Ace American Ins. Co. v. RC2 Corp., Inc., 07 C 5037.

CourtUnited States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
Writing for the CourtWilliam T. Hart
Citation568 F.Supp.2d 946
PartiesACE AMERICAN INSURANCE COMPANY, Plaintiff, Counter-defendant, v. RC2 CORPORATION, INC., Learning Curve Brands, Inc., Learning Curve International, Inc., Defendants Counter-Claimants.
Docket NumberNo. 07 C 5037.,07 C 5037.
Decision Date26 June 2008

Jodi Rosen Wine, Nixon Peabody LLP, Chicago, IL, Leslie P. Machado, Robert F. Reklaitis, Nixon Peabody, LLP, Washington, DC, for Plaintiff, Counter-defendant.

Bart Thomas Murphy, Ice Miller LLP, Lisle, IL, Deanna M. Wilcox, Dimple Gupta, William F. Greaney, Covington & Burling LLP, Washington, DC, for Defendants Counter-Claimants.


WILLIAM T. HART, District Judge.

Plaintiff ACE American Insurance Co. seeks a declaration that it does not have a duty to defend defendants RC2 Corporation, Inc.; Learning Curve Brands, Inc.; and Learning Curve International, Inc. in lawsuits based on defendants' alleged sale of children's toys containing lead paint. The toys were manufactured in China, but all the lawsuits were brought in the United States and are based on harm caused by using the toys in the United States. The pertinent provisions of the four insurance policies at issue (the "ACE Policies") are identical except that each policy covers a different time period. Plaintiff contends there is no duty to defend based on a coverage territory provision limited to territory outside the United States. Plaintiff also contends that a number of other provisions exclude coverage.1 Defendants have counterclaimed for a declaration and related claims that there is a duty to defend. Presently pending are cross motions for summary judgment. The parties agree that Illinois law applies to all the claims in this case. There is complete diversity of citizenship and the amount in controversy exceeds $75,000.

Plaintiff moves for summary judgment based on the coverage territory provision. Defendants move for summary judgment declaring there is a duty to defend, which would require that defendants succeed on the coverage territory issue as well as all the other provisions and exclusions that plaintiff contends preclude a duty to defend. There is no factual dispute as to the contents of the ACE Policies or the contents of the underlying complaints that have been filed against defendants.

It is undisputed that all the underlying complaints allege harm to persons2 or property3 located in the United States and that the harm allegedly was caused by toys that were manufactured in China and contained lead paint that was applied in China, The parties dispute construction of the coverage territory and occurrence provisions of the ACE Policies. The dispute essentially poses the question of whether occurrence, as used in relation to the coverage territory provision, refers to the allegedly improper application of lead paint, which occurred outside the United States, or only refers to alleged injury to plaintiffs and their property coming into contact with the lead from the painted toys within the United States.

Each of the ACE Policies provides commercial general liability coverage. Each has a subsection of "Bodily Injury and Property Damage Liability" entitled "Insuring Agreement" which includes the following language: "We will pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies .... This insurance applies only to `bodily injury' and `property damage' which occurs during the Policy Period. The `bodily injury' or `property damage' must be caused by an `occurrence.' The `occurrence' must take place in the `coverage territory.'"4 The ACE Policies define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." With limited exceptions and refinements not at issue here, coverage territory includes all of the world outside of the United States.

In Illinois the interpretation of an insurance policy is a question of law. BASF AG v. Great Am. Assurance Co., 522 F.3d 813, 813-19 (7th Cir.2008).

"A court's primary objective in construing the language of an insurance policy is to ascertain and give effect to the intentions of the parties as expressed by the language of the policy." [Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill.2d 352, 307 Ill.Dec. 653, 860 N.E.2d 307, 314 (2006)]; see also Cent. Ill. Light Co. v. Home Ins. Co., 213 Ill.2d 141, 290 Ill.Dec. 155, 821 N.E.2d 206, 213 (2004). "In performing that task, the court must construe the policy as a whole, taking into account the type of insurance purchased, the nature of the risks involved, and the overall purpose of the contract." Nicor, Inc. v. Associated Elec. & Gas Ins. Servs. Ltd., 223 Ill.2d 407, 307 Ill.Dec. 626, 860 N.E.2d 280, 286 (2006). Where the terms of an insurance policy are clear and unambiguous, they must be applied as written; but where ambiguity exists, the terms will be strictly construed against the drafter. Id. [307 Ill.Dec. 626, 860 N.E.2d] at 286; Valley Forge Ins. Co., 307 Ill.Dec. 653, 860 N.E.2d at 314. Policy terms "are ambiguous if they are reasonably susceptible to more than one interpretation, not simply if the parties can suggest creative possibilities for their meaning, and a court will not search for ambiguity where there is none." Valley Forge Ins. Co., 307 Ill. Dec. 653, 860 N.E.2d at 314 (internal citations omitted).

