Single Cause is Comin' to Town
The Number of Occurrences Depends on the Insured's Particular Act Which Gives Rise To Liability
On December 27, 2007, the Pennsylvania Supreme Court gave insurers in Pennsylvania a late holiday gift — its decision in Donegal Mutual Insurance Co. v. Baumhammers. For policyholders, it was coal in their stockings.
In Baumhammers, the Pennsylvania Supreme Court held that the Commonwealth adheres to the "cause" of loss test for purposes of determining the number of "occurrences," and, hence, the number of limits of liability, available under a general liability policy. The court's finding of a "single cause" capped the insurer's maximum potential liability at $300,000, and not $1.8 million as the Superior Court had held. The Pennsylvania high court also clarified that the relevant "cause" is the insured's action or inaction which resulted in that particular insured's alleged liability.
The case arose from an incident in 2000 when Richard Baumhammers went on a shooting spree, killing five people and seriously injuring another. Baumhammers was convicted of five counts of first degree murder and other crimes. The victims and their Estates filed suit seeking damages from Baumhammers and his parents. They alleged that the parents were negligent in failing to confiscate Baumhammers' gun and in failing to advise the proper authorities of Baumhammers' violent propensities.
The parents sought coverage under their homeowners policy issued by Donegal Mutual Insurance Company. The Donegal policy provided a $300,000 per "occurrence" limit of liability and defined an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions. . . ." Donegal commenced a declaratory judgment action seeking a determination that it had no duty to defend or indemnify the parents. At the trial level, the court found against Donegal, holding that Donegal had a duty to defend and indemnify the parents, and that the allegations constituted six occurrences under the Donegal policy.
On appeal, the Pennsylvania Superior Court, following re-argument en banc, affirmed the trial court's decision on both issues. Adopting the Third Circuit's rationale in Nationwide Mutual Fire Ins. Co. v. Pipher (1998), the Superior Court found that the parents' alleged negligence constituted an "accident," thus satisfying the policy's "occurrence" definition, despite the recognition that the ultimate injuries were caused by Baumhammers' intentional acts. Then, purporting to apply the "cause" test for determining the number of occurrences, the Superior Court noted that there are two alleged proximate causes of the victims' injuries: Baumhammers' attacks and Baumhammers' parents' negligence.
The Superior Court was persuaded by the rationale used by courts (such as the Florida Supreme Court in Koikos v. Travelers Ins. Co. (2003)) that find multiple occurrences, by focusing on the "immediate cause of the harm, the cause that ultimately triggered the liability of the insured." Looking to the "immediate injuryproducing act," the Superior Court determined that there were six occurrences because Baumhammers shot six victims. The court rejected Donegal's argument that the parents' negligence constituted a "continuous or repeated exposure to the same general harmful conditions" because the victims were not "exposed" to the parents' negligence. Therefore, given Donegal's $300,000 per occurrence limit of liability, Donegal's potential indemnity exposure was determined to be $1.8 million.
Donegal sought review by the Pennsylvania Supreme Court, which granted the request for allowance of appeal and ultimately reversed, in part, the Superior Court's decision. First, the Supreme Court relied on its 2006 decision in Kvaerner Metals v. Commercial Union Ins. Co., as well as the Third Circuit's decision in Pipher. It affirmed that portion of the Superior Court's decision that found that there was an alleged "accident" which satisfied the Donegal policy's definition of an "occurrence."
Citing Kvaerner, the Court stated that it has defined an "accident" in the context of insurance coverage as "an unexpected and undesirable event occurring unintentionally." The Baumhammers Court stated that the "extraordinary shooting spree embarked upon by Baumhammers, resulting in injuries to plaintiffs, cannot be said to be the natural and expected result of the parents' alleged acts of negligence." Rather, the Court stated that the shooting spree was unexpected and, therefore, constituted an "accident" as required by the Donegal policy's definition of an "occurrence." Donegal, therefore, was obligated to defend the parents in the action brought against them resulting from their son's shooting spree.
Perhaps the most attention-grabbing aspect of the Supreme Court's opinion was its reversal of the Superior Court regarding the number of occurrences (and policy limits) implicated. Addressing this key issue, the Pennsylvania Supreme Court noted that courts have utilized two principal tests for determining number of occurrences at issue: the "cause" test (the majority view) and the "effect" test. The Pennsylvania Supreme Court acknowledged that, although it had yet to adopt the "cause" test, the Superior Court had concluded on numerous occasions that the "cause" test should be followed by Pennsylvania courts. See, e.g. D'auria v. Zurich Ins. Co. (Pa. Super. 1986) (adopting the cause of loss test to determine that misdiagnosis and mishandling of patient was one "occurrence") and General Acc. Ins. Co. v. Allen (Pa. Super. 1998) (failing to prevent child abuse to three children was one "occurrence").
Noting that Baumhammers is "a disturbing case with tragic consequences," the Pennsylvania Supreme Court found that only one "occurrence" was alleged. Rejecting the Superior Court's application of the "cause" test, to the extent that it relied on the "immediate injury-producing act," the Pennsylvania Supreme Court stated that the focus should instead be on "the act of the insured that gave rise to its liability." The Supreme Court found persuasive the Nevada Supreme Court's application of the "cause" test in its 1994 decision in Washoe County v. Transcontinental Ins. Co. In Washoe, a day care center employee allegedly sexually abused children at the center over a three-year period. Washoe County allegedly negligently licensed the day care center during the time period in which the abuse took place. Determining that Washoe's negligent licensing of the day care center was the "cause" of the children's injuries, the Nevada Supreme Court stated that "because each of the separate instances of molestation arose from the same proximate cause, i.e. the County's alleged negligence, that negligence was a single occurrence."
Citing Washoe, the Pennsylvania Supreme Court found that Baumhammers' parents' liability was predicated on their negligence in failing to confiscate their son's weapon or in failing to notify the appropriate law enforcement or mental health personnel of his violent propensities. The parents' negligence constituted one accident and, therefore, one "occurrence" as defined by the Donegal policy.
Formally adopting the "cause" test for determination of the number of occurrences in Pennsylvania, the Supreme Court held that the number of occurrences is determined by reference to the particular insured's act that gives rise to the particular insured's liability. The Court explained that, determining the number of occurrences in this manner "recognizes that the question of the extent of coverage rests upon the contractual obligation of the insurer to the insured." The parents' coverage is determined by the accident over which the parents could exercise control — here, their negligent failure to confiscate Baumhammers' weapon or to notify the proper authorities of Baumhammers' violent propensities.
Needless to say, "number of occurrences" is an extremely significant — and hotly contested — issue. It arises in the context of numerous coverage scenarios. As Baumhammers demonstrated, it can be the difference between $300,000 and $1.8 million being applicable to a loss. In many cases, the high-low range is far greater than that. While policyholders were handed a defeat in Baumhammers, all was not lost. Baumhammers will surely be used by policyholders to argue that, when the issue is "number of deductibles," the court's same rationale should lead to a decision that only one deductible applies.