Case Title: Liggert Group Inc. et al. v. Ace Property and Casualty Insurance Company et al.

Citation: 

Docket Number: 

State: delaware

Court: Delaware Supreme Court

Date: 2002-05-16T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE
LIGGETT GROUP INC. and
§
BROOKE GROUP HOLDING, INC.,
§
§
Plaintiffs Below,
§
Appellants,
§   No. 512, 2001
§
v.
§ Court Below: Superior Court 
§ of the State of Delaware in and for
ACE PROPERTY AND CASUALTY
§ New Castle County 
INSURANCE COMPANY,
§ C.A. No. 00C-01-207
CONTINENTAL CASUALTY
§
COMPANY, FEDERAL INSURANCE
§
COMPANY, HARTFORD ACCIDENT & §
INDEMNITY CO., THE HOME
§
INDEMNITY CO., THE HOME
§
INSURANCE CO., INTERNATIONAL
§
INSURANCE CO., NATIONAL UNION
§
FIRE INSURANCE CO. OF 
§
PITTSBURGH, PA., ROYAL 
§
INDEMNITY CO., ROYAL
§
INSURANCE CO. OF AMERICA,
§
SEABOARD SURETY CO., ST. PAUL
§
MERCURY INSURANCE CO.,
§
TRANSPORTATION INSURANCE CO., §
TWIN CITY FIRE INSURANCE CO.,
§
and ZURICH-AMERICAN INSURANCE §
CO.,
§
§
Defendants Below,
§
Appellees.
§
Submitted: April 9, 2002
Decided:
May 16, 2002
Before WALSH, HOLLAND, and STEELE, Justices.
2
Appeal from Superior Court.  AFFIRMED.
Michael D. Goldman, Esquire, John E. James, Esquire, and Richard L.
Horwitz, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware;
Robert L. Carter, Esquire, Andrew M. Reidy, Esquire (argued), Catherine J.
Serafin, Esquire, Kathrin V. Smith, Esquire, Stephen M. Goldman, Esquire,
Matthew J. Schlesinger, Esquire, and Kurt J. Hamrock, Esquire, McKenna &
Cuneo, LLP, Washington, D.C., for Appellants.
Richard K. Herrmann, Esquire and Mary B. Matterer, Esquire, Blank Rome
Comisky & McCauley LLP, Wilmington, Delaware; Gary D. Centola, Esquire
(argued), Alan C. Eagle, Esquire (argued), Michael S. Gollub, Esquire, and
Christopher J. McGuire, Esquire, Rivkin Radler LLP, Uniondale, New York, for
Appellees Royal Indemnity Company and Royal Insurance Company of America.
Kevin Gross, Esquire and Carmella P. Keener, Esquire, Rosenthal, Monhait,
Gross & Goddess, P.A., Wilmington, Delaware; Rodney L. Eshelman, Esquire
(argued), Sarah M. Shields, Esquire and Don Willenburg, Esquire, Carroll, Burdick
& McDonough, LLP, San Francisco, California; Stuart Philip Ross, Esquire,
Thomas T. Locke, Esquire, Richard J. Pratt, Esquire, Karen H. Ventrell, Esquire,
and Charles A. Jones, Esquire, Ross, Dixon & Bell, LLP, Washington, D.C. for
Appellees Continental Casualty Company and Transportation Insurance Company.
B. Wilson Redfearn, Esquire and Danielle Kathleen Yearick, Esquire, Tybout,
Redfearn & Pell, Wilmington, Delaware; John D. Aldock , Esquire, Mark S.
Raffman, Esquire (argued) and Matthew M. Hoffman, Esquire, Shea & Gardner,
Washington, D.C. for Appellee Federal Insurance Company.  
Donald E. Reid, Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware; Norman C. Kleinberg, Esquire and George A. Tsougarakis, Esquire,
Hughes, Hubbard & Reed LLP, New York, New York, for Appellees Hartford
Accident & Indemnity Company and Twin City Fire Insurance Company.  
