Opinion ID: 1714942
Heading Depth: 2
Heading Rank: 6

Heading: Gerling's Argument Concerning Property Damage

Text: Gerling also argues that the circuit court erred in finding that Wheelwright showed that it had sustained property damage under the terms of its policies. The circuit court held that Wheelwright had shown by undisputed evidence that its tractors, although physically undamaged, were rendered less useful as a result of the failure of Dorsey's trailers and that Wheelwright had lost profits as a result. The circuit court stated: Both Alabama and Georgia courts have found coverage for financial losses stemming from the loss of use of tangible property that is related to an insured's product or work, similar to the loss of use of Wheelwright's tractors stemming from the defective trailers. See Fitness Equipment Co. v. Pennsylvania General Ins. Co., 493 So.2d 1337, 1343 (Ala.1985)(holding that lost profits were covered where the insured's product, a motor used in a treadmill, was defective and caused lost profits on the sale of the treadmills); United States Fidelity & Guaranty [Co.] v. Andalusia Ready Mix[, Inc.], 436 So.2d 868, 871 [(Ala.1983)](holding that an insurer was obligated to pay for damages and a loss in value to a water treatment plant caused by the insured's defective product); Truitt Oil & Gas Co. v. Ranger Ins. Co., [231 Ga.App. 89,] 498 S.E.2d 572, 573 [(1998)](finding coverage where a gasoline leak from an insured's property caused loss of use of other real property); Haley v. Georgia Farm Bureau Mut. Ins. Co., [166 Ga.App. 596,] 305 S.E.2d 160, 162 [(1983)](finding coverage for lost profits and other damages caused by the insured's sale of infected swine). Therefore Wheelwright has demonstrated the existence of `property damage' under the Insurers' policies. Although Wheelwright's evidence shows the loss of use was with respect to tangible property that had itself not been physically injured, i.e., the loss of the use of its tractors for hauling the most profitable loads, Gerling argues that Wheelwright's inability to use its tractors for the most profitable use is not property damage within the meaning of its policies. Specifically, it argues that the cases relied upon by the circuit court found property damage only where the property in question had been rendered useless. Gerling characterizes this as a uselessness requirement that must be shown to establish covered property damage under its policies. For example, in Fitness Equipment Co. v. Pennsylvania General Insurance Co., 493 So.2d 1337 (Ala.1985), cited by the circuit court, this Court considered an appeal from a declaratory judgment holding that the insurer, Pennsylvania General Insurance Company (Penn. General), was not liable under its property-damage coverage to pay a consent judgment given by its insured Scott Air, Inc., a manufacturer of electric motors, to the plaintiff Fitness Equipment Company (FEC), in a separate, federal action. FEC was a manufacturer who used Scott Air's motors in manufacturing treadmills. The motors had proven inadequate to power the treadmills, and FEC had sought $6,000,000 in lost profits in the separate lawsuit in federal court. Scott Air subsequently agreed to a consent judgment pursuant to which it paid FEC approximately $53,000 and assigned its rights against Penn. General for approximately $300,000. While the federal action was pending, Penn. General filed its declaratory-judgment action, in which it relied upon the following provision to deny coverage: `This insurance does not apply: `.... (h)`to loss of use of tangible property which has not been physically injured or destroyed resulting from `(1) a delay in or lack of performance by or on behalf of the named insured of any contract or agreement, or `(2) the failure of the named insured's products or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness or durability warranted or represented by the named insured. `(i) to property damage to the named insured's products arising out of such products or any part of such products....' 493 So.2d at 1340. The policy also contained an exclusion stating that the insurance did not apply `(n) to property damage to the named insured's products arising out of such products or any part of such products....' 