BASF, 522 F.3d at 819, In considering the meaning of policy terms, governing legal authority must also be taken into consideration; "a policy term may be considered unambiguous where it has acquired an established legal meaning." Nicor, 307 Ill. Dec. 626, 860 N.E.2d at 286.

At issue in this case is plaintiff's duty to defend, not any duty to indemnify. An insurer's duty to defend against a lawsuit is broader than the insurer's duty to indemnify any liability that is imposed or settled upon. Stoneridge Dev. Co. v. Essex Ins. Co., 382 Ill.App.3d 731, 321 Ill. Dec. 114, 888 N.E.2d 633, 643-44 (2008); BASF, 522 F.3d at 819. The "duty to defend arises if, liberally construing in the insured's favor the allegations in the underlying complaint against the insured, there are factual allegations that even potentially fall within the coverage. General Agents Insurance Co. of America, Inc. v. Midwest Sporting Goods Co., 215 Ill.2d 146, 154-55, 293 Ill.Dec. 594, 828 N.E.2d 1092 (2005). Moreover, if the underlying complaint against the insured contains several theories of recovery and only one of the theories is potentially covered, the insurer must still defend the insured. Midwest Sporting Goods Co., 215 Ill.2d at 155, 293 Ill.Dec. 594, 828 N.E.2d 1092. In this manner, the insurer may become obligated to defend against causes of action and theories of recovery that the policy does not actually cover. Illinois Masonic Medical Center v. Turegum Insurance Co., 168 Ill.App.3d 158, 162, 118 Ill.Dec. 941, 522 N.E.2d 611 (1988)." Stoneridge, 321 Ill. Dec. 114, 888 N.E.2d at 643-44. Accord BASF, 522 F.3d at 819.

The parties do not cite and this court has not found any Illinois case law that decides the particular issue before this court. Plaintiff cites a case from another jurisdiction, involving coverage for injuries to American soldiers in Vietnam caused by Agent Orange manufactured in the United States, which collects cases which it cites for the proposition: "In a variety of related settings, the courts have consistently held that the place where the injury happened is the location of the occurrence." Diamond Shamrock Chem. Co. v. Aetna Cas. & Sur. Co., 258 N.J.Super. 167, 609 A.2d 440, 470 (1992). Plaintiff, though, does not attempt to consider the particular policy language or circumstances involved in the collected cases. As Diamond Shamrock, 609 A.2d at 471, notes for the issue before that court, the other cases are not dispositive; the particular circumstances of the pending case had to be considered, together with the language of the policies at issue. In the present case, the particular language of the AGE Policies must be considered, with appropriate deference accorded to prior court interpretation of the same or similar policy language. See Rich v. Principal Life Ins. Co., 226 Ill.2d 359, 314 Ill.Dec. 795, 875 N.E.2d 1082, 1091 (2007); Nicor, 307 Ill. Dec. 626, 860 N.E.2d at 286.

Plaintiff contends that Illinois follows the majority of jurisdictions which generally determine the time and place of an occurrence based on the resulting harm (effects), while determining the number of occurrences based on the originating cause. See Diamond Shamrock, 609 A.2d at 470-71. Since courts often apply the same effects rule to both time and place, see Farmers Alliance Mut. Ins. Co. v. Salazar, 77 F.3d 1291, 1296 (10th Cir. 1996); Keystone Automated Equip. Co. v. Reliance Ins. Co., 369 Pa.Super. 472, 535 A.2d 648, 651 (1988), plaintiff contends that Illinois applying the effects rule to the timing of an occurrence supports that Illinois would also apply the effects rule to determining the place of an occurrence. Again, however, any general rules like this can only be applied if consistent with the particular language of the insurance policy at issue.

Illinois cases do generally hold that "an occurrence policy is not triggered unless loss to the claimant happened while that policy was in force." Great Lakes Dredge & Dock Co. v. City of Chicago, 260 F.3d 789, 795 (7th Cir.2001). Such holdings, however, are generally based on specific language in the applicable policy that limit coverage to damage or injury in the policy period, not just language providing that an occurrence be during the policy period. See id. (policies "defining `property damage' as an `accident or happening or event [that] . . . results in a . . . physical injury to . . . tangible property. . . . during the policy period'"); Pekin Ins. Co. v. Janes & Addems Chevrolet, Inc., 263...

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