3
Stuart B. Young, Esquire, Young, Conaway, Stargatt & Taylor, LLP,
Wilmington, Delaware; Robert L. Ciociola, Esquire, Litchfield Cavo, Lynnfield,
Massachusetts, for Appellee The Home Insurance Company, both individually and
as successor in interest to The Home Indemnity Company.
John D. Balaguer, Esquire, White & Williams, LLP, Wilmington, Delaware;
Paul R. Koepff, Esquire, O’Melveny & Myers LLP, New York, New York, for
Appellee International Insurance Company. 
Anthony J. Flynn, Esquire and Timothy J. Houseal, Esquire, Young,
Conaway, Stargatt & Taylor, LLP, Wilmington, Delaware; Theodore J. Boutrous,
Jr., Esquire, Gibson, Dunn & Crutcher LLP, Los Angeles, California, and Wayne
A. Schrader, Esquire, Gibson, Dunn & Crutcher, LLP, Washington, D.C., for
Appellee National Union Fire Insurance Co. of Pittsburgh, PA.
Henry E. Gallagher, Jr., Esquire, Connolly Bove Lodge & Hutz, LLP,
Wilmington, Delaware; Steven D. Pearson, Esquire, Scott M. Seaman, Esquire and
Steven J. Ciszewski, Esquire, Meckler Bulger & Tilson, Chicago, Illinois, for
Appellee Zurich American Insurance Company.
WALSH, Justice:
4
In this interlocutory appeal, we review a Superior Court decision granting
summary judgment in favor of the insurers in a dispute over whether liability
insurance coverage is available for tobacco-related injuries.  The appellant, Liggett
Group, Inc. (“Liggett”), brought suit against several of its general commercial
liability insurers seeking coverage, and asserting a duty to defend, for hundreds of
tobacco product liability lawsuits in which it is a defendant.  The Superior Court,
relying on various policy exclusions, ruled the insurance policies at issue did not
provide coverage for the underlying tobacco claims, and that the insurers therefore
had no duty to defend Liggett in those suits.  We agree and affirm.
I
Liggett is a Delaware corporation that manufactures tobacco products in North
Carolina and distributes throughout the United States. Liggett has been sued in more
than one thousand cases filed by plaintiffs seeking to hold Liggett liable for a broad
range of personal injuries and property damage arising out of the use of tobacco.
The underlying complaints assert a variety of legal theories including negligent
defect, negligent design, negligent failure to warn, negligent misrepresentation,
intentional infliction of emotional distress, conspiracy, and concerted action.  Liggett
1  Liggett has dismissed its appeal against Twin City Fire Insurance Company, but only
with respect to policies issued for the years 1997-2000. 
5
Liggett Group Inc., et al. v. ACE Property and Casualty Ins. Co., et al, No. 512, 2001, Opinion
Dated May 16, 2002, Corrected Page, June 6, 2002
filed the present action against thirty-three insurance companies to determine its
rights and the insurers' obligations under more than one hundred liability insurance
policies sold to it (and/or its parent companies) by the various insurance companies
from 1970 through 2000.  Liggett seeks defense coverage for the underlying tobacco
lawsuits filed against it throughout the United States. 
  
Partial summary judgment was granted in favor of the Primary Commercial
General Liability Insurers based on the tobacco exclusions contained in their
policies.  There are seven “Primary CGL Insurers,” with years of alleged coverage,
who are appellees here, Transportation Insurance Company (1979-1981), Federal
Insurance Company (1981-1985), National Union Fire Insurance Company (1985-
1986), Zurich Insurance Company (1986), The Home Insurance Company (1986-
1988),  Hartford Accident and Indemnity Company (1988-1990) and Twin City Fire
Insurance Company (1990-1993)1.  The Superior Court instructed the parties to
choose up to twenty representative complaints from the underlying litigation, as a
basis for testing the duty to defend.  These complaints were brought on behalf of
plaintiffs alleged to have developed one or more diseases as a result of smoking.  In
6
many cases, the plaintiffs seek to recover not just for the physical symptoms of their
disease, but for mental distress and loss of consortium caused by the disease.  Other
tobacco claims are brought by third-party payors, such as state governments and
health insurers, seeking reimbursement of costs incurred to treat people with
tobacco-related illnesses. 
