Opinion ID: 774879
Heading Depth: 2
Heading Rank: 2

Heading: Whether the Recall Was a Covered Loss

Text: 25 Count I of National Union's amended complaint seeks a declaration that the Policy does not cover Stroh's claim because Stroh knew or could have reasonably been expected to know that a Loss had occurred or was likely to occur on or before July 1, 1996, the effective date of Heileman's inclusion under the Policy. The alleged cause of action is based on paragraph I of the Policy, which requires National Union to reimburse Stroh for 26 its Loss... caused by or resulting from any of the following Insured Events, discovered during the Policy Period... provided that the Insured as of the inception date of this policy did not know nor could have reasonably been expected to know that such Loss had occurred or might likely occur. 27 (Emphasis added). An Insured Event is defined to include an accidental contamination of covered products, and a Loss includes recall costs incurred as a result of an Accidental Contamination. 28 The Policy does not explicitly define the term inception date. But a set of declarations on National Union letterhead accompanying the original Policy states that the Policy Period runs from May 12, 1995 to May 12, 1996, and it is undisputed that May 12, 1995 was the Policy's original inception date. National Union contends, however, that this date was later altered by either Endorsement No. 4, which extended the policy period from May 12, 1996 to May 12, 1997, or Endorsement No. 5, which extended coverage to Heileman as of July 1, 1996, or both. 29 The district court rejected this argument, concluding that the Policy provides for only one inception date, and that date was May 12, 1995. See National Union II, 1999 WL 1267461, at , 1999 U.S. Dist. LEXIS 19801, at . Because Stroh could not have known of any problems at the Perry plant on that date -- they are not alleged to have performed any due diligence with respect to the Heileman assets at that time and the problems at the Perry plant had in any event not yet begun -- the district court concluded that Paragraph I did not bar coverage. See id., 1999 WL 1267461, at -, 1999 U.S. Dist. LEXIS 19801, at -; National Union III, 2000 WL 264320, at -, 2000 U.S. Dist. LEXIS 2581, at -. 30 On appeal, National Union contends (1) that the district court misconstrued the Policy in determining the inception date, and (2) that the insurance-law concepts of known loss and fortuity bar coverage of Stroh's claim irrespective of the specific Policy language.
31 We agree with the district court's conclusion that the Policy's inception date was May 12, 1995. As the court noted, [t]he term 'inception date' [in the Policy] refers to a singular event, and that term is used in conjunction with the phrase 'this policy.' National Union II, 1999 WL 1267461, at , 1999 U.S. Dist. LEXIS 19801, at . The only plausible interpretation is that the Policy was thus subject to only one inception date -- the date on which coverage under the Policy originally became effective, May 12, 1995. 32 Neither of the Endorsements on which National Union relies alters this conclusion. Endorsement No. 4 is a Coverage Continuation Endorsement which reads in pertinent part: 33 Item II Policy Period of Declaration [sic] page has been extended to read: Item II Policy Period From: May 12, 1996 34 To: May 12, 1997. 35 (Emphasis added). 36 The district court contrasted this language with the parties' use of the word amended -- within the same endorsement as well as Endorsements Nos. 1, 2, and 3 -- to alter the substance of provisions of the Policy. The court thus held that Endorsement No. 4 extended the duration of the Policy, the inception of which was May 12, 1995, rather than amending the Policy to create a new inception date. 37 Even if Endorsement No. 4 amended the terms of the original Policy, as National Union asserts, it did so only with respect to the Policy Period and not the inception date. It is undisputed that when the parties executed Endorsement No. 4, they did not create a new policy. 38 Rather, the endorsement form[ed] a part of the original Policy and extended coverage under that policy for an additional year, while specifying that [a]ll other terms, conditions and exclusion [sic] of the original policy will remain unchanged. Thus, the original Policy exists over multiple Policy Period[s]. Had the parties wished to achieve the result now urged by National Union, they could have drafted Paragraph I to exclude coverage for losses known or suspected as of the beginning or inception of the current Policy Period. Paragraph I of the Policy, however, refers to the inception date of this policy, making it clear that the inception date is defined in relation to the Policy as a whole rather than in relation to any particular Policy Period. Therefore, an extension of the Policy Period in an endorsement cannot change the inception date of the Policy as a whole, which was May 12, 1995. 