INSURANCE LAW UPDATE. Revisiting the "Number of Occurrences" Issue

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1 INSURANCE LAW UPDATE Revisiting the "Number of Occurrences" Issue An Examination of Case Law on "Number of Occurrences" in Light of the New York Federal Court's Recent Ruling that the Terrorist Attack on the World Trade Center is a Single Occurrence October 8, 2002 The recent decision by the Southern District Court of New York holding that the terrorist attack on the World Trade Center constituted a single occurrence brought into sharp focus the monetary significance of this issue, as it meant the difference between nearly $3.5 billion and $7 billion in liability for the insurers. S.R. International Business Insurance Co. Ltd. v. World Trade Center Properties, LLC, 2002 U.S. Dist. LEXIS (S.D.N.Y., September 25, 2002). The World Trade Center leaseholders have announced their intent to file an expedited appeal to the United States Court of Appeals, and the District Court judge John Martin has indicated his willingness to endorse the appeal. This Insurance Law Update examines this decision and reviews prior case law on the "number of occurrences" issue. We focus particularly on New York law that will be significant in the Second Circuit's review of this issue, but also discuss many of the cases throughout the country that are shaping judges' views on this weighty issue.

2 Liability and property damage policies generally undertake to pay a specified maximum amount for each covered occurrence. Unless a policy caps the insurer's overall liability through the use of an aggregate limit or comparable mechanism, there is no end to the number of per occurrence limits that may be payable under the policy. Thus, so long as there is no applicable aggregate limit, policyholders that lack sufficient insurance to fund all of their otherwise covered losses can seek to multiply their coverage through the simple expedient of arguing for two or more occurrences. S.R. International Decision On October 22, 2001 Swiss Re filed a complaint in the United States District Court for the Southern District of New York, seeking a declaration that the September 11 attack that resulted in the destruction of the shopping mall and of buildings 1, 2, 4 and 5 of the World Trade Center resulted from a single occurrence, entitling the Center s leaseholders to recover, at most, a single limit of liability. The World Trade Center leaseholders, on the other hand, asserted that the airplane crashes into each of the twin towers arose from separate occurrences, so that they were entitled to recover two "per occurrence" limits of liability. It asserted: [T]here are issues in dispute between the Silverstein Leaseholders and a number of their insurers, including the issue of whether the two separate airliners separately crashing into each of the Twin Towers some 18 minutes apart resulting in separate fires that caused the separate collapse of each Tower and the subsequent destruction of Buildings 4 and 5 constitute only one "occurrence"... [World Trade Center Properties LLC, et al. v. ACE Bermuda Insurance Limited, et al., United States District Court, Southern District of New York, complaint, par. 31] At the time that the terrorist attack took place, approximately twenty insurance companies had signed binders obligating them to provide property damage coverage for the World Trade Center. However, they had not issued formal insurance policies. Therefore, before the court could determine whether the terrorist attack constituted a

3 single occurrence or multiple occurrences, it had to first determine what was the applicable definition of "occurrence." The court concluded that, with respect to the policies issued by Hartford Fire Insurance Company, Royal Indemnity Company, and St. Paul Fire and Marine Insurance Company, the parties had agreed to incorporate a definition of "occurrence" that read as follows: "Occurrence" shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur. In granting summary judgment to the insurers, the court succinctly concluded that "the ordinary businessman would have no doubt that when two hijacked planes hit the Twin Towers in a sixteen minute period, the total destruction of the World Trade Center resulted from 'one series of similar causes.'" While this decision resolves the "number of occurrences" dispute with respect to three policies, it by no means resolves the issue entirely. A court may find that other policies issued to the World Trade Center leaseholders incorporated significantly different policy terms, including a different definition of "occurrence." Other policy language could result in a different outcome. Discussion of Number of Occurrences The definition of "occurrence" applied in the SR International case is unique in its specificity. A typical "occurrence" definition arguably is more broad. For example, the 1993 ISO primary general liability policy form defines an "occurrence" as: an accident, including continuous or repeated exposure to substantially the same general conditions