Although the language varies, each of the Primary CGL insurance policies at
issue included a broad exclusion for tobacco-related health claims.  The tobacco
exclusions exclude coverage for claims: “arising, or allegedly arising from the
handling, use or ingestion of any tobacco product;” “due in whole or in part . . . to
tobacco or products containing tobacco;” “based upon . . . consumption or use of
tobacco products;” “allegedly arising out of the use, over a period of days, weeks,
months, or longer, of any tobacco product;” and “caused, or alleged to have been
caused in whole or in part, by use of any tobacco or tobacco products.”
Additionally, each of the policies at issue contain separate coverage for “bodily
injury,” “property damage,” and “personal injury.”  The tobacco exclusions apply
only to “bodily injury” and, in some cases, “property damage.” 
The Superior Court also granted summary judgment in favor of Royal
Indemnity Company and Royal Insurance Company of America (collectively
“Royal”), based on the products-hazard exclusion in its policies, which precluded
a duty to defend Liggett’s claims.  Liggett purchased a series of successive CGL
2  The 1982 policy was not at issue below, and is not included in this appeal. 
7
insurance policies from Royal that provided coverage for bodily injury that took
place from 1993-1997.  The policies exclude coverage for “bodily injury or property
damage included within the products-completed operations hazard.”  The products-
completed operations hazard encompasses “all bodily injury and property damage
. . . arising out of ‘your product’.”  “Your product” is defined as “any goods or
products, other than real property, manufactured sold, handled, distributed or
disposed of by [ ] You . . ..”
Summary judgment was also granted in favor of Continental Casualty
Company, (“Continental”), because the underlying complaints do not allege
“advertising injury,” which would be covered by Continental’s Media Special Perils
(“MSP”) policies.  Continental issued five annual MSP liability insurance policies
covering Liggett between 1981 and 19862.  The 1981 and 1983 MSP policies state,
in relevant part, that Continental agrees to pay “all loss which the Insured becomes
obligated to pay as damages because of liability for claims caused by or resulting
from injury arising out of . . . Libel, slander, or other forms of defamation . . .
committed in the utterance or dissemination of matter broadcast, published or
otherwise exhibited or displayed during the policy period in advertising, publicity
or promotion of any kind . . ..”  The words “emotional distress” do not appear in
8
either policy.  The 1984 MSP policy is similar to the earlier policies, but adds the
following language to the category of enumerated offenses : “Libel, slander, or other
forms of defamation, including but not limited to infliction of emotional distress.”
Finally, the 1985 MSP policy includes an extended defamation perils endorsement,
which provides coverage for claims arising out of “[a]ny form of defamation or
other tort related to disparagement or harm to the character, reputation or feelings
of any natural person or organization, including but not limited to, libel, slander,
product disparagement, trade libel, prime [sic] facie tort, infliction of emotional
distress . . ..” 
Finally, the Superior Court granted partial summary judgment in favor of
Royal, holding that Liggett was not a Named Insured under an umbrella CGL policy
issued by Royal to Intercontinental Hotels Corporation.  The umbrella policy
contains no tobacco or products-hazard exclusion and instead broadly defines its
“personal injury” coverage.  The umbrella policy lists the “Named Insured” as
Intercontinental Hotels Corporation.  Endorsement no. 1 to the policy amends the
Named Insured to include several corporations, including Grand Metropolitan Public
Limited Company (“Grand Met”).  Further, Named Insured is defined in the policy
as “the Named Insured stated in Item 1 of the Declarations including any subsidiary
company and any other company coming under the Named Insured’s control of
which it assumes active management.”   
