Products Liability Law Daily Apportionment of insurers’ liability for product liability settlement hinges on terms of policy endorsement
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Monday, June 17, 2019

Apportionment of insurers’ liability for product liability settlement hinges on terms of policy endorsement

By Georgia D. Koutouzos, J.D.

For property damage coverage under successive commercial general liability insurance policies containing a so-called batch coverage endorsement, the number of policy years and deductibles implicated depended on the number of product "lots" involved.

The umbrella insurer for a manufacturer of truck parts had to reimburse the manufacturer’s commercial general liability insurer for that portion of a $6-million settlement of an underlying product liability lawsuit that related to two separate "lots" of allegedly defective parts, a federal appellate panel determined. In so ruling, the panel affirmed a federal trial court’s grant of judgment ordering the umbrella insurer to reimburse the CGL insurer for the amount of damages attributable to the second lot/occurrence rather than the amount that it initially had paid for a single occurrence of defect-related damages covered under the policies (National Union Fire Insurance Co. of Pittsburgh, PA v. Donaldson Co., Inc., June 14, 2019, Erickson, R.).

Donaldson Co., the manufacturer of two types of plastic ducts exclusively for the air-intake system of trucks used in the logging and construction industries, was informed by the truck maker that three of its trucks had experienced engine dusting due to defects in both types of ducts. Within the following year, buyers of trucks with Donaldson ducts began filing lawsuits alleging a design defect; specifically, that the walls of the ducts were too thin, which caused the ducts to soften and melt, eventually causing dusting and engine failure.

Insurance coverage. Donaldson was insured under consecutive commercial general liability (CGL) policies from two subsidiaries of AIG Property Casualty U.S., Inc. (AIG): National Union Fire Insurance Co. of Pittsburgh, PA provided annual coverage from July 31, 1996—July 31, 2000, and American Home Assurance Co. provided coverage from July 31, 2000—July 31, 2002. Each CGL policy contained a $1 million per-occurrence limit and a $500,000 per-occurrence deductible for property damage. Donaldson also held consecutive umbrella policies issued by Federal Insurance Co. from July 31, 1996—July 31, 2001, that provided $40 million in excess liability coverage.

Underlying settlement. In a lawsuit filed in Mississippi state court, 15 purchasers of the affected trucks sued Donaldson as well as the truck manufacturer and the trucks’ commercial dealer, asserting that the trucks were inoperable due to their air-intake system. The commercial dealer filed a cross-claim against Donaldson that eventually was settled for $6 million—to which the AIG subsidiaries contributed $3,548,387.10 and Federal contributed $2,451,612.90. Both AIG and Federal reserved their rights to challenge the apportionment of the settlement. AIG then filed a coverage dispute against Donaldson and Federal in Minnesota federal court, seeking to recover amounts that its two subsidiaries had contributed to the $6-million settlement. Federal responded by filing a counterclaim against AIG and a cross-claim against Donaldson, and Donaldson counterclaimed against both insurers.

Coverage determinations. Over the course of several years, the Minnesota federal trial court issued a series of orders deciding various motions, the first of which granted summary judgment favoring the CGL insurers on the coverage issue arising from the policies’ Batch Clause Endorsement. According to the trial court, the endorsement unambiguously combined property damage—including damage that might have taken place across multiple policy periods—into one "occurrence" that took place when Donaldson was notified of the damage. Construing the endorsement’s plain language, the trial court found that coverage existed under a given policy period if the requisite notice had been received during that policy period. Whether or not the actual injury had occurred during the policy period was immaterial; rather, the number of policy years and deductibles implicated depended on the number of product "lots" involved. As such, the trial court rejected the argument that the Batch Clause Endorsement only combined into a single occurrence those injuries that had taken place during an individual policy year.

Apportionment of insurer liability. In a subsequent order, the trial court determined that two "lots" of ducts had been responsible for the damage in the underlying settlement and that all "property damage" relating to each of those two "lots" constituted an "occurrence" within the 1999-2000 policy period, for a total of two "occurrences." In yet another order, the trial court granted AIG’s motion for entry of judgment against Federal and Donaldson, concluding that because there had been two "occurrences," two $500,000 per-occurrence deductibles applied to the settlement. Of the $6-million settlement, the court allocated $785,591.44 to the 1999-2000 CGL policy and $5,214,408.56 to the 1999-2000 excess liability policy. Therefore, because Donaldson previously had paid only one $500,000 deductible, the court ordered Donaldson to pay AIG an additional $500,000, and because Federal previously had paid only $2,451,612.90 toward the settlement, Federal was ordered to reimburse AIG for $2,762,795.66.

