Opinion ID: 3009707
Heading Depth: 2
Heading Rank: 3

Heading: Tangible Property

Text: We need not reverse, however, if the LMS was not tangible property within the meaning of the insurance contract. Although the underlying complaint may have potentially alleged that the LMS existed as a tangible entity, at the time The Home disclaimed coverage for Lucker's complaint against Grede it was apparent that the LMS itself was not tangible at the time the castings failed. The LMS design did exist, however, and the complaint potentially pled that Lucker had lost the use of its design after the castings had failed.0 Thus, we must determine whether a design is tangible property as that term is used in a CGL.0 We 0 The LMS designs and plans existed prior to the catastrophic failure of Grede's product. They were used previously in AmClyde's Placid Oil Project, the Conoco Project, and the Akashi Bridge Project in Japan. The existence of the design was also apparent from the complaint. 0 The Home has argued vigorously that since the underlying complaint sought only loss of profits and other economic losses, Lucker was not seeking damages for loss of use of tangible property. Economic harms, The Home argues, are simply not tangible. While such an observation may be correct, it misunderstands the nature of the losses Lucker was seeking from Grede. Lucker was not seeking compensation for economic losses qua economic losses; rather, Lucker was pointing to its economic losses as a proxy for the value of the lost use of its LMS design. Even the cases on which The Home relies recognize that an intangible economic loss, such as the diminution of value of a fixed asset, is recoverable if it provides a measure of damage to the tangible property. See Liberty Bank of Montana v. Travelers Indem. Co., 870 F.2d 1504, 1509 (9th Cir. 1989); Giddings v. Industrial Indem. Co., 112 Cal. App. 3d 213, 219, 169 Cal. Rptr. 278, 281 (1980) (a complaint seeking to recover for economic 24 conclude that the language of the policy, analogous case law from Pennsylvania and Wisconsin, and case law from other jurisdictions compel the conclusion that the term tangible property does not include non-tangible property like system designs. Under Pennsylvania and Wisconsin law, tangible property is property that can be felt or touched, or property capable of being possessed or realized. In re Estate of MacFarlane, 459 A.2d 1289, 1291-92 (Pa. Super. 1983); see also United States Fidelity & Guar. Co. v. Barron Indus., Inc., 809 F. Supp. 355, 360 (M.D. Pa. 1992) (the term tangible in a CGL covers things which are physical -- capable of being touched and objectively perceivable); Holsum Foods, Div. of Harvest States Coop. v. Home Ins. Co., 469 N.W.2d 918, 921 (Wis. Ct. App. 1991) (similar approach). In contrast, intangible property is defined as property that does not have intrinsic value but which is merely representative or evidence of value, like stock certificates. MacFarlane, 459 A.2d at 1292; Barron Indus., 809 F. Supp. at 360 (under Pennsylvania law CGL policy does not cover intangible property, such as property that represents value but has no intrinsic marketable value of its own (e.g., stock, investments, losses falls within the scope of the insurance coverage only where these intangible economic losses provide a measure of damages to physical property which is within the policy's coverage) (internal quotation omitted). In this case, Lucker lost the use of its LMS design. The absorbed costs of beefing up its specifications for the steel in the LMS and the other costs it recovered from Grede are a proxy for the value of the lost use of the original LMS design. As such, they are recoverable under the policy if the LMS design was tangible property. 25 copyrights, promissory notes); property regarded as intangible rights (e.g., goodwill and reputation); or economic interests (e.g., overhead, profits, investment value, and productivity)); Columbia Gas Transmission Corp. v. Commonwealth, 339 A.2d 912, 918 (Pa. Commw. Ct. 1975) (natural gas is tangible property for tax purposes even though it cannot be felt because it is capable of being perceived as materially existent; [i]ntangible properties in the law are such incorporeal rights as shares of capital stock, choses in action, copyrights and the like), error dismissed, 350 A.2d 193 (Pa. Commw. Ct. 1975), rev'd on other grounds, 360 A.2d 592 (Pa. 1976); Palmolive Co. v. Conway, 43 F.2d 226, 227 (D. Wis. 1930) (trademarks, trade secrets, and good will not tangible property), aff'd, 56 F.2d 83 (7th Cir. 1932), cert. denied, 287 U.S. 601, 53 S. Ct. 8, 77 L. Ed. 524 (1932); American Tel. & Telegraph Co. v. Department of Revenue, 422 N.W.2d 629, 631 (Wis. Ct. App. 1988) (cash, shares of stock, notes, bonds, etc., not tangible as defined in tax statute). But see Man, Levy & Nogi, Inc. v. School Dist. of Scranton, 375 A.2d 832, 834 (Pa. Commw. 