9
Liggett is not a direct subsidiary of Grand Met because there are several
intervening layers of corporate control.  Grand Met is a huge international
conglomerate, with at least 126 subsidiaries.  The layers of control are as follows:
(1) Grand Met wholly-owned Grand Met Holdings, Inc.,  (2) Grand Met Holdings,
Inc. wholly-owned Grand Metropolitan (USA) Holdings, (3) which wholly-owned
Grand Met USA, Inc., and (4) Grand Met USA, in turn, wholly-owned Liggett.
Intercontinental Hotels is the wholly-owned subsidiary of Grand Met Holdings, Inc.
The various Grand Met companies are holding companies.  Each entity, however,
is separate and has its own CEO and managing director.  Intercontinental Hotels,
who has many of its own subsidiaries, ran its businesses and procured insurance
completely separate from Liggett. 
II
Our review of the Superior Court’s grant of summary judgment is de novo.
Arnold v. Society for Savings Bancorp, Inc., 650 A.2d 1270, 1276 (Del. 1994).
Further, the Superior Court’s  interpretation of the insurance policies applicable to
this case is a determination of law, also subject to de novo review.  National Union
Fire Ins. Co. v. Fisher, 692 A.2d 892, 895 (Del. 1997).
At the outset, we note that the Superior Court determined that this contract
dispute is governed by the law of  North Carolina.  Because no party has appealed
10
that ruling, we will proceed to examine Liggett’s claims under the law of that State.
Insurers are entitled to summary judgment if they can “show that the claimant cannot
prove the existence of an essential element of [its] claim or cannot surmount an
affirmative defense which would bar the claim.”  Little v. National Service Indus.,
Inc., 340 S.E.2d 510, 512 (N.C. App. 1986); see also Oakley v. Little, 272 S.E.2d
370, 372 (N.C. App. 1980) (stating “summary judgment allows quick and final
disposition of claims where there is no real question as to whether plaintiff should
recover, or where the defendant has established a complete defense”). 
Liggett argues that the Superior Court erred by interpreting the duty to defend
too narrowly while broadly construing the policy exclusions. Insurers counter that
the policies clearly do not provide coverage for tobacco claims and that Liggett is
attempting to pull isolated language from the policies and strain it to create
unwarranted exceptions.  
Generally, an “insurer's duty to defend the insured is broader than its
obligation to pay damages...” and is measured by the facts as alleged in the
pleadings in the action against the insured.  Waste Management v. Peerless Ins. Co.,
340 S.E.2d 374, 377 (N.C. 1986).  Conversely, when the pleadings allege facts
indicating that the event in question is not covered, and the insurer has no knowledge
that the facts are otherwise, then it is not required to defend.  Waste Management,
340 S.E.2d at 377.  In determining whether an insurer has a duty to defend the
11
underlying lawsuit, North Carolina courts employ the so-called “comparison test.”
Smith v. Nationwide Mut. Fire Ins. Co., 446 S.E.2d 877, 878 (N.C. App. 1994).
That test requires the court to read the pleadings in the underlying suit side-by-side
with the insurance policy to determine whether the alleged injuries are covered or
excluded.  Id.  When the pleadings state facts demonstrating that the alleged injury
is covered by the policy, then the insurer has a duty to defend, whether or not the
insured is ultimately liable. The critical focus, then, is on the facts that are pled, not
how the claims are characterized.  Holz-Her U.S., Inc. v. U.S. Fidelity and Guar.
Co., 539 S.E.2d 348, 350 (N.C. App. 2000).
While the duty to defend might be broad, it is not so broad as to expose
insurance companies to risks for which they did not bargain, and clearly excluded
from their policies.  See Waste Management, 340 S.E.2d 374 (affirming grant of
summary judgment in favor of insurer); Holz-Her U.S., 539 S.E.2d 348 (affirming
grant of summary judgment in favor of insurer); Smith, 446 S.E.2d 877 (affirming
dismissal of action against insurer).  After identifying various allegations in the
underlying complaints, and comparing them to the policies at issue, the Superior
Court ultimately concluded that the complaints all sought recovery for deleterious
health effects, both physical and mental, caused by use of tobacco products, which
were clearly excluded from the policies.  In interpreting the insurance policies, the
12
court was mindful that the goal of construction is to arrive at the intent of the parties
when the policy was issued.  Woods v. Insurance Co., 246 S.E.2d 773, 777 (N.C.
