Court Opinion

ID: 9483300
Source: CourtListenerOpinion
Date Created: 2023-08-05 09:16:26.698568+00
Date Added: 2024-06-11T17:49:32.464113
License: Public Domain

CUDAHY, Circuit Judge,
dissenting.
The majority holds that “physical injury to tangible property” occurs when a defective product is incorporated into a larger structure rather than when the product malfunctions, causing physical damage to the structure. The court’s analysis is impressive. I remain somewhat dubious, however, about its ultimate conclusion regarding what the parties intended by the phrase “physical injury.” The ultimate reason I feel compelled to dissent — respectfully, of course — is that I read the Illinois cases differently than the majority reads them.
There is immediately something counter-intuitive about saying that physical injury has been done to a house in which a functioning plumbing system has been installed. Of course when we determine later (years later) that a good number of the systems will fail — five percent in this case — then perhaps there is a sense in which the “injury” was present from the moment of installation: this is the majority’s “ticking time bomb” metaphor. But is there physical injury? The majority believes that interpreting the phrase is all a matter of emphasis — “physical injury” versus “physical injury." In my view, the phrase must be interpreted as “physical injury,” with both words given effect. The majority’s account cannot give both words meaning at the same time. Something physical occurs when the plumbing is installed — but it is not injury; and we might say that there is injury (of a sort) when the plumbing is installed — but it is not physical.
But I am not one to get too bogged down in assertedly “plain” or “objective” language. The majority properly relies on the purpose of insurance: spreading risks. That purpose, however, does not extend to risks that were not bargained for ex ante. (When courts impose risks on insurers that were not paid for by the insured, other insureds will ultimately pay in the form of higher premiums.) The question, then, is what the parties contemplated when they *815contracted for insurance to cover “physical injury.” It is worth noting in this regard that the relevant parties are Eljer, Liberty Mutual and Travelers — not the drafters of the CGL standard policy. I am not at all convinced that these parties intended to refer to the installation of plumbing systems that would fail years later. As counsel for Travelers explained at oral argument, Eljer could have purchased other kinds of insurance that would have covered risks from installation — although we can safely assume that the costs of such insurance would have been higher. See, e.g., Qualls v. Country Mutual Ins. Co., 123 Ill.App.3d 831, 78 Ill.Dec. 934, 937, 462 N.E.2d 1288, 1291 (4th Dist.1984) (“Finding coverage for the cost of replacing or repairing defective work would transform the [CGL] policy into something akin to a performance bond.”). Indeed, as Eljer’s plumbing systems began to leak, its ordinary “physical injury” insurance premiums jumped, and Eljer was soon unable to afford the insurance. This is unfortunate for Eljer, and it may point to problems in the structure of insurance markets; but it does not support an argument that “physical injury” occurs at the point of installation instead of the point of physical failure.
Another difficulty with the majority’s approach is its reliance on the indeterminate notion of a “defective” product to perform the function of the word “physical.” In this case the Qest system’s failure rate was five percent, so perhaps we could say that each system installed was “defective.” But all products have some failure rate. If a product has a failure rate of one percent, or one-tenth of one percent, is it “defective” such that it caused “physical injury” when installed?
Most importantly, I do not agree with the majority that the Illinois courts have left this issue open. First, both the First District appellate court and the Illinois Supreme Court indicated in United States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 193 Ill.App.3d 1087, 140 Ill.Dec. 907, 550 N.E.2d 1032 (1st Dist.1989), aff'd, 144 Ill.2d 64, 161 Ill.Dec. 280, 578 N.E.2d 926 (1991), that the “physical injury” definition of property damage in the 1973 CGL policy was narrower than the “injury” language in the 1966 policy. The appellate court noted that “there is an additional requirement of physical injury under the first prong of the [1973] definition,” 140 Ill.Dec. at 912, 550 N.E.2d at 1037, and the Illinois Supreme Court characterized the 1973 version as “the strictest definition of property damage,” 161 Ill.Dec. at 285, 578 N.E.2d at 931. Next, the appellate court’s analysis in Wilkin must be considered. In the crucial passage, the court distinguishes three cases that stand for the proposition that mere incorporation of a defective product does not result in “physical injury” as required by the policy definition. How does it distinguish them? It points to the peculiar character of the incorporated product in the case before it — asbestos—which does physical damage from the moment of installation:
exposure to asbestos has been described as a continuing physical harm because of the continuous release of the friable asbestos fibers....
[incorporation of the asbestos did result in injury to tangible property. The incorporation of the asbestos physically altered the property in such a manner so as to render the various structures harmful until abatement procedures may be undertaken.
140 Ill.Dec. at 913, 550 N.E.2d at 1038 (emphasis added). The court then cites one of its earlier decisions, in which it held that the installation of asbestos constituted physical injury because it “contaminated the school buildings with asbestos fibers ... [and] threatens a substantial and unreasonable risk of harm by releasing toxic substances into the environment....” Board of Education v. A, C & S, Inc., 171 Ill.App.3d 737, 121 Ill.Dec. 643, 649, 525 N.E.2d 950, 956 (1st Dist.1988), aff'd in relevant part, 131 Ill.2d 428, 137 Ill.Dec. 635, 546 N.E.2d 580 (1989). As the majority notes, the court’s opinion is not a model of clarity. But it is clear enough that the court does not rely on mere incorporation of the asbestos into buildings; it emphasizes the physical contamination from the asbestos which begins at the point of installation.
