Product Recalls

Product-recall expense can prove increasingly expensive in this time of international distribution, just-in-time inventories, far-flung shipping, and the like. Of course, the current poster child is Mattel, which seems to be doing a very good job in managing the recall of some of its Chinese-made toys. Policies today routinely seek to exclude the cost of product-recall expense, which can be staggering and life-threatening to a company — both in terms of cost and perhaps more importantly in reputation of the producer. Speciality policies exist to deal with various types of recalls, and there has been litigation concerning product-tampering coverage and the more traditional liability insurance coverage and the scope of the product-recall exclusion (known in the trade as the “sistership” exclusion). The current wave of recalls involving Chinese-made products may well stimulate demand for this product, but I would not be surprised to see provenance exclusions developed or warranties required from assured as to quality control and quality assurance from their foreign contractors.

Trigger and Allocation for Asbestos, Other Bodily Injury, and Property Damage: Recent Cases and the Policyholders’ Winning Argument

“Who pays” and “how much” continue to be central questions in insurance-recovery litigation by policyholders for asbestos, environmental clean up, pharmaceutical, lead-paint, toxic-tort and other conditions that produce loss over time. Because insurance contracts are governed by state law, the coverage wars apparently will continue until each inch of turf is won or lost. Most recently, the Delaware Supreme Court has weighed in on the question of trigger of coverage (“who pays”) for asbestos- liability claims, the Minnesota Supreme Court has addressed allocation of loss (“how much”) among triggered policies, and the New Hampshire Supreme Court has now been asked to address the allocation question, too.

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What You See Is Not What You Get: Renewal Policies

One aspect of insurance practice that I like is the seemingly unlimited number of nooks and crannies in insurance law. But like a tree falling in the forest, the existence of one pro-policyholder rule or another in a given state has little impact on human behavior — or trial outcomes — unless that rule is called upon.  One such rule is the "renewal rule."

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Fettering the Insurer’s Privilege to Control the Defense It Is Duty Bound to Provide

For more than fifty years, policyholders and their insurers have been struggling over the insurer’s promise to defend and the insurer’s control the defense. Policyholders properly have been concerned that an insurance company that controls the defense of an action potentially covered by the carrier’s duty to indemnify will use that control to avoid that very same indemnity obligation. While in egregious cases where a lawyer hired by the carrier has abused his or her relationship with the insured, the client, so as to favor the lawyer’s source of income – the insurance company – the courts have responded to protect the insured’s interests. But most courts have ruled that such after-the-fact remedies are insufficient: they do not adequately compensate for the injury; meritorious claims are not pursued (in part because insureds may not discover the abuse); and the potential for this abuse alone undermines the dominant purpose of the insurance relationship to afford protection and peace of mind for the insured.

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Gelding the Pollution Exclusion: Welding Exposure Claims Not Barred

For the past several years, the plaintiffs’ tort bar has sought to make workplace-exposure claims by welders the proverbial “next asbestos.” These cases typically allege a Parkinson’s Disease-like syndrome (“Parkinsonism”) or other neurological impairments (all generally referred to as “manganism”) allegedly stemming from the welder’s exposure to manganese while working. Whether this is a mass-tort with legs is certainly not clear, and the defense has had successes (even in what are considered to be plaintiff-friendly jurisdictions). Naturally, this litigation has produced insurance cases too, and the Maryland Court of Appeals (its highest court) recently ruled that an absolute pollution exclusion did not apply to bar coverage. Clendenin Bros. v. United States Fire Ins. Co. (Md. Jan. 6, 2006).

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E Pluribus Plures: More on Number of Occurrences

Courts continue to confront the question of the “number of occurrences” involved in mass-tort situations. The issue is important because policy limits are expressed in dollars per occurrence, with some policies having unlimited or uncapped retentions on a per-occurrence basis. For a policyholder with a large and uncapped per-occurrence retention, a ruling that each claim against the policyholder is a separate occurrence results in multiplying the amounts retained by the policyholder, oft times pushing insurance out of reach. On the other hand, for a policyholder with no or low retentions, a finding of multiple occurrences can multiply the available coverage.

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Insurance for Goods in Transit

Companies that make things need to get those things to their customers, and they face the risk of loss while the goods are in transit to the customer. Via contract, one can shift or retain the risk of loss during transit, such as having title pass to the customer once the item leaves the company’s facility or to wait until the customer accepts the item at its location. In addition to shifting to one party or the other the risk of loss via the sale contract, the company can obtain insurance to protect itself against loss. Recent cases have addressed both liability coverage – insurance against the risk of loss to goods for which title has passed to the buyer – and first-party coverage – insurance against loss in transit while title remains vested in the seller.

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The Faulty Workmanship of the Courts

A common criticism of courts dealing with insurance issues is that they forget they are dealing with a contract. Where courts don’t like the economic incentives that (they fear) they might create by affording coverage, they sometimes make up coverage-limiting postulates that are nowhere expressed in the policy.
This is what happened in the South Carolina Supreme Court recently, which confronted a question common in the construction context – namely, is a contractor’s faulty construction a covered occurrence. L-J Inc. v. Bituminous Fire and Marine Ins. Co. (S.C. Sept. 26, 2005). If that kind of event can never be an “occurrence,” then insurance companies never have an obligation to pay for the defense of claim alleging resulting injury and damage or to fund the cost of any settlement or, if the case gets tried, any judgment.

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Absolute Nonsense

What we once conceived of as the environmental coverage wars continue in a new, broader form where insurance companies seek to deny coverage for the liabilities of their policyholders whenever they stem from toxic exposures.
In 1986, the “absolute” pollution exclusion was widely introduced. There is agreement that Superfund-type claims and other true environmental liability claims are barred under the various guises of the absolute pollution exclusion. But the insurers have not limited their claim denials to that context.

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Walks and Quacks like a Duck: The Reach of Insurance Regulation to a Seller’s Provision of Insurance-Like Benefits – Of Warranties, Requirements Contracts, & Other Benefits

State regulation of insurance applies if the transaction in question is found to be “insurance.” If something is “insurance,” the entity providing it generally must be a licensed insurance company. If not licensed, then the entity exposes itself to fines and potential criminal liability, in addition to the invalidation of the “insurance” it provided. Many manufacturing, service, and retail companies can find it in their interest to package an insurance-like benefit along with the sale of its product or provision of its service. What are the legal risks to the company from providing this type of benefit to its customers and how can the benefit be structured to minimize the risk yet achieve business objectives?

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