1978). 
We agree with the trial court that the underlying complaints, fairly read,
allege injuries arising from the use of Liggett’s tobacco products.  Such allegations
are clearly excluded from the primary CGL policies, absolving the insurers of any
duty to defend.  Furthermore, the parties clearly intended this result.  Liggett itself
did not contend otherwise until recently, for it has been representing to courts
throughout the country that it did not have any liability insurance that would cover
defense of the underlying suits.  The insurers, for their part, calculated premiums
based on the assumption that any tobacco-related health claims against Liggett would
not be covered due to the “tobacco exclusions” and “products-hazard exclusions”
in their policies.  An interpretation of the insurance policies at issue which includes
“litigation insurance” for these claims would contravene the intent of the parties at
the time of contracting, and award Liggett something for which it did not bargain.
III
Liggett attacks the trial court’s failure to distinguish between “bodily injury,”
“sickness” and “disease.”  Liggett points out that the tobacco exclusions vary in
13
scope and that some bar claims of “sickness or disease,” but not “bodily injury,”
while others bar claims of “disease,” but not “bodily injury” or “sickness.”  Liggett
argues that the underlying complaints contain allegations of bodily injury that are not
allegations of any “disease” or “sickness,” such as migraine headaches, chronic
back pain, tooth decay, poor circulation, and pregnancy complications.   The
Superior Court found that “[t]he definitions of ‘disease’ and ‘sickness’ broadly
encompass all ‘unhealthy conditions’ of the human body. By contrast, a burn, a cut,
a broken bone, or any other sudden traumatic injury would be a bodily injury that
is not a disease.”  Liggett Group Inc. v. Affiliated FM Insurance Co., et al., 2001
WL 1456774, *6 (Del. Super. 2001) (citing Eagle-Picher Indus., Inc. v. Liberty
Mut. Ins. Co., 682 F.2d 12, 19 (10 th Cir. 1982) (stating that “bodily injury is most
easily thought of as an injury caused by external violence or impact”)).  In reaching
this conclusion, the court relied upon nonlegal dictionaries for the ordinary meanings
of the terms, as permitted by the North Carolina Supreme Court.  Woods, 246
S.E.2d at 777.
Liggett’s attempt to define sickness, disease, and bodily injury as stages of the
same injury would eviscerate the plain meaning of the tobacco exclusions, making
every excluded disease subject to coverage up to the point that it is clinically
diagnosed.  Such an interpretation is unreasonable.  Equally unreasonable is
14
Liggett’s argument that sickness is defined separately from disease as a “condition
that interferes with one’s daily activities.”  If that were the case, the tobacco
exclusions would be meaningless since every disease, i.e., cancer and emphysema,
at some point, does interfere with one’s usual activities.  Liggett would have this
Court read the tobacco exclusions as excluding only claims that allege conditions that
have manifested symptoms to the point of being clinically diagnosed, but not yet
interfering with the patient’s usual activities.  The unambiguous policy language
cannot sustain such an interpretation.
Liggett further claims that the policies at issue all contain personal injury
coverage, separate and apart from the bodily injury coverage that contains the
tobacco exclusions.  Liggett claims that there are personal injury allegations in the
underlying complaints, such as mental injury, anguish, and humiliation, which are
covered by the CGL policies.  The Superior Court held that coverage for personal
injury claims does not encompass mental and emotional injury arising from an
excluded bodily injury, sickness, or disease.  Liggett Group Inc., 2001 WL
1456774, *7.
