Court Finds Duty To Defend in Wire Case
October 07, 2008
The U.S. District Court for the Northern District of Illinois, applying Illinois law, recently held that a commercial general liability insurer had a duty to defend a wire manufacturer in a lawsuit by a customer claiming that the manufacturer's defective wire had caused the failure of products incorporating the wire which were produced and sold by the customer. Fireman's Fund Insurance Co. v. Amstek Metal LLC, 2008 WL 4066096 (N.D. Ill. Aug. 27).
The plaintiff insurer, FFIC, was represented by Patricia Ryan and John A. Husmann of Wilson & Ryan. James K. Horstman and Jennifer L. Tweeton of Cray, Huber Horstman Heil & VanAusdal LLC and James Deline and Robert Pineau of Kerr, Russell and Weber PLC, Detroit, represented the defendants.
Amstek supplied Wallbank Springs Inc., with steel wire to be used in spring assemblies. On purchasing the wire, Wallbank would subject it to various manufacturing processes and then work it into transmission spring packs which it sold to, among others, a division of General Motors. In 2006, General Motors discovered that some of the springs were breaking, and returned them to Wallbank.
Wallbank determined that the wire for the springs had been supplied by Amstek and directed Amstek to stop shipping the wire. It subsequently brought suit against Amstek in Michigan state court alleging various breaches of contract and seeking revocation of its acceptance of the wire. Specifically, Wallbank claimed that the Amstek wire did not function as required by the purchase agreement, in that it broke frequently when used in springs. That suit remains ongoing.
In the instant lawsuit, Amstek's CGL carrier, FFIC, sought a declaration that it had no duty to defend Amstek in the underlying lawsuit. The initial internal claims analysis by FFIC's claims department suggested that FFIC would have coverage, which the court here suggested created an "uphill battle" for FFIC to overcome in now denying coverage.
Nevertheless, FFIC raised the lack of property damage, the lack of an occurrence and various exclusions as bases for denying coverage, and the parties filed cross motions for summary judgment.
In an opinion by Judge Rebecca R. Pallmeyer, the court granted Amstek's motion and denied that of FFIC. She initially addressed the issue of whether extrinsic evidence, in the form of a declaration from Wallbank's president, should be considered in deciding the coverage issues on summary judgment.
Noting that the duty to defend is normally resolved on the basis of the four corners of the underlying complaint, she cited Am.Econ. Ins. Co. v. Holabird & Root, 382 Ill.App.3d 1017, 886 N.E.2d 1166 (1st Dist. 2008), for the proposition that the trial court may sometimes consider evidence outside the underlying complaint, so long as in doing so the trial court does not determine an issue critical to the underlying action. Based on this analysis, she decided that consideration of Wallbank's declaration would be appropriate.
Pallmeyer then turned to the issue of property damage. FFIC argued that the damages alleged in the underlying complaint did not qualify as property damage because they merely sought recovery for economic loss, and Wallbank did not allege damage to anything other than the Amstek wire. FFIC relied heavily on Viking Constr. Mgmt., Inc. v. Liberty Mut. Ins. Co., 358 Ill.App.3d 34, 831 N.E.2d 1 (1st Dist. 2005), which held that where the only damages alleged are in the nature of repair and replacement of the defective product, the damages constitute only economic losses and not property damage for purposes of a CGL policy.
Pallmeyer acknowledged, as has the 7th U.S. Circuit Court of Appeals, that Viking is a sound interpretation of a standard CGL policy. Nevertheless, she said that Viking and other similar cases do not control if the damage alleged in the underlying complaint extended to a part of Wallbank's product other than the Amstek wire. Here, according to Pallmeyer, the underlying complaint suggested that the allegedly defective wire damaged Wallbank's springs and/or spring assembly packs.
For example, Pallmeyer said that the alleged damage at issue resulted from spring breakage, not wire breakage; and that the wire allegedly caused spring breakage within the spring assemblies, thus distinguishing among the springs, spring assemblies and wire. Moreover, according to the Wallbank declaration, Wallbank subjected the Amstek wire to various manufacturing processes, and, thus, those processes may have to be repeated to repair or replace the defective wire, and there is a possibility of damage to components other than just the wire.
Accordingly, while Viking eliminates coverage for an insured's liability for the cost to repair or replace its own defective product, Pallmeyer concluded that the underlying complaint here appeared to allege damage beyond Amstek's wire, and the "repair and replacement doctrine" would not obviate FFIC's duty to defend.
Pallmeyer applied a similar analysis to FFIC's occurrence argument. She noted that, under Stoneridge Dev. Co. v. Essex Ins. Co., 382 Ill.App.3d 731, 888 N.E.2d 633 (2d Dist. 2008), Viking and other similar cases, insurance coverage requiring the existence of an "occurrence" is not available if the damages result from the natural and ordinary consequences of defective manufacture of a product. She also agreed with these cases that CGL policies should not be converted into performance bonds for the insured, and that they do not typically cover claims for breach of contract.
Even under Stoneridge, however, Pallmeyer observed that construction defects that damage something other than the project itself can constitute an "occurrence." Un-der Continental X-Ray Corp. v. Home Indem. Co., 1997 WL 102537 (N.D. Ill. 1997), moreover, an insured's defective product that has been integrated into a larger mechanism, which results in damage to the completed product, gives rise to property damage.
Here, the underlying complaint alleged that the springs or transmission spring packs were damaged by the allegedly defective Amstek wire, and this damage might constitute an occurrence or accident. Pallmeyer therefore rejected FFIC's no-occurrence argument.
She further found that the "your product" exclusion did not apply to preclude FFIC's duty to defend because, based on her earlier analysis, Amstek's product was the wire, not the springs created from the wire, nor the spring packs into which the wire was incorporated.
The "impaired property" exclusion did not apply because the Wallbank declaration suggested that Wallbank could not correct the injury simply by replacing the Amstek wire. Rather, the break of the metal spring rendered the spring pack irreparable.
Finally, the "sistership" or "recall" exclusion did not apply because, according to Pallmeyer, that exclusion only applies to the recall of products that have not already caused damage, and the recall has to be initiated by the manufacturer, in this case Amstek, which has not occurred.
Pallmeyer thus concluded that FFIC has a duty to defend. She further concluded that the duty to indemnify could not be resolved until resolution of the underlying case.
