The law of describing accidents: a new proposal for determining the number of occurrences in insurance.

• Author: Murray, Michael

NOTE CONTENTS INTRODUCTION I. THE INSURANCE SYSTEM A. Brief Overview of Background Concepts B. The Occurrence Concept II. CURRENT THEORIES OF OCCURRENCE A. Causation Theories 1. Proximate Cause Theory 2. Liability Event Theory B. Effect Theories C. A Hypothetical Example III. CRITIQUING THE CAUSATION THEORY A. The Inconsistency of the Causation Theory B. Straining the Concept of Causation IV. AN INDEPENDENCE APPROACH A. The Independence Model in Practice 1. The Probabilities in an Independence Test 2. Defining the Loss 3. Sources of Data 4. Legal Independence B. Advantages of an Independence Approach C. Problems with the Independence Approach 1. Unforeseen Phenomena 2. Opting Out: Contractual Independence 3. Burdens on the Court System V. THE IMPACT OF AN INDEPENDENCE TEST A. Examples of Independence Analysis B. Differences in Case Outcomes Under the Independence Test C. A Better Justification for Some Case Outcomes CONCLUSION INTRODUCTION

The financial ability to rebuild the World Trade Center depended in part on whether the events in New York City on September as, 200l should be described as one event or two. (1) If the attack on September 11 ought to be described as one event, the owners of the World Trade Center (WTC) were entitled to recover approximately $3.5 billion, not nearly enough to rebuild. (2) If the attack should be described as two events, the owners were entitled to recover over $7 billion, an amount closer to that needed to rebuild. (3)

The precise description of the events of September 11 matters because the insurance policies covering the WTC provided recovery on a "per-occurrence" basis with a cap of $3.5 billion for each occurrence. (4) The definition of "occurrence" and whether the attack constituted one or two occurrences so defined was critical, therefore, to the amount of recovery. Unsurprisingly, lengthy litigation over the term ensued. (5) The dispute was complicated by the fact that the parties had not completed a final insurance contract by September 11 and various drafts and relevant documents had, at least according to the litigants, contradictory implications. (6) In the end, a jury found that a majority of the insurers of the property were bound to a form that treated what happened on September 11 as one occurrence, while a minority of insurers were bound to a different definition that treated what happened on September 11 as two occurrences. (7)

Conflicts over the number of occurrences in an insured event are not limited to terrorist acts or similarly unique situations. On the contrary, disputes over the term occur in a wide variety of contexts, including products liability, (8) environmental damage, (9) employment discrimination, (10) automobile accidents, (11) arson, (12) gunshots, (13) food poisoning, (14) police brutality, (15) and transportation of goods. (16) The issue can arise any time an insured asset is involved with multiple injuries to persons or property.

Academic discussion of the approaches to determining the number of occurrences is sparse. Only a few scholarly works have catalogued the prevalent doctrines in the case law. (17) While several commentaries on the September 11 litigation appeared in both popular publications and academic journals, none of these deeply analyzed the multiple occurrence doctrine. (18) No article has subjected the prominent doctrines to focused theoretical critique and analysis. (19) This omission is striking because of the importance leading treatises and casebooks attribute to the issue. (20)

This Note seeks to fill this gap in the literature. It makes three novel contributions. First, the Note seeks to clarify confusion over how to catalogue the current doctrines employed by courts (21) with a typology and a hypothetical example that highlights the differences among the theories. Second, it criticizes the ascendant causation theory on both transsubstantive and normative grounds. The Note therefore avoids two of the defects of existing criticism of the causation theory. Existing scholarship has primarily focused on particular cases and, as a result, has only criticized the specific application of the causation theory to a set of facts. (22) This Note's critique, however, compares and contrasts outcomes in a wide-ranging series of cases to make a larger point regarding the impossibility of consistent adjudication in insurance disputes under the causation theory. Previous critiques also have not relied on the familiar concept of proximate causation and its connections both to normative responsibility and understandings of human decisionmaking to ground their analysis.