Under North Carolina law, “personal injury” coverage under a Commercial
General Liability policy is limited to coverage for those torts specifically enumerated
in the policy itself.  Russ v. Great American Ins. Companies, 464 S.E.2d 723, 727
15
(N.C. App. 1995).  The policies list identical offenses under their respective
personal injury liability coverage: “false arrest, detention or imprisonment, or
malicious prosecution, libel, slander, defamation or violation of right of privacy,
wrongful entry or eviction or other invasion of right of private occupancy,” as well
as “injury to the feelings or reputation of any person” and “injury to intangible
property sustained by an organization as a result of false eviction, malicious
prosecution, libel, slander, or defamation . . ..”  
These torts do not encompass the “mental anguish” claims for which Liggett
seeks coverage.  See Wake Stone Corp. v. Aetna Casualty and Surety Co., 995 F.
Supp. 612 (E.D.N.C. 1998) (holding that use of term “arising out of” in describing
personal injury covered by CGL policy did not broaden coverage beyond specifically
enumerated torts to encompass statutory unfair trade practices claim, despite fact that
such claim might “arise out of” same facts as libel and slander, which were
specifically covered).  Instead, the mental or emotional health claims made by the
plaintiffs all stem from their physical infirmities, which arise from their use of
tobacco products.  Furthermore, the basis for the tobacco liability claims is
negligence, essentially negligence in the manufacture and distribution of a harmful
product.  The policies at issue clearly do not extend coverage to negligence claims.
The “injury to feelings” of “any person” language, upon which Liggett relies, must
be read in context. Gaston County Dyeing Mach. Co. v. Northfield Ins. Co., 524
16
S.E.2d 558, 563 (N.C. 2000) (noting that the various terms of an insurance policy
are to be “harmoniously construed”).  In this case, it must be read with the
preceding list of torts encompassing, broadly, libel, slander, and defamation.  It
cannot be read as an independent extension of coverage to all mental anguish
allegations in products liability, or negligence, actions.
Liggett further argues that Royal’s products-hazard exclusion does not apply
to bodily injury claims that arise from causes other than Liggett's product, such as
allegations of second hand smokers, third party payors, and government action
complaints.  The Superior Court held that these allegations “arise out of” the use of
Liggett’s tobacco products, relying on this Court’s opinion in Eon Labs
Manufacturing, Inc. v. Reliance Insurance Co., 756 A.2d 889 (Del. 2000), which
held that claims against a manufacturer to recover for injuries from the fen-phen
drug combination arose out of the manufacturer's product and were within the
exclusion of coverage for the products-completed operations hazard in a CGL
insurance policy and the fact that the claims also involved the products of others did
not negate the application of the “arising out of” language.  Although Liggett
attempts to avoid the effect of Eon Labs by arguing that it was not decided under
North Carolina law, this Court specifically noted that its decision was based upon
“general insurance contract principles.”  Id. at 892. 
17
The arguments rejected in Eon Labs are strikingly similar to those alleged by
Liggett in this case.  There, as here, there were allegations that the defendant’s
product, combined with other products, caused bodily injury.  This Court concluded
that the “combination claims are not —  as Eon claims —  ‘claims seeking to hold
Eon liable for injuries from other companies' products.’  Such a contention distorts
the essential fact that in all the underlying cases it is the involvement or presence of
Eon's phentermine (including misrepresentations and failure to warn, etc.) that is the
basis of the fen-phen suits.”  Id. at 893.  North Carolina law does not require a
different result.  In State Capital (and its progeny), the North Carolina Supreme
Court held that “the sources of liability which are excluded from homeowners policy
coverage must be the sole cause of the injury in order to exclude coverage under the
policy.”  State Capital, 350 S.E.2d at 73.  In this case, the Superior Court held that
the use of tobacco products was the sole cause of the alleged injuries, thus
precluding coverage.  We agree. The underlying complaints name Liggett as a
defendant because they allege that Liggett’s product caused injury.  
Additionally, the State Capital line of cases involved motor vehicle or
homeowners insurance, both of which invoke important public policy and consumer
protection goals.  This case deals with a commercial policy entered into between
sophisticated parties.  North Carolina courts seem to recognize this distinction and
are not as protective of commercial insureds.  See Wake Stone Corp., 995 F. Supp.