4 In property policies, there often is no definition of occurrence. For example, the "limits of liability" section of the 1990 ISO building and personal property policy form states that: The most we will pay for loss or damage in any one occurrence is the applicable Limit of Insurance shown in the Declarations. The word "occurrence" is not otherwise defined. Under these circumstances, courts rely on common usage and the expectations of the ordinary policyholder in assigning meaning to the term in the context of the policy. In determining how many occurrences are at issue in a given situation, the majority of courts have adopted a "proximate cause" test. New York courts have created a variant "unfortunate events" test. Proximate Cause Test The "proximate cause" test was developed by the California Court of Appeals in Hyer v. Inter-Insurance Exchange of Automobile Club, 77 Cal. App. 343, 246 P (1926). In Hyer, the court found that two car collisions resulted from a single accident. The court held that, so long as numerous discrete injuries result from the same proximate and uninterrupted cause, there was a single accident. Bartholomew v. Insurance Co. of N. Am., 502 F. Supp. 246 (D.R.I. 1980), aff d 655 F.2d 27 (1st Cir. R.I. 1981). The same proximate cause test is currently the law of numerous other U.S. jurisdictions. The test is frequently applied regardless of whether the insurance policy in issue provides liability coverage or property coverage. The apparent simplicity of the "proximate cause" test is deceptive. One could argue that, in looking for the "proximate cause," one is really looking for a negligent act that is the sole cause of the resulting injury. But what if there are multiple causes? Should the court look to the event immediately preceding the injury? Or should it reach

5 farther back in the causative chain to examine what set in motion the forces that led to the injury? The farther back one looks in the chain of causative events, the likelier one is to find a single occurrence. Because a proximate cause test can be used to reach behind the immediate cause to find a common origin for multiple injuries, it often permits the courts to conclude that multiple injuries resulted from a single occurrence. For example, the following multiple injuries were each attributable to a single occurrence: a fire that damaged multiple buildings (Tri-State Roofing Co. v. New Amsterdam Casualty Co., 139 F. Supp. 193 (E.D. Pa. 1955)); numerous injuries caused by a collision between a tanker and a ferry (McKetithen v. S.S. Frosta, 430 F. Supp. 899 (E.D. La. 1977)); a series of 650 isolated thefts that were part of an overall scheme (EOTT Energy Corp. v Storebrand Int l Ins. Co., 45 Cal. App. 4th 565, 52 Cal. Rptr. 2d 894 (1996), rev. denied Aug. 14, 1996); and multiple claims arising out of the same home improvement loan program (Atlantic Permanent Savings and Loan Ass'n. v. American Cas. Co., 839 F.2d 212 (4th Cir. Va. 1988), cert. denied 486 U.S. 1056, 100 L. Ed. 2d 925, 108 S. Ct (1988)). Because courts have flexibility under the "proximate cause" theory in determining which of several possible events is the proximate cause of injuries, result-oriented courts can use the test to minimize the number of occurrences, where doing so benefits the policyholder. A policyholder could be benefited by a single occurrence where there is a "per occurrence" deductible and a series of small claims that, considered separately, do not exceed the deductible amount. See, e.g., Owens Illinois, Inc. v. Aetna Casualty & Surety Co., 597 F. Supp (D.D.C. 1984) (finding that multiple asbestos injury claims arose from a single occurrence; namely, the manufacture and sale of insulation that contained asbestos) and Appalachian Ins. Co. v. Liberty Mutual Ins. Co., 676 F.2d 56 (3d Cir. Pa. 1982) (finding that numerous sexual discrimination claims are a single

6 occurrence because the common source of all of the injuries was the discriminatory employment practices). Result-oriented courts can also use the proximate cause test to find multiple occurrences where the dispute revolves around the number of "per occurrence" policy limits an insurer is required to pay. For example, a court can find multiple occurrences by concluding that a single cause was or could have been -- interrupted. E.g., Liberty Mutual Ins. Co. v. Rawls, 404 F.2d 880 (5th Cir. Fla. 1968) (two car crashes separated by time and space with the insured regaining control of his vehicle after the initial collision constituted two accidents). Similarly, in Slater v. United States Fidelity & Guarantee Co., 379 Mass. 801, 400 N.E.2d 1256 (1980), the court rejected an argument that a receptionist's numerous acts of embezzlement over a two-year period were part of a single scheme to embezzle and, therefore, arose from a single occurrence. Instead, the court held that each act of embezzlement was a separate occurrence. It reasoned that the scheme to embezzle did not in itself cause the injury. Rather, the injury arose from each act of theft. The court further reasoned that, since each theft could have been interrupted, there was not a single proximate cause. In American Red Cross v. Travelers Indemnity Co., 816 F. Supp. 755 (D.D.C. 1993), the court held that multiple contaminated blood claims could not be attributed to a single occurrence; namely, the policyholder s alleged negligence in handling contaminated blood. Rather, the court focused on the fact that the policyholder made numerous separate decisions with respect to the handling of blood. According to the court, any one of those decisions -- made differently -- could have prevented the injuries. Consequently, there was no single uninterrupted cause for the damage. Each distribution of contaminated blood arose from a separate occurrence. Accord, Federal Savings and Loan Ins. Corp. v. Burdette, 718 F. Supp. 649 (E.D. Tenn. 1989) (holding that although