39 Endorsement No. 5 likewise states that effective July 1, 1996, the coverage provided under [the Policy] has been extended to include Heileman, and that [a]ll other terms, conditions and exclusions of the original policy will remain unchanged. The endorsement thus leaves intact the language creating a single inception date for the Policy and setting May 12, 1995 as that date. Cf. St. Paul Fire & Marine Ins. Co. v. Metpath, Inc., 38 F. Supp. 2d 1087, 1093-95 (D. Minn. 1999) (holding that policy language barring coverage for damages known to insured before policy's effective date did not apply to damages sustained by subsidiary acquired by original insured after effective date). 40 National Union contends that Endorsement No. 5 creates a separate inception date with respect to th[e] specific risk at issue in this case. Appellants Br. at 18. But nothing in the Policy or any of the subsequent endorsements supports the view that each insured risk was given its own inception date. 41 National Union further contends that any interpretation of the Policy that requires coverage of risks that the parties did not contemplate when the Policy first took effect is unreasonable. Yet National Union has been exposed to no risks beyond those contemplated by the plain language of the Policy and subsequent endorsements, including those pertaining to the loss for which National Union now seeks to avoid liability. See Metpath, 38 F. Supp. 2d at 1094 (rejecting argument that policy interpretation that expos[ed][the insurer] to risks that it did not intend in issuing the policy is unreasonable). National Union could have avoided exposure to risks known to Heileman or Stroh at the time Heileman was added to the Policy by asking Stroh about them, or by specifically excluding such risks in the Policy or Endorsement No. 5. See id. (noting that if the insurer meant to exclude risks known at the time coverage was extended to after-acquired companies, it should have clearly worded the language of the Policy to say this.). 42 The district court thus correctly held that the inception date of the Policy was May 12, 1995, and correctly concluded that the known or suspected Loss provision of Paragraph I therefore did not bar coverage for the recall at issue.
43 National Union next argues that even if the district court properly construed the Policy, the fortuity and known loss doctrines bar coverage of Stroh's claim as a matter of law. 44 Broadly stated, the fortuity doctrine holds that insurance is not available for losses that the policyholder knows of, planned, intended, or is aware are substantially certain to occur. Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 8.02, at 248 (5th ed. 1991) (collecting cases). New York has codified a somewhat narrower version of the doctrine under which an insurance contract is defined as an agreement by one party to pay another upon the happening of a fortuitous event, meaning any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party. N.Y. Ins. Law § 1101(a)(1)-(2). 45 The known loss defense is a variation on the fortuity theme. It holds that an insured may not obtain insurance to cover a loss that is known before the policy takes effect. Stonewall Ins. Co. v. Asbestos Claims Mgt. Corp., 73 F.3d 1178, 1214 (2d Cir. 1995), modified on other grounds, 85 F.3d 49 (2d Cir. 1996); see also Henry Modell & Co. v. Gen. Ins. Co. of Trieste & Venice, 193 A.D.2d 412, 412-13, 597 N.Y.S.2d 75, 75 (1st Dep't 1993) (citing N.Y. Ins. Law § 1101(a) as authority for known loss doctrine). 46 1. Impact of Policy Language. The district court concluded that the Policy itself defeats a known loss defense here by excluding coverage only for losses known by the insured as of the inception date. See National Union III, 2000 WL 264320, at -, 2000 U.S. Dist. LEXIS 2581, at -. The court rejected National Union's contention that the known loss and fortuity doctrines exist independently of and override specific policy provisions. See id. 47 Like the district court, we have found no specific authority -- the parties have cited none -- for or against the proposition that New York law would bar coverage for known losses covered by an insurance policy by means of amendments made to the policy after the inception date, even where the policy itself bars coverage only for losses known on the inception date. We also share the district court's reluctance to announce such a rule in the absence of clear guidance from state courts. Our role as a federal court sitting in diversity is... not to adopt innovative theories that may distort established state law. City of Johnstown v. Bankers Std. Ins. Co., 877 F.2d 1146, 1153 (2d Cir. 1989). 