Court Applies Coverage to Representative
March 24, 2009
The 1st District Appellate Court recently held that a vendor's endorsement, by which insurance coverage was afforded to sellers of the insured's products for claims arising from their sale, required the insurer to defend a claim against an entity acting as the manufacturer's representative of the insured, rather than as a re-seller of the insured's products. St. Paul Fire and Marine Ins. Co. v. Antel Corp., 899 N.E.2d 1167 (Dec. 12, 2008).
The underlying claimants, who prosecuted the appeal, were represented by Philip H. Corboy and Kenneth T. Lumb of Corboy & Demetrio P.C. and by Erron H. Fisher of Susman, Selig & Ross. Stephen R. Swofford, Fritz K. Huszagh and Kent J. Cummings of Hinshaw & Culbertson LLP represented St. Paul.
Paul Flowers and Lupe Diaz were injured and Flowers eventually died as the result of an explosion at the chemical plant of Union Oil Company of California (Uno-cal) in 1988. The explosion was caused by the improper heating of chemicals inside a vessel at the plant. The temperature control device used to control the temperature in the vessel was a Digi-Link controller manufactured by Kaye Instruments. Antel Corporation was alleged to have recommended the purchase of the controller by Unocal.
Antel was an Illinois corporation that sold industrial devices built by various manufacturers, either as a direct distributor or as a manufacturer's representative. Kaye was one of the manufacturers with whom Antel worked. Whether working as a manufacturer's representative or a direct distributor, Antel would present the product to the customer, describe its capabilities, and send a price quotation.
When functioning as a distributor, Antel would sell directly to the customer products that Antel had purchased from Kaye. Sometimes, however, the customer would send an order for a product to Kaye via Antel. Antel, acting as the manufacturer's representative, would then send the order to Kaye, which would ship directly to the customer. Kaye would bill the customer and send a 15 percent commission to Antel.
In this case, Antel sold the Kaye controller to Unocal acting as a manufacturer's representative. Accordingly, Kaye shipped the product directly to Unocal, and Antel subsequently received a commission.
The estate of Flowers and Diaz sued Antel, Kaye and others as the result of the injuries received from the explosion. Antel and Kaye were defended by St. Paul, which had issued a liability policy to Kaye, pursuant to a reservation of rights. The policy contained a vendor's endorsement, which extended coverage to "any vendor ... for claims resulting from the sale or distribution of your products." The endorsement contained exclusions for products that the vendor had re-labeled or used as a "part or ingredient of anything else."
Kaye eventually filed a motion for summary judgment based on the lack of defect in its controller. The evidence in the trial court demonstrated that the controller was not, in fact, at fault, but rather that improper chemicals added to the vessel being heated had caused the explosion. Consequently, summary judgment was entered in favor of Kaye.
At that point St. Paul filed the instant declaratory judgment action, claiming that it no longer had a duty to defend Antel. St. Paul eventually moved for summary judgment in the action but, before doing so, the underlying plaintiffs filed amended complaints. They added allegations that Antel had negligently recommended the use of the Kaye controller by Unocal in Unocal's automated system, that the controller apparently was not the proper product for use in the system and that Antel received a commission from the sale.
The trial court granted St. Paul's summary judgment motion on various grounds, and the underlying claimants took this appeal.
In an opinion by Justice James Fitzgerald Smith, the appellate court reversed. He first addressed St. Paul's argument that the granting of Kaye's motion for summary judgment -- based on a finding that the controller was defect-free -- was dispositive of coverage for Antel. He examined the language of the vendor's endorsement, which provided coverage for claims "resulting from the sale or distribution" of a Kaye product. Relying on that language, he concluded that the policy provided coverage for the negligent recommendation claim against Antel.
He then turned to the argument that coverage was excluded under the vendor's endorsement because the Kaye controller was connected to other devices after the sale to Unocal. Specifically, St. Paul argued that the endorsement's exclusion for products that were a "part or ingredient of anything else," applied.
Smith observed that Antel was not a manufacturer, but only a seller of goods, and that Antel itself therefore had not incorporated the controller into another device before selling it to Unocal. Instead, Antel marketed and sold the product to Unocal, which then utilized the product as it was intended to be utilized. Since Antel sold the controller without changing it, and since the controller was put to its proper use, the exclusions to the vendor's endorsement did not apply.
Finally, Smith took up the argument that Antel was not entitled to coverage because it was not a vendor, but rather acted in its capacity of a manufacturer's representative. As a manufacturer's representative, St. Paul maintained that Antel did not actually "sell" the product to Unocal.
Smith, however, relied upon testimony of an Antel employee who said that Antel sold Kaye products as either a manufacturer's representative or as direct distributor. In both cases, Antel presented the product to the customer, described its capabilities, and sent a price quotation. In both cases, Antel also received a commission.
Based on this evidence, Smith found that St. Paul's argument that Antel was not a vendor "is incredible at best and disingenuous at worst." At the very least, said Smith, St. Paul's argument "has illustrated an ambiguity in the contract which must be construed against the insurer."
The court therefore reversed the summary judgment in favor of St. Paul with respect to coverage for Antel.
