Defense Counsel Journal

Conning the Newsletters: The Number of "Occurrences" Dilemma

February 07, 2020

Insurance and Reinsurance

John T. Harding

John T. Harding

John T. Harding is a Partner in the Boston office of Lewis. Brisbois, Bisgaard & Smith LLP, where he practices in the Insurance Group. Mr. Harding has more than 25 years of experience representing insurers and reinsurers in complex coverage disputes and was a speaker at the IADC Midyear Meeting held in Pebble Beach in February 2016.

This article originally appeared in the May 2016 Insurance and Reinsurance Committee newsletter.

Issues concerning excess insurance are now at the forefront of 21st century coverage litigation. While the role of excess insurance was previously reserved for the truly “once in a lifetime” type of loss faced by a major corporation, the prevalence of class actions, “mass tort” claims (e.g., asbestos, medical device, pharmaceutical products), environmental, clergy abuse and other large-scale claims has greatly increased the potential significance of even high layer excess insurance policies. Further, as older primary CGL policies have become exhausted in responding to these claims, policyholders are increasingly looking to their excess insurers as a potential source of recovering the staggeringly large sums that can be involved. Not surprisingly, particularly in light of the relatively small premiums that were paid for this coverage decades ago and the dollars at stake, excess insurers are more willing now than in the past to contest these claims for coverage.

These modern-era coverage disputes have spawned a number of complex issues as to how a multi-layer insurance program is to function in responding to these new claim situations. Nowhere has this trend been more evident than in a multitude of cases that have examined the issue of the number of “occurrences.” While the so-called “rules” for making such determinations—for example, the “cause” and “unfortunate event” tests—are not new, the ways in which these rules are being interpreted and used as strategic tools in coverage litigation are undergoing dramatic changes. In particular, the question of how many “occurrences” a given claim situation presents has created fertile ground for disputes not only between insurers and their policyholders, but among insurers within a policyholder's program. Where a particular insurer “sits” in the layers of coverage can have a significant impact on how the insurer assesses its course of action. The issue is particularly complex because there is no one “right” answer that fits every situation. The challenge that faces insurers is how to use the relevant legal rules to their financial advantage while not falling into traps that can come back to haunt them later. This issue is truly one that can put the insurer on the twin horns of an uncomfortable dilemma.

I. The Sources of the Insurer's Dilemma

As with most disputes arising from the application of insurance policies to claims, the source of the “dilemma” relating to how to measure the number of “occurrences” inheres in the policy language itself. While there are certainly variations to be found in the language of liability insurance policies, a typical example of the operative provision states that “occurrence” means:

an accident, including continuous or repeated exposure to conditions, which results in bodily injury neither expected nor intended from the standpoint of the insured.

For the purpose of determining the company's liability, all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.

Apart from the policy language, the other major source of the “occurrences” dilemma is how coverage disputes have been shaped by the evolution of mass tort claims. For the “occurrences” issue to be significant and worth litigating, there must be an unusual cluster of circumstances, including (1) the insured must be liable; (2) the policy must afford coverage for the claim (that is, the question is not whether there is coverage for the claim at all, but rather how much coverage is available and the scope of that coverage); and (3) the liability must exceed the conceded coverage and therefore raise the need to consider whether more than a single set of policy limits is available for the loss. These are issues that insurers (and for the most part policyholders) have shied away from litigating because there is no consistent “right” position that is always going to benefit the insurer or the policyholder in all situations. For example, an excess carrier seeking to escape liability on the theory that all of the costs should be borne by the primary layer because each individual claimant in a mass tort situation should be considered to be a separate “occurrence” must equally take into account that it may be the primary insurer in the next claim down the road. Thus, the insurer could be inadvertently creating bad law for itself in another case. Similarly, a policyholder may be cautious about arguing that a primary carrier should be saddled with the entire obligation for a loss when it has towers of excess insurance that it wants to access.

