Source: http://masscases.com/cases/app/17/17massappct316.html
Timestamp: 2019-04-23 18:16:50+00:00

Document:
Certain allegations in a third-party complaint against a manufacturing corporation stated a sufficient claim under the property damage provisions of the corporation's policy of products liability insurance to invoke the insurer's duty to defend the third-party action, and did not come within the policy's "business risk" exclusion.
Stephen H. Oleskey (Lisa G. Arrowood with him) for the plaintiff.
protection against certain forms of products liability. In the present suit Sterilite sought a declaration that Continental was obliged to undertake its defense in a third-party action in which it was named as a defendant.
More particularly: Henry Heide, Inc. (Heide), purchased from WRH Products Co., Inc. (WRH), for a price of about $100,000, some 23,130 plastic "starch trays," i.e., trays carrying starch, to be used in the process of candy manufacture. On July 21, 1975, Heide commenced an action in Federal court against WRH, as seller; Sterilite, as manufacturer of the trays; and Dow Chemical Company, as supplier of material entering into the composition of the trays, claiming damages of not less than $600,000 for property damages arising from alleged defects in the trays. [Note 2] Notified by Sterilite of the pending action, Continental provisionally assumed the defense on Sterilite's behalf, then on August 21, 1975, disclaimed responsibility with regard to any damage to the trays, [Note 3] and subsequently, on January 5, 1976, disclaimed all responsibility. Accordingly, Sterilite started to defend itself in Heide's action by engaging and compensating counsel of its own choice.
Court, holding for Sterilite, declared that Continental was in breach of its duty to defend the Heide action on behalf of Sterilite, that it was liable for the counsel fees and related expenses already incurred by Sterilite to the time of judgment (fixed at $108,370.74), and was obligated for the future either to undertake the defense itself or to reimburse Sterilite the further expenses of suit. Continental appeals. We modify the disposition in one particular.
2. When, as in the present case, the allegations of the third-party complaint find apparent lodgment in the effective coverage of the policy, the insurer is obligated to defend. But it can, by certain steps, get clear of the duty from and after the time when it demonstrates with conclusive effect on the third party that as matter of fact -- as distinguished from the appearances of the complaint and policy -- the third party cannot establish a claim within the insurance. Judge L. Hand suggested that the demonstration of the precise basis on which the third-party action will proceed may be made by discovery or other tactics within the third-party action, whose defense will have been undertaken by the insurer. Lee v. Aetna Cas. & Sur. Co., 178 F.2d 750, 752 (2d Cir. 1949). [Note 15] An insurer may make the demonstration when brought into the third-party action upon impleader by the insured. See, e.g., Terrio, supra, 16 Mass. App. Ct. at 164. A declaratory action, in which the necessary interests are represented, may serve for the demonstration. See Atlantic Mut. Fire Ins. Co. v. Cook, 619 F.2d 553, 555 (5th Cir. 1980); Firemen's Fund Ins. Co. v. Chasson, 207 Cal. App.
2d 801, 807 (1962). [Note 16] What is not permitted is that an insurer shall escape its duty to defend the insured against a liability arising on the face of the complaint and policy, by dint of its own assertion that there is no coverage in fact: the insurer then stands in breach of its duty even if the third party fails in the end to support any such claim of liability by adequate proof. See Babcock & Wilcox Co. v. Parsons Corp., 430 F.2d 531, 538-539 (8th Cir. 1970).
4. Besides ordering payment as indicated, the judgment appealed from declares, in substance, that Continental is obligated to defend on behalf of Sterilite or, alternatively, to reimburse Sterilite's expenses of defense. We think the judgment should be modified to declare, in effect, that Continental may absolve itself of the stated obligation from and after the time it makes an appropriate demonstration, as indicated in this opinion, that the third-party claim does not in fact comprise matters for which there is coverage.
[Note 1] Sterilite had also purchased an "excess umbrella third party liability policy" which served to increase the dollar limit of coverage under the "comprehensive" policy but did not itself impose a duty on the part of the insurer to defend third-party actions. Thus we concentrate on the terms of the "comprehensive" policy which did so obligate the insurer. The dollar limit, as raised, was $1.3 million, and the annual premium payable on both policies was about $15,000; the policies ran from 1973 to 1976.
