(Article from Insurance Law Alert, June 2019)
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The Eighth Circuit ruled that a batch clause requires all damage that took place across multiple policy periods as a result of the same defective product to be deemed a single occurrence. National Union Fire Ins. Co. of Pittsburgh, PA v. Donaldson Co., Inc., 2019 WL 2478044 (8th Cir. June 14, 2019).
Donaldson, a manufacturer of air ducts, was insured under consecutive general liability policies issued by AIG and consecutive follow form umbrella policies issued by Federal. A lawsuit against Donaldson alleged that a defect in two types of air ducts caused damage to truck engines. The suit ultimately settled for $6 million. AIG contributed approximately $3.5 million and Federal nearly $2.5 million. Thereafter, AIG sued Donaldson and Federal, seeking to recover its settlement payment.
A Minnesota district court issued a series of orders addressing various coverage issues. Among other things, the district court ruled that a batch clause in the AIG policies operated to combine all property damage arising from the same batch of products into one occurrence, even if the damage occurred across multiple policies periods. The district court further held that the occurrence took place when the policyholder was first notified of that damage. Finally, the district court ruled that there were two batches or “lots” of defective air ducts involved in the underlying settlement and therefore two occurrences. The Eighth Circuit affirmed.
The batch clause in the AIG policies provides that:
all “bodily injury” or “property damage” arising out of and attributable directly or indirectly to the continuous, repeated or related exposure to substantially the same general conditions affecting one lot of goods or products . . . shall be deemed to result from a single “occurrence.” Such “occurrence” will be deemed to occur with the first injury notified to [the insured] during the policy period.
The Eighth Circuit ruled that this clause unambiguously combines all property damage arising from the same “lot” of defective products, including damage that occurs across multiple policy periods, into one occurrence that takes place when Donaldson is first notified of that damage. The court rejected Federal’s assertion that the batch clause only combines injuries that take place during an individual policy year.
In addition, the Eighth Circuit affirmed the district court’s finding of two product “lots” based on Donaldson’s manufacture of two distinct types of air ducts, each with its own product number, specifications, and base materials. The court rejected Donaldson’s assertion that there were multiple lots over the years, based on changes in the particle size of the power form that was used in the product molds to manufacture the air ducts. The court explained that the “minor change in particle size had no bearing on whether a new type of unique product was formed.”