Last year's massive series of recalls of children's toys manufactured in China that contained lead paint spurred lawsuits seeking insurance coverage for losses arising out of the recalls. In one such suit, a federal district court judge for the Northern District of Illinois, applying Illinois law, recently held that an insurer has a duty to defend its insured, a toymaker, in suits arising out of the product recalls. Ace American Ins. Co. v. RC2 Corp., No. 07 C 5037, 2008 WL 2937971 (N.D. Ill., Jun. 28, 2008). The court also held that numerous other coverage issues raised by the insurer did not eliminate the insurer's duty to defend.
The insurer issued four successive liability insurance policies to the policyholder, a maker of children's toys. Each of the policies provided that "[w]e will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." The policies defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The policies contained a temporal limitation on occurrences: "This insurance applies only to 'bodily injury' and 'property damage' which occurs during the Policy Period. The 'bodily injury' or 'property damage' must be caused by an 'occurrence.'" The policies further stated that "the 'occurrence' must take place in the 'coverage territory.'" The coverage territory provision, although not quoted by the court, was noted to include "all of the world outside of the United States."
The policyholder was sued by parents of children in the United States, alleging various theories of exposure and harm from toys contaminated with lead paint that were made in China, but sold in the United States. After the policyholder sought coverage for these underlying actions, the insurer denied that it had a duty to defend or indemnify the insured because of the coverage territory of the policies, the absence of actual bodily injury, the nature of the relief sought, allegations that the offending conduct was intentional, and certain business risk exclusions.
Turning first to the coverage territory issues, the court stated that what constituted the relevant "occurrence" for purposes of a coverage territory provision was a matter of first impression under Illinois law. The coverage territory provision, although not quoted by the court, was noted to include "all of the world outside of the United States." The court rejected the insurer's argument that coverage was barred because the harm for which the underlying plaintiffs sought redress took place in the United States. The court reasoned that "[t]he language of the [policies] refers to Harm that is "caused by an 'occurrence'" and that "here the occurrence is separately identified as being the cause of the Harm" and that the "Harm is not itself part of the occurrence." The court further reasoned that "[t]he language is written in the positive" so that:
For there to be coverage, the occurrence must take place in the coverage territory. It is not required that the Harm take place in the coverage territory but only during the Policy Period. In this situation, the occurrence took place in the coverage territory of China. By contrast, if the provision had been written in the negative, the result could be different. If there had been an exclusion providing that there is no coverage for Harm that took place inside the United States, then the case would fall under such an exclusion.
With respect to the absence of actual bodily injury, the court next found that "Illinois case law construing the same policy language holds that exposure to potentially harmful contaminants constitutes bodily injury even without manifestations of sickness or disease." Accordingly, the court held that each of the underlying complaints alleged bodily injury potentially within the scope of the policies for purposes of the duty to defend.
The court also rejected the insurer's argument that the underlying actions did not seek damages from the policyholder within the scope of the policies. In this regard, the court ruled that "[w]hen left undefined in a comprehensive general liability policy . . . , Illinois law accords 'damages' a broad, nontechnical meaning that is not limited to compensatory damages and can include equitable relief." The court reasoned that each of the underlying complaints sought some type of monetary relief and noted that "compensation for stress and anxiety related to such exposure would clearly be damages because of bodily injury" and that "[a]ll of the cases seek compensation to pay for medical monitoring of underlying plaintiffs who have been exposed to lead contamination from the toys." The court further concluded that "[w]hether such relief is legal or equitable in nature does not matter" because "[i]n either case, it requires payment or expenditure of funds to remediate bodily injury in the form of exposure to lead" and "[t]hat is damages because of bodily injury."
The policies barred coverage for "'Bodily injury' or 'property damage' expected or intended from the standpoint of the insured." The insurer asserted that this exclusion applied because some of the underlying complaints alleged that the toys were "intentionally" painted with lead paint. The court held that this exclusion did not preclude a defense because each of the underlying complaints also contained allegations of negligence that triggered the insurer's duty to defend.
Finally, the court turned to the insurer's argument that the sistership and business risk exclusions preclude coverage. The court noted that the sistership exclusion precludes coverage for "[d]amages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of: 1. 'Your product': 2. 'Your work'; or 3. 'Impaired property'; if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it." The court also noted that the "Your product" exclusion bars coverage for: "'Property damage' to 'your product' arising out of it or any part of it." The court further observed that "Defendants do not dispute that, to the extent any of the underlying lawsuits result in recovery of monies paid to purchase the toys, such recoveries would fall within [the sistership] exclusion." The court concluded, however, that because the current dispute involves the duty to defend and "all the lawsuits contain other claims that do fall within the coverages" at issue, "there is still a duty to defend."