See generally on the "comprehensive" policy Tinker, Comprehensive General Liability Insurance -- Perspective and Overview, 25 Fed'n Ins. Couns. Q. 217 (1975). See also Henderson, Insurance Protection for Products Liability and Completed Operations -- What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 416-425 (1971).
[Note 2] Heide initially filed its action in the United States District Court for the Southern District of New York, but, as there was doubt about jurisdiction, it later, on December 1, 1975, filed another virtually identical action in the District Court for New Jersey. Eventually the first action was dismissed and litigation on the merits went forward in the second.
[Note 3] See the discussion of exclusion (n) of the policy, note 10, infra.
[Note 4] Under the policy, Continental had the "duty to defend any suit against the insured seeking damages on account of such . . . property damage [`property damage to which this insurance applies'], even if any of the allegations of the suit are groundless, false or fraudulent . . ." This obligation was distinct from and of broader scope than the further obligation to indemnify the insured against judgments obtained against it within the policy coverage. See Spoor-Lasher Co. v. Aetna Cas. & Sur. Co., 39 N.Y.2d 875, 876-877 (1976).
[Note 5] For purposes of the present case, we need not explore those decisions which, even where the complaint itself would not cast on the insurer a duty to defend, oblige the insurer to defend if it knows or could readily ascertain facts that implicate such a duty. See the references in Terrio v. McDonough, 16 Mass. App. Ct. 163 , 167 (1983); also Milliken v. Fid. & Cas. Co., 338 F.2d 35, 40 (10th Cir. 1964); 14 Rhodes, supra at Section 51.45; 7C Appleman, supra at Section 4684.01; 1 Long, supra at Section 5.09; Windt, supra at Section 4.03. Compare note 17, infra.
[Note 6] Judge L. Hand early noted the possible effects on the insurer's duty of "the plasticity of modern pleading." Lee v. Aetna Cas. & Sur. Co., 178 F.2d 750, 752 (2d Cir. 1949). There is elaboration and analysis of this point in Terrio v. McDonough, 16 Mass. App. Ct. 163 , 165-169 (1983).
[Note 7] The equipment is spoken of as a "mogul," possibly using that term in a sense derived from a dictionary meaning of a mogul as a locomotive used for hauling heavy trains.
[Note 8] Such a case as Hamilton Die Cast, Inc. v. United States Fid. & Guar. Co., 508 F.2d 417, 419-420 (7th Cir. 1975), cited by Continental, turning on "property damage," requires discriminating reading because the term was defined differently in the policy there at bar. A more-or-less standardized form of 1966 was succeeded by a form of 1973. Tinker, supra at 218, 232-235; 1 Long, supra at Sections 11.01, 11.10. See Guerin Contractors, Inc. v. Bituminous Cas. Co., 5 Ark. App. 229, 236 (1982) (recognizing the increased breadth of the definition of "property damage" introduced in the more recent form of policy).
[Note 9] "Occurrence" was defined in the policy as "an accident, including continuous or repeated exposure to conditions, which results in . . . property damage neither expected nor intended from the standpoint of the insured."
[Note 10] This reading is supported by Honeycomb Syss. Inc. v. Admiral Ins. Co., 567 F. Supp. 1400, 1408 (D. Me. 1983). Any broader interpretation of exclusion (n) encounters serious linguistic difficulties, and, in our view, cannot in any event extend to loss of use of manufacturing equipment as distinguished from the trays proper. Here we should recall that "[e]xclusions from coverage are to be strictly construed" and "[a]ny ambiguity in the somewhat complicated exclusions must be construed against the insurer." Vappi & Co. v. Aetna Cas. & Sur. Co., 348 Mass. 427 , 431 (1965).
[Note 11] There is room for some possible doubt about the meaning of the words "other tangible property" but Continental's argument suggests to us, probably correctly, that the reference is to tangible property other than "the named insured's products," words appearing later in the quoted text. See Todd Shipyards Corp. v. Turbine Servs., Inc., 674 F.2d 401, 418-419 (5th Cir. 1982).
