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The truth about products liability insurance coverage.

It seems like a simple idea. When a manufacturer purchases products liability insurance, it does so with the intention of transferring the uncertainty of a possible future loss to its insurance company in exchange for a stated, fixed sum, or annual premium. The insurance is supposed to afford protection against claims that the manufactured product is defective due to design or manufacture, or that the manufacturer failed to issue proper instructions or warnings to prevent foreseeable injury. Yet this simple scenario has given birth to a complex litigation monster that continues to overwhelm courtrooms nationwide. Most products liability claims are covered for defense and indemnity under comprehensive general liability (CGL) policies. The amount of coverage for multiple claims depends upon the trigger of coverage, number of occurrences and interpretation of policy exclusions. Currently, there are well over 120,000 products liability cases pending nationwide against manufacturers alleging personal injury or property damage due to exposure to, or use of, such diverse products as tobacco, breast implants, heart valves, asbestos, silica dust, lead paint, pesticides, prescription drugs, radiation and urea-formaldehyde insulation.

The two most important common-law causes of action for recovery in a products liability suit are strict liability and negligence. Strict liability means that the manufacturer is held responsible for injury directly attributable to its product. Strict liability is premised on the assumption that the manufacturer has a greater understanding of the inherent risks associated with the use of its product and includes design defect, manufacturing defect, and defect due to a failure to issue a proper warning.

Negligence is based upon the manufacturer's failure to act as a "reasonable man" to prevent a foreseeable injury. Suits asserting this cause of action will generally focus upon the manufacturer's failure to warn the user of the risks of using the product (which ironically are often discovered after the product has been marketed) or the manufacturer's failure to otherwise take reasonable action to produce a safe product, including the failure to correct discovered dangers. Both strict liability and negligence are causes of action used to establish liability for plaintiffs' injuries.

Whether or not these claims will be covered under a products liability policy will hinge upon the terms of the insurance policy purchased by the manufacturers of these products and the interpretation the courts place on these specific terms. Most insurance policies are standard form policies that contain the same basic provisions. Virtually all liability insurance policyholders are automatically covered for products liability when they purchase the standard form CGL policy. Coverages "A" and "B" will generally provide insurance for liability due to personal injury or property damage resulting from products manufactured, sold, handled or distributed by the policyholder.

For 20 years, the 1966 standard form CGL policy was the foundation of insurance coverage for products liability. The standard policy language governing the insurance companies obligation to defend or indemnify on a product-related claim provides: "The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of (A) bodily injury or (B) property damage, to which this insurance applies, caused by an occurrence." Furthermore, "the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent ...." Occurrence is defined in the 1966 policy as "an accident ... which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

However in 1986, the standard form CGL policy underwent revisions to include new term definitions and exclusions, and to rephrase some previous policy language. The revised policy is similar to its predecessor and is offered in two versions: "occurrence" and "claims made." The two differ principally with respect to the trigger of coverage. The "occurrence" policy will provide insurance when bodily injury or property damage occurs during the policy period. The "claims made" version is triggered when a claim for bodily injury or property damage is asserted against the policyholder during the policy period. The 1986 CGL policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

Trigger of Coverage

The term "occurrence," as used in liability insurance policies, gives rise to an issue with respect to the timing of an occurrence. Determination of the timing issue, or trigger of coverage, is dependent upon when the alleged underlying injury or property damage covered by the policy took place.

When a claim is made for damages that occurred instantaneously, such as an automobile accident that takes place within a single existing policy period, there is usually no question as to the trigger of coverage. Issues arise when claims are made for bodily injury or property damage spanning multiple policy periods.

Courts have taken a variety of positions as to whether one or more successive policies are triggered when the timing of injury or damage takes place over several policy periods. The better reasoned cases have adopted a continuous injury trigger requiring each policy in effect during the relevant time frame to provide insurance from the plaintiff s initial exposure to a substance to the plaintiff s manifestation of a disease, In contrast, insurers usually have argued for more restrictive coverage theories to avoid or limit their obligations. For example, insurers contend that coverage can be applied only to those policies on the risk during the claimant's exposure to the harmful substance, or to those policies on the risk when the disease manifests itself (often after an exclusion for that harmful substance has been added to the policy).

