.  This stuff must be harder than we thought.  I'm asking for a raise.