Silgan Containers LLC v. National Union Fire Insurance Co. of Pittsburgh, PA

Filing 148


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**E-filed 10/3/11 ** 1 2 3 4 5 6 7 IN THE UNITED STATES DISTRICT COURT 8 FOR THE NORTHERN DISTRICT OF CALIFORNIA 9 SAN FRANCISCO DIVISION 11 For the Northern District of California United States District Court 10 12 No. C 09-5971 RS SILGAN CONTAINERS, LLC, Plaintiff, v. 13 14 15 16 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, P.A, et al., ORDER GRANTING SUMMARY JUDGMENT FOR DEFENDANT NATIONAL UNION AND RESOLVING ALL OTHER PENDING MOTIONS Defendants. ____________________________________/ 17 18 19 I. INTRODUCTION Silgan Containers, LLC (“Silgan”), plaintiff in this insurance coverage dispute, manufactures 20 cans for commercial producers of canned food goods. In 2005 and 2006, Silgan’s customer Del 21 Monte became concerned that an abnormally high number of Silgan’s cans packed with tomato 22 products were experiencing premature failure. After an investigation discovered a possible defect in 23 the cans’ lining, Del Monte destroyed its remaining inventory and presented a multimillion dollar 24 claim to Silgan, which then tendered to its primary liability insurer, Liberty Mutual Fire Insurance 25 Company (“Liberty Mutual”). Liberty Mutual paid its policy limits of $1.5 million, less a $250,000 26 deductible. Silgan’s excess insurer, defendant National Union Fire Insurance Company of 27 Pittsburgh, P.A. (“National Union”) declined to cover Silgan’s remaining liability to Del Monte of 28 approximately $4 million. 1 Silgan initiated this action against National Union, which has cross-claimed against Liberty, 2 arguing that Del Monte’s claim should have been treated as more that one “occurrence,” such that 3 Liberty Mutual would have additional exposure. Silgan has also amended its complaint to include 4 Liberty Mutual as a defendant, although it continues to allege that Liberty Mutual has fulfilled all its 5 contractual obligations. By cross-motions, the parties now each seek summary judgment in whole 6 or in part. Because Silgan cannot show that Del Monte’s claims against it arose from “property 7 damage” within the meaning of the National Union policy, summary judgment will be granted to 8 National Union, thereby also effectively rendering the claims against Liberty Mutual moot. 9 II. BACKGROUND 11 For the Northern District of California United States District Court 10 Del Monte produces, distributes, and markets tomato products, which it packs in cans each 12 summer between July and October. Silgan manufactured and supplied the cans into which Del 13 Monte packed its tomato products in 2005 and 2006 (“the 2005 Pack and 2006 Pack”). All such 14 cans were manufactured under the same process at Silgan’s facility using specifications provided by 15 Del Monte. 16 In August of 2006, in the middle of that year’s packing season, Del Monte reported problems 17 with the cans used in the 2005 Pack, including swelling, corrosion, loss of vacuum, pitting, and 18 resulting discoloration and metallic taste of the product. In April of 2007, Del Monte informed 19 Silgan it was experiencing the same problems with the 2006 Pack. 20 Silgan and Del Monte conducted a joint investigation into the cause of the problems. While 21 the investigation never uncovered the underlying cause of the cans’ defect, the source of the 22 symptoms was determined to be defective interior coating, which resulted in a chemical reaction 23 between the tomato products and the cans. 24 The problems with the cans were progressive, in that the failure rate increased over time 25 from when the tomato products were packed. Given the truncated can shelf life and escalating 26 failure rate, Del Monte ultimately elected to destroy its remaining inventory of the 2005 and 2006 27 Packs. It then claimed damages from Silgan for the 2005 Pack in the amount of $758,470 and for 28 the 2006 Pack in the amount of $4,721,625. Del Monte recovered these sums from Silgan by 2 1 withholding payments on outstanding Silgan invoices for a total of $5,480,094. Silgan, in turn 2 sought indemnity from its insurers for this amount, together with $311,897 for sums it expended on 3 Del Monte’s behalf. 4 In its amended complaint in this action, Silgan asserts that the underlying Del Monte claim 5 arose out of a single “occurrence” and that Liberty Mutual has paid its per-occurrence limit. As a 6 result, Silgan seeks only declaratory relief with respect to Liberty Mutual, in the event National 7 Union prevails in its contention that Silgan did not exhaust its underlying coverage. Silgan seeks to 8 recover the balance of its claim from National Union, and damages for alleged bad faith. 