Chapter 22 Addressing Insurance Coverage Issues Specific to Products Liability Litigation

• Jurisdiction: New York

CHAPTER TWENTY-TWO ADDRESSING INSURANCE COVERAGE ISSUES SPECIFIC TO PRODUCTS LIABILITY LITIGATION Charles Platto, Esq.

I. UNDERSTANDING THE SCOPE OF COVERAGE

A. Coverage and Exclusions Under Commercial
General Liability Policies

In order to understand products liability insurance, one must be aware of (1) what such insurance does not cover and (2) how coverage, or the lack thereof, is treated in standard commercial general liability (CGL) policies ³⁶⁶²

1. What Products Liability Insurance Does Not Cover

Products liability insurance does not cover defects in a product. It generally does not cover the cost of recall, repair or replacement of the product. It also does not cover warranty work ³⁶⁶³ This lack of coverage can be explained by the very nature of insurance: Insurance is intended to cover fortuities—unexpected events outside the control of the insured ³⁶⁶⁴ A defect in a product that causes damage to the product itself, requiring repair or replacement, is not an insurable event; it is a business risk of the vendor. Thus, when a CGL policy provides coverage for bodily injury or property damage, it is well settled that the policy does not cover damage to the product itself ³⁶⁶⁵

2. Coverage Under the CGL Policy

What the CGL policy does cover is liability for bodily injury or property damage suffered by third parties. Thus, the coverage provisions (the insuring agreement) of the CGL policy appear to cover a product that causes injury or damage to persons or property.

If the coverage provisions were all that had to be considered, this would be a very short chapter. However, nothing is so simple. Indeed, products liability insurance is one of the more complex forms of coverage. Although the coverage provisions in the CGL policy are very short and general (as set forth in greater detail below), the exclusions under the standard policy are quite lengthy and specific. It may be said that what the insurer giveth in the coverage section, it taketh away, in large part, in the exclusions. It then may take away more or add something back in the endorsements to the policy. This is particularly true in the case of products liability coverage and exclusion provisions.

In the first place, the own-property and business-risk exclusions preclude warranty claims for repair or replacement of defective products or workmanship. ³⁶⁶⁶ However, the exclusions do not stop there; otherwise, there still would be coverage for damages to third persons or their property, resulting from the defective product. Such coverage, however, may be excluded under a number of other provisions, including the products-hazard exclusion, completed-operations exclusion, sistership exclusion, pollution exclusion and so on. ³⁶⁶⁷ Some of these appear in the body of the policy itself, and some appear in endorsements.

The net effect of all these exclusions is that the standard CGL policy may or may not provide products liability insurance at all.

B. Coverage for Products Liability and Completed Operations

The most significant form of products liability coverage is coverage for third-party liability, resulting from the insured’s products or the insured’s completed operations. Prior to 1973, these terms appeared as separate exclusions—the products-hazard exclusion and the completed-operations exclusion. Beginning with the 1973 standard policy, coverage was provided for liability resulting from the insured’s products and completed operations in the standard CGL policy (as an exception to the exclusions for damage to one’s products), but was often altogether excluded by endorsement. ³⁶⁶⁸ In the 1985, 1988 and 1992 standard policy forms, the products-hazard and completed-operations provisions were combined as a single products-hazard/completed-operations provision. ³⁶⁶⁹

While the inclusion of these provisions in the coverage section or the exclusion sections or in an endorsement (and the more recent combination of these provisions) may at first seem confusing, the terminology is generally the same. The exclusions are the mirror images of the coverage provisions. The key is to determine whether basic products liability coverage for damage to third parties has been provided by the basic policy form or its endorsements.

C. Claims-Made Versus Occurrence Policies

Since 1966, the CGL policy has been “occurrence”-based; prior to 1966, the policies were “accident”-based. The “occurrence” definition was included in 1966 to make clear that coverage included gradual conditions. ³⁶⁷⁰ Under the accident- or occurrence-based CGL policies, or under separate endorsements or policies that provide products liability coverage based on accidents or occurrences, there is coverage for an accident or occurrence that gives rise to bodily injury or property damage within the policy period.

