Two years ago we reviewed the law on the number of occurrences under a CGL policy in a post titled One or More ? In that article we noted that North Carolina law on the number of “occurrences” is sparse and not entirely clear. Recently the Chief Judge of the North Carolina Business Court, Louis A. Bledsoe, III, provided additional guidance on the number of occurrences in a thorough and well-reasoned opinion in a case styled Hyosung USA, Inc. v. Travelers Property Casualty Insurance Company of America, et al., No. 19 CVS 23974, 2121 N.C.B.C. 81 (December 16, 2021). As an additional bonus, the Hyosung opinion also addressed the “other insurance” question, another topic on which the law in North Carolina is sparse. The Hyosung opinion is a welcome addition to our state’s jurisprudence and provides guidance for lawyers and business owners alike.
Hyosung USA, Inc. contracted with a company called Logipia USA, Inc. for Logipia to provide warehouse space and transportation services for Hyosung’s products, including yarn, steel tire cord and fabric worth approximately $31 million. The Hyosung-Logipia contract required Logipia to maintain a liability insurance policy to cover damages to the Hyosung property. The contract also allowed Hyosung to maintain its own property insurance on the inventory.
Logipia purchased a third-party liability insurance policy through Hartford (the “Hartford Policy”). Hyosung obtained a first party property insurance policy with Travelers (the “Travelers Policy”) that similarly provided coverage for damages to Hyosung’s products.
On April 19, 2019, a windstorm removed large portions of the Logipia warehouse roof, allowing water to enter the warehouse and damage or destroy the Hyosung products that were stored there. Following that incident, plastic sheeting was hung from the ceiling as a temporary repair to prevent additional damage. One week later, on April 26, 2019, the plastic sheeting failed, and allegedly activated the warehouse’s sprinkler system, causing further water damage to the Hyosung products in the warehouse.
Following the incidents, Hyosung sought reimbursement from Logipia, and in addition submitted a claim to its own insurer, Travelers. Logipia refused to pay, and Travelers refused to reimburse Hyosung fully for its losses, arguing that (1) it had no duty to indemnify Hyosung for the first $2 million of loss for each incident because the “other insurance” provision in the Travelers policy required Hyosung to recover those sums from Hartford under the Hartford Policy; and (2) each incident was a separate “occurrence” caused by a windstorm under the policy, meaning that Hyosung had a deductible of $1.55 million for each incident (total $3.1 million - - in other words, the first $3.1 million of the loss belonged to Hyosung).
The Hyosung decision arose in the context of two partial summary judgment motions. In the first, Hyosung argued that Logipia’s Hartford Policy was not “other insurance” under the Travelers Policy, meaning that Travelers was up first for payment. In the second, Hyosung argued that the two incidents comprised a single “occurrence,” and that therefore a single windstorm deductible of $1.55 million under its Travelers policy should apply.
General Principals of Insurance Policy Interpretation
Before turning to the specific issues, Judge Bledsoe provided a helpful review of general principles concerning the interpretation of insurance policies. Those may be summarized as follows:
- An insurance policy is a contract, and its provisions govern the rights and duties of the parties.
- Determining the meaning of language in an insurance policy is a question of law for the court. (This is why so many decisions in this area arise in the context of summary judgment motions.)
- When interpreting an insurance policy, courts apply general contract interpretation rules. The goal is to arrive at the insurance coverage that was intended by the parties when the policy was issued.
- The various terms of the policy are to be harmoniously construed and, if possible, every word and every provision in the policy is to be given effect.
- In addition, the contract of insurance should be given the construction of a reasonable person in the position of the insured would have understood it to mean. If the policy contains a specifically defined term, the court is to apply that meaning unless the context requires otherwise. If, on the other hand, the policy does not define a particular term, then the court must define that term in a manner that is consistent with the context in which the term is used, and the meaning that is given to the term in ordinary speech.
- Any ambiguity or uncertainty as to the words used in the policy is to be construed against the insurance company, and in favor of the policyholder. If, however, the court finds that there is no ambiguity, then it must construe the document according to its terms.
The “Other Insurance” Issue
An “other insurance” clause in an insurance policy comes into play when more than one insurance policy may provide coverage for the same loss. In that situation, the “other insurance” provisions of each policy determine which policy pays first.
In the Hyosung case, its Travelers policy had an “other insurance” provision that stated “[i]f there is other insurance covering the same loss or damage,” Travelers would pay only the amounts in excess of the other insurance, up to its applicable limits of insurance. In other words, if there was other insurance covering the same loss or damage, the Travelers policy would be the second to pay - - the other insurance policy would pay first.
The Hartford policy, by contrast, did not contain an “other insurance” provision at all. Rather, it simply provided that Hartford would pay Logipia (its insured) such sums as Logipia “become[s] legally obligated to pay as damages” for an otherwise covered loss or injury, subject to the applicable limit of insurance under the policy.
Travelers argued that the “other insurance” provision in its policy with Hyosung meant that the $2 million available under the Hartford policy came first and that Travelers should have to pay, if at all, only after that amount was paid by Hartford.
Judge Bledsoe disagreed. The “other insurance” provision in the Travelers policy applied only if there was other insurance “covering the same loss or damage.” Judge Bledsoe observed, correctly, that North Carolina’s Appellate Courts currently offer little guidance on “other insurance” issues. The Fourth Circuit Court of Appeals, however, has stated that, as a general rule, for an “other insurance” clause to operate in an insurance company’s favor, there must be both (1) an identity of the insured interest; and (2) an identity of risk. Judge Bledsoe concluded that the Travelers and Hartford policies did not insure the same interest or the same risk, and accordingly the Travelers “other insurance” provision did not apply.
