Opinion ID: 1120914
Heading Depth: 1
Heading Rank: 3

Heading: sistership exclusions and third party product withdrawal

Text: [1] The Comprehensive General Liability policy that Olympic purchased from Centennial provides, in part, that: This Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of A. personal injury or B. property damage to which this insurance applies, caused by an occurrence and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such personal injury or property damage, .... Exclusions This insurance does not apply: .... O. to damages claimed for the withdrawal, inspection, ... or loss of use of the named insured's products or work completed by ... the named insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein; Glossary .... named insured's products means goods or products manufactured, sold, handled or distributed by the named insured or by others trading under his name, including any container thereof.... Clerk's Papers, at 18, 20, 33. Exclusion O is the sistership clause disputed in this case. The term sistership derives from a practice observed in the aircraft industry. Yakima Cement Prods. Co. v. Great Am. Ins. Co., 22 Wn. App. 536, 541, 590 P.2d 371 (1979), rev'd on other grounds, 93 Wn.2d 210, 608 P.2d 254 (1980). When a defect is suspected to be responsible for an aircraft accident, all other aircraft of that type are grounded pending investigation. The potential damages arising from the loss of use of the sisterships are enormous. The exclusion was originally designed to exclude coverage for damages arising from the defect, other than those arising from the defect in the aircraft that was involved in the accident. Charles E. Brohawn & Bros., Inc. v. Employers Comm'l Union Ins. Co., 409 A.2d 1055, 1057 n. 3 (Del. 1979). The intent of the sistership exclusion is that: while the insurance covers damages for bodily injuries and property damage caused by the product that was defective or failed, it was never intended that the insurer would be saddled with the cost of preventing such defects or failures any more than it was intended that the insurer would pay the cost of avoiding the defect in the first place or preventing the first failure if the product had been discovered to be in a defective or dangerous condition before the occurrence. 2 R. Long, Liability Insurance § 11.09[3], at 11-99 (1990). The insurer, thus, is not liable for the cost of preventative or curative action taken by its insured. 22 Wn. App. at 542. Olympic argues that the sistership exclusion does not preclude coverage because, even assuming that the canned salmon is its product, the sistership exclusion does not apply when a third party, other than the insured, withdraws a product of the insured's from the market. Centennial contends that the language of the sistership clause does not expressly limit its application to instances where the insured withdraws its product, therefore, the clause applies whether the insured or a third party withdraws the insured's product from the market. Although the case law that Centennial cites supports its argument that under the sistership clause in Olympic's policy it is immaterial that the withdrawal was not by the insured (italics omitted), Commercial Union Assur. Co. v. Glass Lined Pipe Co., 372 So.2d 1305, 1309 (Ala. 1979) (quoting Hamilton Die Cast, Inc. v. United States Fid. & Guar. Co., 508 F.2d 417, 420 (7th Cir.1975)), only a minority of jurisdictions, the two cited, embrace this position. The weight of authority from other state and federal courts that have considered the third party withdrawal issue supports Olympic's claim that a sistership clause, like the one in Olympic's policy, [3] applies only when an insured withdraws its own product from the market. In Elco Indus., Inc. v. Liberty Mut. Ins. Co., 90 Ill. App.3d 1106, 1108, 414 N.E.2d 41, 43 (1980), Elco sold Kohler defective regulating pins, which Kohler installed in its engines. Kohler recalled the engines, disassembled each engine to remove the pin, then reassembled the engines. 90 Ill. App.3d at 1108. Elco paid damages to Kohler, then sought a declaration that its insurance policy covered the damages claims. Elco's insurer denied coverage because it contended that the sistership clause excluded protection. The court rejected the insurer's contention that the sistership exclusion applied: A majority position among courts construing the provision holds that [the sistership] exclusion ... is operable only where the withdrawal of the product was by the insured rather than a third party.... Here, Elco did not recall or withdraw any product claimed to be defective; Kohler recalled the engines containing the defective pins. (Citations omitted.) 90 Ill. App.3d at 1110. In International Hormones, Inc. v. Safeco Ins. Co. of Am., 57 A.D.2d 857, 394 N.Y.S.2d 260 (1977), International manufactured hormone suspensions. Bel-Mar used the hormone suspensions to create materials for human injection and resold the material to medical facilities. 57 A.D.2d at 857. The FDA recalled Bel-Mar's product because it was not sterile. Bel-Mar sued International Hormones, which in turn asked that its insurer defend the suit. The insurer denied coverage, based on the sistership exclusion in International's policy. The court concluded that the sistership clause did not exclude coverage because: clauses identical to this one have been held ... operative only where the withdrawal is by the insured party itself, and not, as here, where the product is recalled by a third party.... 