In the 1980s, the insurance industry began to face increasing exposure arising from claims for accidents or events that took place years earlier, giving rise to potential liability under policies issued years ago. The exposure, known as long-tail exposure, is particularly prevalent in the asbestos and pollution areas. ³⁶⁷¹

As a result of concern over such exposure, insurers began to write claims-made policies, which provided coverage based not on when the accident or occurrence took place, but rather on when the claim was first made and reported. This coverage received varying reception and, ultimately, the CGL policy has by and large remained occurrence-based. Consequently, insofar as products liability coverage appears in the form of an endorsement to a CGL policy, it tends to be occurrence-based. ³⁶⁷²

On the other hand, there are more and more products liability, environmental-impairment liability and similar policies that are separately written on a claims-made basis. Under such policies, coverage is provided only for claims first made and reported within the policy period—an attempt by carriers to limit their long-tail exposure. The general rule is that once the policy period has expired, there is no further liability under the policy. There are, however, exceptions to this rule. Claims-made policies generally contain retroactive dates and extended reporting periods. In order not to assume long-tail liability, a carrier will require that the occurrence for which a claim is made must have taken place subsequent to the retroactive date of the policy, which will often be the first year of claims-made coverage and the last year of occurrence-based coverage. ³⁶⁷³ Upon expiration of coverage, the insured may purchase extended reporting coverage, which will provide coverage beyond the original claims-made policy period for events that took place during the coverage period. ³⁶⁷⁴

D. Vendor’s Endorsements and Successor Liability

One unique aspect of products liability is the dual liability of manufacturers and vendors ³⁶⁷⁵ Rather than duplicating coverage, the manufacturer of a product typically obtains coverage for the benefit of its vendors by way of a separate vendor’s endorsement. Such an endorsement usually provides that the policy is amended to include the person or organization named as vendor as an insured, but only with respect to the distribution or sale of the named insured’s products in the regular course of the vendor’s business. ³⁶⁷⁶

Coverage issues include the duty of the insurer to defend an additional insured under the vendor’s endorsement. In Sucrest Corp. v. Fisher Governor Co., ³⁶⁷⁷ the manufacturer of a valve was sued for damages arising from a fire allegedly caused by its valve. The valve manufacturer in turn filed a third-party complaint against a component part manufacturer and a fourth-party complaint against the component part manufacturer’s insurer for a declaratory judgment that the insurer was obligated to provide a defense under a vendor’s endorsement. The insurer argued that it was not obligated to provide a defense in the underlying action where the component part manufacturer had not been named as a defendant and the vendor’s endorsement had been rendered ineffective by modifications to the component by the valve manufacturer. The court held that the insurer’s failure to provide a defense was unjustified. The valve manufacturer was accordingly entitled to recover from the insurer the amount of its contribution to a settlement, as well as the fees and expenses it had incurred in the underlying litigation. ³⁶⁷⁸

Increases in both the number of cases involving delayed manifestation of injury or damage and corporate mergers and acquisitions have led to the increased possibility that a successor corporation may be held liable for the acts of its predecessor. The grounds for successor liability and the circumstances under which insurers may be found to have obligations to successors are thus significant issues with respect to products liability insurance.

Under New York law, a corporation acquiring the assets of another ordinarily will not be held liable for the torts of its predecessor. It may, however, be found liable if one of four exceptions applies: (1) the successor corporation has expressly or impliedly assumed the predecessor’s liability, (2) there was a consolidation or merger of the seller and the purchaser, (3) the purchasing corporation is a mere continuation of the selling corporation, or (4) the transaction was entered into fraudulently to escape such liability. ³⁶⁷⁹

Even if none of these four exceptions applies, a successor corporation may nonetheless be held liable, based on its own relationship arising out of its status as successor, to a claimant who has been injured or damaged. In Schumacher v. Richards Shear Co., ³⁶⁸⁰ a successor corporation purchased substantially all the assets of another corporation, and both corporations were subsequently named as defendants in a suit brought by an injured employee of a purchaser of the

...