48 New York law does not leave us entirely without guidance on this issue, however. As noted, a variation of the fortuity principle is incorporated by statute into the very definition of an insurance contract. See N.Y. Ins. Law § 1101(a)(1)-(2). New York courts have accordingly applied this principle to deny coverage without reference to specific contract language, see Henry Modell & Co., 193 A.D.2d at 412-13, 597 N.Y.S.2d at 75-76 (holding that no insurance coverage exists when, inter alia, the damages claimed occurred prior to the inception of the policy and were fully known to the plaintiff... before the commencement of coverage), and, in Stonewall, in describing the known loss doctrine under New York law, we said that insurance cannot be validly purchased for known losses, 73 F.3d at 1215. We also said in Stonewall that the 'known loss' defense is distinct from a defense based on policy language excluding coverage for injuries that were 'expected or intended' by the insured. Id. 49 It is but a short leap from these formulations to a more specific rule, articulated in other jurisdictions, that fortuity and known loss principles are integral to the nature of insurance and thus apply as a matter of public policy, irrespective of specific policy terms. See, e.g., Koppers Co., Inc. v. Aetna Cas. & Sur. Co., 98 F.3d 1440, 1447 (3d Cir. 1996) (predicting that Pennsylvania courts would hold that public policy bars enforcement of insurance contracts purporting to cover known losses); Univ. of Cincinnati v. Arkwright Mut. Ins. Co., 51 F.3d 1277, 1282 (6th Cir. 1995) ([I]t is against public policy to allow insurance coverage on a certainty.) (internal quotation marks omitted); Bartholomew v. Appalachian Ins. Co., 655 F.2d 27, 29 (1st Cir. 1981) (describing insurance contracts as a wager against the occurrence or non-occurrence of a specified event, such that the carrier insures a risk, not a certainty). See generally Lee R. Russ & Tomas F. Segalia, 7 Couch on Insurance 3d § 102:9, at 102-26 (1997) ([T]he known loss doctrine essentially reforms the contract to exclude the known loss, apparently under the assumption that no reasonable insurer would assume such a 'risk.'); Ostrager & Newman, supra, § 8.02[a], at 250 (The overwhelming majority of courts... have... limited insurance coverage, regardless of the language of a particular policy, to fortuitous or accidental events.) (collecting cases). 50 Applying these principles, at least two courts in other jurisdictions have held that coverage would be barred where an existing policy is extended to cover new parties which then file claims for damages if the evidence showed that the insured parties had sustained and were aware of the damages before being added to the policy. See Certain Underwriters at Lloyd's v. Oryx Energy Co., 957 F. Supp. 930, 936-37 (S.D. Tex. 1997), rev'd on other grounds, 142 F.3d 255 (5th Cir. 1998); Cont'l Ins. Co. v. Beecham, Inc., 836 F. Supp. 1027, 1046 (D.N.J. 1993). 51 The district court thus may have erred in tying National Union's known loss defense strictly to the Policy's language. We need not predict nor ask the New York Court of Appeals what New York law is on this subject, however, because we conclude that even if the fortuity and known loss doctrines override specific policy language in New York, they are inapplicable on the facts of this case. 52 2. Known Risk. National Union argues that there is at least a triable issue of fact as to whether the Loss was known before July 1, 1996 because Heileman and Stroh knew or should have known on that date that the recall was likely. We disagree. 53 We begin with the obvious and apparently undisputed conclusion that a Loss as defined in the Policy -- which includes expenses incurred in connection with a recall -- is a loss for purposes of the known loss doctrine. The loss in question in this case -- i.e., the cost of the Perry recall -- undoubtedly occurred after Heileman was added to the Policy. If, on July 1, Stroh or Heileman knew of a broken glass problem that made a recall likely, it does not follow that the recall, and therefore the expenses in connection with the recall, were known on July 1. In other words, National Union seems to argue that the fortuity doctrine bars coverage not only for known losses but for likely losses, i.e., known enhanced risks. We have expressly rejected the existence of such a known risk doctrine under New York law. See City of Johnstown, 877 F.2d at 1152-53. 54 In City of Johnstown, an insured landowner sought coverage under a liability policy for cleanup costs associated with contaminated land. The landowner allegedly knew of the contamination when it purchased insurance, but did not know whether and to what extent it would be held liable for the contamination. We noted that New York law bars coverage for known losses but does not recognize the broader proposition that a risk, once 'known' is uninsurable. Id. at 1153; see also Stonewall, 73 F.3d at 1215 (holding that New York law did not bar coverage of damages even though the insured knew, before the inception date of its policies, that its products risked asbestosis and cancer diseases and had received a large number of claims). 