[Note 12] Sterilite has argued that all that is excluded is the warranty phase of Heide's claim, not the negligence phase. See the like suggestion in Western Cas. & Sur. Co. v. Budrus, 112 Wis.2d 348, 353-354 (Ct. App. 1983). See also Willets Point Contracting Corp. v. Hartford Ins. Group, 75 A.D.2d 254, 259 (1980), aff'd, 53 N.Y.2d 879 (1981). We need not rule on this matter.
[Note 13] Tinker, supra at 224, describes such "business risks" as those "which management can and should control or reduce to manageable proportions; risks which management cannot effectively avoid because of the nature of the business operations; and risks which relate to the repair or replacement of faulty work or products. These risks are a normal, foreseeable and expected incident of doing business and should be reflected in the price of the product or service rather than as a cost of insurance to be shared by others." See also Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 239-250 (1979).
It is understood that, to cover these risks, special forms of insurance may be available, at one time called "product failure" and latterly "product guarantee." See Product Guarantee Legal Liability Insurance, Fire Casualty & Surety Bulletins, Specialty Lines 1 (Nat'l Underwriters Co., May 1981); 17 John Liner Letter (no. 12), 7-8 (John Liner Insurance and Risk Management Advisors, Inc./John Liner Associates Nov. 1980).
[Note 14] There is argument that loss of use of the manufacturing equipment falls under an exclusion (p), but it is enough to say that this interpretation would run counter to the accepted reading of the exclusion which confines it essentially to situations of withdrawal of a product because of a known defect in a "sister" product -- hence (p) is called the "sistership" exclusion. See Todd Shipyards Corp. v. Turbine Servs., Inc., 674 F.2d 401, 419 (5th Cir. 1982). No such situation is encountered here.
[Note 15] The clarification may not come until the third-party action is fully tried, and in that case the duty to defend continues to the end, even if the result of the action is favorable to the insured and there is no judgment against the insured that the insurer needs to make good. Lee, supra, 178 F.2d at 752. See also United States Fid. & Guar. Co. v. Louis A. Roser Co., 585 F.2d 932, 937 (8th Cir. 1978).
[Note 16] United States Fid. & Guar. Co. v. Louis A. Roser, supra note 15, is an example of a declaratory action being tried in tandem with the third-party action.
[Note 17] On the cross-motions in Sterilite's present action, Continental has relied essentially on its interpretation of Heide's complaint and the insurance policy. There was indication in some of Sterilite's "exhibits" submitted on the motions that the trays had buckled or deflected or sagged in use, with damage to the contents and jamming of other equipment, but the information was not particularized. As to whether even solid information reaching the insurer from the insured, and indicating that claimed losses were in fact uninsured, could itself relieve the insurer of its duty to defend, the Lee case says: "This language [requiring the insurer to defend even a baseless claim] means that the insurer will defend the suit, if the injured party states a claim, which, qua claim, is for an injury `covered' by the policy; it is the claim which determines the insurer's duty to defend; and it is irrelevant that the insurer may get information from the insured, or anyone else, which indicates, or even demonstrates, that the injury is not in fact `covered.'" 178 F.2d at 751. On this "irrelevance," see also Clemmons v. Travelers Ins. Co., 88 Ill.2d 469, 476 (1981); Green Bus Lines, 74 A.D.2d at 144-145. But see Rowell v. Hodges, 434 F.2d 926, 929-930 (5th Cir. 1970); American Motorists Ins. Co. v. Trane, 544 F. Supp. 669, 688 (W.D. Wis. 1982).
[Note 18] Continental asserted that too many lawyers were put to work on some parts of the defense of the Heide litigation but a supplemental affidavit on Sterilite's behalf tends to meet this criticism.
[Note 19] See S.J.C. Rule 3:07, DR 2-106 (Fees for Legal Services), as appearing in 382 Mass. 772 (1981); First Natl. Bank of Boston v. Brink, 372 Mass. 257 , 265 (1977). See also Salem Realty Co. v. Matera, 10 Mass. App. Ct. 571 , 576 (1980), S.C., 384 Mass. 803 (1981).
[Note 20] Whether Continental could become responsible for Sterilite's expenses in prosecuting the present declaratory action, we need not discuss, for Sterilite abstains from pressing any such claim. See Annot., 87 A.L.R.3d 429, 441-449 (1978).

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