American Insurance Company The v. Crown Packaging International
Filing
56
OPINION AND ORDER granting in part and denying in part American's 27 Motion for Summary Judgment and granting in part and denying in part Crown's 29 Motion for Partial Summary Judgment. Signed by Senior Judge James T Moody on 8/24/2011. (rmn)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
THE AMERICAN INSURANCE COMPANY, )
Plaintiff,
)
)
v.
)
)
CROWN PACKAGING INTERNATIONAL, )
Defendant.
)
No. 2:05 CV 68
OPINION AND ORDER
During the times relevant herein, plaintiff, The American Insurance Company
(“American”), had in force a commercial general liability insurance policy (hereinafter,
the “CGL Policy,” “American Policy” or “Policy”) issued to defendant, Crown
Packaging International (“Crown”).1 Crown sells plastic containers manufactured by a
wholly-owned subsidiary, Polycon Industries.2 Crown’s largest customer, Ecolab,
bought an ongoing supply of the containers in which to package its liquid soap
products. Ecolab began experiencing problems with some of the containers already
The Policy, S64MZX80810962, is attached to American’s amended complaint
(DE # 52) as Exhibit A (DE # 52-2), and appears to be on the standard CGL form bearing
the copyright of the Insurance Services Office. See Sheehan Constr. Co. v. Cont’l Cas. Co.,
935 N.E.2d 160, 162 (Ind. 2010) (“Most CGL policies are written on standardized forms
developed by an association of domestic property insurers known as the Insurance
Services Office.”)
1
Crown’s subsidiary, Polycon Industries, was also a named insured under the
Policy. For the remainder of this discussion, the distinction between the parent and
subsidiary is irrelevant, and references to Crown should be understood to include
Polycon, and vice-versa.
2
1
filled with soap, and began deducting its expenses associated with the defective
containers from invoices from Crown. In other words, Ecolab began taking credits for
past purchases of defective containers against current purchases from Crown. The
parties refer to these credits as “chargebacks.”
Crown sought indemnification for the amount of the chargebacks from
American. American denied the claim, and filed the present case seeking a judgment
declaring that, for multiple reasons, its CGL Policy does not apply. Before the court for
resolution is American’s motion for summary judgment and Crown’s cross-motion for
partial summary judgment.
A. Factual Background3
Unless the context makes it clear otherwise, the following facts are not in dispute.
Crown has sold containers to Ecolab for approximately thirty-five years, and Ecolab is
Crown’s largest customer, accounting for thirty to thirty-five percent of Crown’s
The court’s method of citing to the electronic case file for this action must be
explained. Section B7.1.4 of the Nineteenth Edition of The Bluebook states that citations
to documents in the court’s CM/ECF system should use the document’s name (e.g.,
“Rubio Dep.”) and original internal pagination instead of the page number in the
CM/ECF header imprinted on the document. Of all the inanities foisted upon the legal
profession by The Bluebook, this one might take the cake. Documents filed with the
court often have no page numbers. In other cases, where the document consists of
multiple exhibits, it might contain multiple instances of internal page number sequences
of 1 - X. Thus, page 12 of the “Rubio Dep.” might be on physical page 60 of the
document, and it might be one of a dozen other page twelves in the document. The
CM/ECF system provides a unique document number for every filing, and assigns a
unique page number to every physical page of the filing. The combination of these two
numbers enables any reader with access to CM/ECF to easily find the exact information
cited, and so is the only information the court will provide.
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2
revenue. During the period relevant to this litigation—and as was their normal course
of business—Ecolab sent Crown blanket purchase orders approximating the quantity of
containers needed during a specific ensuing period of time. Crown would then make
daily and weekly shipments of the containers pursuant to the purchase orders. On
average, Ecolab purchased one million containers a month.
As part of the manufacturing process, Crown silk-screened graphics, for
example, the name of the product and directions for its use, on the containers using art
provided by Ecolab. After Ecolab received the containers, it filled them with its liquid
soap products, and printed a date code on them using an ink-jet printer. In February
2003, Ecolab began experiencing a problem with about 20% of the Crown containers,
causing the date code to fail to adhere and to be easily rubbed off (“the date-code
problem”). In June 2003, Ecolab notified Crown of an additional problem, that the silkscreened graphics put on the containers by Crown were flaking off of some of the
containers (“the graphics problem”). Both of the problems only became apparent after
Ecolab had filled the containers with its soap products.