18
at 617 (holding that use of term “arising out of” in describing personal injury
covered by CGL policy did not broaden coverage).    
IV
Liggett next argues that the Superior Court erred in determining that the
underlying complaints did not allege damage “arising out of” its advertising, thus
evoking its coverage under the Media Special Perils policy with Continental. Liggett
claims the Superior Court used the wrong causation standard in making its
determination, requiring that the injury arise out of the four corners of the
advertising rather than just being a natural and reasonable consequence of it.
Continental asserts that the MSP was only intended to cover libel, slander, or other
forms of defamation committed against competitors in advertising, not the claims of
injured consumers.
Liggett contends that the underlying complaints allege facts that constitute the
tort of infliction of emotional distress, directly caused by Liggett's advertising.
Although each of the complaints enumerate either intentional or negligent infliction
of emotional distress as a cause of action, the gravamen of these complaints is that
Liggett concealed the fact that its products were addictive and, instead, affirmatively
represented that they were safe.  See Holz-Her, 539 S.E.2d at 350 (noting that the
19
focus is on the facts that are pled, not how the claims are characterized).  The
plaintiffs, in turn, relied on the misrepresentations of Liggett to their detriment.  The
further claim that Liggett’s advertising directly targeted youth or induced the
plaintiffs to use its product could be said of all advertising – indeed, inducement to
purchase is the purpose of all commercial advertising.  Thus, although the plaintiffs
use the “magic words” of emotional distress, their claims revolve around fraud and
misrepresentation.  Further, the emotional distress alleged is a result of the physical
injuries incurred from use of Liggett’s product.   
Even the most inclusive Continental MSP policy, by its terms, requires a
causal connection between the offense for which coverage is sought and the insured's
advertising activities.  The coverage is for “claims arising out of” infliction of
emotional distress, “committed in the utterance or dissemination” of Liggett’s
advertising.  Liggett argues that the State Capital case stands for the proposition that
the infliction of emotional distress claims are covered if they are the “natural and
reasonable consequence” of Liggett’s advertising.  State Capital Ins. Co. v.
Nationwide Mutual Ins. Co., 350 S.E.2d 66 (1986).  The language of the opinion
belies that proposition, however.  The State Capital court noted that “the standard
of causation applicable to the ambiguous ‘arising out of’ language . . . is one of
proximate cause.”    Id. at 74.
20
The Superior Court was correct in its conclusion that in order to invoke
coverage, “the advertising alone must be actionable.”  Liggett Group Inc. v.
Affiliated FM Insurance Co., et al., 2001 WL 1456853, *6 (Del. Super. 2001). As
this Court has noted, the “vast majority of courts have held that claims made
pursuant to the advertising injury policy provisions which provide that the injury
‘rise out of’ or occur ‘in the course of’ the insured's advertising activities must be
supported by a causal connection between that injury and the activities.”  ABB Flakt,
Inc. v. National Union Fire Ins. Co., 731 A.2d 811, 817 (Del. 1999).  The case of
McDonald’s Corp. v. American Motorists Ins. Co., interpreting nearly identical
policy provisions, is also persuasive.  748 N.E.2d 771 (Ill. App. Ct. 2000).  The
McDonald’s court held that the media special perils policy at issue provided
coverage only if the offense itself was caused by the promotion or advertisement.
Id.  To hold otherwise, as the trial court recognized, would unduly expand the policy
to cover all claims relating to a product, simply because it was advertised.  Liggett
Group, Inc., 2001 WL 1456853, *6, citing McDonald’s, 748 N.E.2d at 779; Frog,
Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 (3rd Cir. 1999)
(holding that advertising alone must be actionable).
