Defining 'Occurrence' in Insurance Can Have Major Impact in Recovery

WTC Properties arose from the 9/11 attacks on the World Trade Center towers. On one side of the case were the buildings' owner, the Port Authority of New York and New Jersey and Silverstein Properties, which had a 99-year lease of the towers. Under the lease, it was responsible for procuring $3.5 billion in property insurance coverage naming the Port Authority as an additional insured. On the other side of these “Silverstein parties” were more than a dozen insurance companies providing primary and excess property insurance coverage. See also SR International Business Ins. v. World Trade Center Properties, 467 F.3d 107 (2d Cir. 2006). (The SR International decision did not further elaborate on the “occurrence” issue. It affirmed the district court's judgment issued after a jury trial which stated, with the exception of three insurers, the parties had been bound by the Silverstein parties' binder language making the two plane crashes one occurrence.)

The property losses from the 9/11 attacks far exceeded the $3.5 billion per-occurrence limit under the various policies. Nevertheless, if each plane crash were a separate occurrence with its own policy limit, the Silverstein parties would pay two sizable deductibles, but would have $7 billion in coverage because there would be two occurrences, each subject to its own policy limit. If both plane crashes were considered one occurrence, then there would be one deductible, but a limit of $3.5 billion in property coverage. The staggering magnitude of the losses caused the Silverstein parties to argue that there were two occurrences, requiring their payment of two deductibles.

The focus of a significant portion of WTC Properties was on what was an “occurrence” under the first-party property damage coverages provided by the various insurance companies which would reimburse the Silverstein parties for the monumental property destruction and income losses. Complicating matters was that only one of the many insurers had actually issued a policy before the 9/11 attacks. The other insurers had all bound coverage under binders but had not yet issued policies.

Nevertheless, the WTC Properties court determined that insurance binders were stand-alone, fully enforceable, interim contracts providing a quick way of “binding” coverage until a policy is issued. 345 F.3d at 166-67. However, because several binders did not define “occurrence,” the court had to decide how the meaning of “occurrence” would be decided.

The WTC Properties court said that “customs, practices, and usages,” as generally understood in a particular business, can be used to prove the meaning of “occurrence” in an ambiguous insurance binder. 345 F.3d at 185-86. However, it rejected the argument of the Silverstein parties that New York case law had a common law “occurrence” definition.

The court also rejected looking to the case law definition of “occurrence” in third-party liability insurance cases to arrive at the meaning of “occurrence” in the case's first-party property loss claims. It said liability cases involved “different interests, both public and private.” 45 F.3d at 186-87. A court in a third-party liability case will determine the number of occurrences to establish which occurrence was the result of an insured's negligence that was the proximate cause of the injury.

“Occurrence” when considered in a liability context “is influenced by the public policy concern of ensuring adequate compensation for injured third parties who are not parties to the insurance contract” and were not involved in negotiating the contract. In contrast, with first-party property coverage, the goal is to provide financial protection against property damage. 345 F.3d at 187-88. Implicitly, “occurrence” in a third-party liability case is defined more broadly and more favorably to providing coverage to injured third parties. The WTC Properties court concluded, ” … no New York case of which we are aware has set forth [a test] for purposes of determining the number of occurrences [in a first-party property coverage case] that comprise a loss.” 345 F.3d at 188.

The court concluded that the “occurrence” language in one of the major insurer's binder was sufficiently ambiguous to allow the issue to be decided by a jury. However, with the language in their own broker's binder, the Silverstein parties fared poorly. The binder form defined an “occurrence” as “all losses or damages that are attributable directly or indirectly to one cause or one series of similar causes. All such losses will be added together, and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.” 345 F.3d at 160.

The Silverstein parties had argued that this definition was ambiguous, but the district court and the Second Circuit rejected their argument. The Second Circuit concluded, “no finder of fact could reasonably fail to find that the intentional crashes into the WTC of two hijacked airplanes sixteen minutes apart as a result of a single, coordinated plan of attack, was at the least, a 'series of similar causes.' The court concluded that “the events of September 11 constitute a single occurrence as a matter of law.” 345 F.3d at 180.

Dataflow

In Dataflow, the district court refused to follow what appeared to be WTC Properties' prohibition against applying the more liberal third-party liability application of “occurrence” in a case where the issue was the number of occurrences in a first-party theft loss claim. The plaintiff's employee in 2005 had been promoted to manager of its accounting department. Starting in October 2007 and continuing through 2009, the plaintiff purchased one-year term policies from the insurer. Each policy had a maximum limit of $75,000 for employee dishonesty during the policy period.

