Coverage Analysis
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 (1st Circuit)


  An intent to injure may be inferred as a matter of law in cases involving the sexual molestation of a child.  Peerless Ins. Co. v. Viegas, 667 A.2d 785 (R.I. 1995).   Further, the Rhode Island Supreme Court refused to find coverage for allegations of sexual harassment in Craven v. Metropolitan Prop. & Cas. Ins. Co., 693 A.2d 1022 (R.I. 1997), despite the fact that the underlying suit sought recovery on the alternative ground of negligent infliction of emotional distress.  The court ruled that the allegation of negligence did not mandate coverage where the injuries were based on intentional sexual misconduct on the part of the insured.


  All appeals are heard directly by the Rhode Island Supreme Court.


  Since May 20, 1981, Rhode Island General Laws §9-1-33 has permitted insureds to pursue bad faith claims against insurers for claims that are denied without any objectively reasonable basis and where the insured acts with reckless disregard or knowledge of the wrongness of its position.  It provides, in pertinent part, that: "an insured . . . may bring an action against the insurer . . .when it is alleged the insurer . . . wrongfully and in bad faith refused to timely perform its obligations under the contract of insurance."  A successful claimant may recover compensatory damage, punitive damage and reasonable attorney's fees.

  There cannot be a showing of bad faith when the insurer is able to demonstrate a reasonable basis for denying benefits.  Bartlett v. John Hancock Mutual Life Insurance Co., 538 A.2d 997 (R.I. 1988); Bibeault v. Hanover Insurance Co., 417 A.2d 313 (R.I. 1980).  When a claim is "fairly debatable," the insurer is entitled to debate it, whether the debate concerns a matter of fact or law.  Pace v. Insurance Co. of North America, 838 F.2d 572 (1st Cir. 1988).  Moreover, an insured must show intention or recklessness on the part of the insurer.  Id.

  Under Rhode Island law, discovery or claims with respect to bad faith must be severed from a contractual claim and cannot be pursued until such time as the insurer has been found to owe coverage for the underlying action.  Bartlett v. John Hancock Mutual Life Insurance Company, 538 A.2d 997, 1002 (R.I. 1988) and Imperial Casualty & Indemnity Company v. Bellini, No. 98-546 (R.I. February 16, 2000).

  A third party has no right to bring a direct action against a liability insurer until such time as it has “obtained judgment against the insured alone.”  Rhode Island Statutes, Section 27-7-2.  A third-party tort claimant has no right to assert bad faith claims against the tortfeasor’s liability insurer.   Auclair v.  Nationwide Mutual Insurance Company, 505 A.2d 431 (R.I. 1986). 

  In 1993, the Rhode Island legislature enacted the Unfair Claims Settlement Practices Act (§27-9.1-1, et seq.).  Unlike the bad faith statute, this new law does not create a private cause of action.  Rather, an aggrieved insured must petition the Department of Business Regulation if an insurer has violated one or more of the sixteen proscribed practices set forth in the regulations accompanying the Act.  An insurer may be fined up to $10,000 for each violation, not to exceed $100,000 in the aggregate, or, if committed flagrantly and in conscious disregard of the Act, $25,000/$250,000.

  Unfair or deceptive consumer practices are proscribed by R.I. Gen. Laws § 6-13.1-1 (1985 & Supp. 1991) and the Unfair Claims Settlement Practices Act, General Laws § 27-9.1-1, et seq.  The latter statute mandates that an insurer acknowledge receipt of a claim within 10 days and make a claim determination within 30 days unless the insured assents to a longer period of time.  Any denial letter must also alert the insured of its right to appeal to the Rhode Island Insurance Department.

  Where there is no coverage, an insurer cannot be held liable for bad faith, particularly where the only claimed injury is the denial of contract benefits.  Bartlett v. John Hancock Mutual Life Ins. Co., 532 A.2d 997, 1000 (R.I. 1988).  

  The Supreme Court has expressed reluctance to permit the assignment of bad faith claims but has stated that an assignment may be permitted in particularly egregious circumstances.  Mello v. General Ins. Co. of America, 525 A.2d 1304 (R.I. 1987).