21
V
The Superior Court held that Liggett is not a “Named Insured” under an
umbrella policy issued by Royal.  In this appeal, Liggett argues that the court erred
in holding that the term “subsidiary” encompasses only direct subsidiaries and that
the court ignored both the commonly understood meaning of subsidiary and the
North Carolina rules of contract construction that call for ambiguities to be construed
in favor of coverage.  Further, Liggett argues, the Superior Court failed to
appreciate the effect of the modifier “any” on “subsidiary” and, again, did not
recognize the breadth of the duty to defend.  Royal contends that the policy was
issued to cover hotel operations, and the contracting parties never intended for
Liggett, who is six corporate layers down from the actual named insured, Grand
Met, to be covered by the policy.
Because the goal of construction is to arrive at the intent of the parties when
the policy was issued, an insurance policy must not be construed piecemeal.  Blake
v. St. Paul Fire and Marine Ins. Co., 248 S.E.2d 388, 390 (N.C. App. 1978), citing
Woods v. Insurance Co., 246 S.E.2d at 777.  The contract must be examined as a
whole.  Id.  Furthermore, “the construction of the policy must not be strained,
arbitrary, unnatural, or forced, but rather it should be reasonable, logical, and
22
practical, having reference to the risks and purposes of the entire contract.”  Id.,
citing 1 Couch on Insurance, 2d Edition, ss 15.10-.17 (1959).  Although any
ambiguity in the meaning of the words used in the policy must be resolved in favor
of the insured, use of the plain, ordinary meaning of a term is the preferred
construction.  C.D. Spangler Constr. Co. v. Industrial Crankshaft & Engineering
Co., 388 S.E.2d 557, 568 (N.C. 1990) (concluding that, absent a limiting definition
in the policy, the parties did not intend “damages” to have a specific technical
meaning, but rather they intended to use its ordinary meaning).
In construing the ordinary and plain meaning of disputed terms, the Supreme
Court of North Carolina has used “standard, nonlegal dictionaries” as a guide.  C.D.
Spangler, 388 S.E.2d at 568, citing Insurance Co. v. Insurance Co., 146 S.E.2d
410, 416 (1966).  In this case, the language at issue is the inclusion of “any
subsidiary company” within the definition of Named Insured. The American
Heritage Dictionary of the English Language 1283 (4th ed. 2000) defines subsidiary
company as “a company having more than half of its stock owned by another
company.”  See also Random House Unabridged Dictionary 1896 (2nd ed. 1993)
(defining subsidiary company as “a company whose controlling interest is owned by
another company”); Webster’s Third New International Dictionary 2279 (1993) (a
subsidiary company is “a company wholly controlled by another that owns more
than half of its voting stock”). 
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The Superior Court properly construed the Royal insurance policy to cover
only those subsidiary companies that are directly owned, or controlled by the actual
named insured, Grand Met.  Liggett is not a direct subsidiary of Grand Met under
this definition.  The term subsidiary company is not defined in the policy, thus the
parties must have intended it to have its ordinary meaning.  Although the term
subsidiary may have a different meaning in a corporate law context, its commonly
understood meaning, according to leading non-legal dictionaries, is limited to direct
subsidiaries.  This definition reasonably and logically harmonizes the policy
language granting coverage to “any subsidiary company” of Grand Met, with the
reality that Grand Met is a holding company with hundreds of direct and indirect
subsidiaries worldwide.
Furthermore, construing subsidiary company to mean direct subsidiaries
comports with the intent of the contracting parties, Intercontinental Hotels and
Royal, that the policy cover hotel, food and lodging operations (not tobacco
litigation).  This clear intention balances the strong policy in favor of interpreting
ambiguous provisions as affording coverage.  C.f., C.D. Spangler, 388 S.E.2d at
569. Liggett’s argument  that the Superior Court’s interpretation of subsidiary
company implicates general corporate law is off the mark.  The court was not
directing its holding to a dispute between a corporation and its subsidiary nor to a
matter of corporate governance but to the ordinary meaning of a term in an
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insurance contract between an insurer and an entity enjoying a remote legal
relationship with another corporate entity.
The decision of the Superior Court awarding summary judgment to the
insurers is affirmed.