January 11, 2010
Written By Attorneys: Joseph F. Bermudez and Jennifer A. Coughlin
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In the product recall coverage arena, the number of insured events, losses or occurrences is a critically determinative issue. During the underwriting process, insurers and insureds review the financial implications of the amounts upon which a policy's limits are structured, including retentions, deductibles and underlying limits. In this regard, a decision addressing the number of insured events or occurrences will have a dramatic financial impact on resulting coverage, if any. The vast majority of jurisdictions use a "cause" standard as opposed to an "effect" test. Nevertheless, the application of the same or similar standard does not guarantee consistent results.
A recent decision, Bausch & Lomb Inc. v. Lexington Insurance Company, 6:08-cv-0626), Document No. 41 (W.D.N.Y. December 28, 2009), demonstrates yet again that the definition of an "occurrence" within a policy, especially within the context of product recalls, remains a significant and hotly disputed issue amongst insurers and insureds. In Bausch & Lomb, Judge Michael A. Talesca denied an insured's request for both defense and indemnification under umbrella policies. He found that each of the two-thousand product liability claims against the insured for alleged injuries arising from consumers' alleged use of the insured's products constitute a single occurrence, and are not subject to the grouping provision contained in the "occurrence" definition.
Plaintiff, Bausch & Lomb Inc. ("B&L") is a manufacturer of eye care products, including several brands of contact lens solutions. Certain of B&L's contact lens solutions are the subject of products liability claims brought by thousands of consumers. B&L sought both defense and indemnification for these claims from Lexington, who had issued on an annual basis to B&L commercial umbrella policies for the period of January 1, 2004 to January 1, 2007 (the "Policies"), that sit in excess of the retained limits specified in each of the policies ($2 million per occurrence with a $4 million aggregate retained limit in 2004 and 2006 and $2 million per occurrence with a $2 million aggregate retained limit in 2005). The Policies defined an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions. All such exposure to substantially the same general harmful conditions shall be considered as arising out of one Occurrence."
B&L asserted that coverage was triggered because all two-thousand claims constitute a single occurrence or, in the alternative, constitute multiple occurrences to which the grouping provision of the Policies apply. Since B&L has met its liability thresholds, Lexington's obligations were triggered under the Policies. However, B&L's request for coverage was denied since each alleged injury sustained by the claimants constituted a separate occurrence, not subject to the grouping provision, that rendered the liability thresholds unsatisfied.
B&L filed a declaratory judgment action against Lexington and both parties moved for summary judgment. The court granted summary judgment to Lexington, finding as a matter of law that the thousands of product liability claims, as a whole, do not constitute not a single "occurrence" and are not the result of a single "occurrence."
In reaching its conclusion, the Court noted that, in order to find an "occurrence" under the Policies, it must be established that an "accident," or an unintentional act, occurred. Relying upon a recent New York Appellate Division case, ExxonMobil v. Certain Underwriters at Lloyd's, London, 855 N.Y.S.2d 484 (1st Dept. 2008) and a recent New York Court of Appeals case, Appalachian Ins. Co. v. General Electric Co., 8 N.Y.3d 162, 863 N.E.2d 994 (N.Y. 2007), the Court determined that it is the exposure by consumers to the product, and not the manufacturing of the product itself, that is the "accident." Following this logic, since each consumer was exposed to the product in different locations, at different times, and in different manners, and since each consumer experienced a different injury, each consumer exposure constituted a single "occurrence" under the Policies.
The Court noted that New York's "unfortunate events" test, as set forth in Arthur A. Johnson Corp. v. Indemnity Ins. Co. of North America, 7 N.Y.2d 222, 196 N.Y.S.2d 678 (N.Y. 1959) and applicable where parties do not otherwise indicate with the policy what constitutes an "accident" or "occurrence," supported the denial of coverage. The "unfortunate events" test requires the determination of whether or not there is a close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether or not the incidents can be viewed as part of the same causal sequence, without intervening agents or factors. The "unfortunate events" test calls for consideration of the specific incident giving rise to liability, and not to some point further back in the causal chain that only presents the potential for injury someday in the future. Noting again the different locations, times, manner and injuries of exposure, the Court found that the necessary close and spatial relationship between the incidents with no intervening agents or factors did not exist and, as a result, the grouping provision did not apply.
The court also rejected B&L's argument that, even if the claims were determined to constitute multiple occurrences, the grouping provision of the Policies requires that these accidents be considered to constitute a single occurrence. The Court ruled that the grouping provision is not intended to group claims where there is no single incident that can be identified as the event resulting in injury to the numerous claimants. Moreover, the Court found that "it was each individual's exposure to the solution, under conditions unique to each individual, that constituted the accident that caused the injury" and were not subject to the grouping provision because each "exposure was separate and distinct."
As insureds and insurers face an increase in super-regional, national and international recalls in the coming years, the number of insured events or occurrences issue will continue to be critical to coverage determinations. Bausch & Lomb reinforces the issue's significance in the product recall coverage context. NLdH will continue to nationally monitor this vital issue.
For further analysis of Crisis Management coverage issues involving, international and domestic food contamination and product recalls; trade disruption; supply chain management; brand risk; political risk; terrorism; kidnap & ransom; cyber attack; and other emerging issues such as climate change, nanotechnology or pandemics, please contact Jennifer Coughlin of Nelson Levine de Luca & Hamilton. NLdH is a nationally recognized leader in representing the insurance industry in all coverage areas, including Crisis Management matters.
