Property Casualty Focus

Applying well-settled Wisconsin law, a federal district court found that an insurer had no duty to indemnify an oral hygiene product manufacturer for tainted products after determining that the losses did not result from an “occurrence” under an excess liability policy.

The case, Sage Products LLC v. Federal Insurance Co., arose from a recall of single-use oral hygiene kits that were provided to hospitals and nursing homes. The supplier of the kits contracted with a manufacturer that provided the oral rinse solution used in the kits. When the manufacturer received a warning letter from the Food and Drug Administration requiring the removal and disposal of tainted kits due to the manufacturer’s process of producing the oral rinse solution with the same equipment that it uses to produce toxic car wash products, the supplier sued the manufacturer. While the supplier and manufacturer ultimately settled, the manufacturer assigned its rights under its excess liability policy to the supplier, which allegedly suffered millions in losses. The supplier filed suit against the manufacturer’s insurer, seeking $6 million in policy limits as compensation. In arguing that it was entitled to coverage, the supplier contended that both the incorporation of the oral rinse solution into the kits, and the eventual removal of the oral rinse solution from the kits, constituted occurrences under the policy. The court disagreed.

First, the court looked to the policy language. In pertinent part, the policy provided that the insurer was liable for property damage caused by an “occurrence,” which was, in turn, defined by the policy as an “accident.” The court then relied on previous courts’ interpretation of the word “accident,” which was derived from dictionary definitions, to determine its meaning — an unintentional or non-volitional act. In rejecting the argument that the incorporation of the oral rinse solution into the kits was an “occurrence,” the court likened the tainted oral rinse solution’s inclusion in the kits to a faulty workmanship scenario. And because settled Wisconsin law notes that faulty workmanship is not, in and of itself, an “occurrence,” and that installation is a part of workmanship, the court found that incorporation of the tainted oral rinse solution into the kits was not an “occurrence.”

The court also explained that the incorporation of the oral rinse solution was also not accidental; rather, it was intentional given the entire purpose of the relationship between the supplier and manufacturer in producing the kits. The court used the same reasoning in rejecting the supplier’s remaining argument that the eventual removal of the oral rinse solution from the kits constituted an “occurrence” under the policy. Because that, too, was an intentional and volitional act, and not an accident, the court found that the removal of the oral rinse solution from the kits was likewise not an “occurrence.”

Consequently, the court found that the supplier could not recover against the insurer because it failed to demonstrate that coverage had been triggered in the first instance given that the losses were not caused by an “occurrence” within the meaning of the policy.