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AIG units win suit with Chubb unit over truck ducts settlement


American International Group Inc. units have prevailed in litigation with a Chubb LLC unit over the allocation of a $6 million settlement in an underlying product liability lawsuit involving truck ducts, in a divided appeals court ruling.

At issue in the litigation is a “batch clause,” which involves how many policy periods are applicable.

During the 1990s, Minneapolis-based Donaldson Co. Inc. designed and manufactured two types of plastic ducts for the air-intake system of trucks manufactured by Portland, Oregon-based Western Star Trucks Sales Inc., according to Thursday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in National Union Fire Insurance Co. of Pittsburgh PA et al., v. Donaldson Co. Inc. v. Federal Insurance Co.

When they function properly, the air-intake system delivered clean air into the internal parts of Western Star diesel truck engines, according to the ruling.

In 2001, Western Star truck purchasers began filing lawsuits alleging a design defect in the ducts, stating their walls were too thin, causing the ducts to soften and melt and eventually cause engine dusting and failure.

Fifteen truck purchasers sued Donaldson, Western Star and a commercial dealer of the trucks in Mississippi state court, which led to a $6 million settlement.

Two AIG units, National Union and American Home Assurance Co., which were Donaldson’s primary insurers, contributed $3.5 million to the settlement while excess insurer Federal, a Chubb unit, contributed $2.5 million, with both insurers reserving their rights to challenge the settlements apportionment.

A batch clause in AIG’s policies, which had a $1 million per occurrence limit and a $500,000 per occurrence deductible, provided that property damage affecting “one lot of goods or products” would be “deemed to result from a ‘single occurrence.’”

AIG’s six policies covered six consecutive policy periods from July 1996 to July 2002. Chubb’s policies, which provided $40 million of excess coverage, were silent about the underlying AIG policies’ batch clause endorsement, according to the ruling. Its five policies covered the period from July 1996 to July 2001.

AIG filed suit in U.S. District Court in Minneapolis 2010 seeking to recover the amounts it contributed to the settlement, and Federal filed a counterclaim against AIG and a crossclaim against Donaldson.  Donaldson filed counterclaims against both insurers.

The U.S. District Court ruled AIG should be paid $500,000 by Donaldson, and reimbursed more than $2.8 million by Federal.

A three-judge panel’s 2-1 ruling upheld the lower court’s decision.
“Federal challenges the district court’s interpretation of the Batch Clause Endorsement and corresponding finding that only the 1999-2000 policy period was triggered,’” said the ruling.

Federal’s interpretation “fails to give meaning to the plain language of the (batch clause) endorsement as a whole” and “conflicts with the main purpose of batch clauses, which is ‘to reduce the number of occurrences whenever the same product causes multiple bodily injuries or property damage,’” said the ruling, in citing a legal treatise and earlier ruling.

“Finally, Federal’s interpretation violates a cardinal insurance policy interpretation rule - limitations of liability are to be construed again the insurer,” said the decision.

“Upon applying Minnesota’s rules for interpreting insurance policies and considering the policies’ unambiguous terms, we find that when a defective ‘lot’ of goods or products is involved, the claims are consolidated into a single ‘occurrence,’” said the ruling.

The judge said in his dissenting opinion that he disagrees that the batch clause endorsement “aggregates occurrences across different policy periods.”

AIG’s attorney had no comment while other attorneys could not immediately be reached.






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