1977) (insurance premiums are tangible property for tax purposes).0 0 The distinction between tangible and intangible property made by these cases tracks the definitions found in Black's Law Dictionary. Black's defines tangible property as property that has physical form and substance and is not intangible and intangible property as such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stock, bonds, promissory notes, copyrights, and franchises. Black's Law Dictionary (6th ed. 1990). Insurance companies reasonably might want to exclude coverage for damage to such intangible interests because estimating the potential liability for purposes of setting the 26 Because these principles are so well settled, Lucker does not argue that the concept of the LMS is tangible property, for such an idea cannot be touched and is not materially existent. Rather, Lucker contends that a design which is reduced to a tangible medium, like a blueprint or a computer disk, should be considered tangible property. The Home, on the other hand, argues that where the real value of a design is in the idea, not in the physical plans that memorialize it, any loss in value of the design represents a loss in the value of the idea, which is not a loss of use of tangible property. We believe that The premium might be very difficult, or even if the premium could be calculated, insuring against such liability might expose the company to such increased costs because of a great variance in liability that a CGL policy might become prohibitively expensive. It may also be that insurance companies are in no better position to insure against such losses than the insured. For example, assuming that the stock is publicly traded, one can insure against changes in market price by purchasing options. We note, however, that it is difficult to explain why liability for copyright or patent infringement would be included among the interests not covered by a CGL policy. There is no obviously increased moral hazard problem (an insufficient incentive to be careful) with respect to copyright or patent infringement as compared to other types of injuries. Nor does it appear to raise the possibility of huge liability, or liability that is difficult to calculate. And it does not appear that the marketplace provides an efficient alternative to an insurance policy as it does with things like stocks. Perhaps exclusion of coverage for copyright or patent violations can be explained by the fact that the CGL policy is a standard form and most customers of such policies are not as risk averse with respect to copyright and patent violations as they are with other types of tort damages and so they do not demand coverage for such injuries. At all events, it appears sensible to presume that purchasers of liability insurance, who are principally concerned with more conventional forms of tort damage that their product may cause a third party, reasonably would be willing to bear the risk of loss to traditionally intangible interests in exchange for lower premiums. 27 Home's position is the one best supported by the relevant case law. The Home principally relies on a taxation case from Wisconsin which held that the sale of computer keypunch cards was not a sale of tangible property for purposes of the Wisconsin sales tax. See Janesville Data Center, Inc. v. Wisconsin Dep't of Revenue, 267 N.W.2d 656, 658-59 (Wis. 1978). In Janesville, the Wisconsin Supreme Court reasoned that the information on the card, rather than the card itself, was the object of the transaction, and that, the tangible medium keeping the information was merely incidental to the transaction. Id. Therefore, the court held, the sale of the keypunch cards was not a sale of tangible property. Id.0 Lucker has cited no authority from the relevant jurisdictions. Instead it has countered with a Minnesota case, Retail Sys., Inc. v. CNA Ins. Cos., 469 N.W.2d 735 (Minn. Ct. App. 1991), which held that a computer tape that stored information was tangible property covered under a liability policy, and a case from the United States District Court for the Northern District of Georgia, State Farm Fire & Casualty Ins. Co. 0 The other case on which The Home places principle reliance, Gulf Insurance Co. v. L.A. Effects Group, Inc., 827 F.2d 574 (9th Cir. 1987), does not really advance The Home's position. In that case, L.A. Effects was sued by Twentieth Century Fox for failing to perform adequately in designing the special effects for the film Aliens. Although L.A. Effects' argument that Fox's damages amounted to a loss of use of Aliens was rejected, Fox did not allege as damage any diminution in value to the film. Id. at 577-578. Thus the issue presented here was not before that court and consequently that court did not hold that the loss of value of the film could not be loss of use of tangible property. 