Pennsylvania Court Holds Drywall Claims Arose Out of Single Occurrence

In its recent decision in Cincinnati Ins. Co. v. Devon International, 2013 U.S. Dist. LEXIS 20659 (E.D. Pa. Feb. 15, 2013), the United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, had occasion to consider whether a series of Chinese drywall-related claims, arising out of the insured’s importation of a single batch of defective drywall, were properly considered a single occurrence, or multiple occurrences.

The insured, Devon, was a U.S.-based sourcing agent for Chinese manufactured products.  In 2006, it was retained to procure drywall manufactured in China.  Devon subsequently made a single purchase of drywall from Shandong – a Chinese manufacturer – and then shipped the drywall to Florida for use in construction.  The majority of the drywall was shipped to Devon’s initial customer; however, Devon also sold a portion of the drywall to other individuals and entities in Florida for use in construction.  In 2009, Devon received a letter from its initial customer seeking a defense and indemnification in connection with a “multitude” of Chinese drywall claims filed in several jurisdictions.  These underlying plaintiffs alleged damage in late 2008 and throughout 2009.

Cincinnati Insurance Company insured Devon under consecutive general liability policies, the first of which was issued for the period November 20, 2008 to November 20, 2009, and the second for the period November 20, 2009 to November 20, 2010.  The policies provided coverage for property damage arising out of an occurrence, but only to the extent the property damage occurred during the policy period.  Cincinnati and Devon disputed whether the underlying claims should be considered multiple occurrences, thus potentially triggering coverage under both of Cincinnati’s policies, or a single occurrence triggering coverage only under one of the policies.

The court looked to the Pennsylvania Supreme Court decision in Donegal Mutual Insurance Co. v. Baumhammers, 938 A.2d 286 (Pa. 2007), which it observed was the seminal Pennsylvania decision regarding number of occurrences.  The Baumhammers court adopted the “cause” test for determining number of occurrences, as opposed to the “effects” test, which it described as the minority approach.   Under this test, explained the Devon court, all of the underlying property damage claims would be considered a single occurrence if all such claims arose out of a single “proximate cause” over which Devon had control.   The court found this test satisfied, explaining:

Here, all the injuries to the underlying plaintiffs and claims against Devon originate from a common source: Devon's single purchase and shipment of defective drywall from Shandong. Moreover, Devon "had some control" over the cause of the injuries, in that it chose to purchase and distribute the defective drywall. Therefore, the Court finds that there is only one "occurrence" for purposes of insurance coverage.

Further relying on Pennsylvania law regarding trigger of coverage, the court explained that the property damage happened when the damage first manifested itself in a manner that a reasonable person would observe an injury.  Noting that the property damage first manifested itself while Cincinnati’s first policy was in effect, the court concluded that the single occurrence happened during the first policy period and could not be considered as also happening during the second policy period.  As such, only the earlier of the Cincinnati policies was triggered.