9 III. LEGAL STANDARD 11 For the Northern District of California United States District Court 10 Summary judgment is proper “if the pleadings and admissions on file, together with the 12 affidavits, if any, show that there is no genuine issue as to any material fact and that the moving 13 party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The purpose of summary 14 judgment “is to isolate and dispose of factually unsupported claims or defenses.” Celotex v. Catrett, 15 477 U.S. 317, 323-24 (1986). The moving party “always bears the initial responsibility of 16 informing the district court of the basis for its motion, and identifying those portions of the 17 pleadings and admissions on file, together with the affidavits, if any, which it believes demonstrate 18 the absence of a genuine issue of material fact.” Id. at 323 (citations and internal quotation marks 19 omitted). If it meets this burden, the moving party is then entitled to judgment as a matter of law 20 when the non-moving party fails to make a sufficient showing on an essential element of the case 21 with respect to which he bears the burden of proof at trial. Id. at 322-23. 22 The non-moving party “must set forth specific facts showing that there is a genuine issue for 23 trial.” Fed. R. Civ. P. 56(e). The non-moving party cannot defeat the moving party’s properly 24 supported motion for summary judgment simply by alleging some factual dispute between the 25 parties. To preclude the entry of summary judgment, the non-moving party must bring forth 26 material facts, i.e., “facts that might affect the outcome of the suit under the governing law . . . . 27 Factual disputes that are irrelevant or unnecessary will not be counted.” Anderson v. Liberty Lobby, 28 Inc., 477 U.S. 242, 247-48 (1986). The opposing party “must do more than simply show that there 3 1 is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio, 2 475 U.S. 574, 588 (1986). The court must draw all reasonable inferences in favor of the non-moving party, including 3 Magazine, Inc., 501 U.S. 496 (1991) (citing Anderson, 477 U.S. at 255); Matsushita, 475 U.S. at 6 588 (1986). It is the court’s responsibility “to determine whether the ‘specific facts’ set forth by the 7 nonmoving party, coupled with undisputed background or contextual facts, are such that a rational 8 or reasonable jury might return a verdict in its favor based on that evidence.” T.W. Elec. Service v. 9 Pacific Elec. Contractors, 809 F.2d 626, 631 (9th Cir. 1987). “[S]ummary judgment will not lie if 10 the dispute about a material fact is ‘genuine,’ that is, if the evidence is such that a reasonable jury 11 For the Northern District of California questions of credibility and of the weight to be accorded particular evidence. Masson v. New Yorker 5 United States District Court 4 could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248. However, “[w]here the 12 record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there 13 is no ‘genuine issue for trial.’” Matsushita, 475 U.S. at 587. In these cross-motions, the parties are 14 largely in agreement that no material disputes of fact exist regarding the threshold issues of whether 15 there is coverage at all under the National Union policy, and whether Liberty Mutual correctly 16 treated the claim as one occurrence. The dispute, therefore, is primarily as to proper application of 17 the law to the facts.1 IV. DISCUSSION 18 19 A. National Union’s Motion for Summary Judgment and Silgan’s Cross-motion 20 As Silgan acknowledges, “[t]he burden is on the insured to establish that the claim is within 21 the basic scope of coverage.” MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635, 648 (2003). In 22 the policies it issued to Silgan, National Union undertook to “pay on behalf of the Insured those 23 sums in excess of the Retained Limit that the Insured becomes legally obligated to pay by reason of 24 liability imposed by law . . . because of . . . Property Damage . . . that takes place during the 25 Policy Period and is caused by an Occurrence happening anywhere in the world.” There is no 26 27 28 1 The parties are in agreement that California law applies to the insurance contracts in dispute. 4 1 dispute that the failure of the Silgan cans would satisfy the policy definition of “Occurrence”; the 2 question is whether there was “Property Damage.” The policies define that term two ways: 3 (1) “Physical injury to tangible property, including all resulting loss of use of that property. All such 4 loss of use shall be deemed to occur at the time of the physical injury that caused it; or (2) Loss of 5 use of tangible property that is not physically injured. All such loss shall be deemed to occur at the 6 time of the ‘occurrence’ that caused it.” Silgan contends it is entitled to coverage under either 7 prong.2 8 1. Physical Injury to Tangible Property 9 As an initial matter, Silgan does not and could not contend that the apparent defects in its cans constitute the requisite “physical injury to tangible property.” Silgan acknowledges that 11 For the Northern District of California United States District Court 