The final and primary contribution of this Note is an independence-based proposal for the definition of occurrence. No scholar has advanced such a proposal: all other scholarship argues in favor of a particular variation of the causation theory (23) or for an outcome under a particular variation. (24) The Note argues for an independence approach on the basis of normative analysis of the economics of the insurance system and of appeals to judicial economy. Specifically, the independence approach better comports with the intent of the parties. It also provides an objective criterion that reduces the inconsistent outcomes and the opportunities for outcome-based judging plaguing the causation approach. This economics-based argument contrasts strongly with the existing scholarly defenses of the causation theory, which focus largely on outcome, such as privileging victims or addressing a certain type of injury. (25) The Note, therefore, is also original in extending economic analysis--common in insurance law (26)--to the occurrence issue.

A brief comment on the property versus liability insurance distinction is important before proceeding. Despite the reference to property insurance regarding the WTC case, this Note generally focuses on liability, and not property, insurance. The same arguments apply, however, to property insurance, albeit in somewhat different terms. To be sure, some commentators distinguish between property and liability insurance when analyzing occurrence theories. They reason that payouts for liability insurance are unlimited and compensate unsuspecting tort victims whereas payouts for property insurance are limited to land value and compensate individuals choosing to own and insure property. (27) This reasoning, however, is flawed on a number of grounds. First, it is countertextual: the contracts in both areas are often similar, if not identical. (28) Since insurance is a contract-based field, and textual intentions matter in contract interpretation, (29) this similarity matters. Second, the assumptions of insurance--such as independence of insured events and information availability--are the same in both types of cases. In other words, there is no reason to think that different background principles underlie the different insurance systems. Third, while liability insurance addresses unlimited losses, the ability to calculate average losses and a loss distribution is more important for the operation of insurance: unpredictable and large losses can be insured as long as their distribution is known. There is no reason, consequently, to think that a different occurrence conception is needed to address this difference. In any event, the rise of aggregate caps in liability insurance renders this difference moot. Finally, the distinction presumes that insurance contract interpretation should care about distributional justice at the expense of consistency and efficiency because it privileges tort victims--who cannot purchase insurance--by maximizing their recovery. But contractual interpretation traditionally relies on the intent of the specific parties, not universal utilitarian concerns better addressed by mandatory insurance requirements, as for automobile insurance or social safety net policy. Consequently, this Note rejects such a distinction between property and liability insurance for the limited purpose of interpreting the occurrence concept. Courts, however, appear divided on this point. (30)

The Note proceeds in four Parts. Part I provides a brief overview of insurance and the concepts relevant for later analysis. Part II describes the two theories of occurrence prevalent in the case law, focusing on the ascendant causation theory and its two variations. Part III critiques these theories from both external and internal perspectives, arguing that the variations are internally incoherent, that courts choose between the variations without principle, and that courts apply the variations inconsistently. Part IV proposes a different theory for the definition of occurrence based on the concept of independence. It details the types of inquiries required by an independence test, discusses the sources of the data necessary for such inquiries, and addresses counterarguments to an independence test. The final Part provides examples of independence analysis and describes the clarifying impact of an independence test on current doctrine and cases.

1. THE INSURANCE SYSTEM

   Insurance is widespread in the modern world and has existed in some form since ancient times. (31) While the modern insurance system is technical and complex, its basic functioning is consistent and its terms are often standardized. (32) This Part will briefly describe how insurance works and define several relevant concepts.

   1. Brief Overview of Background Concepts

      Insurance increases societal welfare because of the phenomenon of risk aversion. (33) Demand for insurance arises because individuals are risk averse with regard to losses: they prefer a certain loss to the risk of a greater loss even when the average loss is the same for both. (34) Individuals, therefore, routinely pay insurance premiums that are equal to or less than the average loss plus their risk premium to avoid the chance, however small, of disastrous loss.

      In order to capitalize on risk aversion, insurance systems...