  The Rhode Island Supreme Court has ruled that the absence of bad faith will not insulate an insurer against its responsibility for negligently failing to settle a claim within policy limits.  In Asermely v. Allstate Ins. Co., 728 A.2d 461 (R.I. 1999), the court declared that an insurance company’s fiduciary obligations to its policyholder include a duty to explore all reasonable settlement offers.  If the insurer’s failure to take advantage of an opportunity to settle within policy limits results in an excess judgment against its policyholder, the insurer will be liable for the full amount of the excess verdict unless it can show that the insured was unwilling to accept the offer of settlement.  

  Insurer must prove prejudice.  Pickering v. American Employers Ins. Co., 109 R.I. 143, 282 A.2d 584 (1971); see also, Pennsylvania General Insurance Co. v. Becton, 475 A.2d 1032 (R.I. 1984) and Cooley v. Anderson, 443 A.2d 435 (R.I. 1982).

  Prejudice will be deemed to exist as a matter of law where the insured enters into a settlement or otherwise assumes liabilities before giving notice.  Avco Corp. v. Aetna Cas. & Sur. Co., 679 A.2d 323 (R.I. 1996).

  A notice requirement may be satisfied by information obtained from a third-party other than the policyholder. Cooley v. John M. Anderson Company, 443 A.2d 435 (R.I. 1982).


  Supreme Court ruled that coverage should receive narrow interpretation, holding in Allstate Ins. Co. v. Russo, 641 A.2d 1304 (R.I. 1994) that coverage for "misrepresentation" is limited to the types of claims otherwise insured under that section of the policy and did not extend to all claims for "misrepresentation" for which recovery is permitted under the common law.

  In the same case, the U.S. District Court had earlier ruled that claims for emotional distress or damage to reputation did not allege a claim for "bodily injury."  Allstate Ins. Co. v. Russo, 829 F.Supp. 24 (D.R.I. 1993).

  A federal court refused to preclude coverage for trademark violation claims under the "advertising injury" coverage on the basis of public policy.  Nortek, Inc. v. Liberty Mutual Ins. Co., 858 F.Supp. 1231, 1239 (D.R.I. 1994).  


  Once an insurer demonstrates the applicability of a policy exclusion, the burden of showing that a claim falls within an exception to the exclusion shifts back to the policyholder. St. Paul Fire & Marine Ins. Co. v. Warwick Dyeing Corp., 26 F.3d 1195 (1st Cir. 1994). 


  Under Rhode Island choice of laws rules, the state in which the contract was entered into would be the jurisdiction whose substantive law would be applied to resolve the controversies.  See Everett/Charles Contact Products. v. Gentec, 692 F.Supp. 83 (D. R.I. 1988)(emphasis on place of contracting) and Bartholomew v. Ins. Co. of North America, 502 F.Supp. 246 (D.R.I. 1980).   Rhode Island has not to date adopted the "most significant relationship" standard for purposes of choosing law to settle contract disputes.  However, this approach has been adopted for purposes of tort actions.  See Blais v. Aetna, 526 A.2d 854 (1987).  It may be assumed that if the issue were presented to the Supreme Court of Rhode Island it would follow the majority approach and adopt the "most significant relationship" standard for choosing which state's substantive law should be applied to resolve contract disputes.

  Judge Lageux ruled in CPC International, Inc. v. Northbrook Excess and Surplus Ins. Co., (D.R.I. December 16, 1993), aff'd as to this issue 46 F.3d 1211 (1st Cir. 1995).,  that under New Jersey choice of law rules, Rhode Island law would govern a claim involving wastes emanating from a Rhode Island facility that were dumped at a site in Rhode Island, even though the insured's corporate headquarters was in New Jersey.


  An insured may refuse to accept appointed defense counsel in the event of a conflict with its insurer. Employers Fire Ins. Co. v. Beals, 240 A.2d 397 (R.I. 1968).   In such circumstances, the insurer must approve the independent counsel selected by its policyholder, said approval not to be unreasonably withheld, or may appoint separate counsel to represent its own interests.   Where an insured, after being apprised of a conflict between his interests and the interested of his insurer, declines to be represented by the insurer’s attorney, the insurer’s desire to control the defense must yield to its obligation to defend its insured.  This results in a situation where the insured must retain both defense counsel for the insured and "Beals” counsel" to monitor the defense on behalf of the insured.


