Product liability lawsuits represent a serious threat to any manufacturer's bottom line. The total value of the top five product liability verdicts shot up 52% last year to $620 million, according to data recently compiled by Bloomberg.
Although these cases might be extreme examples, no company is immune from liabilities arising from its products. To manage such liabilities, companies obtain liability insurance -- usually in the form of commercial general liability insurance policies. In an increasingly global economy, companies may obtain general liability policies, or combinations of policies, that provide coverage both in the U.S. and internationally.
Whether your company's insurance policies provide sufficient coverage for products liabilities in a global market may depend upon the policies' coverage territory provisions. Such provisions typically provide broad geographical coverage for product liabilities, but not all do, especially when read together with certain exclusions. Even insurance policies that purport to provide worldwide liability coverage may fall short of doing so.
ACE American Insurance Co. v. RC2 Corporation, Inc.
A recent appeals court decision involving products manufactured outside the U.S. vividly illustrates this issue. In ACE American Insurance Co. v. RC2 Corporation, Inc., No.09-3032 (7th Cir. 2010) ("RC2"), RC2, the Illinois-based company that designs and markets the popular "Thomas & Friends" toys, sought coverage for class action lawsuits filed against it in the U.S. after certain toy trains and train set components were found to have been manufactured in China with lead paint.
RC2 maintained two lines of commercial general liability insurance. The first provided coverage within the U.S., while the other provided coverage in all other parts of the world. When RC2 obtained these policies, it likely thought it had adequate insurance coverage for products-related liabilities throughout the world.
When RC2 turned to its insurers for coverage relating to the class actions, however, both its U.S. and international insurers denied its claim. The U.S. policies contained a lead paint exclusion, which specifically applied to the type of liabilities for which RC2 was seeking coverage. That left the international policies, which did not have a lead paint exclusion.
The international policies covered bodily injuries caused by an "occurrence" that took place in the "coverage territory," which included anywhere in the world except the U.S. There was no dispute that the toys were manufactured in China. The international insurer took the position that the "occurrence" giving rise to the injuries alleged in the class actions took place within the U.S., and thus its policies did not apply.
The trial court agreed with RC2 that, because the products were manufactured in China (well within the international coverage territory), the policies potentially covered the liabilities arising from the class actions and the insurer had a duty to defend RC2. The legal issue on appeal was where does an "occurrence" takes place when products manufactured outside the U.S. cause harm in the U.S.
The Seventh Circuit Court of Appeals held that an occurrence takes place when and where all of the factors that lead to the injury come together to inflict injury. The occurrence thus "takes place where the actual event that inflicts harm takes place." Although the chain of causation began with the manufacturing process in China, the place of the occurrence was the U.S., where consumers ultimately were exposed to the lead paint. The Seventh Circuit also noted that expanding the coverage territory provision in the international policy to include any of the conduct leading to the injury would blur the line between RC2's U.S. and international policies.
Although a win for the insurer, the RC2 case may make it more difficult for insurers to deny coverage under liability insurance policies applicable to the U.S. by arguing that the products were manufactured outside the U.S. This assumes, of course, that no exclusion, like the lead paint exclusion in RC2, limits coverage.
The "coverage territory" provision in the standard form commercial general liability policy published by the Insurance Services Office, for example, expressly contemplates coverage for products manufactured overseas but sold in the U.S. See Commercial General Liability Coverage Form, CG 00 01 12 07 (ISO Properties, Inc. 2006). Under this standard policy form, the coverage territory provision includes the U.S., Puerto Rico, and Canada for products liability suits brought in the U.S., as well as all other parts of the world, if the injury arises out of goods or products made or sold in the U.S., Puerto Rico, or Canada. Id.
Conclusion
The RC2 case demonstrates that liability insurance policies, or combinations of liability policies, designed to afford worldwide liability coverage, may not in fact do so. The interaction between coverage territory provisions that promise broad geographical coverage and exclusions with particular applicability to a policyholder's business -- in RC2's case, a lead paint exclusion -- can actually limit where coverage is available. As RC2 unfortunately found out, the lead paint exclusion in its U.S. policy left it uncovered in a major market for its products.
To avoid a similar situation, a company should periodically review its liability insurance policies to make sure that the coverage territory provisions and the exclusions align to address the particular risks for which the company needs coverage. If there are potential gaps in coverage, then the company should consider obtaining additional insurance to fill them or take other steps to address such risks.
David Elkind is a partner with Dickstein Shapiro LLP. His practice primarily is focused on representing policyholders in insurance coverage disputes. James Carter is an associate in Dickstein Shapiro's Insurance Coverage Practice. Since joining the Firm, he has actively litigated cases on behalf of insureds in a variety of industries in federal and state courts nationwide.
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