Crown attempted to determine the reason for the date-code problem by renting a
printer from Ecolab like the ones Ecolab was using. Crown was unable to determine the
basis of the problem (DE # 31-6 at 62), but the issue occurred only on containers
manufactured by Crown, and not on similar containers Ecolab purchased from other
manufacturers. (DE # 31-6 at 20, 39; # 31-10 at 19; 21.) Crown resolved the issue by
purchasing a new laser printer for Ecolab that created an indelible code. (DE # 31-6 at
3
62.) As to the graphics problem, Crown investigated and discovered that the ink was
flaking off because of three issues: improper strength of an ultraviolet light used to cure
the ink printed on the container; additives in the ink interfering with its ability to
adhere to the containers; and shipment of the containers to Ecolab too soon after
manufacture, which did not allow long enough for them to cure.
Before the problems were resolved, however, Ecolab had to manually inspect its
inventory of containers at the end of the manufacturing process, and dispose of or
“rework” the soap found in defective containers,4 employing additional labor to
accomplish these tasks. Reworking the soap involved removing it from the containers
by cutting them off the solidified soap, then “reblend[ing] the material into new batches
at small percentages.” (DE # 31-7 at 10-11.) In March 2004, Ecolab decided to dispose of
the remaining defective containers filled with their product instead of reworking the
soap because the amount of defective material being dealt with was impacting its
manufacturing process. Whatever product could not be reworked within ninety days
was scrapped. In addition, product was scrapped which had been returned to Ecolab by
its customers because of the graphics flaking off, and product held in inventory in
containers with the graphics flaking off was deemed unsaleable and scrapped.
Prior to the events in the present case, during the course of the lengthy business
relationship between Ecolab and Crown, when Ecolab had experienced any problems
Although Ecolab fills the containers with the soap in liquid form, it then
hardens into a solid: “the product is a liquid when it goes in and within maybe a 15minute period of time it’s a rock.” (DE # 31-6 at 21.)
4
4
with the containers Crown supplied, it typically resolved them using the chargeback
method, i.e., giving itself a credit on current invoices. Pursuant to this customary
practice, Ecolab deducted from its payments to Crown the cost of the defective
containers at issue in the present case, along with the consequential costs incurred in
dealing with the problem and scrapping significant portions of its product. Ecolab
provided Crown with a series of nineteen “Chargeback Advisory” forms, informing
Crown of the basis for the deductions from its payment. Thus, although Crown never
affirmatively authorized the chargebacks, it was aware of them and Crown never
demanded full payment by Ecolab, consistent with past practice. Before the incidents
involved in the present case, Ecolab had never paid Crown for any other chargebacks
taken. Nevertheless, in the present case Crown continues to carry the relevant
chargebacks on its books as aging accounts receivable.
Ecolab’s charge backs totaled about $454,122.685 between March 2003 and
September 2004, $91,035.28 of which was from the ink date-code adhesion problem.
(DE #28 at 8, ¶ 23.) The $91,035.28 figure was comprised of Ecolab’s costs for reworking
All of the dollar amounts in the accompanying paragraph should be considered
approximate and subject to further proof. For example, as American explains, there is a
$16,133.42 difference between the total of the chargebacks taken from the Chargeback
Advisories submitted by Ecolab to Polycon, and the total on a June 16, 2004, chart
prepared by Ecolab summarizing the chargebacks. (DE #28 at 10, n.1.) This total figure
includes the “missing” $16,133.42, and thus does not equal the total obtained from
adding the amounts itemized in the accompanying paragraph.
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5
the soap and inspection, Ecolab’s material loss, and “rental”6 of the date code printer.
(DE #28 at 8-9, ¶¶ 24-26.) The remaining portion of the total chargeback amount
resulted from the graphics problem, which affected 15 to 20% of the containers and also
caused Ecolab to rework some of the soap and place it in new containers, and to scrap
some product. (DE # 27-2 at 69; DE #28 at 9-10, ¶ ¶ 28-31.) As of June 16, 2004, the
chargebacks to Crown from Ecolab totaled $346,953.98 for this graphic adhesion
problem. (DE #28 at 10, ¶ 32.)
