The U.S. District Court in Pennsylvania ruled last week that multiple claims that arose from allegedly defective drywall that the insured entity imported in one single shipment from China should be considered a “single occurrence” for the insurance coverage.
The insurer that provided coverage was Cincinnati Insurance Co. and the insured business entity was a Penn.-based import company called Devon and its affiliates Devon International Inc., Devon IT Inc., Devon International Group, and Devon International Industries Inc.
Devon and its affiliates were named insureds under Cincinnati Insurance Policy No. 365 83 38, which was in effect from Nov. 20, 2008, until Nov. 20, 2010.
The policy was issued to Devon under a pair of one-year policy periods, and included commercial general liability coverage and commercial umbrella coverage.
Under the policy’s commercial general liability coverage form, Devon and Cincinnati agreed that the insurance policy would cover only bodily injury or property damage if (1) “[t]he bodily injury or property damage is caused by an occurrence that takes place in the coverage territory” and (2) “[t]he bodily injury or property damage occurs during the policy period.”
The coverage form further defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
Although Policy No. 365 83 38 included commercial umbrella coverage, such coverage only applied if an injury was caused by an occurrence that took place during the policy period.
One Order, One Shipment
The court documents show that on Feb. 8, 2006, Devon, serving as a sourcing agent for Chinese products, received an order from the North Pacific Group for Chinese drywall.
Devon filled this order by purchasing drywall from Shandong, a Chinese drywall manufacturer, and then shipping that drywall to Florida.
The court stated that all the drywall that Devon imported came by way of one single order to Shandong and one single shipment from China to Pensacola, Florida.
Some of the drywall was damaged en route to Florida, however, and one of Devon’s insurers took possession of this damaged drywall and sold a portion of it at salvage.
In July 2006, North Pacific accepted delivery of some — but not all — of the undamaged drywall. Devon then sold the remaining undamaged drywall to other individuals and entities.
By April 2009, Devon received a letter from counsel for North Pacific requesting a defense and indemnification for a claim arising from alleged defects in the imported drywall. Thus, Devon thus became aware that the imported drywall allegedly contained an improper amount of sulfur.
Devon subsequently faced what the parties describe as a “multitude of lawsuits” in various jurisdictions arising from the allegedly defective drywall.
Plaintiffs in these suits allege that sulfur emitted by the drywall damaged their real and personal property, but they do not allege that the drywall was defective because it was damaged en route to Florida.
Some plaintiffs in these lawsuits allege that they sustained damage between November 2008, and November 2009 as a result of the drywall imported by Devon, and others allege that they sustained damage between November 2009, and November 2010 due to this drywall.
Cincinnati, Devon File Cross-Motions for Summary Judgment
The U.S. District Court in Pennsylvania stated that the parties differed over the extent to which Cincinnati Insurance must provide Devon with a defense and indemnification in litigation related to allegedly defective drywall that Devon imported in one shipment.
The two parties have filed cross-motions for summary judgment in this coverage dispute. On Feb. 15, the U.S. District Court, Eastern District of Pennsylvania, granted Cincinnati’s motion and denied Devon’s motion.
The court stated that both Cincinnati Insurance and Devon agreed the insurance policy at issue is an “occurrence” policy governed by Pennsylvania law. Therefore, the court stated, the central issue in cross-motions for summary judgment is whether the underlying claims against Devon arise out of a single occurrence or multiple occurrences.
The U.S. District Court in Pennsylvania stated that various courts “have applied three tests” to determine “whether there is a single or multiple occurrences” for purposes of insurance coverage. A majority of courts determined the number of occurrences by looking to the cause or causes of an injury, while other courts focused on the effects of an insured’s action. Additionally, a “third category of courts consider the event that triggered liability [of the insured] to determine whether there are single or multiple occurrences.”
The court stated that, based on the parties’ arguments, under Pennsylvania law, the two relevant tests for determining the number of occurrences are the “cause” approach and the “liability-triggering event” approach.
Court: All Claims Against Devon Stemmed From One Proximate Cause
The court stated that under Pennsylvania law, it is the duty of the court to interpret an insurance policy and thereby determine the existence of insurance coverage. And in this case, the court evaluated whether coverage exists for Devon by using the “cause” approach to determine how many “occurrences” took place under the policy.
If all the claims against Devon “stem from one proximate cause” and Devon “had some control” over that cause, then there is a single occurrence, the court stated.
In its ruling, the court stated that all the injuries to the underlying plaintiffs and claims against Devon originated from a common source: Devon’s single purchase and shipment of allegedly defective drywall from Shandong.
Moreover, Devon “had some control” over the cause of the injuries, in that it chose to purchase and distribute the defective drywall. “Therefore, the court finds that there is only one ‘occurrence’ for purposes of insurance coverage,” according to the ruling.
The court also noted that under Pennsylvania law regarding coverage trigger, an occurrence happens when the injurious effects of the negligent act first manifest themselves, in a way that would put a reasonable person on notice of an injury.
Some of the underlying plaintiffs were allegedly damaged by Devon’s imported drywall during the first policy period: November 2008 through November 2009. Thus, the court ruled that the single occurrence took place during that first policy period. And as such, the policy during that period is the one policy being triggered.