7 the issuance of twnety-five loans appeared to be part of an overall scheme to defraud the bank shareholders, each loan was a separate occurrence because each involved independent business decisions by individual officers, and each loan was made at different times, with different collateral, different deficiencies in the loan process and different allegations against officers with respect to each loan). It is noteworthy that, in Rawls, Slater, American Red Cross, and Burdette, the courts findings of multiple occurrences maximized the coverage available to the policyholder. Courts applying the "proximate cause" test can also use it to increase the number of occurrences by focusing on the insured's specific source of liability. For example, where the insured was a grain importer who was subject to numerous lawsuits arising from its sale of contaminated seed, the court rejected the argument that there was a single occurrence consisting of the defective processing of the grain. The court s reasoning was that the importer had no liability for the processing itself. Its liability arose from its sale of the grain to various retailers. Thus, according to the court, each sale of grain was a separate occurrence. Maurice Pincoffs Co. v. St. Paul Fire and Marine Ins. Co., 447 F.2d 204 (5th Cir. Tex. 1971). See, also, Mason v. Home Ins. Co., 5177 Ill. App. 3d 454, 32 N.E.2d 526, 126 Ill. Dec. 841 (Ill. Ct. App. 1988), cert. denied 125 Ill. 2d 567, 537 N.E.2d 811 (1989) (rejecting the argument that numerous claims arising out of tainted food constituted a single occurrence based upon the improper preparation of food because the restaurant had no liability until it served the food). When a court applies a "proximate cause" test, it can find multiple occurrences on the basis that there were multiple intervening events and acts, or it may focus on the respective liability of the policyholders and find that there were multiple acts of alleged negligence and liability. Thus, the "proximate cause" test is not so certain in its outcome

8 that it is possible to predict the result. How a court would rule in any particular situation would depend upon the specific facts, the policy wording, and whether the court is compelled to reach a result that maximizes coverage for the policyholder. Unfortunate Event Test The "unfortunate event" test is routinely applied in New York. It was promulgated in Arthur A. Johnson Corp. v. Indemnity Ins. Co., 7 N.Y.2d 222, 196 N.Y.S.2d 678, 164 N.E.2d 704 (1959), which determined how many policy limits were available under a construction liability policy. The policyholder had incurred liability when two buildings were damaged by the failure of a temporary cinder block wall that was intended to protect the two buildings from a nearby excavation. An abnormally heavy rainfall caused two breaches in the temporary wall. The breaches took place approximately fifty minutes apart. The court rejected a "proximate cause" analysis (which it described as focusing on the negligent act that caused the injury) and adopted an "unfortunate event" test that looks to find the event of unfortunate character that takes place without one's foresight or expectation... an unexpected, unfortunate occurrence." Using this test, the court found that there were two occurrences. Among other things, it noted that the rain could not be an "occurrence" because, in itself, it did not cause the harm. Rather, it was the collapse of the sections of wall that resulted in the injury. Because those collapses took place at separate locations and at different times and arose independently of each other (that is, the first collapse did not bring about the second collapse), they were two separate accidents/occurrences. Application of the "unfortunate event" test does not necessarily entail a finding of multiple occurrences. In Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 350 N.Y.S. 2d 895, 305 N.E.2d 907 (1973), the court applied the "unfortunate event" test

