Westchester Surplus Lines Ins. Co. v. Maverick Tube Corp., #H-07-540 (S.D. Tex. June 28, 2010) see Decision
One of the most vexed and confused liability insurance coverage issues under Texas law is the determination of the number of occurrences that cause covered damage or injury under standard CGL policies. This case illustrates the problem. An oil-field pipe manufacturer sold 1.306 pieces of pipe to a distributor, who in turn sold the pipe to a drilling company, who used the pipe in four different gas wells. The pipe failed in all four wells due to a manufacturing defect. The driller sued the manufacturer basically for the cost to redrill the four wells.
The manufacture was covered under a standard CGL policy and an umbrella for over $25 million, but the CGL policy was subject to a $350,000 self-insured retention on a per occurrence basis. This means that the manufacturer must pay a separate retention for each occurrence. An "occurrence" is typically defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions" that cause damage or injury. The insurance company argued that each damaged well represented a separate occurrence. The manufacturer said that the manufacturing defect was the single cause of the failures; hence, only one occurrence.
The court agreed with the insured and relied on a 2009 case from the Southern District of Texas, National Union Fire Co. v. Puget Plastics Corp., 649 F. Supp.2d 613 (S.D. Tex. 2009), which held that defective plastic water chambers incorporated into over 800 water heaters constituted a single occurrence that resulted in multiple failures. The cause of the multiple failures was the single manufacturing defect.
So why do I say that this issue is a hopeless muddle under Texas law? It seems fairly straightforward, right? But consider Maurice Pincoffs Co. v. St. Paul Fire & Marine Ins. Co., 447 F.2d 204 (5th Cir. 1971), in which the court held that defectively manufactured bird seed sold by 8 separate dealers to customers constituted 8 occurrences, not one, even though no one disputed that the cause of the bird injuries was the defective manufacture of the seed. The Westchester court considered the Pincoffs decision and distinguished it by noting that the defendants were product distributors, not manufacturers, and the cause of the injury was the sale, or rather, the multiple sales, of the defective seed by the 8 distributors. I doubt, however, that this reasoning will stick in the next case where a defective product sold by multiple distributors causes damage to multiple, multiple customers.
The heart of the problem is that the number-of-occurrence cases fall into two categories: one, as here, in which policyholders benefit from a finding of only one occurrence (because the insured pays only one retention or deductible), and another that rewards the policyholder for multiple occurrences (because the insured receives the benefit of an additional limit of insurance for each separate occurrence). It should come as no surprise that Pincoffs falls into the second category. The real dispute in Pincoffs was between the primary insurer, whose policy provided an occurrence limit of $50,000 but an aggregate limit of $100,000, and the umbrella insurer, who argued that the primary insurer should pay the aggregate limit because there were multiple occurrences.
Now, I am not saying that judges are so shamelessly result-oriented that they decide the number-of-occurrence issue in whichever way maximizes the amount of coverage for the policy holder, but it is spooky how many multiple-occurrence findings involve the number of limits that may be stacked, and the sole-occurrence decisions are about the number of retentions that must be paid.
Nor am I saying that the Westchester court got it wrong. The judge's decision is well reasoned and well supported. But I am not convinced that the cause of damage in a product-defect case changes from the manfacturing process to the sale of the product depending on whether the manufacturer or the distributor is the defendant. The physical cause of damage should be the same in either case. Just wait until the next stacking-limits case raises the number-of-occurrence issue. Pincoffs will no doubt seem a lot more appealing, even if the manufacturer is the defendant.
David S. White, Thompson & Knight L.L.P.
www.tklaw.com
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