Crown never expressly consented to the chargebacks for the date code ink
adhesion or graphics adhesion problems. However, Crown’s production manager’s
name (David Wilbourn) appears on the Chargeback Advisory forms as having
authorized them on behalf of Crown. Wilbourn never discussed this with anyone from
Ecolab nor did he know that his name appeared on the Chargeback Advisories.
In June 2003, Crown contacted Lockton Companies, its insurance broker, to
notify American of its claim7 under the Policy arising from the chargebacks for damage
caused to Ecolab’s property by Crown. In progress notes dated June 25, 2003, the claims
adjuster investigating for American opined that a product recall was not involved,
Crown did not make actual rent payments to Ecolab for the printer; instead,
Ecolab added the cost of Crown’s use of the printer to the chargebacks. Although the
parties have not addressed precisely this issue, the court fails to see how any Crown
expense incurred investigating the problem would be recoverable from American as
property damage for which Crown is liable. In addition, it would seem to be a
voluntary expenditure, barred by the voluntary payment provision discussed herein.
6
American does not contend that notice given to Lockton Companies was
insufficient to give notice to American.
7
6
because the product was not sent into the market, and indicated that Ecolab had already
taken credit of about $40,000 in the form of chargebacks to Crown. (DE # 31-31 at 25.)
From June 2003 through October 2004, Crown, directly and through Lockton, furnished
American with documentation and information regarding the Ecolab claim, including
all of the investigation records and chargeback records. However, American has refused
to pay Crown for the claim, contending that several policy provisions apply to preclude
any coverage.
American initiated this action by filing a complaint seeking a declaratory
judgment that its CGL Policy does not provide indemnity to Crown for any of the
chargebacks taken by Ecolab. In simple terms, the Policy issued to Crown covers
“property damage” caused by an “occurrence.” The Policy excludes coverage when the
insured voluntarily makes a payment, assumes any obligation, or incurs any expense
without first receiving American’s consent. Furthermore, the Policy excludes property
damage to the insured’s product itself, or to property of a third party which is
“impaired” because of a defect in the insured’s product which has been incorporated
into the third party’s product; and excludes coverage of expenses associated with the
recall of a product. The complaint contains seven counts, each of which seeks a
declaration as to one of these Policy provisions.
American moved for summary judgment on each count of the complaint,
contending that some of the Policy provisions operate so that Crown is not entitled to
any indemnity, and some (most notably, the exclusion for recalled products) operate to
7
exclude part of the damages for which Crown seeks indemnity. Crown moved for
partial summary judgment, claiming that the policy provisions at issue apply to provide
coverage. Crown’s motion is for partial summary judgment because it concedes that a
question of fact may exist as to count VII of the complaint, concerning the voluntary
payment provision.8 Both parties supported their motions with memoranda, responses
to the other party’s motion, and replies in support of their own. In addition, at the
request of Judge Lozano, who formerly presided over this case, the parties filed
additional memoranda on the issue whether Ecolab’s chargebacks were tantamount to a
voluntary payment made by Crown.
B. Standard of Review
A motion for summary judgment must be granted “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits, if any,
show that there is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law.” FED. R. CIV. P. 56(c). In viewing the facts
presented on a motion for summary judgment, a court must construe all facts in a light
most favorable to the non-moving party and draw all legitimate inferences and resolve
all doubts in favor of that party. Gonzalez v. City of Elgin, 578 F.3d 526, 529 (7th Cir.
2009).
The court thinks that simply for the reason discussed supra at 6 n.6, there would
be a question of fact preventing Crown from obtaining summary judgment on Count
VII.
8
8
This notion applies equally where, as here, opposing parties each move for
summary judgment in their favor pursuant to RULE 56. I.A.E., Inc. v. Shaver, 74 F.3d 768,
774 (7th Cir. 1996). Indeed, the existence of cross-motions for summary judgment does
not necessarily mean that there are no genuine issues of material fact. R.J. Corman
Derailment Serv., LLC v. Int’l Union of Operating Eng’rs, 335 F.3d 643, 647 (7th Cir. 2003).
