CHICAGO—A federal appeals court ruled unanimously Monday that an insurer has no duty under Illinois law to defend a policyholder in class actions for products manufactured in China but sold in the United States when its general liability policy specifically excluded coverage of occurrences that took place in the United States.

The case, ACE American Insurance Co. vs. RC2 Corp. Inc. et al., involved lead exposure claims against a toy manufacturer. According to the ruling by a three-judge panel of the 7th U.S. Circuit Court of Appeals, Oak Brook, Ill.-based RC2 had “two separate lines of commercial general liability insurance,” one that applied to occurrences within the United States and another—underwritten by ACE—that applied internationally but excluded the United States.

“Unfortunately for RC2,” Judge Daniel Manion wrote for the three-judge appeals court panel, “the domestic policies expressly excluded damages resulting from lead paint; this oversight erased what would have been the obvious source of coverage for injuries occurring in the United States. Citing the exclusion, the domestic insurer denied coverage. That left the ACE international policy, which excluded occurrences within the United States, as RC2’s only opportunity for obtaining coverage.”

ACE, citing the policy’s exclusion of U.S. occurrences, also denied coverage and sought a declaration that it had no duty to defend or indemnify RC2. But a federal judge held that because “the negligent manufacture of the products had taken place in China, which was within the coverage territory, the policies potentially covered the damages and ACE therefore had a duty to defend the claims against RC2,” the appeals court said in discussing the lower court ruling.

The parties settled the indemnity claims, but they disagreed about the duty to defend.

The appeals court held that “under Illinois law and unless a particular policy contemplates a different definition, an accident occurs when and where all the factors come together at once to produce the force that inflicts injury and not where some antecedent act takes place….Because the parties agree that all the alleged exposures to the products took place within the United States, these occurrences took place in the excluded coverage area of the ACE international policies.”

The Chicago-based appeals court remanded the case to the district court with instructions to enter judgment in favor of ACE.