When it was discovered that since 2007 the employee had embezzled over $1.2 million, the policyholder filed claims with Peerless for the maximum amount of employee dishonesty coverage for each of the three years. Peerless denied the claims, arguing that the employee's larcenies constituted a single “occurrence” of employee dishonesty and therefore were subject to the $75,000 limit of the policy that was effective at the time of the first larceny.

The three policies stated that all loss or damage “[i]nvolving a single act or series of related acts is considered one occurrence.” Peerless argued that WTC Properties prevented the court from using third-party liability concepts of “occurrence” to determine that the thefts were more than one occurrence. It said that the manager's repeated acts of theft over three years was a “series of related acts” and only one occurrence under out-of-state decisions on employee dishonesty. Nevertheless, seeming to brush aside the WTC Properties language, the Dataflow court explained its rationale for relying on the third-party liability “unfortunate events test” used in third-party liability cases by New York courts to determine the meaning of “occurrence.” 2015 WL 6023675 at 3.

The test examines whether there is a close temporal and spatial relationship between the incidents giving rise to the loss and whether the incidents could be viewed as part of an uninterrupted “causal continuum.” Appalachian Ins. v. General Electric, 8 NY3d at 171-72. This approach “is based not solely on the cause but the nature of the incident giving rise to damages [citing Arthur A. Johnson Corp. v. Indemnity Ins. Co. of North America, 7 NY2d 222, 225-26 (N.Y. 1959)].'” Id. at 3. The Dataflow court had decided that under New York cases applying the unfortunate events test, the incidents of larceny were separate occurrences.

In the view of the Dataflow court, the Second Circuit's prohibition against using a crossover definition of “occurrence” was merely dicta. The Dataflow judge also said that WTC Properties had actually left the door open to applying the unfortunate events third-party liability standard to first-party insurance cases. 2015 WL 6023675 at 5. Thus, the Dataflow policyholder could recover up to $75,000 for each year in which a larceny occurred.

Selective

The last New York “occurrence” decision was handed down this year by the State's highest court, the New York Court of Appeals. In this third-party liability case, the policyholder had sought to have one occurrence with one deductible. Selective Insurance of America v. County of Rensselaer arose from two consolidated federal class action lawsuits initially commenced in 2002 and alleging illegal strip searches performed by the county jail. The county had purchased liability insurance from Selective Insurance of America beginning in 1999, and had renewed the coverage each year for 2000 through 2002.

The class-action litigation ultimately settled with over 800 individuals each receiving $1,000 and the named plaintiff receiving $5,000. Attorney fees for the class members' attorneys were almost $450,000. Even though the policy deductibles were $10,000 for each of the first three years of coverage and $15,000 for the fourth year, as part of the settlement the county refused to pay Selective more than a single deductible payment, perhaps believing that the common facts that led to the certification of the class also established there was only one “occurrence” with one deductible.

Selective sued the county to collect a separate deductible for each class member and sought to have the plaintiffs' attorney fees allocated ratably to each member of the class. The NY Supreme Court and the Appellate Division held that the claim for each separate class member was subject to a separate deductible and that all the attorney fees should be allocated to the claim of the named plaintiff. Because the deductible for each liability claim was at least $10,000 and there were 800 separate claims of only $1,000 each, none of the 800 claims would meet the policy deductibles. Unless there was a policy provision that limited the county's responsibility to a certain number of claims, the county was on the hook for at least $800,000.

The Court of Appeals didn't bother with the “unfortunate events” test cited in Dataflow. It merely looked to the language in all the insurance policies which defined “occurrence” as “'an event, including continuous or repeated exposure to substantially the same general harmful conditions, which results in … 'personal injury' … by any person … and arising out of the insured's law enforcement duties.'” Id. at 656. The Selective court held as a matter of law that this definition did not allow the “grouping of multiple individuals who were harmed by the same condition, unless that group is an organization … .” The court concluded that the harm was to each individual and “each strip search constitutes a single occurrence.” Id.

The county's consolation prize was the Selective court's finding that the policies' silence about how the attorney fee award would be allocated created an ambiguity that allowed for the attribution of all the attorney fees to the one claim of the named plaintiff.

As you see, one can never be sure about what “occurrence” will mean next.

Jason L. Shaw is a partner at Whiteman Osterman & Hanna in Albany, NY. This article also appeared in the New York Law Journal, an ALM sibling publication of this newsletter.