9 to find that a three-car accident in which a car ricocheted off one car into another constituted a single occurrence on the ground that there was a single inseparable accident, as the collisions were seconds apart and the continuum between the two impacts was unbroken with no intervening agent or operative factor. A recent case applying the "unfortunate event" test is Dicola v. American S.S. Owners Mutual Protection & Indemnity Association (In re Prudential Lines), 158 F.2d 65 (2d Cir. N.Y. 1998), which involved numerous asbestos claims arising out of exposure to asbestos aboard various ships. The policyholder asserted that there was a single occurrence, namely, the presence of asbestos aboard ships. The court rejected this approach. Applying the "unfortunate event" test, the court found that, "under New York law, multiple injuries are grouped as a single 'occurrence' when they arise out of the same event of unfortunate character and occur close in time with no intervening agent." Because it was exposure to asbestos that caused the injuries, and not its mere presence on the ships, the court found that the "occurrence" must relate to the exposure. Consequently, all asbestos claims resulting from exposure on a particular ship constituted a single occurrence. Even more recently, a New York court rejected an attempt to aggregate multiple claims in the context of reinsurance. In Travelers Casualty and Surety Co. v. Certain Underwriters at Lloyd's of London, N.Y.2d 583, 760 N.E.2d 319, 734 N.Y.S.2d 531 (N.Y. Ct. App. 2001), the underlying insurer funded the settlement of approximately 160 pollution liability claims involving locations throughout the United States and which took place at various times. The reinsurer disputed the underlying insurer's attempt to aggregate all of these claims as a single occurrence. The policy specified that any occurrence or causative incident having a common origin or being traceable to the same act, omission or error or mistake would be considered as a single occurrence. The

10 underlying insurer, relying upon this language, asserted that all of the pollution claims arose from a common origin or was traceable to the company's waste disposal practices. The court rejected the argument, finding that, even under this definition, aggregation of losses was permitted "only where the losses are linked spatially or temporally and share a common origin." While these cases provide some guidance, what exactly is meant by an "unfortunate event" in any specific context is not always clear. Judge Weinstein in Uniroyal Inc. v. Home Ins. Co., 707 F. Supp. 1368, 1382 (E.D.N.Y. 1988) noted that "All that can be drawn from [the Johnson and Wesolowski cases] is that the 'unfortunate event' is not the "negligent act or omission" and it is not the injury to each victim. The 'unfortunate event' is evidently one of the several happenings, with the exception of the negligent act or omission, which precedes and contributes to the resulting injury." In Stonewall Ins. Co. v. Asbestos Claims Management Corp., 73 F.3d 1178, 1213 (2d Cir. N.Y. 1995), the United States Court of Appeal for the Second Circuit described the "unfortunate event" test as follows: In determining the number of occurrences for deductible purposes, New York inquires whether multiple claims result from "an event of an unfortunate character that takes place without one's foresight or expectations."... Although a single "occurrence" may give rise to multiple claims, courts should look to the event for which the insured is held liable, not some point further back in the causal chain. In Stonewall, the court found that the installation of asbestos (and not its manufacture) was the final link in the causal chain leading to the manufacturer's liability. The court noted that its holding would significantly limit the insured's recovery, but

11 found that the "per occurrence" deductible provisions were not ambiguous and, therefore, there was no legal basis for interpreting them so as to find coverage. 1 Conclusion The seeming simplicity of both the "proximate cause" test and the "unfortunate event" test masks the multiple levels of complexity and subjectivity that are inherent in their application. The result is that it is difficult to predict the number of occurrences that courts will find in any specific circumstance. Predicting the number of occurrences that a court will find becomes even more difficult when it is recognized that insurance policies define or use occurrence in a variety of ways. Those differences can and should materially alter the outcome of the court s analysis. For more information on this issue or other insurance matters, please contact: in our San Francisco office, Gregory Schopf at (415) or Ann G. Miller at (415) in our Boston office, Gregory P. Deschenes at (617) in our Washington, D.C. office, John C. Hayes, Jr. at (202) Insurance Law Update is intended as an information source for the clients and friends of Nixon Peabody LLP. Its content should not be construed as legal advice, and readers should not act on information in this publication without professional counsel. 1/ Compare, Champion International Corp. v. Continental Casualty Co., 546 F.2d 502 (2d Cir. N.Y. 1976), cert. denied 434 U.S. 819, 54 L.Ed.2d 75, 98 S. Ct. 59 (1977) in which the court held that 1,400 separate claims against a retailer of defective vinyl covering constituted a single occurrence and, therefore, the retailer was required to pay a single deductible for all of the claims. The court was aware that each claim did not exceed the deductible and that there would be no coverage unless the claims could be aggregated. Judge Newman, in his dissenting opinion, criticized the majority for its result-oriented approach.