Loss Of Use Caused By A Mislabeled Product
June 15, 2011
The 1st District Appellate Court recently held that the sale of a mislabeled product which, when incorporated into another product caused the other product not to perform as intended, constituted an occurrence giving rise to a loss-of-use form of property damage for which a commercial general liability (CGL) policy potentially provided coverage. United National Insurance Co. v. Faure Brothers Corp., 2011 WL 1902126 (1st Dist. May 17, 2011).
The insurer, United National, was represented by Cray, Huber, Hortsman, Heil & VanAusdal LLC. Horvath & Weaver P.C. represented the insured, Faure Brothers and one of its divisions, Gateway.
Background
Gateway was in the business of warehousing chemical products, relabeling them and then having them shipped following the directions of its customers. Among its customers was Air Products, which brought suit in 2008 alleging that Gateway affixed the wrong labels to certain chemicals, which then were shipped to one of Air Products' customers, Henkel.
The complaint further alleged that Henkel used the mislabeled chemical in producing adhesive products, which it sold to BD and Smiths. The adhesive products allegedly did not perform as intended due to the inclusion of the mislabeled chemical. BD and Smiths then notified Henkel of their damages, which in turn made a claim against Air Products, which satisfied the claims, or expected to, for about $400,000. Air Products' complaint against Gateway sought damages based on negligence and res ipsa loquitur theories.
United National issued a CGL policy to Faure Brothers for the relevant time period. Upon tender of the Air Products complaint by Faure Brothers/Gateway, United National denied coverage and subsequently brought this declaratory judgment action. Following cross motions for summary judgment, the trial court granted United National's motion finding that the underlying complaint failed to allege an "occurrence." Faure Brothers brought this decision to appeal.
Occurrence Issue
In an opinion by Justice Sheldon A. Harris, the 1st District reversed. He initially addressed whether the Air Products complaint alleged an "occurrence" or "accident." He observed that determination focused on whether the injury alleged was expected or intended by the insured, not whether the acts were performed intentionally.
Here, Harris said, the underlying complaint did not make any allegations that Faure Brothers expected or intended the resulting mislabeled chemicals to cause a problem. From its perspective, based on the allegations, the mislabeling occurred unexpectedly and the underlying complaint, therefore, alleged an accident or occurrence.
Property Damage Issue
United National, however, further argued that the Air Products complaint did not make a claim for property damage under the policy. Harris noted the two-prong definition of "property damage," which included both physical injury to tangible property and loss of use of tangible property that was not physically injured. Under applicable case law, however, the definition does not include intangible damage to property, such as economic loss or a mere diminution in the value of a product.
Construing the underlying allegations in favor of Faure Brothers, Harris said they potentially fell within coverage. The allegations did not concern an intangible loss or a mere diminution of value. Rather, they concerned damages based on the wrong chemical being used in formulating the adhesive product. The harm did not occur because the chemicals did not perform as promised but, rather, because Henkel was negligently given the wrong chemical.
Furthermore, Harris said, the loss-of-use prong of the property damage definition does not require physical injury. Under this prong it was clear to Harris that the underlying complaint alleged that Henkel, BD and Smiths all had damages based on the loss of use of the defective adhesive products.
Product Recall Issue
United National also relied on the "product recall" exclusion in its policy. That exclusion precludes coverage for products "withdrawn or recalled from the market ... because of a known or suspected defect." As to this provision, Harris relied on United States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64 (1991), which described the product recall exclusion as a "sistership exclusion" that excluded coverage where, because of the actual failure of the insured's product, similar products are withdrawn from use to prevent the failure of these other products which have not yet failed.
Under Wilkin, the exclusion does not apply to the product that has already failed while in use and caused damage to the property of a third party. Since the product here, the mislabeled chemicals, already failed and caused damage, Harris therefore found that the product recall exclusion had no application.
The court therefore reversed the judgment of the circuit court and found that United National had a duty to defend.
Key Points
1) Mislabeling a product in a manner neither expected nor intended by the insured may constitute an occurrence.
2) Products not performing as intended due to the incorporation of a mislabeled chemical may result in a loss-of-use form of property damage.
3) The product recall exclusion applies only to products recalled from the market prior to their actual failure, based on the actual failure of similar products.