Contentions on appeal. Federal appealed the trial court’s judgment, challenging the court’s interpretation of the Batch Clause Endorsement and its corresponding determination that only the 1999-2000 policy period had been triggered. Federal argued that the trial court had ignored the plain language of the insuring agreements in the CGL and umbrella policies, which provided that "property damage" or "injury" is covered only if it occurs or takes place during the applicable policy period. According to Federal, the CGL policies’ Batch Clause Endorsement had no effect on the timing requirement set forth in the policies’ coverage sections as to when "property damage" coverage was triggered. In other words, Federal contended that the "property damage" had to occur during the policy period regardless of the language in the endorsement.

Batch Clause Endorsement. The appeals court found several problems with Federal’s interpretation. First, the umbrella insurer’s interpretation failed to give meaning to the plain language of the Batch Clause Endorsement as a whole. Combining each provision in the endorsement led to a single, unambiguous interpretation, i.e., all "property damage" affecting a defective "lot of goods or products" is consolidated into a single "occurrence" deemed to occur when the insured is first notified during the policy period. Federal’s interpretation rendered the endorsement meaningless by placing a claim in one policy period while assigning the "property damage" to another.

In addition, Federal’s interpretation conflicted with the main purpose of batch clauses, which is to reduce the number of occurrences whenever the same product causes multiple bodily injuries or property damage. Under Federal’s approach, an insurer would be permitted to break the single "occurrence" created by the endorsement into multiple "occurrences" (i.e., one "occurrence" in each policy period in which a truck was damaged by a duct from the same "lot"). That result not only ran contrary to the purpose of batch clauses, but also would open the door to expensive coverage disputes when a defective product is at issue and multiple insurers are involved. Additionally, it posed a risk that gaps in coverage would exist if, for example, there was a policy period where the insured received no notification of damage. Finally, Federal’s interpretation violated the cardinal insurance policy interpretation rule that limitations of liability are to be construed against the insurer.

Coverage-triggering "occurrence." Applying Minnesota’s rules for interpreting insurance policies and considering the policies’ unambiguous terms, the appellate panel instructed that when a defective "lot" of goods or products is involved, the claims are consolidated into a single "occurrence" deemed to occur on the date the insured first received notice of the injury during the policy period. Damage that takes place across multiple policy periods is to be combined into a single "occurrence" so long as it arises out of and is attributable directly or indirectly to the continuous, repeated, or related exposure to substantially the same general conditions affecting one lot of goods or products manufactured, sold, handled or distributed by the insured or others trading under the insured’s name.

Definition of "lot." Furthermore, Federal did not establish that the trial court erred in making the "lot" determination. The duct manufacturer makes unique products tailored to individual companies like the truck maker, and a "lot" applied to each type of unique product designed and manufactured by Donaldson. There were two different types of ducts uniquely designed for the at-issue trucks; therefore, two "lots" were implicated for purposes of insurance coverage, the panel held.

Time period of coverage. As for Federal’s argument that the trial court erred in entering judgment against it because the injuries implicated in the underlying settlement did not all factually occur during the period of the 1999-2000 umbrella policy, the umbrella policy was a so-called "follow form" policy that incorporated the terms and conditions of AIG’s underlying CGL policy, including the CGL policy’s endorsements, with two limited exceptions: (1) "any contrary provision contained in [the Federal] policy" or (2) "any provision in [the Federal] policy for which a similar provision is not contained in [the AIG policy]." Consequently, because the umbrella policy was not inconsistent with the CGL policy, the appeals court refused to read an implied invalidation of the Batch Clause Endorsement into the umbrella policy. A decision that required actual injury to occur during the policy period would contradict the plain language of the Batch Clause Endorsement, the panel reasoned.

The case is No. 18-1063.

Attorneys: Matthew J. Fink (Nicolaides Fink Thorpe Michaelides Sullivan LLP) for National Union Fire Insurance Company of Pittsburgh, PA. Sarah Elisabeth Bushnell (Arthur & Chapman) for Federal Insurance Co.

Companies: Donaldson Co., Inc; AIG Property Casualty U.S., Inc.; National Union Fire Insurance Co. of Pittsburgh, PA; American Home Assurance Co.; Federal Insurance Co.

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