493 So.2d at 1339. Approximately two months after the consent judgment was entered in the federal action, the trial court entered an order in the state declaratory-judgment action finding that Penn. General did not owe any coverage. FEC and Scott Air appealed. In Fitness Equipment, this Court reversed the circuit court's declaratory judgment holding that the insurer was not liable, stating: We now focus our attention on the circuit court's conclusions with regard to the applicability of the various exclusions of the policy. The court correctly found that damages to the motors falls within exclusions (i) and (n). However, the treadmills also suffered `property damage,' or `physical injury ... including the loss of use thereof.' Exclusions (i) and (n), inasmuch as they pertain only to the work product of the insured, Scott Air, are inapplicable. Furthermore, in United States Fidelity & Guar. Co. v. Andalusia Ready Mix, Inc., 436 So.2d 868 (Ala.1983), this type of damage was held to be covered under a policy similar to that in the instant case. In Andalusia Ready Mix, defective grout was used in the construction of a water sewage treatment plant, and, as a result, the plant itself had to undergo extensive repairing and remodeling. Citing United States Fidelity & Guar. Co. v. Bonitz Insulation Co., 424 So.2d 569, 573 (Ala.1982), this Court stated: `if [an] occurrence or accident causes damage to some other property than the insured's product, the insured's liability for such damage becomes the liability of the insurer under the policy.' 436 So.2d at 870. Therefore, Penn. General is obligated to pay any judgment based on the damage[] to the treadmills. 493 So.2d at 1341-42. Gerling argues that the Court correctly held in Fitness Equipment that there was coverage because the plaintiff's treadmills were rendered completely useless as a result of the defendant's defective motors. It distinguishes the present case from Fitness Equipment on the basis that in this case Wheelwright's tractors were not rendered useless, merely less profitable. Similarly, it distinguishes United States Fidelity & Guaranty Co. v. Andalusia Ready Mix, Inc., 436 So.2d 868 (Ala.1983), discussed in Fitness Equipment, on the same rationalethe insured defendant's defective grouting in Andalusia Ready Mix rendered the plaintiff's water plant unuseable; thus coverage was proper under a loss-of-use-of-property exclusion similar to the exclusion in the present case. Gerling also attempts to distinguish Truitt Oil & Gas Co. v. Ranger Insurance Co., 231 Ga.App. 89, 498 S.E.2d 572 (1998), and Haley v. Georgia Farm Bureau Mutual Insurance Co., 166 Ga.App. 596, 305 S.E.2d 160 (1983), by arguing that in both of those cases the property was rendered useless by the occurrence that resulted in insurance coverage. However, we note that the applicable definition for property damage, definition b. quoted in Part II.B. of this opinion ([l]oss of use of tangible property that is not physically injured), facially fits Wheelwright's loss of use of its tractors and does not specify any particular degree or extent of the loss of use. Further, we note that Fitness Equipment does not hold that the loss-of-use provision means that the property in question must be rendered completely useless. In fact, none of the cases cited in the circuit court's order specifically notes this interpretation of the loss-of-use provision. Our research indicates that neither Alabama nor Georgia has explicitly recognized a uselessness requirement in a similar context. Rather, the cases addressing property damage on this point consider products that have a specific use, such as the treadmills in Fitness Equipment, rather than a more general use, such as Wheelwright's tractors. That is, where the treadmills in Fitness Equipment could be used only for exercise walking, the tractors in this case could be used for a variety of purposes. However, we are cognizant of McDowell-Wellman Engineering Co. v. Hartford Accident & Indemnity Co., 711 F.2d 521 (3d Cir.1983), and Wisconsin Label Corp. v. Northbrook Property & Casualty Insurance Co., 221 Wis.2d 800, 586 N.W.2d 29 (1998), cited by Gerling in support of its argument for a uselessness requirement to establish coverage for property damage. Those cases do recognize coverage under loss-of-use provisions similar to those in the instant case only when the property affected is diminished in value or made useless. Both of those cases rely on the uselessness requirement set out in Sola Basic Industries, Inc. v. United States Fidelity & Guaranty Co., 90 Wis.2d 641, 653-54, 280 N.W.2d 211, 217 (1979). Because McDowell-Wellman relied upon Wisconsin law set out in Sola Basic for its conclusion and because the rationale for the uselessness requirement in Sola Basic has been more recently discussed in Wisconsin Label, that latter case is of particular interest. In that case, Wisconsin Label sought a declaratory judgment that its insurer owed it coverage for damages arising from its mislabeling of a client's products. The loss-of-use provision at issue in Wisconsin Label was identical to the provision at issue in this case. In discussing the uselessness requirement, the court stated: Because there is no physical damage to tangible property under the policy, Wisconsin Label must show `loss of use to tangible property not physically injured' to demonstrate coverage. As