57 A.D.2d at 857. Finally, in Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co., 34 N.Y.2d 356, 314 N.E.2d 37, 357 N.Y.S.2d 705 (1974), Gioia sold Lipton noodles, which Lipton put in its soups. When the parties discovered that the noodles were tainted, Lipton notified the trade and the general public, withdrew its affected soups from the market, and recalled its stocks of pasta. Lipton filed an action to recover damages from Gioia, including costs related to the recall of the tainted product. Liberty Mutual, Gioia's insurer, denied coverage based on the sistership exclusion in Gioia's policy. The New York court disagreed, stating that: [T]he [sistership] exclusion in each policy extends only to claims ... arising from withdrawal and recall by the named insured, Gioia. ... ... Thus, in the present factual setting had Gioia withdrawn its own macaroni and noodles, Liberty Mutual would not have been obligated to indemnify Gioia for any third-party claims made by Lipton against Gioia for damages sustained by Lipton in consequence of such withdrawal by Gioia.... 34 N.Y.2d at 360-61. Several other state courts have embraced the rule that a sistership exclusion applies only when the insured withdraws its own product from the market, but have found the exclusion inapplicable to the cases before them for other reasons. See United States Fid. & Guar. Co. v. Wilkin Insulation Co., ___ Ill. App.3d ___, 550 N.E.2d 1032, 1040 (1989); Marathon Plastics, Inc. v. International Ins. Co., 161 Ill. App.3d 452, 465, 514 N.E.2d 479, 487 (1987), review denied, 119 Ill.2d 559 (1988); Parker Prods., Inc. v. Gulf Ins. Co., 486 S.W.2d 610, 613 (Tex. Civ. App. 1972), aff'd, 498 S.W.2d 676 (Tex. 1973). The Court of Appeals distinguished Elco from this case because Elco sought coverage for consequential damages that its product caused to the goods of another, while Olympic seeks damages for defects in its own product. This distinction is flawed because it presumes that the packers' canned salmon is Olympic's product, a presumption which the facts and the law, discussed below, do not support. The court distinguished Lipton from this case because it did not believe that the cost Lipton incurred in recalling the pasta stock was a significant part of the damages that Lipton claimed. The Lipton court, however, stated only that Lipton incurred substantial expense when it withdrew its soups and stocks from the market: nothing in the Lipton opinion supports the Court of Appeals speculation that the cost to Lipton of withdrawing the tainted stock was insignificant. Further, there is no authority which suggests that the scope of coverage, or the application of the sistership clause, depends on some minimum degree of damage. 90 Ill. App.3d at 1110-12. The court also suggested that Lipton does not apply because in Lipton the third party took all the steps necessary to recall the product, while in this case Olympic, the insured, oversaw the recall. The record establishes, however, that after Olympic notified the Association and the packers of the defect, then the FDA, not Olympic, oversaw the product recall. The weight of state authority, including Lipton and Elco, supports the conclusion that a sistership clause does not apply when a third party removes the insured's product from the market. The federal courts have not settled the third party withdrawal issue. In Todd Shipyards Corp. v. Turbine Serv., Inc., 674 F.2d 401 (5th Cir.), cert. denied, 459 U.S. 1036 (1982), the case upon which Olympic relies, the insureds improperly installed blades in a turbine engine, and the defective blading destroyed the engine. The ship's owners and Todd Shipyards filed claims against the insureds, who in turn sought coverage from their insurers. The insurers argued that the sistership exclusion in the insureds' policies precluded coverage for the claims. The court concluded that the exclusion did not apply because the damages claimed arose from the malfunctioning of a product where no `sister' products are involved. 674 F.2d at 419. In a footnote, the court stated, As an independent ground for this conclusion, that most courts did not apply the sistership clause when the product was withdrawn by a third party. [4] 674 F.2d at 419 n. 13. The observation is dicta, however, since the court did not dispose of the claim on this independent ground. Several other federal courts also have adopted the rule that the exclusion applies only when the insured removes its product from the market, but found the exclusion inapplicable to the case before them for other reasons. Aetna Cas. & Sur. Co. v. PPG Indus., Inc., 554 F. Supp. 290, 295 (D. Ariz. 1983); Bigelow-Liptak Corp. v. Continental Ins. Co., 417 F. Supp. 1276, 1281-82 (E.D. Mich. 1976) (citing Arcos Corp. v. American Mut. Liab. Ins. Co., 350 F. Supp. 380 (E.D. Pa. 1972), aff'd in part and dismissed and remanded in part mem., 485 F.2d 678 (3d Cir.1973). We do not rest our decision on this federal authority, but these federal decisions provide additional support for our conclusion that a sistership clause does not exclude coverage if a third party withdraws the insured's product from the market. [2] In conclusion, a review of state authority reveals that a majority of the jurisdictions, which address the issue, conclude that a sistership clause does not exclude coverage if a third party withdraws the insured's product from the market. We believe that this rule is sound, and it fairly balances the interests of the parties. The rule does not impose on the insurer the cost of an insured's curative or preventative measures, but provides the insured with protection against a foreseeable element of claims that commonly arise in economic and factual settings similar to Olympic's. We therefore hold that a sistership clause, phrased as is the clause in Olympic's policy, does not preclude coverage when a third party withdraws the insured's product from the market.