Rather, the process of taking the facts in the light most favorable to the nonmovant, first
for one side and then for the other, may reveal that neither side has enough to prevail
without a trial. Id. at 648. “With cross-motions, [the court’s] review of the record
requires that [the court] construe all inferences in favor of the party against whom the
motion under consideration is made.” O’Regan v. Arbitration Forums, Inc., 246 F.3d 975,
983 (7th Cir. 2001) (quoting Hendricks-Robinson v. Excel Corp., 154 F.3d 685, 692 (7th Cir.
1998)).
C. Analysis
American seeks summary judgment on each count of its complaint, arguing that
various Policy provisions independently operate so as to avoid or exclude coverage,
either in whole or in large part. It organizes and groups its arguments in the manner in
which the court will address them, as follows: (1) Crown assumed obligations without
American’s consent contrary to the Policy terms; (2) the chargebacks were not on
account of “property damage” caused by an “occurrence;” (3) the Policy’s exclusions for
“damage to your product” and “damage to your work” exclude coverage; (4) the
Policy’s exclusion for damage to impaired property excludes coverage, and; (5) the
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Policy’s exclusion for recalled products excludes coverage. Crown’s cross-motion seeks
a summary determination that none of these provisions bars coverage, except for the
voluntary payment provision, as to which Crown concedes there is a question of fact.9
(1) “Voluntary payments” provision
The American CGL Policy, as is common in many liability insurance policies,
contains a “voluntary payments” provision precluding coverage if the insured
voluntarily makes a payment, assumes an obligation, or incurs an expense other than
for first aid without first obtaining the insurer’s consent. Section IV(2)(d) of the Policy
states:
No insured will, except at that insured’s own cost, voluntarily make a
payment, assume any obligation, or incur any expense, other than for first
aid, without our consent.
(DE # 52-2 at 16.) The purpose of a provision like this is twofold, and is intended to give
the insurer the ability to control settlement negotiations with the injured party, and to
prevent an the insured party from conspiring with a third party to receive benefits. See
Coil Anodizers, Inc. v. Wolverine Ins. Co., 120 Mich. App. 118, 124, 327 N.W.2d 416, 418
(1982); Gribaldo, Jacobs, Jones & Assoc. v. Agrippina Versicherunges A.G., 3 Cal. 3d 434, 449,
476 P.2d 406, 415 (1970).
American’s response (DE # 34) to Crown’s motion incorrectly states that Crown
does not seek summary judgment of Count III of its complaint. Nevertheless,
American’s memorandum does address the substance of Crown’s argument on count
III.
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10
American argues that this provision precludes Crown from indemnification
because Crown voluntarily accepted Ecolab’s chargebacks without the consent of
American. Further, Crown did not dispute the chargebacks nor did it ever demand that
Ecolab pay the amounts which it had charged back. Crown, on the other hand,
maintains that the provision at issue requires an affirmative act to pay the third party.
Because it never made a payment to Ecolab, and instead Ecolab made the chargebacks
unilaterally with neither Crown’s permission nor affirmative acquiescence, Crown did
not voluntarily make a payment or assume an expense (or, Crown asserts, at the very
least a question of fact exists as to whether Crown acted voluntarily). As Crown sees it,
Ecolab’s conduct left it with no choice: if Crown had demanded payment for defective
merchandise, it simply would have exacerbated the situation, possibly causing Crown
to lose Ecolab as a customer. Moreover, Ecolab likely would have refused payment, and
the situation would be no different except for the loss of Ecolab’s business.
The essence of American’s argument, however, is that Crown did effectively
consent to, and authorize the chargebacks, because of its prior history of allowing
Ecolab to take such chargebacks, and its failure, in the present matter, to ever demand
full payment from Ecolab. In other words, as American sees it, Crown’s affirmative
assent to the chargebacks is the only inference which can be drawn from the past
history between the parties, and Crown’s failure to demand payment from Ecolab or
voice any objection to the amount of the chargebacks.
