The number of ‘occurrences’ dilemma

August 9, 2016

Insurance Form No Credit iStock PhotoIssues 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 (such as asbestos, medical device, pharmaceutical products), environmental claims, clergy abuse claims and other large-scale claims has greatly increased the potential significance of even multilayer excess insurance policies. 

Further, as older primary commercial general liability policies have become exhausted in response to these claims, policyholders are increasingly looking to their excess insurers to recover the staggering 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 than ever to contest these claims.

These modern-era coverage disputes have spawned a number of complex issues as to how a multi-layer insurance program is to function in these situations. Nowhere has this phenomenon 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, they are being interpreted and used as strategic litigation tools in dramatically new ways.

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 it sets its course of action.

The issue is particularly complex because there is no one right answer that fits every situation. Insurers face the challenge of using the relevant legal rules to their financial advantage while avoiding traps that can come back to haunt them. This issue is truly one that puts the insurer on the twin horns of an uncomfortable dilemma.

Sources of the dilemma

As with most disputes arising from the application of insurance policies, the dilemma relating to how to measure the number of occurrences is inherent in the policy language itself. While the language of liability policies certainly varies, 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.

The other major source of the dilemma is how coverage disputes have been shaped by the evolution of mass tort claims. For the “occurrences” issue to be worth litigating,  there must be an unusual cluster of circumstances, including:

  • The insured must be liable.
  • 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).
  • 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 will benefit the insurer or policyholder in all situations. For example, an excess carrier seeking to escape liability on the theory that all 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 remember that it may be the primary insurer in the next claim down the road. Thus, the insurer could inadvertently be 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 not limited to the mass tort context. The sheer range of cases in which the issue has been litigated demonstrates how critical it has become. The debate has played out in contexts as varied as asbestosbad batches of peanut butterimported drywallclergy abuse and drowning.

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 to maximize available coverage limits, that approach will not be the best way to maximize coverage if the policyholder has significant self-insured retentions, or 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.

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 Insurance Co. v. DuPont Co.

The DuPont case arose from a very common product liability claim scenario. Also typical was the fact that the policyholder — a huge corporation — had structured its insurance program based upon a very substantial SIR. What is different about the DuPont case — and is instructive in considering the number of occurrences issue — is how these factors converged.

The litigating insurer’s position in the towers of coverage prompted it to try to stretch the terms of the policy language to avoid coverage. The case also illustrates that many courts will not ignore the economic realities of the situation when interpreting policy provisions.

The underlying claims arose from a resin that was manufactured by DuPont and incorporated into polybutylene plumbing systems. After claims surfaced that the product was causing plumbing systems to leak, DuPont promptly stopped distributing it. The company ultimately settled thousands of claims against it 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 the other companies. It then 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 DuPont’s liability for the product arose from a single occurrence, which would mean that it only had to satisfy a single SIR before it could recover under its excess policies. If the liabilities arose from multiple occurrences, multiple SIRs would be triggered.

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.

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

The Delaware Supreme Court soundly rejected both propositions. It concluded that Stonewall’s first position conflated the issue of what constitutes a “condition” with the issue of whether there were multiple occurrences.

The specific cause or defect in the product (and whether there was a single defect or multiple defects) were 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. An examination of whether there were different types of defects inherent 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. It 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.”

Applying this test, 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, DuPont’s production of an unsuitable product triggered only one single occurrence under the policies.”

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. Given the “per occurrence” SIR that was contained in the policy, requiring separate exhaustion of the SIR for each and every 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 Du Pont and deprive Du Pont of the protection for which it paid.

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.

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 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 because it wants to confine the scope of coverage to the primary layer.

Similarly, the insurer must consider whether it really wants to advocate for a position (as in the DuPont case) 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 the attorneys who represent them need to take a long view of the issue. Focusing solely on how the number of occurrences issue will affect a single case is unduly narrow. An insurer that fixates only on the case at hand may unwittingly be making law that will hurt it in another matter where it is positioned differently.

All these questions create serious dilemmas for the insurer that seeks to gain a favorable outcome in a particular case without setting itself up to be skewered 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.”