this policy provision reflects, the term `property damage' does not necessarily require physical damage. Sola Basic Ind. v. USF & G, 90 Wis.2d 641, 653-54, 280 N.W.2d 211, 217 (1979). Rather, tangible property may be damaged if `diminished in value or made useless,' even if the tangible property suffers no actual physical injury. Id. (emphasis added); see also ARNOLD P. ANDERSON, WISCONSIN INSURANCE LAW, § 5.17, at 5-49 to 51 (4th ed.1998) (discussing Sola Basic & noting same). As discussed below, because the mislabeling neither diminished the value of the products and packaging nor rendered them useless, Northbrook's policy does not cover the loss. The uselessness requirement originates in Sola Basic, 90 Wis.2d at 644, 280 N.W.2d at 212. Sola Basic sold a transformer to Thunder Bay Manufacturing Corporation for use in its manufacturing process. Id. When the transformer malfunctioned, Sola Basic repaired the transformer. Id. Thunder Bay alleged that Sola Basic's negligent performance of the repair damaged the transformer's windings. Id. As a result of the negligent repair, Sola Basic [sic] had to use another method while the transformer was being repaired; this method increased Thunder Bay's operating expenses. Id. Sola Basic removed and rebuilt the transformer at its own expense but did not make a claim to its insurer for that expense. Sola Basic's insurer denied coverage for the increased cost of operation, however. Id. The Sola Basic court reviewed case law from other jurisdictions and concluded that tangible property may be damaged if `diminished in value or made useless' irrespective of physical injury. Id. at 653-54, 280 N.W.2d at 217 (emphasis added). In holding that coverage existed, the Sola Basic court stated that the removal of the damaged transformer `rendered useless' Thunder Bay's electric furnaces, causing it to incur additional operational expenses. Id. at 654, 280 N.W.2d at 217. 221 Wis.2d at 812-13, 586 N.W.2d at 34. We note that the court in Sola Basic cited only Pittway Corp. v. American Motorists Insurance Co., 56 Ill.App.3d 338, 370 N.E.2d 1271, 13 Ill.Dec. 244 (1977), in adopting a uselessness standard for establishing coverage for loss of use. The court in Pittway held that property damage occurred when, because of the insured's defective aerosol-can valve assemblies, a third party's aerosol products were rendered valueless and destroyed. However, as in Fitness Equipment and the other cases cited by the circuit court, the Pittway court did not adopt a uselessness requirement. Thus, the uselessness requirement advocated by Gerling in this case appears to be limited to Wisconsin law beginning with Sola Basic. We conclude that the rationale of Sola Basic does not warrant engrafting a uselessness requirement onto Gerling's policies concerning property damage under the facts of this case. Moreover, the disjunctive phrasing of the Wisconsin rule, diminished in value or made useless, permits a loss of use to be recognized in a situation where the property in question is not rendered useless but rather is simply lessened in value through a contraction of its usefulness. The failure of the loss-of-use provision of the Gerling policies to specify the extent of the loss of use, whether complete uselessness or diminishment in value for a particular purpose, means that, at a minimum, the provision is ambiguous and therefore due to be construed against Gerling under the circumstances of this case. See Georgia Farm Bureau Mut. Ins. Co. v. Meyers, 249 Ga.App. 322, 548 S.E.2d 67 (2001); Cherokee Credit Life Ins. Co. v. Baker, 119 Ga.App. 579, 168 S.E.2d 171 (1969). We believe that the approach of the cases cited by the circuit court, where the courts involved addressed the definition of property damage under the particular facts before them, is more appropriate than a rigid rule of uselessness that would not accommodate a fact situation involving a diminishment in value. Thus, construing the loss-of-use provisions of its policies most strictly against Gerling, we conclude that the circuit court was correct in determining that Gerling owed coverage for Wheelwright's loss of use of its tractors as a result of the failure of Dorsey's trailers. Gerling also argues that Wheelwright's damages are excluded by provisions in its policies designed to exclude business risks by Dorsey. Those exclusions include exclusions for damage to your product, damage to your work, damage to impaired property, and recall of products, work or impaired property. Gerling asserts that the exclusions deny Dorsey coverage for the failure of its trailers to meet the requirements of its contract with Wheelwright. Gerling further argues that its insurance polices provide coverage for tort liability for injury to persons and damage to other property[,] and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained, quoting