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Commercial Union Insurance Co. v. International Flavors & Fragrances Inc.

decided: June 23, 1987.


Appeal and cross-appeal from two judgments of the United States District Court for the Southern District of New York (Milton Pollack Judge ) granting in part defendant's motion for judgment n.o.v. or for a new trial and awarding defendant counsel fees and costs. The principal issues are whether an insured complied with a notice-of-occurrence provision and whether the insurer lost its rights under that provision by defending the action. We reverse Judge Oakes dissents in a separate opinion.

Author: Winter

OAKES, CARDAMONE, and WINTER, Circuit Judges.

WINTER, Circuit Judge:

Commercial Union Insurance Company ("CU") brought this declaratory judgment action in the Southern District of New York seeking a determination that it had no duty either to defend or to indemnify its insured, International Flavors and Fragrances, Inc. ("IFF"), in a product liability action brought against IFF by Plough, Inc. ("Plough"). IFF counterclaimed for the amounts it had expended in defending and settling the Plough action and for its attorneys' fees in the instant case. After a jury verdict in favor of CU, Judge Pollack set aside the verdict to the extent that it denied IFF reimbursement for its costs in defending the Plough suit and ordered a new trial on that issue. Commercial Union Ins. Co. v. International Flavors & Fragrances, Inc., 633 F. Supp. 646 (S.D.N.Y. 1986). The jury in the second trial found that IFF was entitled to recover all of its costs of defending the Plough suit. Judgment was entered for IFF in the amounts of $834,913 for its costs in the Plough action and $372,597.20 for its costs in the instant case.

Both parties have appealed. Because the first jury properly found that IFF failed to comply with a provision of its insurance policy requiring it to give timely notice to CU of a relevant occurrence, we hold that judgment n.o.v. was improperly granted and order that judgment be entered for CU.


CU issued a comprehensive liability policy to IFF in 1976. It was renewed each year through 1979. The policy contained the usual promises to indemnify for losses and to provide a defense in lawsuits within the policy's coverage. It also required as a condition of coverage that IFF give written notice to CU "as soon as practicable" of an "occurrence" relevant to the coverage.

In July 1975, Plough asked IFF to provide it with a banana-coconut fragrance that would be compatible with the mineral base of Plough's newly-developed Tropical Blend suntan lotion. Plough was already buying a banana-coconut fragrance compatible with the base of its Tropical Blend suntan oil from Perry Brothers, Inc. Plough provided IFF with a sample of the Perry Brothers fragrance, and IFF created a similar fragrance for use in the Tropical Blend suntan lotion. IFF supplied Plough with about 62,000 pounds of that fragrance from 1975 to 1977 at a total price of about $772,000. The IFF and Perry Brothers fragrances both contained 6-methyl coumarin ("6-MC"), a fragrance and flavoring agent that had been widely used without incident in foods, cosmetics, and toiletries since the 1920's.

Sometime during 1975 or 1976, Plough began receiving complaints of adverse skin reactions following use of its Tropical Blend products. On July 30, 1976, Plough's chief toxicologist, Dr. Eden F. Keith, informed IFF's chief toxicologist, Dr. Otho D. Easterday, that fifteen persons had reported such skin reactions. Dr. Keith explained that three of these persons had required hospitalization and that Plough had communicated the problem to the United States Food & Drug Administration ("FDA"). Dr. Easterday was also advised by Plough that there was no evidence that IFF's fragrance was involved. He nevertheless reported the July 1976 complaints to two senior IFF executives, President Eugene P. Grisanti and Vice President Joseph T. Bannan.

Dr. Easterday, who became a vice president of IFF in May 1977, consulted repeatedly over the next year with his counterparts at Plough as they attempted to identify the cause of the adverse skin reactions. On June 23, Plough executives John M. Clayton and Edward Marlowe met to discuss the skin reaction problem with Dr. Easterday and other IFF personnel. Dr. Clayton stated that there had been fifty reports of skin reactions, ten of which had been validated by physicians. Dr. Easterday knew that there were between nine million and twenty million units of Tropical Blend "in the field" at this time. He did not know how many of these had been purchased by consumers and how many were still held by wholesalers or retailers.

On the basis of new clinical tests, a group of dermatologists concluded in July 1977 that the Tropical Blend skin reactions were photoallergenic in nature and were caused by 6-MC. On September 9, 1977, Dr. Clayton reported these results to Dr. Easterday, who agreed that 6-MC appeared to be the ingredient that was causing skin reactions in Tropical Blend users. IFF executives Grisanti and Bannan were also made aware of this conclusion by autumn 1977. By this time, Plough had returned the unused fragrance containing 6-MC, for which IFF gave Plough a credit of about $18,000. At Plough's request, IFF reformulated the fragrance without 6-MC and supplied it to Plough through 1978. Tests by outside laboratories subsequently confirmed that 6-MC was the source of the Tropical Blend skin reaction problem. In December 1977, Dr. Easterday learned that Dr. Albert Kligman of the University of Pennsylvania Department of Dermatology had concluded that 6-MC was the most potent photoallergen he had ever encountered. One year later, on December 2, 1978, the FDA informed IFF by telegram that 6-MC was being banned from use in suncare products.*fn1 IFF informed its insurance broker of the FDA's action in a letter dated December 8, 1978.

On March 14, 1979, Plough filed an action against IFF and Perry Brothers in federal district court in Memphis, Tennessee. Plough alleged that the allergic reactions from the 6-MC ingredient in the fragrances produced by IFF and Plough had caused it to incur $10,000,000 in damages, including the loss of millions of units of Tropical Blend containing 6-MC, the expenses of research and testing, the costs of handling and settling consumer claims and lawsuits, lost profits, and other costs associated with the Tropical Blend problem.

Upon receiving the complaint, IFF notified CU of the lawsuit. It is undisputed on appeal that the allegations of the Plough complaint fell within the policy's products hazard clause. Further, CU was obligated under the policy to defend IFF in any suit that implicated coverage regardless of whether the allegations were groundless.

On April 17, 1979, a Memphis law firm, Holt, Batchelor, Spicer & Ryan, notified IFF that it had been retained by CU "regarding representation of" IFF. IFF's outside general counsel, the New York firm of Fulton, Duncombe & Rowe, requested that it also be listed as counsel of record. The litigation proceeded uneventfully, with the Fulton firm initiating pretrial motions and providing supporting documents to be filed in Memphis by the Holt firm. In correspondence dated May 3 and May 16, however, the Holt firm informed the Fulton firm that CU had not yet confirmed its coverage.*fn2 On May 31, 1979, CU notified IFF that there appeared to be "no coverage" due to "late notice and other policy violations" and that CU was "proceeding to investigate . . . with a complete reservation of all rights under the policy." IFF refused to allow CU to defend it under such terms and instructed the Fulton firm to retain other Memphis counsel. CU thereafter withdrew its defense of the suit. On July 8, 1980, CU wrote to IFF reiterating its denial of coverage.

On November 26, 1980, CU filed the instant action in the Southern District seeking a declaratory judgment that it had no duty either to defend or to indemnify IFF in the Plough action because IFF had not given timely notice of a relevant occurrence. The court stayed CU's action pending the outcome of the Plough case. The Plough case went to trial on November 14, 1983, and was settled by IFF for $750,000 on November 21, 1983. IFF then counterclaimed against CU in the ...

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