  No cases.  Reduction in value of polluted real estate held not to be "damages" resulting from pollution in Ryan, Klimek  Ryan Partnership v. Royal Ins. Co., 728 F.Supp. 862 (D. R.I. 1990), affirmed, 916 F.2d 731 (1st Cir. 1990)(interpreting New York law) where loss resulted from insured's voluntary "market" decision and not as the result of any claim or demand by the government.

  The Rhode Island Supreme Court has ruled that pre-judgment interest are "damages" subject to an insurer's policy indemnity limit.  Factory Mutual Liability Ins. Co. v. Cooper, 106 R.I. 632, 637 (1970).  


 Under Rhode Island law, a third-party claimant does not have direct claim against an insurer.  See Cianci v. Nationwide Insurance Co., 659 A.2d 662, 666 (R.I. 1995) and Auclair v. Nationwide Mutual Insurance Company, 505 A.2d 431 (R.I. 1986).  A tort claimant is a stranger to the relationship between the insurer and the policy holder and only has rights against the insurer to the extent that it stands in the shoes of the policy holder.


   --Claims Manuals

   --Drafting History

   --Other Policyholder Claims

   --Reinsurance Information



  An insurer must defend any suit that alleges a covered set of facts, without regard to whether the insured will ultimately prevail.  Flori v. Allstate Ins. Co., 388 A.2d 25, 26 (R.I. 1978).  Any doubts as to the adequacy of the pleadings must be resolved in the insured's favor.  Employer's Fire Ins. Co. v. Beals, 240 A.2d 397, 403 (R.I. 1968).

  Whether a duty exists will be determined based on the facts alleged, not the theories of liability ascribed to such facts.  See, Peerless Ins. Co. v. Viegas, 667 A.2d 785 (R.I. 1995)(in case of child molestation, "the fact that the allegations in the complaint are described in terms of negligence is of no consequence").

  The fact that the insured may not ultimately be liable is not a basis for an insurer refusing to defend.  Progressive Casualty Insurance Company v. Narragansett Auto Sales,  No. 99-271 (R.I. January 19, 2001).

  An insurer's obligation to pay defense costs does not arise until a claim is tendered to it. Michaud v. Merrimack Mutual Fire Ins. Co., 1994 WL 774683 (D.R.I. November 16, 1994).  


  Under Rhode Island law an insurer that wrongfully refuses to defend is estopped from disputing the scope of its indemnity obligation.  Conanitcut Marine Service, Inc. v. INA, 511 A.2d 967 (R.I. 1986).

  An umbrella policy is a supplemental insurance policy which protects insureds against losses in excess of the amount covered by their primary policies or fills in gaps in coverage.  Commercial Union Ins.  Co.  v.  Walbrook Ins.  Co., 7 F.3d 1047, 1053 (1st.  Cir. 1993), cited in Fratus v.  Republic Western Ins.  Co., No.  97-1876 (1st.  Cir.  June 23, 1998).  

  Recognized in Bartholomew v. Ins. Co. of North America, 655 F.2d 27 (1st Circuit 1981)("The concept of insurance is that the parties, in effect, wager against the occurrence or non-occurrence of a specified event; the carrier insures against a risk, not a certainty.")

  Subsequently, however, the Rhode Island Supreme Court ruled in INA v. Kayser-Roth Corporation, No. 99-531 (R.I. April 25, 1991) that “the known loss doctrine is applied when the insured has knowledge, before the inception of an insurance policy, that the insured has suffered the threat of an immediate economic loss, as a result of some event, and that the reality of that loss occurring is a certainty.”  As with Montrose, the Rhode Island Supreme Court found that a loss is still insurable “when there is uncertainty about the imposition of liability and no legal obligation to pay.” The Rhode Island Supreme Court therefore found that the mere fact that the insured had been issued a PRP letter and was aware of the existence of pollution in and around the property did not preclude coverage, particularly inasmuch as the Stamina Mills site was not directly owned by the insured but by a second tier subsidiary.  As a result, the court found that Kayser-Roth, while aware that it potentially could be subjected to suits for property damage, had no knowledge or reason to know until 1984 that it could be subjected to a suit from the government for cleanup costs.