10 Exclusion F of the policies excludes from coverage “Property Damage to Your Product arising out 12 of it or any part of it.” Silgan instead argues, as it must, that the defective cans caused physical 13 injury to the Del Monte tomato products placed in the cans. Silgan relies on evidence that when the 14 cans failed, the contents would undergo chemical changes, resulting in an unusual “metallic” taste, a 15 strange odor, a “foamy consistency,” and increased iron content. As a consequence, Silgan asserts, 16 this case is distinguishable from another action involving it, Del Monte, and National Union, where 17 defects in the “pull tab” opening devices on Silgan cans could not be said to have had any physical 18 effect on the Del Monte fruit packed in those containers. See Silgan Containers Corp. v. Nat’l 19 Union Fire Ins. Co. of Pittsburgh, Pa., 2010 WL 1267127 (N.D. Cal.) (“Silgan I”) (granting 20 summary judgment in favor of National Union on grounds that no “property damage” existed to 21 trigger coverage). The flaw in Silgan’s position, however, is the absence of any evidence that the large 22 23 numbers of cans discarded by Del Monte had in fact already failed. Indeed, Silgan forthrightly 24 25 26 27 28 2 National Union faults Silgan for simultaneously seeking coverage under both definitions, pointing out that they are necessarily mutually exclusive because the “loss of use” prong applies only where there is no physical injury to tangible property. Although Silgan’s argument conflates the two definitions to some degree, its intent appears to be to argue in the alternative—i.e., that either there was physical injury to the tomato products sufficient to trigger coverage, or, if not, then there was loss of use within the meaning of the policies. 5 1 admits that the cans were pulled from distribution because of a “risk” that they would develop 2 problems. In fact, a Del Monte witness testified that disposal of its remaining inventory was 3 necessary from its point of view because it could not “dud detect or systematically cull out the bad 4 product.” While there is evidence of a “severe” risk that virtually all of the cans would eventually 5 fail prior to the expiration of their normal shelf life, or at a minimum, that an unacceptably high 6 percentage of them likely would do so, Silgan has not even tried to show that the physical changes 7 to the tomato product on which it relies had already taken place in any significant portion of the cans 8 that were destroyed.3 That Silgan is attempting to rely on potential future physical damage to the tomato product is 9 further confirmed by its reliance on Eljer Manufacturing, Inc. v. Liberty Mut. Ins. Co., 972 F. 2d 11 For the Northern District of California United States District Court 10 805 (7th Cir. 1992). In Eljer, the majority concluded, over a vigorous dissent, that where defective 12 plumbing systems with a potential to leak and cause damage in the future had been installed in more 13 than a half million homes, the physical injury to tangible property should been seen as having taken 14 place at the time of installation, even though no leaking or damage to the residences had yet 15 occurred. See id. at 814. Eljer reached that conclusion based on an analysis of how the language in 16 form comprehensive general liability policies evolved, and the intended purposes of such insurance. 17 See id. at 810-812. 18 If Eljer represented California law, Silgan’s showing that the defects in its cans were likely 19 to cause future degradation of the tomato product might be sufficient to give rise to coverage here. 20 The California courts, however, have pointedly rejected the Eljer majority opinion, as have the 21 majority of other courts that have considered it. See F & H Construction v. ITT Hartford Ins. Co., 22 118 Cal.App.4th 364, 374–376 (2004) (“Eljer has been soundly rejected because it failed to give the 23 24 25 26 27 28 3 The possibility—or even probability—that appreciable physical damage to the tomato product had already occurred within at least some of the cans discarded by Del Monte does not give rise to an obligation on National Union’s part to provide coverage. Del Monte’s claim was not based on any such existing damage, but on Silgan’s failure to comply with its contractual obligation to provide cans conforming to shelf life and other specifications. Even assuming Silgan would have had the right to pass on to its insurers the portion of that claim involving damaged tomato product, it would be obliged to quantify the amount of product involved to meet its burden to establish a claim within the basic scope of coverage. 