The number of “occurrences” dilemma is by no means limited to the mass tort context. The sheer range of cases in which the issue of the number of “occurrences” has been actively litigated demonstrates how critical the issue has become. The debate has played out in contexts as varied as asbestos,¹1 Appalachian Ins. Co. v. General Electric Co., 8 N.Y.3d 162, 863 N.E.2d 994 (N.Y. 2007). to bad batches of peanut butter,²2 ConAgra Foods, Inc. v. Lexington Ins. Co., 21 A.3d 62 (Del. 2011). to imported drywall,³3 Cincinnati Ins. Co. v. Devon International, Inc., 924 F. Supp.2d 587 (E.D. Pa. 2013). to clergy abuse cases,⁴4 Roman Catholic Diocese of Brooklyn v. National Union Fire Ins. Co. of Pittsburgh, Pa, 21 N.Y.3d 139, 991 N.E.2d 666 (N.Y. 2013). to drowning cases.⁵5 Fellowship of Christian Athletes v. AXIS Ins. Co., 758 F.3d 982 (8th Cir. 2014). The number of high-stakes cases involving the central issue of whether a claim situation involves one occurrence or more than one occurrence (and, if so, how many) indicates that the gloves are off. The cases that have emerged also reveal that the old dilemmas still remain. While a policyholder may generally favor an approach that trends in the direction of multiple “occurrences” so as to maximize the limits that are available to satisfy a loss, that won't be true if the policyholder has significant SIRs that must be satisfied for each “occurrence” or if it wants to be able to “spike” its excess towers of coverage. Similarly, while insurers can generally be said to favor a one “occurrence” rule, their incentives to argue for a contrary position can increase exponentially when the insured has significant SIRs that can be called upon to pay on each and every claim in a mass tort scenario. This can also be the case when the insurer is excess (especially at a higher layer) and therefore views the number of “occurrences” issue as a way to forestall the likelihood that its coverage will ever be reached. How these scenarios play out in the context of actual coverage litigation readily illustrates the dilemmas that litigants on both sides must confront.

II. A Case in Point: Stonewall v. DuPont

A cogent (and cautionary) example of how the factors discussed above can coalesce to generate high-stakes battles over the number of “occurrences” can be found in the Delaware Supreme Court's decision in Stonewall Ins. Co. v. E.I. DuPont De Nemours & Co.⁶6 996 A.2d 1254 (Del. 2010)(“DuPont”). While arising out of a common product liability claims scenario, the convergence of the policyholder's coverage profile and the litigating insurer's position in the towers of coverage created a situation where the insurer attempted to stretch the literal terms of the policy to their breaking point and evidenced the unwillingness of some courts to follow the insurer over the cliff based upon economic realities.

The underlying claims arose out of a resin that was manufactured by DuPont and incorporated into polybutylene plumbing systems. At some point after DuPont began selling the resin for this use, claims surfaced that the product was causing the plumbing systems to leak. DuPont promptly ceased distributing the product. Thousands of claims were ultimately asserted against DuPont, which it defended and settled at a cost of nearly $240 million. DuPont brought suit against its excess insurers in four different towers of coverage from 1983 to 1986. Significantly, the lowest layer in each tower did not attach until the losses exceeded a $50 million SIR. DuPont settled with all insurers save for Stonewall and recovered nearly $112 million from these other companies, at which point DuPont fixed its sights on the lone holdout.

Stonewall only participated in the 1985 tower of coverage, providing $1 million of limits in the first layer of excess policies and $4 million in the second layer. A central issue in the case was whether all of DuPont's liability for the product arose out of a single “occurrence,” which would mean that DuPont only had to satisfy a single SIR before it could recover under its excess policies, or whether the liabilities arose out of multiple occurrences which would trigger multiple SIRs. Stonewall's policies included fairly standard “occurrence” language with a slight wrinkle:

The term ‘occurrence,' whenever used herein, shall mean an accident or a happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury, property damage or advertising liability during the policy period. All such exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed one occurrence.⁷7 996 A.2d at 1257 (emphasis added).

The trial court ruled, as a matter of law, that all of the claims arose out of a single “occurrence” and that once DuPont satisfied a single $50 million SIR it could access its excess coverage.