  "Cause" test adopted in Bartholomew v. INA, 502 F.Supp. 246 (D. R.I. 1980), aff'd sub nom, 655 F.2d 27 (1st Cir. 1981).  All damage flowing from same product defect held to arise out of one "occurrence."  Relying on Bartholomew, a federal district court in Illinois predicted in Lee v. Interstate Fire & Cas. Co., 826 F.Supp. 1156 (N.D. Ill. 1993), rev'd, 86 F.3d 101 (7th Cir. 1996) that the Rhode Island Supreme Court would find that the sexual molestation of a child over several years was one "occurrence" triggering coverage in the year of "first encounter."  On appeal, however, the 7th Circuit ruled that the tort of negligent supervision continues to occur throughout the period of the tortfeasor's employment.  While expressing doubt as to whether there was factual evidence to support a finding that the Archdiocese had been warned of the priest's misconduct, so as to support a finding of multiple acts of negligence, the court ruled that the claims involved one "occurrence" in each year.


  The Rhode Island Supreme Court ruled in Textron Corp. v. Aetna Cas. & Sur. Co., 2000 R.I. LEXIS 150 (R.I. June 22, 2000) that the ‘sudden and accidental” type exclusion is ambiguous and, in light of its claimed drafting history, should only bar coverage for “intentional or reckless polluters” and  "provides coverage to the insured that makes a good faith effort to contain  and to neutralize toxic waste but, nonetheless, still experiences unexpected and unintended releases of toxic chemicals that cause damage."  The court declared that in order to avoid the exclusion “the insured must show that it had no reason to expect the unintended damage and that it undertook reasonable efforts to contain the waste safely.  In other words, manufacturers that use state-of-the-art technology, adheres to state and federal environmental regulations, and regularly inspects, evaluates and upgrades its waste containment systems in accordance with advances in available technology should reap the benefits of coverage under our construction of this type of pollution exclusion clause.  But one that knowingly or recklessly disposal of waste without the necessary and advisable precautions will forfeit coverage under this clause.”  The court found that this interpretation of “sudden” was consistent with the drafting history of the exclusion which suggested that its original purpose was only to deny coverage for reckless or intentional polluters.  Furthermore, it seemingly adopted a “secondary discharge” analysis finding that the intentional placement of wastes into a holding or containment pond should not be the subject of the exclusion if the subsequent spills from the pond were unexpected or intended.  The court found that Textron had at least created questions of fact as to whether its placement of wastes “into the neutralization pond amounted to indiscriminate dumping of toxic chemicals conducted as part of its regular business activity . . . or whether its regular practice was to contain the waste, neutralize it and thereby try to prevent it from contaminating the environment....”  Finally, the Rhode Island Supreme Court declared that the insured could avoid the exclusion so long as it established that the pollution resulted from both excluded and non-excluded causes.  Under this “concurrent causation” analysis, the court ruled that it was appropriate to “micro-analyze” the sources of pollution.  Accordingly, even though the majority of contamination resulted from routine business practices, summary judgment would be inappropriate if there was concrete evidence of “sudden and accidental” spills.

  Earlier, the U.S. Court of Appeals for the First Circuit ruled in St. Paul Fire & Marine Ins. Co. v. Warwick Dyeing Corp., 26 F.3d 1195 (1st Cir. 1994) that pollution resulting from an insured's on-going shipment of wastes to a site could not be "accidental."  While the First Circuit did not address the lower court's ruling that the discharges were also not "sudden," it expressly rejected alternative arguments presented by the insured that subsequent releases of pollutants from the landfill might be "accidental" or that the exclusion should not apply to it since it had not been directly involved in the dumping of waste at this landfill.  Finally, the court ruled that the insured had the burden of proving an exception to the exclusion.

  Likewise, in a case arising under New Jersey law, Judge Lageuex had ruled in CPC International, Inc. v. Northbrook Excess and Surplus Ins. Co., 759 F.Supp. 966 (D.R.I. 1991), rev'd on other grounds, 962 F.2d 77 (1st Cir. 1992) that the term "sudden" unambiguously avoids coverage for gradual pollution.  Although his findings were subsequently overturned by the First Circuit, Judge Lagueux ruled in Providence Journal Co. v. The Travelers Indemnity Co., 938 F.Supp. 1066 (D.R.I. 1996) that a waste generator's CERCLA liabilities were subject to a London-type exclusion in Travelers' policy for discharges that were "expected or intended" by the insured or by some party for whom the insured was legally liable.  While agreeing with the insured that the first part of the exclusion did not apply, since the wastes were supposed to have been incinerated at a different location and had been transhipped to the CERCLA site without the insured's knowledge, the court nonetheless held that the exclusion applied because a waste generator is liable under CERCLA for the acts of a site operator.