This issue, perhaps more than any other in the liability insurance area, has produced a series of widely divergent, confusing and inconsistent opinions from the courts. At least four different "trigger of coverage" theories have been articulated, each of which was developed in the first instance in response to latent bodily injury cases. These theories sometimes have been labeled as "continuous injury," "exposure," "injury-in-fact" and "manifestation." The continuous injury theory combines the exposure and manifestation theories and provides the most expansive coverage from the policyholder's standpoint.

Much of the law concerning products liability insurance coverage issues has been promulgated in the area of asbestos bodily injury actions, one of the first latent disease issues to be heavily litigated. Doctors testifying in asbestos insurance coverage actions have stated that persons who ultimately manifest an asbestos-related disease undergo continuous injury from their initial inhalation of asbestos fibers, and that the injurious process continues to develop long after the ingestion has ceased, until the disease is diagnosed or manifests itself. Litigation of insurance coverage for asbestos bodily injury claims has resulted in a variety of opinions in regard to trigger of coverage.

Many policyholders, attempting to obtain the full benefit of the insurance coverage they purchased, advocate the continuous injury principle for delayed manifestation claims relying upon Keene Corp. vs. Insurance Co. of North America, 1981, 1982. The Keene case involved claims for asbestos bodily injury, and was the seminal decision adopting the continuous trigger principle of insurance coverage. The trial court held that all policies at risk from first exposure to manifestation, including the intervening period, were jointly and severally obligated to provide insurance. The continuous trigger principle expressed in Keene and its progeny spreads losses broadly over many policy periods of coverage and appears to have gained widespread acceptance in the courts. For example, the Keene continuous trigger was most recently applied in an asbestos property damage case in Flintkote Co. vs. American Mutual Liability Insurance Co., 1992, where the court held that all insurance policies are triggered from the date of installation of asbestos to the date of removal or containment of asbestos.

The continuous trigger also has been applied to claims involving substances other than asbestos. In a recent case, Northern Insurance Co. of New York vs. Allied Mutual insurance Co., 1992, the court held, without any discussion of choice of law or trigger cases, that two successive policies, each in effect during a portion of the claimant's pregnancy, potentially provided insurance for the claimed birth defects and thus both had a duty to defend.

By contrast, the Michigan Court of Appeals recently adopted a "manifestation" trigger in Transamerica Insurance Co. vs. Safeco Insurance Co., 199 1. The case involved coverage for claims of bodily injury and property damage arising out of the use of urea-formaldehyde insulation in homes and businesses. The insulation manufactured by the policyholder allegedly gives off an injurious gas, although the rate of release tapers off with time. The court considered both exposure and manifestation theories before opting for manifestation. The exact opposite reasoning was applied in Lloyd E. Mitchell Inc. vs. Maryland Casualty Co., 1991, in which the court adopted "at a minimum," the "exposure" theory of coverage, placing only those insurance companies with a policy in effect at the time of the injured person's exposure to asbestos under an obligation to defend and indemnify their policy-holder.

The injury-in-fact trigger was first developed in American Home Products vs. Liberty Mutual Insurance Co., 1983, 1984, a case involving various pharmaceuticals, including diethylstilbestrol (DES) - a drug prescribed to prevent miscarriages that was withdrawn from the market subsequent to tests associating it with cancer. The court found that those policies on the risk when the injuries in fact happened would provide insurance. The difference between continuous injury and injury-in-fact is obscure, if not nonexistent.

In a recent asbestos personal injury and property damage case, Continental Casualty Co. vs. Rapid-American Corp., 1992, 1993, the court clearly rejected the manifestation trigger of coverage for asbestos claims by emphasizing that the duty arose because the pleadings at issue "permit proof" of injury during the policy period, since "liability may be fixed upon injury-in-fact rather than actual manifestation of asbestosis or related diagnosable disease."

