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The 3M Silicone Implants Case -
What is the Impact for Construction Cases?

some guidance as to how the Court would address the above questions.  In a decision that examines "continuing injury" claims, the Supreme Court of Minnesota recently held that it is not appropriate to allocate losses among insurers pro rata by time on the risk in a case involving continuous injuries that can be traced back to a discrete and identifiable event. In re: Silicone Implant Insurance Coverage Litigation, 2003 WL 21982491 (Minn., decided August 21, 2003) the Court held that the implantation of silicone gel breast implants was a discrete and identifiable event and that the district court had erred in allocating losses among insurers pro rata by time on the risk. The Court affirmed in part and reversed in part the decision of the Court of Appeals.

The case involved a declaratory judgment action brought by several of 3M's excess-layer, occurrence-based policy insurers. These insurers sought to clarify their coverage obligations in 3M's ongoing silicone gel breast implant mass tort litigation. The insurance policies at issue were in place from 1977 to 1985 and covered claims arising from injuries occurring during that time period. The implant claims for which 3M sought reimbursement were brought in the early 1990s, but were based largely on implantations that occurred during the policy periods, which implants allegedly caused various systemic autoimmune diseases.

The Supreme Court's review included the following issues:

1. When and how policy coverage was triggered;
2. Whether allocation is appropriate and, if so, when the allocation period should end.

Policy coverage is triggered when actual injury occurs.

As discussed in Northern States Power Co. v. Fidelity and Casualty Co. of N.Y., 523 N.W.2d 657, 662 (Minn. 1994) (NSP), Minnesota follows an "injury-in-fact" or "actual-injury" rule and has explicitly rejected the continuous trigger rule. Under the actual-injury rule, the time of the occurrence is not the time the wrongful act was committed but the time the complaining party was actually damaged. Thus, under the actual-injury trigger rule, only those policies in effect when the bodily injury or property damage occurred are triggered. To trigger a policy, the insured must show that some damage occurred during the policy period. For purposes of the actual-injury trigger theory, an injury can occur even though the injury is not "diagnosable," "compensable," or manifest during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period.

In holding that the insurance coverage was triggered shortly after implantation of 3M's silicone gel breast implants, the Court noted that the district court, relying upon expert medical testimony, had made the factual determination that:

Leaked silicone is in contact with body tissues from the time of implant until the formation of a protective capsule, a period of several weeks. Silicone is bioreactive during that period and more likely than not that is the period during which cellular abnormality is produced. Thus, bodily injury within the purview of the trigger language occurs at or about the time of implant.

. . . . Such cellular damage is determinable, constitutes the underlying bodily harm without which there would be no manifestation in the form of disease symptoms, and satisfies the "actual injury" legal standard for trigger.

The Supreme Court held that this factual finding was not clearly erroneous and concluded that the policies were triggered at or about the time of implantation.

Allocation among insurers is inappropriate when a discrete, identifiable event causes injury.

Having concluded that the insurance policies were triggered at or about the time of implantation, the Court then addressed whether to allocate 3M's losses from those injuries among the multiple insurers.

The Supreme Court analyzed the issue by reviewing its three earlier decisions addressing environmental damage liability: NSP, 523 N.W.2d 657; SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305 (Minn. 1995); and Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724 (Minn. 1997). In those three cases, the Court discussed the pro rata by time on the risk allocation method and how it applies to continuous injuries arising from environmental contamination.

In NSP, the Court chose the time on the risk allocation method because it has the advantage of being a "more or less per se rule." This method assumes that the damages in a contamination case are evenly distributed (or continuous) through each policy period from the first point at which damages occurred to the time of discovery, cleanup, or whenever the last triggered policy period ended. Because the contamination in NSP was viewed as a continuous process in which the property damage was evenly distributed over the period of time from the first contamination to the end of the last triggered policy (or self-insured) period, there was no period during which more or less damage occurred, so allocation according to time on the risk was appropriate.

One year later, in SCSC, the Court revisited the issue of allocation. The jury in that case found that "property damage arose in August 1977, as the result of an unintended, unexpected, sudden and accidental event, and that the damage was neither divisible nor attributable to an overriding cause. On appeal, the Court held that the only covered "occurrence" was the1977 chemical spill. The continual leaching of the chemicals from the soil into the groundwater did result in damages to SCSC because of property damage, but that damage was held to be covered only by insurers that were on the risk in 1977, the year during which the only covered "occurrence" took place. The Court refused to allocate any damages to insurers that were not on the risk in 1977.

Finally, in Domtar, the insured sought reimbursement for clean-up costs it incurred in association with its tar refining plant. In that case, the Court summarized NSP as establishing that in "continuous and indivisible environmental contamination cases" (1) general liability policies are triggered when property damage occurs during the policy period; (2) insurer liability is consecutive, limited to property damage occurring during the insurer's policy period; and (3) one way to allocate loss among consecutively liable insurers, in the absence of relevant policy language, is pro rata by time on the risk.

