Properly ascertaining available liability limits is essential to early case evaluation. The outcome frequently affects a practitioner’s decision whether, and how, to pursue certain claims. The issue is most significant when representing a claimant against an under insured defendant with limited assets, and is complicated where a series of related events seemingly cause a single injury, or a series of related injuries. In those circumstances, how does one determine the “number of occurrences” under an applicable policy to establish the available liability limits?
Often times, the dispute regarding the extent of an insurer’s indemnity obligation hinges on whether a single event, or “occurrence,” caused the covered loss, or whether multiple events, or “occurrences,” caused the loss. Typically, a liability insurance policy contains two liability limits; a “per occurrence” limit and an aggregate liability limit. Generally, the “per occurrence” limit is the most the insurer will indemnify its insured for a single loss. The aggregate liability limit is the most the insurer will indemnify its insured during the policy period for losses caused by multiple occurrences, regardless of the number or number of claimants. For this reason, the determination of the number of occurrences can have a dramatic impact on the amount of indemnity an insured is entitled to receive from its insurer.
Consider, the owner of the World Trade Center property in New York following 9/11. Assume hypothetically the World Trade Center property was insured for $3.5 billion per occurrence and was subject to a $7 billion aggregate limit. Also, assume that the total property destruction exceeded the aggregate liability limits. What is the amount of recoverable insurance for the total loss and destruction of the World Trade Center property that occurred from the terrorist attack on 9/11? Is the planned attack by terrorists to hijack two fuel-laden planes used to destroy the World Trade Center property a single “occurrence” thus, limiting the property owner to $3.5 billion in coverage? Or, do the acts of separate terrorists utilizing distinct instruments of destruction constitute separate “occurrences” thus, permitting the property owner to recover the $7 billion aggregate coverage? This was the precise issue presented to Second Circuit Court of Appeals, in World Trade Ctr. Props., LLC v. Hartford Fire Ins. Co., 345 F.3d 154 (2d Cir. 2003). The determination of the “number of occurrences” in this case had the potential to be a $3.5 billion issue.
Nationally, there is an authoritative split when determining the number of occurrences. A minority of jurisdictions utilize the so-called “effect” test. Under the “effect” test, the number of occurrences is determined by a focused inquiry on the effect of an injury-producing event, i.e., how many individual injuries did a particular event cause. For example, damage to 119 homes from the failure of a single underground drainage canal constituted 119 separate occurrences under the “effect” test. See Lombard v. Sewerage & Water Bd. of New Orleans, 284 So.2d 905, 915-916 (La. 1973).
Conversely, California courts adopted the majority view and utilize the “cause” test. Under the “cause” test, the number of “occurrences” is determined by examining the cause or causes of the injury-producing event rather than the number of injuries that result from the event. Safeco Ins. Co. of America v. Fireman’s Fund Ins. Co., 148 Cal.App.4th 620, 633.
In Safeco, the underlying dispute centered around damage to real property caused by a series of landslides. There, the insured defendant owned a home located on a hillside. In 1997, the hillside failed which caused a landslide, and damaged adjacent property owned by the plaintiff. Id. at 625. During the following three years, and before the insured defendant repaired the failed hillside, mud, debris, vegetation and water continued to flow onto the adjacent property causing additional property damage and ultimately loss of use of portions of the property by plaintiff. Id. at 626. Litigation between the adjacent property owners followed.
At the time of the landslide in 1997, the insured defendant had a homeowners policy issued by Fireman’s. The defendant renewed the Fireman’s homeowners policy for the three successive years until 2001. Each policy contained a $500,000 limit of liability per occurrence. Id. The Fireman’s policies at issue defined an “occurrence,” as “[a]n accident, including continuous or repeated exposure to the same or similar harmful conditions, which results, during the policy period …, ‘property damage.’” Id. at 631.
In addition to the Fireman’s policy, at the time of the collapse, the defendant held an excess policy issued by Safeco Insurance Company containing a $5 million per occurrence liability limit. The Safeco policy did not cover an occurrence until the defendant exhausted the liability limits available under the applicable Fireman’s policies. The defendant annually renewed the Safeco policy until 2000. Id. at 626. Thus, at the time of the collapse the defendant held $5,500,000 in insurance coverage per occurrence. The Fireman’s policy covered the first $500,000 in liability for a single occurrence, while the Safeco policy provided an additional $5 million in excess coverage for the same occurrence.