55 In Stroh's case, similarly, there had been no Loss at the time Heileman was added to the policy; there was only the risk of a Loss. Even if the risk was known, and known to be high, at that time -- a question hotly in dispute -- the known loss doctrine does not bar coverage. 56 The rule announced in City of Johnstown does not leave insurers unprotected under New York law when insuring such risks. It simply makes clear that such protection lies not in a known risk rule but in narrower and better-established doctrines, such as rules barring recovery (1) where the insured fraudulently conceals or misrepresents a loss, imminent loss, or other material fact, and (2) for damages that are 'expected' or 'intended' by the insured where the policy so provides. City of Johnstown, 877 F.2d at 1153. 57 Neither of these narrower doctrines is applicable here. National Union has disclaimed any allegation that the defendants fraudulently concealed or withheld material information. See National Union I, 1999 WL 619635, at , 1999 U.S. Dist. LEXIS 12580, at . And City of Johnstown's reference to damages 'expected' or 'intended' by the insured arose in the context of our interpretation of standard language in the liability policy there in issue excluding coverage for such damages, and thus is not directly applicable in this case. In other words, we held there that the parties may avoid insuring known risks in part through their own draftsmanship. As we have already observed, the pertinent language of the Policy in this case -- i.e., the exclusion for Losses that Stroh knew had occurred or might likely occur -- applies only to Stroh's knowledge as of the inception date. 58 3. Knowledge of Inevitable Loss. National Union argues, however, that at the time Heileman was added to the Policy, even though the Loss in question had not occurred, it was not merely a risk but a certainty. National Union makes two separate arguments in this regard: that because Stroh and Heileman knew that a recall was necessary but delayed initiating one until Heileman was covered under the Policy, the Loss was (1) known for purposes of the known loss doctrine, and (2) non-fortuitous under New York law since it was not beyond the control of either party. N.Y. Ins. Law § 1101(a)(2). 2 We consider the first of these theories here, and the second in Part II.C.4, below. 59 National Union's notion that the known loss doctrine bars coverage not merely for losses that the insured knows have already occurred at the time insurance is purchased, but also for losses that have not occurred but the prospective insured knows inevitably will occur is not without support. See, e.g., City of Johnstown, 877 F.2d at 1152 (noting that insurance will not normally cover damages that are, as a result of legal or administrative proceedings, already apparent at the inception of insurance); Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56, 63 (3d Cir. 1982) (noting that the purpose of insurance is to protect insureds against unknown risks, and barring coverage under liability policy where the risk of liability was no longer unknown at the time the policy became effective); Bartholomew, 655 F.2d at 29 ([A] homeowner could not insure his house against flood damage when the rising waters were already in his front yard. (citation omitted)); cf. Pittston Co. Ultramar Am. Ltd. v. Allianz Ins. Co., 124 F.3d 508, 518 (3d Cir. 1997) (holding that the known loss doctrine will bar coverage [under a liability policy] only when the legal liability of the insured is a certainty); Stonewall, 73 F.3d at 1215 (rejecting a known loss defense where insured was aware that its products risked asbestosis and cancer diseases and had received a large number of claims). We conclude, however, that this defense is unavailable in this case because no reasonable jury could find on the evidence presented to the district court that Stroh or Heileman knew that a recall was inevitable before, but delayed initiating it until after, Heileman products had been added to the Policy. 60 The initial burden of showing that the loss in question was fortuitous -- here meaning that the inevitably of such loss was not known to the insured before coverage took effect -- is on the insured party. See In re Balfour MacLaine Int'l, Ltd., 85 F.3d 68, 77-78 (2d Cir. 1996). 