On appeal, Stonewall presented two distinct theories relating to the number of “occurrences” issue. First, Stonewall contended that there were disputed issues of fact that should be determined by a trial as to whether there were two distinct “causes” of the system failure: (1) chemical degradation and (2) the product's inability to resist mechanical stresses. Second, Stonewall separately argued, based upon the language quoted above, that each of the some 469,000 locations at which a plumbing system was installed and failed should be treated as a separate “premises location” under the policy language and thus constituted a separate “occurrence.”

The Delaware Supreme Court soundly rejected both propositions that were advanced by Stonewall. As to the first, the court concluded that Stonewall's position conflated the issue of what constitutes a “condition” with the issue of whether there were multiple occurrences. Whatever the specific cause or defect in the product might be (and whether there was a single defect or multiple defects) was irrelevant to the number of occurrences question. In every claim, it was the product that was the source of the leaking plumbing systems and resulting property damage. Accordingly, going behind this fundamental fact of product failure to determine whether there were different types of defects that inhered in the product was of no assistance in the occurrences analysis.

The court next held that Delaware, like the majority of states, would adopt the “cause” test for determining whether there was a single or multiple occurrences. The Court noted that “where a single event, process or condition results in injuries, it will be deemed a single occurrence even though the injuries may be widespread in both time and place and may affect a multitude of individuals.”⁸8 996 A.2d at 1257 (citing Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56, 61 (3rd Cir. 1982) (adoption of an employment practice that resulted in a multitude of claims for discrimination held to be one occurrence). Applying this test to the facts of the claims against DuPont, the court concluded that, in a products liability case, the “proper focus is . . .on production and dispersal—not on the location of injury or the specific means by which injury occurred. Therefore, Du Pont's production of an unsuitable product triggered only one single occurrence under the policies.”⁹9 996 A.2d at 1258.

The Delaware Supreme Court also made it very clear that its decision was based (at least in part) on the extreme nature of the position being advanced by Stonewall which, if accepted, would essentially deprive DuPont of any excess coverage for the plumbing system claims. Given the “per occurrence” SIR that was contained in the policy, requiring separate exhaustion of the SIR for each and very claim would render the policy meaningless. As the court stated:

Further, if Stonewall's interpretation of the occurrence provision is correct, then each separate claim would constitute its own separate occurrence. As a consequence, DuPont must first expend $50 million per occurrence for a total of approximately $23,450,000,000,000 before being entitled to look to its excess insurers. It is inconceivable to imagine 469,000 occurrences generating almost $24 trillion in damages. Such an interpretation would produce an absurd, unacceptable result that would render meaningless the excess insurance purchased by DuPont and deprive DuPont of the protection for which it paid.¹⁰10 Id.

The DuPont case serves as a cautionary example for insurers of how aiming for a result that can be viewed as inconsistent with the parties' economic expectations (even if supported by the specific terms of the policy) can cause the insurer to miss the target altogether.

III. Practical Tips and Guidance

If there are any lessons to be gleaned from how these modern-era number of “occurrences” cases have been litigated, it is that the issue presents one of virtually boundless opportunities for both insurers and policyholders to craft new and creative arguments. The cases show how the tests of what constitutes the “cause” of an injury and whether “events” are related to one another can be molded to benefit either the insurer or the policyholder depending upon the particular facts of the claims at issue and how those claims intersect with the coverage profile. Equally, however, the cases (as well as common sense) suggest that for the insurer entering into this minefield it is essential not to have tunnel vision and be guided solely by the argument that will minimize (or entirely avoid) coverage in a particular case. Serious thought should be given to whether the insurer wants to champion the position adopted by the policyholder (as in the Corning case). Similarly, the insurer must consider whether it really wants to advocate for a position (as in DuPont) that the policyholder should not be able to access its excess towers of coverage that attach at $50 million until it has paid out some $24 trillion in losses. Insurers and attorneys representing them must contemplate how taking a particular position on the number of “occurrences” in the case that is on the insurer's plate at the moment will affect other cases in which the insurer may be on a very different footing owing to its being positioned differently in the policyholder's insurance program. All of these questions create serious dilemmas for the insurer seeking a favorable outcome in a particular case without setting up a situation to be skewered in the next case down the road. As Oscar Wilde once famously quipped: “In this world there are only two tragedies. One is not getting what one wants and the other is getting it.”

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