6 1 full and ordinary meaning to the policy’s definitional words ‘physical injury’ . . . . We find the 2 dissent in Eljer more persuasive; nor are we alone in that view.”); Watts Industries, Inc. v. Zurich 3 Am. Ins. Co., 121 Cal.App.4th 1029, 1044 (2004) (“Courts applying standard CGL policy language 4 generally agree that the incorporation of a defective component or product into a larger structure or 5 system does not constitute physical injury to tangible property, unless and until the defective 6 component physically injures some other tangible part of the larger system or the system as a 7 whole.” (emphasis added)). Silgan also contends that covered property damage may be found when the insured’s 8 9 defective product is “integrated” with or “incorporated” into some other product. For this proposition, Silgan relies on Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 11 For the Northern District of California United States District Court 10 Cal.App. 4th 847 (2000), Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 12 Cal.App.4th 1 (1996), and Watts Industries, supra, 121 Cal.App.4th 1029. As explained in Watts, 13 however, these decisions all turn on the fact that the insured’s product was hazardous, thereby 14 supporting the notion that the product as a whole became hazardous (and in that sense, damaged) at 15 the moment of incorporation. See 121 Cal.App.4th at 1044-45. Watts further observed that only in 16 such cases do the principles of Eljer have any force in California. Id at 1045-46. Here, there was 17 nothing hazardous about Silgan’s cans in and of themselves. Indeed, there is not even any evidence 18 that the types of changes Silgan asserts the tomato product was likely to undergo presented any 19 serious health hazard. Accordingly, there is no basis to find property damage merely from the fact 20 that the cans and tomato product were “integrated” or “incorporated,” particularly where, even 21 under the most favorable view of the evidence, any danger did not arise until some point later in 22 time.4 23 24 25 26 27 28 4 In support of its “integration” argument, Silgan invokes one case not involving adulteration with a contaminant posing a hazard from the outset—Goodyear Rubber & Supply Co., Inc. v. Great Am. Ins. Co., 471 F. 2d 1343 (9th Cir. 1973). Goodyear, however, involved an older version of the standard liability policy form that did not require physical injury to tangible property. See 471 F. 2d at 1344. As the Ninth Circuit has explained, the policy language present in this case triggers a different analysis. See New Hampshire Insurance Co. v. Vieira, 930 F.2d 696, 699 (9th Cir. 1991). 7 1 2. Loss of Use 2 As noted, Silgan argues in the alternative that property damage exists under the prong of the 3 definition providing coverage where there is “loss of use” without physical damage.5 The two 4 cases to which Silgan points in which coverage or at least a duty to defend was found under the loss 5 of use definition both involved defective electronic components that caused the devices into which 6 they were installed to be inoperable. See Semtech Corp. v. Royal Ins. Co. of America, 2005 WL 7 6192907, *5 (C.D. Cal. 2005) (defective chips installed on motherboards caused servers to shut 8 down periodically); Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F.3rd 1049 (9th Cir. 9 2002) (defective circuit boards rendered scanners inoperable). Neither of these cases involved products that were taken off the market because they were expected to fail, both involved lost use 11 For the Northern District of California United States District Court 10 arising from actual failures. 12 It may very well be that Del Monte, in a reasonable exercise of business judgment, 13 concluded that it could not use the canned tomato products in the manner in which it had intended. 14 As National Union points out, however, there is no evidence that the products were wholly 15 unusable. To the contrary, the evidence is only that the tomato products likely were to become 16 unusable, thereby preventing Del Monte from selling them at full price through its normal 17 distribution channels. The canned goods may have lost most, or even all, of their economic value by 18 the time Del Monte destroyed them, but as discussed above, there is no indication that the tomato 19 product could not be safely consumed at that point in time. Commercial liability insurance does not protect against the risk of inferior or defective 20 21 workmanship. F & H Construction, 118 Cal.App. 4th at 377. By failing to provide cans capable of 22 meeting the contractual shelf life expectations, Silgan incurred contractual liability for the loss in 23 economic value of the canned goods. That does not support a conclusion, however, that there was 24 property damage to the tomato product even under the loss of use prong of the policy definition. 25 5 26 27 28 Silgan’s own motion mentions “loss of use” only in passing, and blurs the distinction between the two definitions. While coverage under the “physical injury to tangible property” prong encompasses any resulting loss of use of the property, loss of use without physical injury is not a subset of that prong; it is a separate basis for finding “property damage.” Silgan’s opposition to National Union’s motion addresses the two prongs separately, with greater clarity. 