Sapp v. State Farm Fire & Casualty Co., 226 Ga.App. 200, 205, 486 S.E.2d 71, 75 (1997). Gerling characterizes Wheelwright's claims as claims for economic losses arising from Dorsey's failure to build Wheelwright's trailers to the required contractual specifications. The circuit court specifically held, however, that Wheelwright lost the use of its tangible propertyits tractorsfor the purpose of hauling concentrated loads of 45,000 to 50,000 pounds. Despite Gerling's arguments that Wheelwright's claims are entirely contractual, we note that Wheelwright's claims, from the outset, have included claims based on fraud, negligence, and the AEMLD. With respect to the business-risk exclusions, the circuit court stated: All of the policies state the insurance does not apply to `property damage to your product arising out of it or any part of it.' The Insurers contend that this exclusion precludes coverage for damages relating to the Dorsey trailers, such as the cracking, the de-arching, and the loss of use of the trailers. The Insurers further argue that Wheelwright is merely claiming damages as a loss of use of its tractors, as opposed to the Dorsey trailers, in order to avoid the effect of the `your product' exclusion. The testimony demonstrates, however, that Wheelwright in fact suffered damages as a result of the loss of use of its tractors for hauling the higher paying heavy steel coil freight. The trailers are, in a sense, a component part of the larger tractor-trailer units. The defect and cracking in the trailers rendered the tractors less useful and less profitable. This `property damage' is separate and apart from the damage to the trailers themselves. Courts in Alabama and Georgia have recognized that damages from the loss of use of tangible property relating to the insured's product is covered under general liability policies. The circuit court cited Fitness Equipment, Andalusia Ready Mix, and Truitt Oil, supra, and concluded that the exclusions for damage to Dorsey's trailers did not exclude coverage for Wheelwright's claims based on the loss of use of its tractors. We agree. With respect to the damage-to-impaired-property exclusion, the circuit court stated: The impaired property exclusion excludes property damage to `property that has not been physically injured, arising out or a defect, deficiency, inadequacy or dangerous condition in your product.' While this `impaired property' exclusion would appear initially to negate coverage for the loss of use of Wheelwright's tractors, since they are not physically injured, the exclusion contains its own definitional exception. The `impaired property' exclusion states that it `does not apply to the loss of use of other property arising out of sudden and accidental physical injury to your product... after it has been put to its intended use.' Wheelwright correctly points out that this definitional exception applies in this case. In particular, the loss of use of Wheelwright's tractors arose out of a sudden and accidental physical injury to the Dorsey trailers after they were put to their intended use. After Wheelwright placed the Dorsey trailers into service, they suffered sudden and accidental physical injury in the form of cracking, buckling, and de-arching. Therefore, the `impaired property' exclusion does not negate coverage in this case. Although we have rejected the circuit court's determination that the cracking of the trailers was the occurrence in this case, our determination that the failure of the trailers to haul concentrated loads is properly characterized as the occurrence does fit within the circuit court's rationale. In this case, the failure by the trailers was both sudden and accidental, both in terms of the initial failure of particular trailers and in terms of the discovery that all of the Dorsey trailers were flawed. See Claussen v. Aetna Cas. & Sur. Co., 259 Ga. 333, 380 S.E.2d 686 (1989)(holding that the word sudden in a pollution-exclusion clause in a general liability insurance policy was ambiguous, i.e., was capable of more than one reasonable interpretation, and therefore would be interpreted in favor of the insured to mean unexpected and unintended). See also Alabama Plating Co. v. United States Fid. & Guar. Co., 690 So.2d 331 (Ala.1996), and United States Fid. & Guar. Co. v. Armstrong, 479 So.2d 1164 (Ala.1985)(both cases holding that the word sudden is ambiguous and may be construed against the drafter of the policy; Alabama Plating holding that the word sudden may properly be considered to mean unexpected). Accordingly, the circuit court's summary judgment for Wheelwright against Gerling is due to be affirmed, subject to the determination of the extent to which Dorsey satisfied its SIR obligations for calculating the setoff of the SIR amount of each Gerling policy.