Insurer Wins Appeal in Lead-Contaminated Chinese Toy Case

April 16, 2010

A federal appeals court has ruled that an insurance company has no duty to defend against class action lawsuits filed in Illinois targeting the company’s insured, a Chinese manufacturer of toys sold in the United States that were found to have contained lead.

RC2 Corporation Inc. (RC2) and its subsidiaries design and market toys that are primarily manufactured in China. The company sought coverage under its commercial general liability policies issued by Ace Insurance Company for defense of litigation in the United States related to a recall of RC2 wooden railway trains and train set components that had been manufactured in China between 2005 and 2007. The toys had been found to contain lead.

Ace had issued the policies to RC2 for a coverage period from Aug. 1, 2003, to Nov. 1, 2007. The policies excluded coverage of occurrences that took place within the United States.

Neither party disputed that the lawsuits relevant to the appeal were based on products sold and used exclusively in the United States.

Nevertheless, the U. S. District Court for the Northern District of Illinois, Eastern Division, according to court documents, previously “found that the policies potentially extended coverage to injuries that occurred in the United States.”

As such, the court “ruled that ACE had a duty to defend RC2 against class action lawsuits brought against it for products sold and used exclusively in the United States but manufactured in China.”

On appeal, the U.S. Court of Appeals for the Seventh Circuit reversed the judgment of the lower court, stating: “We hold that, under Illinois law, the insurance policies unambiguously excluded coverage for the alleged harm caused by exposure to defective products that occurred in the United States, regardless of where antecedent negligent acts took place.”

RC2 had argued that the negligent cause, i.e., the contamination of the toys with lead, took place in China, and asserted that “the ‘occurrence’ also took place in China,” the appeals court explained in the written opinion.

However, the appeals court said, in this particular instance although the “relevant negligent cause” may have taken place in China, “the ‘occurrence’ here happened at the location (or locations) of the exposure itself: within the United States.”

The case was argued before the appeals court on Dec. 10, 2009. The court published the opinion in Ace Insurance Company v. RC2 Corporation, Inc., et al, No. 09-3032, on April 5, 2010.

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