The "Rapid-American" court's decision adopting the injury-in-fact trigger principle may mean that policyholders with asbestos claims will receive the broadest possible coverage. The finding is consistent with state and federal cases that have held that injury during the policy period triggers an insurance company's duty to respond to a claim, and injury during multiple policy periods triggers multiple policies. Because asbestos-related personal injuries involve a continuously evolving disease process typically extending over a number of policy periods, the "Rapid-American" court's decision may mean that all policies in place during the period from the claimant's first inhalation of asbestos until manifestation of an asbestos-related disease are obligated to provide insurance. That the injury-in-fact trigger as applied to asbestos bodily injury claims is the same as the Keene continuous trigger was recognized by the judge in Owens-Illinois Inc. vs. Aetna Casualty & Surety Co., 1984, and by the judge in In Re Asbestos Insurance Coverage Cases, California Superior Court, San Francisco County, May 1987.

Number of Occurrences

Another issue arising out of the use of the term "occurrence" in products liability policies concerns the number of occurrences for the purpose of determining the "per occurrence" limits of liability and the number of deductibles a policyholder must pay for a particular group of claims. The number of occurrences determines the number of times the limits of a triggered policy will apply to pay for a loss.

Courts generally use three approaches to determine the "number of occurrences" for purposes of the Policy limits and deductibles: the "cause test," the "effects test" and the "liability-triggering event test." The "cause test" calculates the number of occurrences based upon the overall conduct that ultimately resulted in the personal injury or property damage for which the policyholder is seeking coverage, The "effects test" looks to the number of ultimate effects of the conduct to determine the number of occurrences. The "liability-triggering event test" looks neither to the cause of the injury nor to the effects of an act, but rather to the event which triggered the liability of the policyholder.

A vast majority of courts have decided that the number of occurrences for purposes of coverage limitations is determined by reference to the cause of the damage, and not the number of injuries or claims. An example of the application of this "cause test" is found in Owens-Illinois Inc. vs. Aetna Casualty & Surety Co., 1984. Owens-Illinois had manufactured and sold products containing asbestos for a number of years and was subsequently the defendant in thousands of bodily injury claims alleging exposure to its asbestos products. Relying upon the large "per occurrence" deductible in its policies, Aetna Insurance Co. urged the court to find that the deductible applied separately to each underlying lawsuit or claim against the manufacturer Owens-Illinois. In opposition, Owens-Illinois argued that its production and sale of asbestos-containing products constituted a single occurrence within the terms of the insurance contract. The court held that for purposes of determining the number of occurrences subject to the deductible provision within Aetna's CGL policies, all claims alleging exposure to the policyholder's asbestos-containing material arose from a single occurrence. Courts following the "cause test" hold that where one proximate, uninterrupted and continuing cause results in injuries to more than one person or damage to more than one item of property, there is a single accident or occurrence within the meaning of the "per accident" or "per occurrence" clause in the liability insurance policy.

The second method, which a minority of courts use to determine the number of occurrences, is the "effects test." Under this method of analysis, the courts look to the number of injuries, rather than the cause or causes of those injuries, to determine the number of occurrences. For example, in Elston-Richards Storage Co. vs. Indemnity Insurance Co. of North America, 1960, 1961, the court held that damage to each appliance in cartons caused by the incorrect operation of a forklift over a period of time "constituted |one event or occurrence' within the meaning of those words as used in the defendant's policy."

The final method used by a minority of courts to determine the number of occurrences is the "liability-triggering event test," which looks neither to the underlying circumstances that caused the injury nor to the effects of an act, but rather to the event that triggers the liability of the policyholder. For example, in Dow Chemical Co. vs. Associated Indemnity Corp., 1989, the policyholder faced hundreds of millions of dollars of potential liability as a result of a defective mortar additive used in building construction. The policyholder argued that the effects test should apply to determine the number of occurrences and that each building in a claim or suit was a separate occurrence. Conversely, the insurers argued that the causation test should be applied and that there was a single occurrence. The court calculated the number of occurrences by inquiring into the event that triggered liability of the policyholder, and rejected both the cause and the effects tests. The court held that the incorporation of the mortar into each building constructed constituted an occurrence. The court reasoned that this "event" was a separate occurrence as to each building.