If the appellate court’s decision in Wil-kin is not clear enough, the Illinois Su*816preme Court’s opinion in that case is. There the court found “physical injury” to property only by virtue of the fact that the buildings and their contents were “contaminated by toxic asbestos fibers.” 161 Ill.Dec. at 285-86, 578 N.E.2d at 931-32. In the case before us, this “contamination” standard translates into a conclusion that there is no physical injury until the Qest system leaks. The majority suggests that the Wilkin court’s use of the “contamination” approach does not imply a rejection of a different approach. There might be something to this point — except that it is belied by analysis later in the opinion. The court proceeds to consider whether there was an “occurrence,” defined in relevant part as “an accident ... which result[s] in property damage ... neither expected nor intended from the standpoint of the insured.” The insurance company had argued that Wilkin (the insured) “intentionally installed asbestos-containing products with knowledge of the products’ threat to human health” and that the risk was therefore expected or intended from Wilkin’s standpoint. The Illinois Supreme Court rejected the argument:
Plaintiffs misread the definition of “occurrence” contained in the policies. Under this definition, it is the “property damage” which must be “neither expected nor intended from the standpoint of the insured.” Therefore, it is the contamination of the buildings and their contents that must be neither expected nor intended by Wilkin. We have reviewed the underlying complaints and are unable to find any allegations that Wilkin “expected or intended” to contaminate the buildings and the contents therein with toxic asbestos fibers.
161 Ill.Dec. at 286, 578 N.E.2d at 932 (emphasis added). The passage may seem innocuous at first, but in fact it reveals that the Illinois Supreme Court adopted the “contamination” theory of physical injury exclusively. The court thus held that mere installation (plus risk) does not constitute property damage (defined as physical injury), but that contamination does constitute property damage.
The majority notes that other decisions of the Illinois courts do not provide particularly clear guidance, and I agree. I must disagree, however, with the court’s reading of these cases and the guidance that they do provide. The majority finds support in Marathon Plastics, Inc. v. International Ins. Co., 161 Ill.App.3d 452, 112 Ill.Dec. 816, 514 N.E.2d 479 (4th Dist.1987), in which the Fourth District appellate court relied on two cases decided under the pre-1973 CGL standard policy to find that the installation of a defective water pipe system was property damage. On the other hand, in Bituminous Casualty Corp. v. Gust K. Newberg Construction Co., 218 Ill.App.3d 956, 161 Ill.Dec. 357, 578 N.E.2d 1003 (1st Dist.1991), the First District appellate court held that the installation of a defective heating, ventilation and air conditioning (HVAC) system at the State of Illinois Center was not property damage. I cannot agree with the majority that Bituminous Casualty is not an incorporation case. It is difficult to imagine that such an HVAC system did not become an integral part of the building upon installation. Indeed, the construction company had alleged that “during the repair work, walls, ceilings and other portions of the building had to be removed and replaced or repaired.” 161 Ill.Dec. at 360, 578 N.E.2d at 1006. The court’s refusal to find coverage under the policy turned on the fact that “only economic losses” — such as loss of value— were alleged. Id. at 362, 578 N.E.2d at 1008. The court held that mere installation of the defective HVAC system did not constitute property damage under the 1973 policy language (“physical injury”) because “there is no physical detrimental effect to the State of Illinois Center. We do not find this case analogous to the toxic fibers permeating the school buildings in Wilkin.” Id. at 364, 578 N.E.2d at 1010 (emphasis added).
But Bituminous Casualty does seem to adopt an analysis that conflicts with Marathon Plastics. How should this conflict be resolved? I think that Bituminous Casualty should ultimately carry the day. First, it is the more recent case, decided just last year. Second, it discusses, and makes sense of, the Wilkin decisions. And third, the analysis contained in Marathon Plastics is questionable (especially after *817the Wilkin decisions). The Marathon Plastics court’s reliance on pre-1973-policy incorporation cases is based on the premise that the new definition of property damage is “virtually identical” to the old one — a proposition not accepted by the Wilkin courts. Additionally, the court seems to forget that it is applying the new definition when it concludes: “Therefore, even though no physical injury occurred to the water system, we find that due to the diminution in value to the system caused by the leaks, property damage has occurred.” Marathon Plastics, 112 Ill.Dec. at 822, 514 N.E.2d at 485 (emphasis added). The court fails to make any attempt (unlike the majority’s valiant and plausible effort) to fit the notion of installation into the definition of “physical injury.”
Were we writing on a clean slate, I might well agree that “physical injury” occurs when a defective product is installed. The majority concludes that what we are writing on is something very close to a clean slate — and I cannot say that that characterization is completely off the mark. But in the end I think the cases provide enough guidance to call for affirmance. Therefore, I reluctantly but respectfully dissent.