The products liability litigation arena has recently seen an influx of overseas production processes litigation. Last year’s massive recalls on products such as children’s toys and pet food are just a two examples of the growing trend. Insurance defense practitioners are beginning to realize the impact of such litigation and that massive and expensive product liability claims based on overseas production are a new reality.
A recent decision, Ace American Inc. Co. v. RC2 Corp., 568 F. Supp. 2d 946 (N.D. Ill. 2008), focuses on insurance coverage in these circumstances, addresses issues that products practitioners need to know, and holds that an insurer has a duty to defend its insured in suits arising out of product recalls of products made outside of the United States if included in the coverage territory. In RC2 Corp., a federal district court judge for the Northern District of Illinois, applying Illinois law, held that an insurer has a duty to defend its insured, a toymaker, in suits arising out of the product recalls. The policyholder was sued by parents of children in the United States, alleging various theories of exposure and harm from toys contaminated with lead paint that were made in China, but sold in the United States. The insurer issued four successive liability insurance policies to the policyholder, the maker of the toys. Each of the policies stated that "the 'occurrence' must take place in the 'coverage territory.'" The coverage territory provision included "all of the world outside of the United States." After the policyholder sought coverage for these underlying actions, the insurer denied that it had a duty to defend or indemnify the insured because, inter alia, of the coverage territory of the policies.
In addressing the coverage territory issues, the court stated that what constituted the relevant "occurrence" for purposes of a coverage territory provision was a matter of first impression under Illinois law. The court rejected the insurer's argument that coverage was barred because the harm for which the underlying plaintiffs sought redress took place in the United States. The court reasoned that "[t]he language of the [policies] refers to Harm that is "caused by an 'occurrence'" and that "here the occurrence is separately identified as being the cause of the Harm" and that the "Harm is not itself part of the occurrence." The court further reasoned that "[t]he language is written in the positive" so that:
For there to be coverage, the occurrence must take place in the coverage territory. It is not required that the Harm take place in the coverage territory but only during the Policy Period. In this situation, the occurrence took place in the coverage territory of China. By contrast, if the provision had been written in the negative, the result could be different. If there had been an exclusion providing that there is no coverage for Harm that took place inside the United States, then the case would fall under such exclusion.
Though the court found against the insurer in this case, the court did direct litigators and insurers as to how to prevent such a costly occurrence from reoccurring. For insurers of overseas product manufacturers to prevent similar coverage disputes from being brought in the future, insurers should include exclusions in their policies providing that there is no coverage for harm, bodily injury, and/or damages that occur inside the United States. In this case, such simple language may have prevented costly litigation and saved millions of dollars.