A little-noticed but consequential decision challenges the accepted notion of coverage territory in standard general liability policies in widespread use throughout the world. The federal district court in Chicago has upset the settled understanding of the concept of “policy territory” in general liability policies issued to companies engaged in international sales of products. ACE Am. Ins. Co. v. RC2 Corp., No. 07 C 5037, 2008 WL 2937971 (N.D. Ill. June 26, 2008), reh’g denied Aug. 14, 2008. The court held that policies restricting coverage to countries other than the United States nonetheless afforded coverage for alleged bodily injury to children in this country purportedly caused by defective toys manufactured in China. Insurance coverage provided to companies selling goods internationally is often segmented geographically with coverage for the United States, with its highly developed product liability tort law regime, being written separately from coverage for the rest of the world where, realistically, product liability exposure is less significant. Other geographic splits of various sorts (e.g., U.S. and Canada versus the rest of the world) are also common. The RC2 decision, if followed elsewhere, will seriously erode those coverage limitations.

Impact of the Ruling

Under the reading adopted by the RC2 court, policies containing language indistinguishable from that found in current ISO commercial general liability forms extend coverage for every bodily injury or property damage claim in which either the product is allegedly defectively manufactured in the policy territory or the actual harm to the claimant arises in the policy territory. So, if the policy territory is the “rest of the world” beyond the United States, coverage is available both if the product was made, say, in China and the alleged injury occurred in the U.S., or if the product was made in the U.S. and the harm took place overseas. Equally, if the policy territory is the United States, coverage arises if the product is made here and the harm occurs elsewhere or vice versa. In substance, as a result of this decision, the effective coverage territory for products liability becomes global in most export contexts, regardless of the “coverage territory” the parties negotiated.

The commercial implications of expanding the geographic scope of coverage for international insurers are illustrated by the facts of the RC2 case itself. RC2 arose when bodily injury claims were asserted based on exposure of children in the U.S. to toys manufactured with lead paint in China. Such U.S. bodily injury claims and sweeping product recalls premised on asserted substandard manufacture in China (and other lower-cost countries) of consumer products, particularly those intended for children, are prominent today. They must be expected to continue for many years in a globalized but often only minimally regulated economy. Indeed, the specific concern with lead in toys underlying RC2 is likely to grow more severe in the U.S. and other Western countries. The newly-enacted Consumer Product Safety Improvement Act in the U.S. reflects a greatly heightened public alarm about lead in products. It creates mechanisms that may cause more mass tort claims to be asserted, even though the law’s goal is to prevent exposure of Americans to potentially unsafe products.

The Court’s Analysis

The RC2 court reaches its radical result through what it characterizes as merely exceptionally precise parsing of policy language. As the court recognizes, the central question is whether an “occurrence” arises where the product is manufactured, or where it causes harm, or both. The text of the definition of “occurrence” does not provide a clear answer. The approach that the court takes in the face of this circumstance appears not to be analytically rigorous.

The court begins by rejecting both parties’ efforts to invoke prior cases. The principal case addressing geographic limitations is Diamond Shamrock Chemical Co. v. Aetna Casualty & Surety Co., 609 A.2d 440 (N.J. Super. Ct. App. Div. 1992), decided by the New Jersey intermediate appellate court. The facts of that case are, in effect, the converse of RC2. A product (the now infamous Agent Orange) manufactured in the United States caused bodily injury in Vietnam. The relevant policies limited the coverage territory to the United States. In Diamond Shamrock, the appellate panel cited ten appellate cases from jurisdictions around the United States in concluding “the courts have consistently held that the place where the injury happened is the location of the occurrence.” 609 A.2d at 470. It goes on to note that “it has been said that ‘the focal point of coverage is not the place of the negligence, but the place of the accident,’ i.e., where the injury occurred.” Id. (quoting Dowden v. Sec. Ins. Co. of New Haven, 378 F.2d 46, 48 (5th Cir. 1967)).

The judge in RC2, however, curiously gives Diamond Shamrock the back of his hand, based on the supposed failure “to consider the particular policy language or circumstances involved.” 2008 WL 2937971, at *3. This even though the scholarly Diamond Shamrock panel made clear that it could resolve the question presented based on the overall structure of the insuring arrangement and the uniformity of precedent without regard to the varying nuances of policy language. Similarly, in declining to alter his ruling on rehearing, the judge dismissed reliance on “cases from other states,” observing that “[t]hey are not controlling in Illinois, generally are distinguishable, or contain only conclusory reasoning that is inconsistent with Illinois precedents.” Opinion and Order, Aug. 14, 2008 at 3.

