Location, Location, Location: Territorial Coverage Restrictions
Insurance Law Update
In ACE American Ins. Co. v. RC2 Corp., Inc., 600 F.3d 763 (7th Cir. (Ill.) April 5, 2010), the Seventh Circuit Court of Appeals ruled, under Illinois law, that commercial general liability policies unambiguously excluded coverage for a U.S. based toy manufacturer with operations in China for the alleged harm caused by exposure to defective toy products that occurred in the United States, irrespective of where the manufacture of the toy products took place.
RC2 Corporation, Inc., a designer and marketer of toys, recalled certain of its "Thomas & Friends" wooden railway trains and parts manufactured in China. Following the recall, RC2 was sued in class action lawsuits in the United States alleging harm arising from exposure to toy products containing lead paint. RC2 tendered the lawsuits for defense and indemnity to its insurance carriers. ACE American Insurance Company issued commercial general liability policies to RC2 that apply internationally, but exclude occurrences that take place within the United States.
The district court ruled that the policies potentially afford coverage for injuries that occur in the United States if some negligent act in the manufacturing process occurs in another country. Thus, the court declared that ACE owed a duty to defend the class action lawsuits.
On appeal to the Seventh Circuit, ACE argued that the "occurrence" took place in the United States. RC2 countered that, in a product liability case, any "antecedent negligent act" such as the manufacturing process in China supported a finding that the "occurrence" took place in China, because the underlying cause of injury in product liability cases is often negligent manufacturing or testing.
Rejecting RC2's argument, the Seventh Circuit determined that the "occurrence" that triggers coverage is where the actual event inflicting harm takes place. Also, the court observed that if it adopted the position of RC2, such construction would render territorial limitations in insurance policies immaterial in product liability situations. Contrary to Illinois law, such an interpretation would allow policyholders to include domestic liabilities under international policies by reference to some antecedent negligent act taking place outside the United States. The Seventh Circuit reversed the district court and remanded with instructions to enter judgment in favor of ACE.