3 Once that burden is met, the insurer must come forward with evidence showing that an exception to coverage applies, including exceptions based on the non-fortuity or known loss doctrines. Id. (internal quotation marks and citation omitted); see also Ressler v. White, 968 F.2d 1478, 1479 (2d Cir. 1992) (per curiam) (holding that insured bore the burden of showing that loss was fortuitous but insurer had the burden to show that allegedly fortuitous cause of loss was a sham); Northwestern Mut. Life Ins. Co. v. Linard, 498 F.2d 556, 562 (2d Cir. 1974) (stating that if insured shows that loss was fortuitous, insurer must establish that the probability that the loss was the result of misconduct or otherwise not fortuitous is as great as the probability that the loss was fortuitous.). 61 Stroh's initial burden is satisfied by evidence showing that it did not take the first steps toward a recall until after August 12, 1996, some weeks after coverage of Heileman products was added to the Policy. In early August, Stroh learned of several specific consumer complaints of broken glass in bottles filled at the Perry plant, most of which were received by Hornell in July and August 1996. Stroh ceased production at the Perry plant, examined about 30,000 bottles of Arizona Iced Tea produced at the plant, convened its Recall Committee, and consulted with Hornell. Only then, on or after August 20, 1996, was a recall decision made. Had Stroh begun these steps toward a recall prior to the date the Policy was extended to cover Heileman products, there might have been a basis for a reasonable jury to find that Stroh knew then that a recall was inevitable. But these events and the knowledge of inevitability of loss that they might have imparted did not occur until long after coverage of the recall was in place. 62 Stroh thus having adduced evidence that neither it nor Heileman had knowledge of an inevitable loss, the burden fell on National Union to rebut this evidence and show that the loss was in fact known by either insured to be inevitable. It did not do so. 63 In support of its assertion that Stroh or Heileman knew the recall was inevitable before July 1, 1996, the date on which coverage of a recall of Heileman products was added to the Policy, National Union relies on two categories of evidence: alleged statements by employees or agents of Stroh and Heileman regarding what the insureds knew in April and May 1996 about problems at the Perry plant, and evidence purporting to show that the insureds were aware before July 1, 1996 of glass inclusion complaints by consumers regarding bottles filled at the plant. Neither category of evidence would permit a reasonable jury to draw the inference urged by National Union. 64 Included in the first category is an alleged statement by an employee of Stroh's insurance broker to National Union's claims attorney in September 1996, as the dispute over Stroh's claim for the recall was beginning to take shape, that Heileman had begun to notice glass breakage in March or April of 1996. Similarly, National Union claims that Stroh's quality control inspector said that he noticed the production line flaw at the Perry plant in March or April of 1996, while conducting a due diligence inspection in preparation for Stroh's acquisition of Heileman's assets. 65 Both employees deny having made the statements attributed to them by National Union. But even if the statements were made, they do not support an inference that Stroh or Heileman knew that a recall was inevitable before July 1, 1996. Neither person is alleged to have indicated that Stroh or Heileman suspected in March or April 1996 that contaminated bottles had reached or would reach the public or to have known that a recall would ultimately be necessary. To the contrary, both are alleged to have indicated that Stroh and Heileman believed that any risk of glass breakage was sufficiently contained by quality controls in place at the Perry plant. 66 The proof with respect to consumer complaints also fails to support an inference of known inevitability of loss. There is, to be sure, substantial evidence that Heileman, and perhaps Stroh, knew that there had been some consumer complaints regarding broken glass in bottles produced at the Perry plant. But knowledge of such complaints does not, without more, support the inference that Heileman or Stroh knew that a recall was inevitable. Indeed, such an inference is flatly contradicted by the undisputed evidence on the issue: The plant manager of the Perry plant during the relevant period testified by declaration that [a] small amount of glass complaints is typical of any bottling facility. 