Is an Occurrence the Bodily Injury or Property Damage?
December 2011
Several national insurers have included
wording in their excess liability policy forms making clear that no payment
will be made if the limits of the underlying policies are exhausted by
payment of losses arising out of occurrences
that took place before or
after the policy period. For coverage to
apply, the underlying limits must be exhausted by payment of losses arising
solely out of occurrences that first
take place during the excess insurers' policy period.
by
Craig F. Stanovich
Austin & Stanovich
Risk Managers, LLC
These excess liability policies fail to define "occurrences," but the
insurers generally insist that their excess policies follow the terms and
conditions of the underlying policies—except when they don't.
"Occurrence" in the underlying commercial general liability (CGL)
policies has its usual meaning "… an accident, including continuous or
repeated exposure to substantially the same general harmful conditions." Of
course, the CGL policy is not triggered when the "occurrence" takes place
but rather when the bodily injury or property damage
caused by the "occurrence" takes place.
Stated differently, when the
"occurrence" takes place is entirely irrelevant to the CGL coverage trigger.
There simply is no mention in the CGL insuring agreement as to timing of the
"occurrence," only the timing of the bodily injury or property damage.
The presupposition is clear—the occurrence and the resulting bodily
injury or property damage are one and the same—and are thus
indivisible. This view is at times held so strongly that any attempt to
point out the distinction between the occurrence and its result is often met
with utter disbelief—never heard such a thing (which means it can't be
true), and the challenge is this—show me one instance in which the
occurrence was not the bodily injury or property damage!
Limits and Deductibles
Despite such convictions, it is undeniable that the
same definition of "occurrence" is also
used to govern how the limits and deductibles apply in the CGL policy. For
example, Section III—Limits of Insurance, in pertinent part states:
… the Each Occurrence Limit is the most we will pay for the sum
of: Damages ... because of "bodily injury" or "property damage" arising out
of one "occurrence."
If the occurrence and the resulting bodily injury or property damage were
indivisible as assumed, then each person
who is injured or every incidence of property damage
would at all times be considered a separate
occurrence. This is simply not the case.
While this may be a desirable conclusion if the question is related to
the policy limit, the opposite may be true if the issue is how a "per
occurrence" deductible would apply.
The Bad Gas Example
The local filling station has a problem—it has inadvertently deposited
the diesel fuel in the underground gasoline storage tank and the gasoline in
the underground diesel fuel tank. Several motorists purchase motor fuel and
direct the attendant to pump (unknown to both the attendant and motorist)
the wrong motor fuel into their vehicles and attempt to drive away, only to
find out that the motor fuel has damaged their engines, requiring, on the
average, about $800 in repair work.
Before the problem is discovered and corrected, two dozen motorists have
damaged their engines because of the mistake by the filling station. Each
motorist makes a claim against the filling station for property damage ($800
per motorist or $19,600 in total damages) to their respective vehicles.
The filling station is subject to a $1,000 per occurrence property damage
deductible on its CGL policy. The insurer, consistent with the notion that
an incidence of property damage is the occurrence, deems each motorist's
property damage to be a separate occurrence, leaving the filling station to
pay more than $19,000 for the damages instead of the filling station paying
one $1,000 deductible, with the balance of the damages (more than $18,000)
paid by the insurer. Is the insurer correct?
Cause or Effect Approach
In most (but by no means all) instances, the insurer would not be
correct. The property damage to the motorists' vehicles would be considered
one occurrence, despite the fact that, in this example, there were two dozen
separate incidents of property damage.
In general, courts nationally have adopted two approaches for
determining number of occurrences. Under the "effect" test, number of
occurrences is determined by examining the effect that an event had, i.e.,
how many individual claims or injuries resulted from it. Conversely, under
the "cause" test, number of occurrences is determined by examining the cause
or causes of the damage. The "cause" test is the majority rule nationwide.1
In the above "Bad Gas" example, the "cause" test would likely focus on
the underlying cause—the motor fuels
being placed into the wrong underground storage tanks. That cause is the
"occurrence"; the resulting property damage to each motorist's vehicle is
not the "occurrence." The majority of courts, however, appear to answer this
question based on the "underlying cause" of the property damage alleged.
Under this majority approach,
the calculation of the number of occurrences must focus on the
underlying circumstances which resulted in the personal injury and claims
for damage rather than each individual claimant's injury.
Addison Ins. Co. v. Fay, 905 N.E.2d 747
(Ill. 2009)
Even in the situations where the courts have found multiple occurrences,
such as in a recent New York Court of Appeals case,
Appalachian Ins. Co. v. General Elec. Co., 863 N.E.2d 994 (N.Y.