Coverage for Intentional Acts

The 1966 CGL policy provided insurance coverage for the unintended results of intentional acts. In the 1986 policy, the "expected or intended" language present in the old definition of occurrence was deleted and rewritten as an exclusion. The exclusion states, "[t]his insurance does not apply to: |Bodily injury' or |property damage' expected or intended from the standpoint of the insured. This exclusion does not apply to |bodily injury' resulting from the use of reasonable force to protect persons or property." The old form covered unintentional results of intentional acts by requiring that bodily injury or property damage be "neither expected nor intended" from the standpoint of the policyholder. The scope of coverage for unintentional results of intentional acts appears to be unchanged by the 1986 policy, but it is important to note that these changes have not as yet been decisively tested in court.

The standard with which to judge expectation and intent still remains a battleground. At times, insurers attempt to deny liability coverage on the grounds that the injury or damage caused by the policyholder was "expected or intended" because it was reasonably "foreseeable." Foreseeability, however, is a tort concept upon which negligence liability is predicated. Therefore, foreseeability is inapplicable in an insurance context. The Washington Appellate Court in Queen City Farms Inc. vs. The Central National Insurance Co. of Omaha, 1992, stated that "the presumption that a person intends the ordinary consequences of his voluntary act does not apply to negligent conduct for the purpose of construing contemporary comprehensive general liability insurance." CGL insurance is intended to provide liability coverage for all risks, including liability based on negligence. In Messersmith vs. American Fidelity Co., 1921, Justice Cardozo held that, "[t]o restrict insurance to cases where liability is incurred without fault of the insured would reduce indemnity to a shadow."

Limiting Exclusions

Every liability policy should be closely examined for exclusions that may limit the policyholder's coverage. Although the exclusion section of the CGL policy was completely rewritten in 1986, the overall breadth of coverage changed little. Exclusions that may impact upon products liability claims include: the business risk exclusion, exempting from coverage any damages resulting from the policyholder's product failing to perform its designated function; the injury to products or work exclusion, which denies coverage for damages to the policyholder's own product or work; and the sistership exclusion, under which the insurance company excludes indemnity for damages arising from product recall. Other exclusions that may have an impact on products liability claims include: the exclusion in connection with a vendor's endorsement, which precludes coverage when the original product has been modified in certain respects by a vendor other than by the manufacturer; and the pollution exclusion, which was designed to deny coverage for damages resulting from intentional environmental contamination and which insurance companies argue denies coverage for all types of contamination. The 1970s pollution exclusion has generated a plethora of litigation and many conflicting decisions. The drafting history of the 1986 provision, in fact, shows that it is not an exclusion at all for products and completed-operations liability.

Duty to Defend

The standard-form occurrence policy typically provides defense coverage whenever a claim is asserted against the policyholder based on bodily injury or property damage that occurred or could have occurred during the policy period. The duty to defend is broader than the duty to indemnify and is usually based upon an examination of the allegations found within the underlying complaint. Ordinarily the insurance company must pay for the defense of the entire claim. In Atwood & Morrill Co. vs. Liberty Mutual Insurance Co. vs. Travelers Insurance Co., 1991, the policyholder filed a complaint for declaratory judgment on the duty to defend and for breach of contract. The policyholder manufactured high pressure valves that at one time contained an encapsulated component that held asbestos-containing gasket material. The manufacturer was sued along with numerous other defendants by roughly 10,000 claimants alleging injury and death as the result of asbestos exposure from the 1930s to the 1980s. According to the policyholder's complaint, Liberty Mutual Insurance Co., rather than providing a full defense, offered to pay a prorata portion of defense costs (equaling less than 1 percent), comparing the one-year policy period to the total period of asbestos exposures. Liberty had in turn filed a third-party complaint against The Travelers Insurance Co. and Aetna. The court held that Liberty was jointly and severally liable to the policyholder for the defense of the underlying claims.

The 1986 CGL policy provides that the insurance company "will have the right and duty to defend any suit seeking coverage for these damages." This defense obligation does not contain the limiting language "groundless, false or fraudulent" present in earlier policies. Any doubt about whether the risk is within the policy period is usually resolved in favor of the policyholder.
COPYRIGHT 1994 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994 Gale, Cengage Learning. All rights reserved.

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Author:Warshauer, Irene C.; Plunkett, Catherine
Publication:Risk Management
Date:Jun 1, 1994
Words:3319
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