67 Viewed separately, then, neither the evidence of Stroh's knowledge of a flaw in the Perry production line nor the evidence of its knowledge of consumer complaints support an inference that Stroh or Heileman knew a recall was inevitable. The same is true when this evidence is considered together. There is nothing from which a reasonable jury could properly find that either Stroh, which thought that there were controls to respond to the risk of thermal shock breakage in Perry, or Heileman, which similarly believed that despite occasional complaints, its production process at the Perry plant was safe and free of any contamination in the finished products, knew that that risk had manifested itself in the particular glass inclusions that were giving rise to the consumer complaints. There was thus no factual basis for a finding that Stroh or Heileman knew in March 1996 that a flaw at the Perry plant was sending bottles of iced tea with glass inclusions into the distribution stream. Moreover, even had National Union proffered evidence that Stroh or Heileman knew that there was a connection between the flaw in the Perry process and the complaints National Union has offered no basis for a jury to infer from such knowledge that Stroh or Heileman knew a recall, rather than some other remedial but uninsured measure, was therefore inevitable. 68 4. Loss within the Control of the Insured. Our conclusion that National Union has failed to adduce facts sufficient to defeat summary judgment on the known-loss defense is also applicable to National Union's other variation on the fortuity argument: that because Stroh and Heileman deliberately delayed the recall until Heileman had been added to the Policy, the Loss was non-fortuitous under New York law because it was not beyond the control of either party. N.Y. Ins. Law § 1102(a)(2). 69 National Union relies on several decisions barring coverage for damages caused by intentional acts on the part of insureds. See Univ. of Cincinnati, 51 F.3d at 1281-84 (holding that asbestos clean-up costs were non-fortuitous when they were incurred as a result of insured's decision to demolish a building with knowledge that demolition would require asbestos removal); New York State Elec. & Gas Corp. v. Lexington Ins. Co., 204 A.D.2d 226, 226, 612 N.Y.S.2d 43, 43 (1st Dep't 1994) ([W]here plaintiff deliberately removed [a]... component from its generating plant for diagnostic testing and preventive maintenance, the resulting downtime cannot be deemed a fortuitous event....). We have similarly held that damages that flow directly and immediately from [the insured's] intentional act cannot be considered accidental or fortuitous. City of Johnstown, 877 F.2d at 1150. 70 These decisions would be applicable only if an intentional act by Stroh or Heileman led directly to the accidental contamination. National Union makes no such allegation. Of course, the recall was intentional in the sense that it was a purposeful and willful act, and the resulting Loss was in that limited sense non-fortuitous. But the Loss was nevertheless fortuitous in the sense that it resulted from an accidental or unintended event: the glass inclusion problem at the Perry plant. Cf. Univ. of Cincinnati, 51 F.3d at 1282 (distinguishing losses caused by deliberate actions taken in reaction to unanticipated conditions from losses stemming solely from voluntary decisions by insured); A&B Enters., Inc. v. Hartford Ins. Co., 198 A.D.2d 389, 390, 604 N.Y.S.2d 166, 168 (2d Dep't 1993) (holding that loss was fortuitous where insured's intentional conduct was contractually required). 71 National Union also appears to contend, without citation to New York authority, that the timing of the Loss at issue was non-fortuitous because Stroh and Heileman postponed the inevitable recall until it was covered by the Policy. But, as we have noted, there is no basis in this record on which a jury could properly conclude that Stroh or Heileman knew the recall was inevitable when the Policy was extended to cover that risk. 72 National Union warns that requiring coverage under these circumstances will leave insurers vulnerable to misconduct, offering the hypothetical example of a building owner that adds a building it knows to be structurally unsound to an existing insurance policy and then files a claim for the cost of repairing the building. But the insurer in National Union's example may protect itself by requiring the insured to disclose any problems with buildings added to the policy after the original inception date, just as National Union was free to ask Stroh of any known or potential problems associated with Heileman's assets prior to adding Heileman's assets to Policy coverage. As discussed in more detail below, an insured's failure to respond accurately to such questions may render the policy subject to rescission by the insurer. See, e.g., Vella v. Equitable Life Assurance Soc'y, 887 F.2d 388, 391, 393 (2d Cir. 1989). And even in the absence of such inquiry, coverage may be barred where the insured fraudulently withholds a material fact. See, e.g., Lighton v. Madison-Onondaga Mut. Fire Ins. Co., 106 A.D.2d 892, 892-93, 483 N.Y.S.2d 515, 516 (4th Dep't 1984). In the case before us, the insurer has explicitly disclaimed any intent to prove or rely upon a theory of fraud. See National Union I, 1999 WL 619635, at , 1999 U.S. Dist. LEXIS 12580, at .