2007), the focus is still on the event causing liability. New York and the
majority of other courts fix the "occurrence" by looking to the
injury-causing event that allegedly establishes liability—in other words,
the conduct of the policyholder.
Whether the jurisdiction adopts a "cause" or "effect" test (or something
in between), the critical issue is that courts generally consider the
"occurrence" to be the event or cause
that resulted in the bodily injury or property damage.
The effect theory, as its name implies, determines the number of
accidents or occurrences by looking at the effect
an event had, i.e., how many individual
claims or injuries resulted from it. Under the cause theory, on the other
hand, the number of occurrences is determined by referring to the
cause or causes of the damages.
Nicor v. Associated Elec. & Gas Ins. Servs. Ltd.,
860 N.E.2d 280 (Ill. 2006) [Emphasis added.]
This is true even if the "occurrence" is deemed to be either the
"immediate" injury-producing act (in our example, the attendant pumping the
wrong motor fuel into each motorist's vehicle) or the act that "gave rise"
to the liability (in our example, the underlying cause—the filling station
putting the diesel fuel into the gasoline underground storage tank and vice
versa); the court is still focusing on the
actions that caused the bodily injury or property damage.
Therefore, the court concluded that Baumhammers' independent
acts of shooting each of his victims constituted the immediate
injury-producing act and that the alleged negligence of Parents resulted in
six distinct attacks on six individuals. We disagree with the application of
the cause approach adopted by the Superior Court in the instant case and the
Florida court in Koikos, and conclude instead
that to determine the number of "occurrences" for which an insurance company
is to provide coverage, the more appropriate application of the cause
approach is to focus on the act of the insured that gave rise to their
liability.
Donegal Mut. Ins. Co. v. Baumhammers, 938
A.2d 298 (Pa. 2007)
At least one court, RLI Ins. Co. v. Simon's Rock
Early Coll., 765 N.E.2d 247 (Mass. App. Ct. 2002), has concluded that
it is the negligence of the insured that constitutes the "occurrence" for
the purposes of determining coverage under the CGL policy.
When reviewing the meaning of "occurrence" in a broader context—that is,
the number of occurrences when applied to limits or deductibles—it becomes
abundantly clear that the "occurrence" is not considered synonymous with the
resulting bodily injury or property damage.
Implications for Timing
If the "occurrence" is the injury-producing act, the underlying
circumstances giving rise to the liability, the negligence of the insured,
or the event that results in individual claims, it follows that the
"occurrence" may take place months or even years prior to the resulting
bodily injury or property damage.
Consider defective products sold or
otherwise placed into the stream of commerce by any business—if bodily
injury or property damage results from the sale of these defective products,
it may be months if not years between the "occurrence" (the sale of the
defective product2) and the resulting bodily
injury or property damage. The need for appreciating the difference between
the "occurrence" and the resulting bodily injury or property damage is
unmistakable.
Conclusion
Back to our excess liability insurers whose policies
expressly state that they will have no
obligation to pay if the underlying insurance is exhausted by payment of
losses arising from occurrences taking
place before the policy period; the
excess insurers' obligation to pay arises only
if underlying limits are exhausted by the payment of loss that arises
from occurrences taking place
during the excess policy period.
In light of the defective products example, if the occurrences (the sale
of the defective products) take place months or years
prior to the excess insurers' policy
period—how will the excess insurers respond when the resulting bodily injury
or property damage occurs during the excess
insurers' policy period and the underlying CGL insurer fittingly pays
its limit during that policy period?
By their policy wording, the excess insurers have no obligation to pay in
this rather common claim scenario because payment of the losses arose out of
occurrences that took place
prior to the excess insurers' policy
period rather than because of payment of losses arising out of occurrences
taking place during the excess insurers'
policy period.
This would undoubtedly be an unwelcome surprise to the policyholder and
seems to thwart the very reason for purchasing the excess liability
insurance in the first instance. But, absent a judicial finding of ambiguity
in the excess insurers' liability policies wording (or other judicial
construction that interprets the wording differently), the policyholder will
likely be without excess liability coverage.
A simple solution would be to revise the excess insurers' policy wording
to more closely match the trigger of the CGL policy. However, that would
require getting past the "bodily injury or property damage
is the occurrence" debate—an argument
that ought to be taken up and resolved before, rather than after, the large
liability loss in which millions of dollars are at stake.
Put another way, obtaining an excess liability insurance policy with
wording that clearly grants coverage is always preferable to relying on the
insurers' oral representations (contrary to the policies' wording) that the
excess liability coverage completely follows the underlying insurance or
hoping for the favorable result of litigation.
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