Accordingly, in Domtar, the Court affirmed the use of allocation pro rata by time on the risk, specifically rejecting Domtar's argument that this allocation method unfairly allocated losses to Domtar by allocating losses to periods during which Domtar was uninsured, self-insured, or underinsured. The Court also emphasized the limits of its holding, however, and attempted to clarify the discussion of allocation in NSP and SCSC:

The proper scope of coverage also will depend on the facts of the case. When environmental contamination arises from discrete and identifiable events, then the actual-injury trigger theory allows those policies on the risk at the point of initial contamination to pay for all property damage that follows. [citing SCSC] * * * It is only in those difficult cases in which property damage is both continuous and so intermingled as to be practically indivisible that NSP properly applies. NSP provides a judicially manageable way for trial courts to adjudicate certain pollution-coverage disputes when it is difficult to determine when an "event" or "occurrence" or "damage" giving rise to legal liability has occurred. NSP does not establish hard-and-fast rules; it offers a practical solution in the face of uncertainty.

Id. at 733-34.

In determining whether to allocate 3M's losses from silicone gel injuries pro rata by the insurers' time on the risk, the Court followed the analytical progression provided in Domtar. First, it determined whether the plaintiffs' injuries were continuous. If they were not, under the actual-injury trigger theory, the policies on the risk at the time of the injury would pay all losses arising from that injury. In the 3M case, the district court found that the injury was continuous and the "actual injury" continued to occur as silicone came in contact with new cells, so the Court moved to the next determination: whether the continuous injury arose from some discrete and identifiable event. If it did, the policies on the risk at the time of that event were liable for all sums arising from the event. If not, allocation might be appropriate.

The Court noted that in the actual-injury trigger framework, allocation is meant to be the exception and not the rule because it is only in those difficult cases that allocation is appropriate: the issue of allocation should be raised only if the triggering injury does not arise from discrete and identifiable events. If one can identify a discrete originating event that permits avoiding allocation, the Court held that it should do so. Since the district court labeled the time of implant as the beginning of the continuing injury process, such implantation was viewed by the Court as a readily identifiable discrete event from which all of the plaintiffs' alleged injuries arose. Such implantation is more akin to the single spill that led to continuing soil damage in SCSC than it is to the situation in NSP or Domtar where contamination could not be apportioned among causes.

Thus, the Court concluded that the 3M case was not one of the "difficult cases" in which allocation is appropriate and, therefore, held that the lower courts erred in allocating the damages among the insurers. Consistent with the actual-injury trigger theory, it held that those insurers on the risk at the time of implantation were liable up to the limits of their respective policies for 3M's losses arising from that implantation.

Future applications of the Silicone Implant decision.

It is certainly foreseeable that the NSP, SCSC, Domtar line of cases and the Silicone Implant decision will be applied in other contexts, such as cases involving residential water infiltration and mold. In the typical residential water infiltration case, the homeowner becomes aware of water damage a substantial period, usually years, after the construction of the house. An insurer on the risk at the time of construction will examine the facts to see if it can argue that no actual injury occurred during its policy period. If there was neither damage nor an event during that initial policy period, the insurer would take a "no coverage" exposure position. However if the insurer on the risk at construction time concluded there was either damage/injury or an event during that period, the initial period insurer would have to worry that perhaps it would be considered the only insurer whose coverage was triggered. In that event, the insurer would try to determine if there was damage or injury during a later policy period, that such injury or damage was continuous and thus that the case was one of the "difficult cases" requiring allocation among several insurers. What of the insurer on the risk at a later time only? The later insurer will attempt to point to any indicators of actual injury to the property that occurred prior to its policy period, in order to encourage the court to conclude, like the Silicone Implant court, that there is a discrete and identifiable event that is the sole trigger for coverage.

Litigation relying on these concepts in the construction area has actually already commenced, as demonstrated in Parr v. Gonzalez, 2003 WL 22233689 (Minn. Ct. App., decided Sept. 30, 2003). There, the Court of Appeals, citing Silicone Implant and Domtar, held that damage to a vent cap during a roofing project was a discrete and identifiable event that led to the blockage of the vent pipe and subsequent mold formation. Because of the actual injury to the vent cap, the contractor's insurer, which was on the risk at the time of the construction work and shortly thereafter, was unsuccessful in denying coverage by arguing that mold did not take begin to form until after the policy period.

A more difficult analysis will be required when there is nothing beyond poor construction technique to point to during the construction time frame. In such situations, it may be more difficult to argue that the construction itself is an "actual injury," and the parties may need to retain experts to identify when mold or water damage commenced, even if the damage was not observable for a substantial time thereafter. Such an analysis will resemble that of the Court in Silicone Implant.

"Continuous injury" litigation in the construction area will undoubtedly be extensive, but the Silicone Implant case provides the framework for deciding such cases. If you have a coverage question about any of these cases, feel free to call one of the attorneys in our Insurance Coverage Practice Group.

About the Author: Jim's experience includes insurance coverage issues, products liability, professional liability, commercial litigation, and automobile litigation. He has handled trials, appeals, and alternative dispute resolution in these areas. Jim has dealt extensively with issues pertaining to the Federal Employer's Liability Act and currently works with one of our insurer clients on all of their litigation in this field. He possesses an in-depth understanding of settlement strategies and has spoken and authored articles on the subject. Jim has engaged in a wide variety of litigation since 1980, after serving a one-year judicial clerkship with a United States District Judge.

© 2003 Arthur, Chapman, Kettering, Smetak & Pikala, P.A.

This publication is intended as a report on legal developments in the insurance coverage area. It is not intended as legal advice. Readers of this publication are encouraged to contact Arthur, Chapman, Kettering, Smetak & Pikala, P.A. with any questions or concerns.