28 v. White, 777 F. Supp. 952 (N.D. Ga. 1991), which held that architectural plans in blueprint form were tangible property covered under a CGL policy. Neither Retail Systems nor White extended the concept of tangible property as far as Lucker would have us do here, however. In Retail Systems the court limited the coverage to the considerable value of the computer tape as a storage medium, disallowing recovery for the value of the data it stored. Similarly, in White, a case in which developers sought coverage for costs they incurred in converting architectural drawings, the district court recognized that the only recovery due the developers under the policy was for the value of the paper and ink, and not the value of the ideas the paper and ink embodied. 777 F. Supp. at 954-55. Both cases drew a sharp distinction between recovery for the value of a tangible medium storing ideas, and recovery for the ideas themselves.0 To the extent that the damage had been merely to the value of the idea, it was not damage to tangible property. In this case, none of the losses Lucker sought from Grede represented a loss in value of the storage medium in which the design for the LMS was embodied or in the costs in reducing the design to blueprints or computer tape (e.g. the costs of 0 Other courts have also seen such a distinction. See, e.g., Commonwealth of Massachusetts v. Rizzuto, 1980 WL 4637 (Mass. Super. 1980) (Commonwealth could not prosecute for theft a defendant that copied someone else's idea for a film because the idea, although reproduced in tangible form and capable of being reproduced into tangible form, was not itself tangible; distinction must be drawn between cause of value and thing of value). 29 having engineers draw up the plans for the system). The recovery Lucker sought was for the loss of use of the design itself -- for the loss in usefulness of the original concept of the LMS. The loss of use of this concept, however, was not loss of use of something which could be touched or felt. For this reason, we hold that Lucker's loss of use of the LMS design was not loss of use of tangible property. We note, however, that the tangibility limitation in the standard form CGL seems to be in tension with what we believe is its underlying rationale. As far as we can tell, the CGL limits coverage to tangible property to avoid indemnifying the insured for any liability the insured faces for damage caused to stocks, bonds, copyrights and the like, items for which either the insurer is arguably in no better position to spread risk than the insured, or which would dramatically increase the premiums.0 But by making tangibility the touchstone of coverage, the CGL excludes a significant class of property for which liability insurance reasonably could be provided --property like system designs or computer software. The tangibility limitation was probably a reasonable way to separate insurable from non-insurable property interests in 1973 when the CGL standard policy was drafted. But the tremendous increase in automation, and the concomitant increase in demand for intangible products like computer software and system designs during the past twenty years, has made such a 0 See note 13 above. 30 limitation of questionable value. As a matter of risk spreading, we see no qualitative difference between the need for insurance to protect a manufacturer from liability incurred because its product shuts down a furnace, damages a computerized billing system, or, as in this case, devalues a system design.0 Nevertheless, we are bound by the language of the policy, and we cannot stretch it to include non-tangible property like the LMS design. Unlike loss of use, which can plausibly be construed to include loss of customer acceptance, it would require too great a departure from the meaning of tangible to hold that a system design is tangible property covered under the policy. Therefore, because the LMS design was not tangible property, there was no property damage and thus no coverage under the policy for Lucker's loss. As a result, we agree with the district court that The Home did not breach its duty to defend Grede when it disclaimed coverage.0