Opinion ID: 784841
Heading Depth: 1
Heading Rank: 4

Heading: analysis

Text: 14 Continental Western's duty to defend depends upon the cause of the disputed damages. If the damages flow from the loss of the use of Modern's rack system due to the inadequacy of the rack system designed by Modern Equipment then coverage is excluded. If the claimed damages instead flow from Nebraska Beef's inability to use the interior space of its warehouse, coverage exists, and Continental must defend Modern Equipment. Predictably, Continental Western argues that the damages arise solely from the failed rack system and are thereby-under the language of Exclusion (k)-excluded from coverage. Modern Equipment responds that the damages flow from an impairment to the warehouse, and thus the claim should be analyzed under Exclusion (m), as opposed to Exclusion (k). Specifically, Modern Equipment argues that the damages are covered because the Modern Equipment rack system had been put to its intended use and the warehouse became impaired property due to the sudden and accidental fall of several rack sections. 15 Both parties cite to Ellsworth-William Co-op. Co. v. United Fire & Cas. Co., 478 N.W.2d 77 (Iowa App.1991) as support (or distinction) for their respective positions. In Ellsworth, coverage was sought-under a substantially similar policy-for lost revenues resulting from a loss of use of seven grain-storage bins. Four of the bins and an overhead conveying system-constructed by the insured-failed. The overhead conveying system was a required operational component of the three preexisting bins, which were not constructed by the insured. The owner of the bins brought an action against the insured to recover for losses sustained from the loss of use of the four negligently-constructed bins and the three preexisting bins. 16 The Ellsworth court analyzed the damages attributable to the negligent construction of the four newest bins under a contract provision mirroring Exclusion (k). The court determined that this exclusion explicitly exclude[s] liability for property damage to the insured's products and to work performed by the insured. Id. at 82. The court, however, concluded that the loss of use damage to the preexisting grain bins, resulting from their dependence on the defective conveying system, was covered under language almost identical to the exception language of Exclusion (m). The court reasoned that 1) the preexisting bins were not built by the insured, and thus qualified as other tangible property; 2) the physical injury to the insured's product (the overhead conveying system) was sudden and accidental; and 3) the injury occurred after the conveying system had been put to use by any other person or organization other than an insured-in this case, by Ellsworth. Ellsworth-William Co-op., Co., 478 N.W.2d at 81. 17 The facts of this case are fundamentally different than those presented in Ellsworth. First, the storage racks were not an integral component of Nebraska Beef's freezer and cooler warehouse. Certainly, the analysis would be different if the insured's product had been an air-conditioning unit or a door seal, the failure of which would impair the whole of the warehouse by not allowing it to function as a freezer and a chiller. Second, unlike the preexisting bins in Ellsworth, the Nebraska Beef warehouse was not rendered inoperable. The racks' collapse did not prohibit the freezer from operating as a freezer. Third, Nebraska Beef continued to use its warehouse and much of the Modern Equipment rack system. Modern Equipment argues that there is no legally appropriate or correct reasoning to require that the warehouse be totally inoperable. We agree that circumstances could exist where a sudden and accidental event could cause a loss of use so severe that the warehouse is rendered practically inoperable. For example, in this case, had the racks collapsed in a position that prohibited ingress or egress from the warehouse area, while not literally inoperable, we would consider the warehouse to be inoperable in a practical sense. In such a scenario, the mitigation required for the freezer to once again become operable would presumably be as immediate as the accident causing the loss of use in the first place. However, in this case the alleged loss of use, i.e., the ability to store the same amount of beef product in it after the collapse as before the collapse occurred, was limited, thereby allowing a significant level of use of the majority of the warehouse space. If we were to consider a marginally less useful warehouse to be inoperable, the damages flowing from the sudden and accidental failure of a portion of the shelving unit could accrue at Nebraska Beef's leisure-here, over a time period in excess of two years. 18 An examination of the damages claimed by Nebraska Beef illustrate this point. The majority of the damages that it claims are not attributable to the loss of use of its warehouse during the time period that the damaged racks were dismantled and removed. Instead, the bulk of the damages flow from the diminished shelving capacity of the freezer-beginning at the date of the first collapse, November of 1995, and continuing until December of 1997 (when the Modern Equipment system was finally removed). In our view, had Nebraska Beef's warehouse been suddenly and accident[ally] rendered inoperable (even if only in a practical sense), the exigency of the circumstances would have required immediate mitigation. Therefore, we conclude that because Nebraska Beef's warehouse was not rendered inoperable by a sudden and accidental physical injury, the exception to Exclusion (m) does not apply. In any event, even the limited loss of use of its warehouse allegedly experienced by Nebraska Beef was due to the loss of the use of Modern Equipment's rack system, not from the loss of the use of the warehouse's functional freezing and cooling capacity, nor from a diminution of its available total cold storage cubage.