8 1 In the absence of property damage within the policy definition, the potential applicability of 2 any exclusions under the policy terms need not be evaluated. Likewise, National Union’s additional 3 contentions with respect to whether the policy limits of Silgan’s primary insurers can be deemed to 4 have been exhausted and its challenges to various aspects of Del Monte’s claim are all moot. 5 Having prevailed on the threshold issue of the definition of “property damage,” National Union is 6 entitled to summary judgment in its favor as to all of Silgan’s claims against it. Conversely, 7 Silgan’s cross motion for partial summary judgment must be denied. 8 9 The claims between Liberty Mutual and the other parties all sound solely in declaratory 11 For the Northern District of California United States District Court 10 B. Liberty Mutual’s Motion for Summary Judgment relief, and arise from National Union’s contention that Liberty Mutual improperly treated Del 12 Monte’s claim as a single “occurrence,” thereby limiting its indemnity obligation to Silgan. As 13 between Liberty Mutual and National Union, the fact that National Union has been found not to be 14 liable to Silgan removes any basis for it to challenge Liberty Mutual’s interpretation of its policy 15 obligations. 16 The granting of National Union’s motion would not, standing alone, necessarily preclude 17 Silgan from contesting that Liberty Mutual fully performed its obligations under its policies. 18 Silgan’s amended complaint, however, expressly alleges that Liberty Mutual has no further liability, 19 and it did not oppose Liberty Mutual’s motion for summary judgment seeking such a determination. 20 Accordingly, there is no existing controversy between Silgan and Liberty Mutual and Silgan, and its 21 motion for summary judgment will be granted. 22 23 C. Other Pending Motions 24 In conjunction with the briefing on the summary judgment motions, Silgan filed two 25 “motions in limine” to strike the declarations of National Union’s expert witnesses, Peter Cocotas 26 and Kenneth R. Neumann. As discussed at the hearing, to the extent these motions were based on 27 alleged failures to comply with discovery obligations, they should have been presented to the 28 9 1 assigned magistrate judge in the first instance. In light of the fact that summary judgment is now 2 being entered, the question of whether these witnesses should be permitted to testify at trial is moot. 3 The motion regarding Cocotas, however, also challenged the admissibility of the opinions he 4 offered, on grounds that they were not based on any special expertise or testing that would warrant 5 expert testimony. Because Cocotas appears to have merely summarized underlying testimony and 6 evidence, this order has not relied on any opinions or conclusions he proffered, and instead is based 7 on the underlying record. 8 9 Silgan’s administrative motion to file supplemental materials under seal (Dkt. No. 125) is granted. Although, as reflected above, the materials do not alter the analysis, National Union is not prejudiced by their inclusion in the record, and sufficient cause has been shown to maintain them 11 For the Northern District of California United States District Court 10 under seal. 12 The parties’ respective motions (Dkts. 137 and 145) to file additional materials related to 13 proceedings in the Ninth Circuit in the Silgan I matter are denied. The Court is aware that the 14 district court’s ruling was affirmed in a non-precedential memorandum disposition, that rehearing en 15 banc was denied, and that a petition for certiorari on a limited issue is pending. None of these 16 matters impact the conclusions above. 17 National Union’s motion for relief from a non-dispositive order of the magistrate judge (Dkt. 18 140) is granted on the sole ground that in light of the above disposition, no further discovery is 19 necessary or appropriate. National Union’s motion for leave to file a reply in support of that motion 20 (Dkt. 143) is denied as moot. 21 22 23 24 25 26 27 28 10 V. CONCLUSION 1 2 National Union’s motion for summary judgment is granted on grounds that the undisputed 3 facts establish the absence of any property damage within the meaning of its policies. Liberty 4 Mutual’s motion for summary judgment is granted on grounds that there is no longer an existing 5 controversy between it and either National Union or Silgan. The other pending motions are 6 resolved of as set forth above. A separate judgment will issue. 7 8 9 11 For the Northern District of California United States District Court 10 IT IS SO ORDERED. Dated: 10/3/11 RICHARD SEEBORG UNITED STATES DISTRICT JUDGE 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11

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