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Risk Management
Uncertain territory
Products liability claims origin—at home or abroad?—is a big issue
By Donald S. Malecki, CPCU
Products liability insurance is undergoing a re-examination today much as it did during the mid-1970s, when both buyers and sellers of this coverage were confronted with a crisis dealing primarily with American-made goods. Out of this turmoil came increased usage of the claims-made form to eliminate the long-tail exposures of products liability, laser endorsements whose purpose is to narrow coverage, or the outright refusal of insurers to provide this coverage at any limits.
The problem today is in how to deal with the liability potential of foreign-made products where there appears to be little or no implementation of controls to make sure that the products are free of defects and reasonably safe for their intended purposes.
Coverage essentials
When U.S. businesses manufacture, handle, distribute or sell foreign products, it is important for them to understand the mechanics of products liability insurance written on a claims-made or an occurrence basis. The reason is that these forms trigger or activate coverage at different times.
Generally speaking, the claims-made form is triggered when a claim is made, with notice to the named insured or made in writing to the insurer within the policy period or during the extended reporting period.
With an occurrence form, on the other hand, coverage is triggered at the time of the bodily injury or property damage.
In either case, one additionally essential requirement to activate coverage that is especially important with products liability—absent an applicable exclusion—is that the occurrence takes place within the coverage territory. In the standard ISO commercial general liability forms and, undoubtedly, most independently filed policies, the territorial scope of coverage for purposes of where the occurrence takes place, is the United States, its territories, possessions, Puerto Rico, or Canada.
The question that needs an answer, then, is what is the occurrence that must take place within the coverage territory insofar as a products liability claim or suit is concerned? The answer, unfortunately, depends. The occurrence could be at the time when the product was defectively made, or at the time when a person sustains injury because of exposure to a defective product.
If the occurrence is found to be at the time the product was made, and that manufacture takes place outside the policy’s coverage territory, insureds would require a foreign products liability policy to obtain coverage. Insurers issuing a commercial liability policy limiting occurrences to within the United States, its territories, possessions, Puerto Rico or Canada, might have a legitimate reason to deny coverage in the absence of some foreign-type coverage.
A case that illustrates this kind of situation—that is, a foreign-made product that resulted in injuries within the United States—is ACE American Insurance Company v. RC2 Corporation, Inc., et al., 568 F.Supp.2d 946 (U.S. Dist. Ct. N.D. Ill.2008). The named insured had a CGL policy where the coverage territory was the United States, but because it contained a lead exclusion, the named insured could not rely on it for purposes of this case.
The issue in this case was over the payment of defense costs, rather than in establishing coverage. Defense costs are not payable, however, unless there is coverage or the facts and allegations show a potential for coverage.
The insurer in this case issued CGL policies for four successive years, all providing products liability coverage. While the coverage provisions read much like the standard ISO CGL policy, the coverage territory of the ACE policies differed because they encompassed all parts of the world outside of the United States.
The dispute was over the meaning of coverage territory in the ACE policies when the named insured was sued because of its sale of toys containing lead paint. The toys were manufactured in China but sold within the Unites States.
The court’s focus was on the question of whether “occurrence,” as this term applied to the coverage territory provision, was deemed to be (1) at the time the lead paint was applied to the toys, which occurred outside the United States, or (2) at the time the plaintiffs alleged they suffered bodily injury and damage to their property coming in contact with the toys within the United States, where the toys were purchased.
The named insured maintained that the focus should have been on the common cause of the injury or damage, which was the improper manufacturing process that occurred in China. The insurer, on the other hand, contended that focus should have been on the immediate cause of injury, which happened in the United States, when people came in contact with the toys.
The court ruled against the insurer. In doing so, it held that the occurrence took place within the coverage territory of China and, therefore, within the policies issued by ACE American Insurance Company, which covered anywhere in the world outside of the United States.
A defense down the drain
Not satisfied with the court’s decision, ACE appealed it. In presenting their respective arguments, both parties cited Illinois cases as support. In the end, the U.S. Court of Appeals for the 7th Circuit in ACE American Insurance Company v. RC2 Corporation, Inc., et al., No. 09-3032 (U.S. Ct. App. 7th Cir. 2010) reversed the decision of the U.S. District Court for the Northern District of Illinois.
In doing so, the U.S. Court of Appeals stated that “under Illinois law and unless a particular policy contemplates a different definition, an accident occurs when and where all factors come together at once to produce the force that inflicts injury and not where some antecedent negligent act takes place.”
Thus, under the policies in question, this court went on to say that the accident that constituted the triggering event took place at the location of the exposure to lead paint, and not at the location where the products were manufactured and painted.
In light of the fact that the parties in this case agreed that all of the alleged exposure to the products took place within the United States, the court held that the occurrences took place in the excluded area of the ACE international policies; in other words, within the United States.
Analysis—conclusion
Much will depend on the policy language and the facts, of course, but arguing over where an occurrence has taken place may have been a better defense for insurers to take than the reasons they have been citing for purposes of denying coverage pertaining to the so-called “Chinese drywall” and kindred claims in the United States.
The conclusion of the insurer’s appeal in this case, however, eliminated that defense for insurers insofar as the decision of the U.S. Court of Appeals is relied on and upheld by the courts of other jurisdictions.
A court decision, however, is not embedded in concrete. The facts of a case and the arguments made by the respective parties can produce a different result, even in the same jurisdiction where some precedent has been established, such as the Illinois case discussed here.
To summarize the significance of this court case, for insureds and insurers alike, requires an analysis of a couple of illustrations. Assume a business in Illinois sells a defective product that was made in a foreign country that causes injury or damage within the United States.
From the standpoint of standard ISO CGL policy provisions, the definition of coverage territory also means all other parts of the world—if bodily injury or property damage arises out of goods or products made or sold by the named insured within the United States, its territories, possessions, Puerto Rico, or Canada.
The key, however, is that the insurance applies only if the bodily injury or property damage is caused by an occurrence that takes place in the coverage territory which, again, is defined to mean the United States, its territories, possessions, Puerto Rico, or Canada.
If the ACE American Insurance Company case had not been appealed, the insurer that issues an ISO-type CGL policy to a seller of foreign products sold within the coverage territory would have no obligation to provide coverage. In light of the appeal, however, coverage would apply, since the requirement is that the occurrence take place in the United States, which is within the coverage territory of the CGL policy.
If this same business (named insured) in the above illustration were to export a product it made to a foreign country and it were to cause bodily injury outside the United States, its territories, possessions, or Canada, it would be protected by its ISO-type CGL policy.
This assumes, of course, that there is: (1) no applicable exclusion, (2) no breach of a policy condition, (3) bodily injury or property damage that occurs during the policy period, and (3) the named insured’s liability is determined in a suit within the coverage territory or in a settlement to which the insurer agrees.
To reduce the chances of being without coverage, it would be safer for the business to purchase a specialty policy covering products suits brought in foreign countries.
In the final analysis, it is not likely that U.S. insurers will rely on the decision of the U.S. Court of Appeals in the ACE American Insurance Company case in matters having to do with the ISO-type CGL policy provisions. To put it bluntly, it is a bad decision from the insurers’ perspective.
Since deciding on what is covered is a question of law for the courts to decide, and that is like playing roulette, the answer producers need to give when confronted with questions about products liability situations is the same one that consultants give: It depends.
Actually, there is no answer. Producers should continue to sell products liability coverage just as they have been doing.
The author
Donald S. Malecki, CPCU, has spent 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.
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