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Fourth Circuit Applies North Carolina Cause Test and Proximate Cause Theory to Define “Occurrence” by Cause of Injury and Not Effect

Mitsui Sumitomo Insurance Company v. Duke University Health System
United States Court of Appeals for the Fourth Circuit, No. 11-2057 (4th Cir. Feb. 11, 2013)

by Jhanelle Graham, Law Clerk
Semmes, Bowen & Semmes (

In Mitsui Sumitomo Insurance Company v. Duke University Health System, the United States Court of Appeals for the Fourth Circuit was asked to determine whether a hydraulic fluid mistake constituted one “occurrence” under the applicable insurance policy, even though the mistake resulted in multiple injuries. Adhering to North Carolina precedent, the appellate court affirmed the district court’s finding that the proper focus of the dispute should be on the sole cause of the mistake, not on its effects.

In 2004, Duke University Health System, Inc. engaged Automatic Elevator Company to renovate two (2) elevators in a hospital’s parking deck. During Automatic Elevator’s work on Elevator 1, Duke made available several empty fifteen (15)-gallon plastic barrels. These barrels previously contained surgical detergents that Duke had purchased from Cardinal Health 200, Inc. As part of Automatic Elevator’s renovation of Elevator 1, it removed hydraulic fluid from the elevator and stored it in the plastic barrels. Automatic Elevator’s employees then disposed of the hydraulic fluid at a waste disposal site. During the course of Automatic Elevator’s work on Elevator 2, it placed barrels full of used hydraulic fluid in its designated storage area at the hospital. Duke employees saw the barrels, mistakenly thought they contained surgical detergents and lubricants, and ultimately used the hydraulic fluid to wash hundreds of surgical instruments. Approximately 127 patients who may have come into contact with the tainted instruments sued Duke, who settled the claims for over $6 million.

Mitsui Sumitomo issued two (2) insurance policies to Automatic Elevator that coincide with the time periods when Automatic Elevator worked on the two (2) DHRH elevators: the 2003-2004 policy, which was effective from August 1, 2003, to August 1, 2004, and the 2004-2005 policy, which was effective from August 1, 2004, to August 1, 2005. Both policies included a $1 million limit for “any one occurrence.” The policies defined “occurrence” as “an accident, including the continuous repeated exposure to substantially the same harmful condition,” but neither policy defines “accident.” After settling the tort claims against it, Duke sued Automatic Elevator for breach of contract, indemnity, and negligence in the General Court of Justice, Superior Court Division, in Wake County, North Carolina, in a case styled Duke University Health System, Inc. v. Automatic Elevator Co., Inc., Case No. 08 CVS 011270. Thereafter, Mitsui Sumitomo Insurance Company of America - Automatic Elevator’s insurer - brought an action seeking a declaratory judgment that it owed no further obligation to Automatic Elevator, because the hydraulic fluid mistake constituted one (1) “occurrence,” obligating it to pay $1 million under the applicable insurance policy, which it had already paid to settle the surgical patients’ claims against Automatic Elevator. The district court agreed.

On appeal, Duke alleged that the hydraulic fluid mistake involved multiple occurrences, entitling Automatic Elevator to more than $1 million under the 2004-2005 policy. Specifically, Duke argued that: (1) Automatic Elevator’s decision to leave the barrels in its designated storage area at DHRH could not constitute an occurrence in and of itself because that choice was a “volitional act” rather than an “accident,” and (2) the district court should have looked to the “most immediate cause” of the injury — such as each surgery or each use of hydraulic fluid to wash surgical instruments - to determine the number of occurrences.

Contrary to Duke’s assertions, the Fourth Circuit stated that North Carolina’s definition of “accident” had no bearing on the number of occurrences. Instead, the cases that Duke cited proved that the definition of “accident” was relevant when determining whether the insurance company must provide coverage at all or pinpointing the date an event triggered coverage. See Gaston Cnty., 524 S.E.2d at 564-65 (considering whether there was an occurrence and the trigger of coverage date); Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d 374, 379-380 (N.C. 1986) (whether there was an occurrence). Because Mitsui Sumitomo did not dispute the trigger of coverage date or whether the hydraulic fluid mistake constituted an occurrence, the appellate court found Duke’s definitional argument to be misplaced. Rather, the Court looked to Supreme Court of North Carolina precedent for a method of calculating the number of occurrences.

Under North Carolina law, the number of occurrences “is determined by the cause or causes of the resulting injury.” Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56, 61 (3d Cir. 1982). The cause test stands in opposition to the effect test, which treats each injury as a separate occurrence. The Fourth Circuit echoed the district court in employing the proximate cause theory, where the “proper application of the cause approach . . . requires asking which negligent act, or continuum of negligent acts, on the part of the insured gave rise to liability.” Mitsui Sumitomo Ins. Co. of Am. v. Automatic Elevator Co., No. 1:09-CV-00480, 2011 WL 4103752, at *14 (M.D.N.C. Sept. 13, 2011). Therefore, to determine how many occurrences stemmed from the hydraulic fluid mistake, the Fourth Circuit evaluated the cause or causes of the incident rather than its effects. According to the appellate court, the only action that Automatic Elevator took in this case was placing the barrels of hydraulic fluid in its designated storage area at DHRH. Thus, the Fourth Circuit posited that, based upon North Carolina precedent, the hydraulic fluid mistake involved one (1) occurrence, and the central inquiry was into Automatic Elevator’s single act of negligence rather than Duke’s intervening actions. Consequently, the Fourth Circuit affirmed the district court’s grant of summary judgment in favor of Mitsui Sumitomo, holding that Automatic Elevator’s negligence constituted one (1) occurrence and the “per elevator” endorsement did not apply.