  A “sudden and accidental” spill of perchloroethylene from a tank car was held to support a jury’s verdict in favor of the insured in CPC Int’l, Inc.  v.  Northbrook Excess & Surplus Ins.  Co.,144 F.3d 35 (1st Cir.  1998).  The First Circuit declared that the spill was the sole cause of the groundwater contamination at the issue, rejecting the insurer’s argument that it was improperly engaging in a “microanalysis” of the causes of polllution at the sites.  The court declared that “microanalysis” occurred when there were diverse causes of pollution, whereas here there was only one source that had caused the groundwater problem.

  A federal district court in Rhode Island interpreting New Jersey law ruled in John Toledo v. Van Waters & Rogers, Inc., 92 F.Supp.2d 44 (D.R.I. 2000) that a total pollution exclusion precluded coverage for severe burns and injuries that a worker suffered when  nitric and sulfuric acid spilled onto him from drums belonging to the insured.  Judge Lagueux declared that the facts here were plainly within the scope of the exclusion as the injuries resulted directly from a discharge of pollutants.  The court further rejected the insured’s contention that the claim should be covered as falling within the scope of the “products-completed operation hazard.”  The court ruled that the exclusion applied without regard to whether the underlying claims were within the scope of completed operations or products hazards.


  Fraud claims against the former directors of an insolvent credit union are outside the scope of the insured's homeowner's policies but may be covered under their umbrella policies.  In Allstate Ins. Co. v. Russo, No. CIV.A 91-0510 (D. R.I. July 30, 1993), Judge Boyle ruled that the investment losses were neither "bodily injury" nor "property damage" but certified to the Rhode Island Supreme Court the issue of whether such claims constitute a "misrepresentation" within the "personal injury" portion of the insured's personal umbrella policies or arose out of a civic endeavor as distinguished from an excluded "business activity."  the court responded in Allstate Ins. Co. v. Russo, 641 A.2d 1304 (R.I. 1994) that "personal injury" coverage should not be given an overly broad interpretation and that this coverage must be considered in context and did not extend to every conceivable claim alleging such an offense.  Thus, the court ruled that coverage for "misrepresentations" only extended to false statements that resulted in a personal injury (ie. an injury to reputation or some other personal interest of the plaintiff) as distinguished from the broad panoply of "misrepresentation" claims for which recovery is available under the common law.


  Rhode Island does not permit coverage for punitive damages.  Allen v. Simmons, 533 A.2d 541 (R.I. 1987).


  In interpreting the contested terms of an insurance policy, the court is bound by the rules established for the construction of contracts generally.  Colagiovanni v. Metropolitan Life Ins. Co., 57 R.I. 486, 190 A. 459 (1937).

  If an insurance policy is subject to more than one reasonable interpretation, it will be interpreted in the way that favors coverage.  Bush v. Nationwide Mutual Ins. Co., 448 A.2d 782, 784 (R.I. 1982). The contract terms must then be applied as written and the parties are bound by them.  Factory Mutual Liability Ins. Co. v. Cooper, 106 R.I. 632, 262 A.2d 370 (1970).  However, if policy language is ambiguous, it will be given a reasonable meaning that favors coverage.  Elliott Leases Cars, Inc. v. Quigley, 118 R.I. 321, 373 A.2d 810 (1977).  The terms should be read in the sense which the insurer had reason to believe they would be interpreted by the ordinary reader and purchaser.  Id.  As stated in Gleason v. Merchants Mutual Ins. Co., 589 F.Supp. 1474, 1480-81 (D.R.I. 1984). 

Courts should refrain from conjuring up ambiguities where none exist and from saddling insurance carriers with liabilities not fairly imposed by the insurance contract.  The courts must abjure unnecessary mental gymnastics which give the terms of the policy a forced or distorted construction.