Following trial, the court entered a $2.2 million judgment against the defendant for the damage caused by the landslide and the cost to repair the failed hillside. Fireman’s paid $765,000 towards satisfying the judgment against its insured defendant and Safeco contributed $1.5 million. Id. at 627.
Subsequently, Safeco filed a declaratory relief action against Fireman’s seeking a determination that the Fireman’s policies issued between 1997 and 2001 provided the insured defendant with $4 million in coverage – enough to satisfy the entire judgment entered against the insured defendant. Safeco argued that the initial landslide was merely the first in a series of “occurrences.” Safeco contended that each additional slide of mud, debris, vegetation and water during the three years that followed the initial landslide constituted separate occurrences. Thus, Safeco argued, there had been at least four separate occurrences, covered by four separate policies issued by Fireman’s, each subject to a $500,000 per occurrence liability limit for a total of $4 million. Accordingly, Fireman failed to exhaust its liability limits when it contributed only $750,000 towards satisfying the $2.2 million judgment against the insured defendant. As such, Safeco argued it was entitled to recover the $1.5 million it paid towards the judgment from Fireman’s. Id. at 627-628.
Fireman’s on the other hand, cross-complained against Safeco seeking to recover $265,000, representing the amount Fireman’s paid above its $500,000 per occurrence liability. Fireman’s argued that the 1997 landslide and all subsequent slides of mud, debris, vegetation and water during the ensuring three years, constituted a single occurrence under a single Fireman’s policy in effect during 1997. Fireman’s contended that its $765,000 contribution to satisfy the $2.2 million judgment against the insured defendant exceeded the $500,000 policy limit for a single occurrence. Consequently, Fireman’s asserted subrogation and an equitable indemnity claims against Safeco for $265,000. Id. at 628.
The issue before the Court of Appeal was whether the landslide and all subsequent damages caused from sliding mud, debris, vegetation and water, constituted a single occurrence, or multiple occurrences under the applicable Fireman’s policies. If the Court of Appeal found multiple occurrences, Fireman’s would potentially be liable for all $2.2 million of the judgment against the insured under the various policies issued between 1997 and 2001. Whereas, if the Court of Appeal found a single occurrence, Safeco would be liable to Fireman’s for the amount Fireman’s paid in excess of its $500,000 per occurrence liability limit.
In analyzing the issue before it, the Court of Appeal adopted the “cause” test and focused its inquiry on the injury-producing event, rather than the number of injuries caused by the event.
In determining policy limits, occurrence has generally been held to mean the underlying cause of the injury, rather than the injury or claim itself; otherwise, the insurer's effort to limit its liability per occurrence would be substantially weakened. When there is a single cause of multiple injuries (or a number of causes that result in a greater number of injuries), courts often look to the cause rather than the injuries in determining the amount of insurance coverage. In such a case, the result is a finding of only one claim, i.e., the court looks to the single cause rather than to the multiple injuries…It is irrelevant that there are multiple injuries or injuries of different magnitudes, or that the injuries extend over a period of time. Conversely, when a cause is interrupted, or when there are several autonomous causes, there are multiple “occurrences” for purposes of determining policy limits and assessing deductibles.
Id. at 633-644 (emphasis in original; internal citations omitted).
Under the “cause” test, the Court of Appeal held that continuous damage to the property during a four-year period caused by the initial landslide constituted a single occurrence. Id. at 634. The Court of Appeal accepted, but found it irrelevant when asked to determine available policy limits, that the damage to the property continued over the four-year period. Id. at 635. “A subsequent policy period that consists solely of preexisting or continuing damage, without another precipitating act or event, does not provide additional benefits.” Id. Here, the Court of Appeal determined that “there was one uninterrupted cause or event—the landslide—that resulted in all the damage.” Id. at 634. Accordingly, the Court of Appeal affirmed the judgment in favor of Fireman’s for $265,000.
Fortunately for the injured plaintiff in Safeco, the insured defendant carried adequate primary and excess insurance to cover the damage caused by the landslide. Unfortunately for the owners of the World Trade Center properties, the finding of a single occurrence nearly led to a multi-billion dollar uninsured loss. In practice, ascertaining available policy limits, and the number of occurrences causing a loss, can be the difference between obtaining an early policy limit demand and obtaining a large virtually uncollectable judgment. For this reason, it is imperative to target the complete production of insurance policies early in the discovery process. This will reveal the policy(ies) definition of “occurrence” which will allow the practitioner to properly analyze the available policy limits for the loss.