In much the same way, the court moves with remarkable alacrity through all of the Illinois caselaw cited as analogous by either party, typically Illinois cases addressing either the timing of an occurrence or the number of occurrences presented by a fact pattern, again because the policy language varied from that presented here. 2008 WL 2937971, at *4-6. It concludes that “there is no case law giving the language of the [applicable] policies an established legal meaning that should be applied.” Id. at 6.

Having disposed of a prominent on-point appellate case and numerous assertably analogous cases largely because they supposedly did not address the applicable policy language, the RC2 court proceeds to resolve the crucial question of where an occurrence is deemed to arise in a brief analysis that, as it turns out, is not itself meaningfully tied to the specifics of policy language.

First, the court focuses on a “well-recognized tort principle that there can be more than one proximate cause of an injury.” Id. Why is this tort principle more pertinent then the “consistent” principle of insurance contract law invoked by Diamond Shamrock? And, even more basically, why is tort law controlling here at all? The RC2 court cites no authority in its principal opinion in support of this unusual leap from contract to tort principles. When the insurer challenged this approach in seeking rehearing, the court only reiterated that “it is consistent with Illinois tort law to have more than one proximate cause of an injury,” Opinion and Order, Aug. 14, 2008 at 4, without explaining why tort law is controlling.

Second, the RC2 court notes that, as a tort law proposition, “[b]oth the negligent manufacture of the toys and the paint leaching lead . . . must have occurred for Harm to be caused.” 2008 WL 2937971, at *6. On the basis of that proximate cause point, it draws the conclusion that under the policy language “coverage is not precluded” because “[t]he language is written in the positive.” Id. This is both the court’s central holding and a puzzling reading of language that says only that “[t]he ‘bodily injury’ or ‘property damage’ must be caused by an ‘occurrence.’” Indeed, if anything, the policy language defining an “occurrence” as an “accident” indicates that, as a contract law proposition, no occurrence takes place until the harm occurs – in this case in the United States. At a minimum, it is clear that the court is not actually construing the policy language in reaching its coverage-expanding conclusion. On rehearing, the court simply states that its ruling “is fully consistent with the plain language of the policies’ territorial provisions,” not that it is based on that language. Opinion and Order, Aug. 14, 2008 at 4.

The court’s supposed focus on policy language must realistically be seen as merely a device for bypassing precedent that should have dictated its reading of “occurrence.” The RC2 court earlier in the opinion actually quotes the Illinois Supreme Court to the effect that “a policy term may be considered unambiguous where it has acquired an established legal meaning” 2008 WL 2937971, at *2, quoting Nicor, Inc. v. Associated Elec. & Gas Ins. Servs. Ltd., 860 N.E.2d 200, 286 (Ill. 2006). Yet, it dismisses Diamond Shamrock, which holds precisely that “occurrence” has a settled geographic meaning, because of the supposed need to apply specific language. However, it does not actually parse the policy language in any meaningful way. On rehearing, it can only add that out-of-state cases are “not controlling,” without explaining why they should not be highly persuasive. Fairly viewed, Diamond Shamrock and the earlier cases it invokes establish a legal meaning of precisely the sort Nicor references. Indeed, the absence of recent cases addressing that geographic meaning of “occurrence,” post-Diamond Shamrock, surely a frequent question in real-world claims handling, presumably reflects the now-established character of that concept. The RC2 decision sidesteps the important principle articulated in Nicor.

Future Consequences

If, as this writer suggests, the analysis of the RC2 court is seriously flawed, can the insurance industry simply assume that the case will be overturned or at least disregarded by other judges? This case poses a question of real practical importance to insurers providing less-than-global coverage to companies engaged in international commerce. Although the significance of a single trial court ruling should not be overstated, nonchalance is clearly not appropriate. International sellers of goods today face rapidly expanding, often unexpected liability outside of their home countries. The inclination to assert insurance coverage under geographically limited policies will likely not be confined to the management of RC2 Corporation. Equally, the kind of sophisticated, aggressive policyholder counsel that represented that company will surely be advising other similarly positioned companies to take the same position. The drastic expansion of coverage found in RC2 must be expected to be sought elsewhere, as well.

Prospectively, insurers’ underwriters can and should address uncertainty about the application of policy territory provisions through clarifying language. However, general liability policies are typically written on an “occurrence” (rather than “claims made”) basis, exposing insurers to the possibility of “long tail” claims arising many years after a policy expires. Indeed, the policies at issue in RC2 dated from the 1970s. No alteration of future policy language will eliminate the threat of unintended coverage as to such claims.