Hyosung’s Travelers policy was a first-party property insurance policy, while the Hartford policy was a third-party liability insurance policy. Those policies do not insure the same interests. First-party coverage pertains to loss or damage sustained by an insured to its own property, and the insured receives the policy proceeds when the damage occurs. Third-party insurance, by contrast, protects the insured against a third party (outsider) claimant, who is paid according to a judgment or settlement against the insured. Those are two different interests that are being insured.
Moreover, the Travelers policy covered Hyosung for its own property losses. The Hartford policy, by contrast, provided coverage only to the extent that a third-party claimant could establish liability against Logipia. While each policy provided coverage for damage to the same property, each policy-protected a separate insured from a separate risk - - Hyosung was protected if its property was damaged, whereas Logipia would get coverage if it was legally obligated to pay damages to a third party resulting from loss to that same property. Judge Bledsoe concluded that those interests were sufficiently different to exclude the Hartford policy from the “other insurance” provision of the Travelers policy as a matter of North Carolina law.
One Occurrence or Two?
The number of occurrences matters because it affects how many deductibles an insured must pay. Hyosung’s position was that (1) the windstorm on April 19, 2019, that allowed water to enter the warehouse and damage its products, and then (2) the failure of the plastic sheeting one week later, on April 26, 2019, that activated the warehouse’s sprinkler system and caused further water damage to Hyosung’s products, were a single “occurrence” under the Travelers policy. If Hyosung was correct, then it would be responsible for only a single $1.55 million windstorm deductible.
Travelers, on the other hand, argued that the two incidents were separate and distinct “occurrences” under the Travelers policy and that therefore Hyosung was responsible for two $1.55 million windstorm deductibles, meaning that Travelers would be able to deduct $3.1 million from its payment to Hyosung for its losses under the Travelers policy.
Judge Bledsoe correctly began with the language of the Travelers policy. The Travelers policy did not define the term “occurrence,” and the windstorm deductible provision stated that when a windstorm limit of insurance or a windstorm deductible was shown in the declarations, that limit of insurance or deductible would apply to all loss or damage in any one occurrence caused directly or indirectly by a windstorm that occurred at locations to which the windstorm limit of insurance or deductible applied, regardless of any other cause or event that contributed concurrently or in any sequence to the loss or damage.
Hyosung argued that this language could be interpreted only one way - - a single windstorm deductible of $1.55 million should be applied, because all the loss or damage suffered in two incidents of April 2019 were caused directly or indirectly by the windstorm on April 19, 2019, regardless of any other cause or event that contributed concurrently or in any sequence to the loss or damage. In other words, the windstorm incident on April 19, 2019, resulted in the open roof and temporary repair that led to the losses suffered on April 26, 2019, when the plastic sheeting failed, meaning only one occurrence.
Travelers, on the other hand, argued that the Court should apply the “effects” test that the U.S. Court of Appeals for the Second Circuit has used to calculate the number of occurrences and that if the “effects” test were used, the Court should find two occurrences because the two incidents did not constitute a single, uninterrupted, continuous process closely linked in time and space.
Judge Bledsoe reviewed North Carolina law on the occurrence question, including the cases reviewed in our earlier blog post, concluding that the “cause” test applied, rather than the “effects” test, to determine the number of occurrences under first-party property damage insurance policies such as the Travelers policy at issue here. Applying the cause test from Gaston County Dying Machinery Company v. Northfield Insurance Company, 351 N.C. 293 (2000), Judge Bledsoe observed that the April 19 windstorm caused substantial damage to the warehouse’s roof, which necessitated the repairs that later failed when the plastic sheeting failed on April 26, causing further damage to Hyosung’s products.
Like the valve rupture in the Gaston County case that allowed contaminants to seep into media contrast dye, the initial windstorm here exposed Hyosung’s products to the elements. The attempted repair not only caused further water damage by apparently activating the warehouse sprinkler system, but it also failed to protect Hyosung’s products from additional damage caused by rain. Like the valve rupture in Gaston County, the opening in the warehouse roof that allowed wind and rain to damage Hyosung’s products on April 19 was the same opening in the warehouse roof that allowed wind and rain to damage Hyosung’s products on April 26. The fact that the two incidents were separated by one week of time was of no consequence since both incidents were caused by the April 19 windstorm. Accordingly, Judge Bledsoe concluded that a single windstorm deductible applied, because there was a single occurrence, and Hyosung was responsible for only one $1.55 million deductible, rather than two.
The number of occurrences will impact the number of deductibles that the insured must pay, and accordingly the ultimate amount of recovery for losses. The Hyosung decision is important because it applies the Gaston County “cause” test for the number of occurrences in a first-party property insurance context. In accord with earlier decisions, the Court found a single occurrence because there was a single causative event or act - - the damage to the roof on April 19, 2019. This confirms the observation in our earlier blogpost that North Carolina courts will likely find a single occurrence when a single act or event can be isolated as the immediate cause of the damage when viewed from the insured’s perspective, and/or the acts or events are continuous in time and space. If, on the other hand, a case involves separate acts or events as the immediate cause of damage, North Carolina courts would be more likely to find multiple occurrences.
“Other Insurance” clauses can be more important to insurance companies than policyholders because they determine the order in which multiple insurance policies that may cover the same loss will pay. However, as the Hyosung case demonstrates, policyholders can be caught up in those disputes as well and may be directly impacted by them.