  Words in a policy should not be read in isolated and must be interpreted in the context of the policy provisions surrounding them.  Allstate Ins. Co. v. Russo, 641 A.2d 1304 (R.I. 1994).  They should not be given an interpretation that renders a term meaningless by an isolated or artificial interpretation of the policy terms.  Anglo American Ins. Co., LTD v. Shooters at India Point, Inc., 1997 U.S. Dist. LEXIS 5458 (D.R.I. April 24, 1997), citing Psaty & Fuhrman, Inc. v. Housing Authority of Providence, 68 A.2d 32, 35 (R.R. 1949).  


  Market share theory of liability was rejected in Gorman v. Abbott Laboratories, 599 A.2d 1364 (R.I. 1991)(DES).

  On December 26, 1995, on a certified question from the First Circuit, the Rhode Island Supreme Court ruled in CPC Int., Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d 647 (R.I. 1995)  that coverage should arise in the policy year in which property damage was discovered, became manifest or, in the exercise of reasonable diligence, could have been discovered.

  The Rhode Island Supreme Court clarified the last aspect of the CPC “trigger”  in Textron-Gastonia, Inc. v. Aetna Casualty & Surety Co., 723 A.2d 1138 (R.I. 1999), declaring that “discoverable in the underlying exercise of reasonable diligence” meant that “(1) the property damage occurred during the policy period, (2) the property damage was capable of being detected and (3) the insured had reason to test for the property damage.”  Id. at 1144.  
  The Rhode Island Supreme Court seemed to take a step away from “manifestation”  when it next considered this issue in Truk-Away of Rhode Island v. Aetna Cas. & Sur. Co., 732 A.2d 309 (R.I. 1999).  The court ruled that insurers whose policies expired before 1977 did not owe coverage for claims against a waste transporter that had received an EPA Notice of Responsibility that only made reference to pollution between 1977 and 1984.  The court ignored the insured’s contention that the same wastes had been dumped as far back as 1977 and that EPA had selected 1977 as the starting point because that was when solid wastes were first classified as “hazardous substances.”  Rather, the court held that there was no evidence that waste disposal had resulted in any environmental contamination until 1977, nor was there any evidence that any pollution that might have occurred earlier was the basis for any claim of liability against the insured.

  The court plainly reaffirmed “manifestation” a year later in Textron, Inc. v. Aetna Casualty & Surety Co., 2000 R.I. LEXIS 150 (R.I. June 22, 2000) finding that a trial court had erred in granting summary judgment based upon the absence of a trigger where evidence of earlier spills suggested that the insured not only could have found contamination but had reason to test of it.    In light of its CPC ruling, as clarified by the 1999 decision in Textron-Gastonia, the court found that the evidence presented by Textron concerning intermittent discharges for decades prior to the discovery of pollution not only created a question of fact as to whether damage had been discoverable during INA’s policy period but suggested that the insured had reason to test for it.  

  Earlier, in a products liability context, a federal court adopted a "manifestation" trigger, ruling that coverage arises in the policy years when it becomes clear that insured's product was "fundamentally flawed for its intended purpose."  Bartholomew v. INA, 502 F.Supp. 246 (D.R.I. 1980), aff'd sub nom, 655 F.2d 27 (1st Cir. 1981)(defective car washing apparatus).

  A federal district court ruled in Employers Mutual Casualty Co.  v.  PIC Contractors, Inc., 24 F.Supp.2d 212 (D.R.I.  1998) that CPC did not excuse an insurer from defending asbestos BI suits even though the dates of diagnosis were apparently after the last policy that lacked an asbestosis exclusion.  Judge Torres declared that EMC could not rely upon information as to the dates upon which the underlying claimants were diagnosed as suffering from asbestos related injuries where such facts were not set forth in the underlying suits.  Further, the court refused to find that EMC’s coverage was limited to bodily injuries taking place during the policy period where the definition of “occurrence”  contained no such requirement.  

  In Textron, Inc. v. Aetna Casualty & Surety Co., 638 A.2d 537 (R.I. 1994), the Rhode Island Supreme Court ruled that Textron was not entitled to recover under policies issued prior to 1979 for environmental liabilities involving a subsidiary that it acquired in January 1981.  The court agreed with Aetna that its policies were limited in scope to the actions of insureds during the policy period and did not extend to a polluting subsidiary that was a "total stranger" to the policies at the time that the pollution occurred.

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