No Coverage For $6M Sale Of Moldy Bales Of Cotton Affirmed By 8th Cir. In CGL & Propty Coverage Win
September 30, 2009
The U.S. Circuit Court of Appeals for the Eighth Circuit recently affirmed the grant of two separate summary judgments obtained by Clausen Miller partners Amy Rich Paulus and Mark D. Paulson, holding that the insurer they represented had no duty to defend or indemnify a cotton gin operator accused of selling more than 50,000 bales of moldy cotton. The Court affirmed the two judgments, one under a CGL coverage form and the other under a Property coverage form.
DG&G Co. Inc. ginned a 2005 crop of cotton for delivery to cotton brokers who claimed that the cotton did not meet industry standards of merchantability. They alleged that DG&G added excess water during the ginning process, rendering the cotton bales unmerchantable. The cotton brokers who held title to the bales demanded payment from DG&G in a lawsuit filed in the U.S. District Court for the Eastern District of Missouri, where the CM-represented insurer also litigated the insurance coverage action against DG&G.
The Ruling Under the CGL Coverage
Although there was a dispute between DG&G and its insurer as to how the cotton was damaged, the District Court for the Eastern District of Missouri held that the damaged cotton crop qualified as "property damage" under the general liability policy, but that coverage is excluded under the "care, custody or control" exclusion because DG&G's liability would be based on acts or omissions when the cotton was in DG&G's care, custody or control. The 8th Circuit backed District Court's decision, concluding that it was DG&G's alleged negligence at the cotton gin that caused the excess moisture discovered in the product months later, stating, "It does not matter if the cotton developed significant additional damage after it left the gin, in cases of progressive damage, coverage issues are determined at the time the initial property damage occurs."
The Ruling Under the Property Coverages
The Eighth Circuit further affirmed the District Court's ruling that damage to a cotton crop altered by excess water is not covered under a commercial agribusiness policy's "contamination or deterioration" and "defects, errors, and omissions" exclusions under its Property Coverage form. DG&G had purchased a moisture system and contended that the damage was caused by a defect in the system controlling the amount of water added during the ginning process, as well as by a defect in the system installed to accurately measure moisture in the baled cotton or bags, which bags were also not appropriate for baled cotton. The Eighth Circuit rejected DG&G's contention that an exception existed to the otherwise applicable "contamination or deterioration" exclusion because coverage was arguably available where water damage is a covered peril under the policy. The Court held that the covered water damage refers to leakage or discharge of water from a system or appliance and that a layperson would not interpret "system" to mean an isolated apparatus such as the moisture system used by DG&G in the ginning process. Rather, the Court agreed that the term "system," as used in the policy, refers to a set of pipes or conduits that delivers water throughout an insured building.
As to the exclusion for "defects, errors, and omissions," the Eighth Circuit further agreed that the loss at issue, if it is attributable at all to DG&G, was caused by a deficiency or defect in the materials or processing of the cotton. "In the underlying lawsuit, DG&G asserted that the cotton suffered 'direct physical loss' (mold, mildew, and hardening) caused by malfunctioning of the Lewis Moisture System that caused excess moisture to be applied during ginning, by failure of the Vomax device to detect excess moisture levels, and/or by packaging of the cotton at the gin in bags not suitable for moisture-enhanced cotton. These loss theories are premised upon defects in DG&G's processing, testing, workmanship, or materials used in the ginning operations that fall directly within the unambiguous terms of this exclusion," the Eighth Circuit's panel held.
The case was presented to the Eighth Circuit at oral argument by Mark D. Paulson. The opinion can be found at Michigan Millers Mutual Ins. Co. v. DG&G Co.Inc., 2009 WL 1873506 (8th Cir. 2009).