11
No doubt the economic result of Crown’s inaction is the same as if Ecolab had
paid the full amount of Crown’s invoices, demanded a refund, and Crown acceded to
that demand. That clearly would be a voluntary payment which the American Policy
wouldn’t cover. In both cases (that is, whether Crown made a refund or assented to
non-payment), Ecolab is made whole while American is potentially denied the benefits
of the voluntary payment provision, if it had no opportunity to investigate the claim
and negotiate a settlement. If American had that opportunity, it in all likelihood could
have driven a harder bargain than Crown did when it accepted the unilateral decisions
of its largest customer.10 Thus, there is an initial attractiveness to treating Ecolab’s nonpayment the same as Crown having made a refund, and holding that the voluntary
payment provision negates coverage.
In its supplemental memorandum (DE # 43), American points out one Michigan
case which has done essentially that, Coil Anodizers. Surprisingly, this appears to be one
of only two cases addressing the precise issue of whether acquiescing to non-payment,
such as Crown did in this case, precludes coverage under a voluntary payment
provision. In the CoilAnodizers, the insured’s metal-anodization treatment damaged its
customer’s product. 120 Mich. App. at 120, 327 N.W.2d at 417. The customer told the
insured that it would hold the insured liable for the cost of replacing the defective
In point of fact, Crown drove no bargain at all. In his deposition, Crown’s
President, Dennis Tilles, testified that Crown didn’t fight Ecolab on the chargebacks
because it was “beyond the doubt” that Crown had caused the problem and he feared
that Crown was going to lose Ecolab as a customer. (DE #27-2 at 36-37.)
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product. Id. The insured then informed its insurance carrier of its potential liability, but
the insurer denied coverage (the court decision does not explain the reason for this
initial denial). Id. The insured then agreed that its customer could set off the cost of
replacing the damaged product against its accounts payable. Id. The court held that this
set-off arrangement constituted voluntary payment, recognizing that the purpose of the
voluntary payment clause was to prevent collusion between the insured and a third
party and to give the insurance company control over settlement negotiations. 120
Mich. App. at 123-24, 327 N.W.2d at 418. Since the insurance company was not given
the opportunity to negotiate the settlement, indemnification was denied under the
voluntary payment provision.11 Id.
Essentially, the reasoning of the court in Coil Anodizers is that the insured had to
wait for its customer to sue it for damages, even though the court recognized that the
insured undoubtedly felt compelled to accept its customer’s demands in order to retain
goodwill. Id. The court’s observations on this issue address Crown’s argument that it
had no choice under the circumstances but to sue Ecolab, which would have resulted in
losing it as a customer. As the Coil Anodizers court explained, those compelling business
circumstances didn’t make the insured’s actions “any less voluntary” and deprived the
A significant distinction should be pointed out, however. The court also rested
its decision on another policy provision which conditioned the insurer’s obligation to
indemnify on a formal judgment against the insured. 120 Mich. App. at 123, 327 N.W.2d
at 418. That provision makes the reason for denying payment in Coil Anodizers stronger,
and American is not relying on a similar provision in the present case. Nevertheless, the
portions of the case discussing the voluntary payment provision are still instructive.
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insurer of its “bargained for . . . contractual right to contest the liability of its insured
instead of having its money given away by an agreement to which it was not a party.”
120 Mich. App. at 123, 327 N.W.2d at 418.
The second case involving acquiescence to non-payment is New England
Extrusion, Inc. v. American Alliance Ins. Co., 874 F. Supp. 467 (D. Mass. 1995). The insured
maufactured plastic film used for food packaging, some of which turned out to be
defective. A customer of the manufacturer demanded compensation for food which had
spoiled. Eventually the manufacturer agreed to allow the customer to take credits
against future orders. The manufacturer’s insurer denied the claim, relying on what it
claimed were the insured’s breaches of notice and voluntary payment provisions in the
CGL policy at issue. Id. at 470. The court denied the insurer’s motion for summary
judgment, holding that the insurer had not shown actual prejudice, as required by
Massachusetts law. Id. at 471.
American admits that there is a “dearth” of Indiana authority on the issue. (DE #
28 at 12.) In its opening memorandum in support of its motion, it essentially relies on
only Askren Hub States Pest Control Servs., Inc. v. Zurich Ins. Co., 721 N.E.2d 270 (Ind.
App. 1999). In that case, however, the insured, a pest inspector, voluntarily agreed to,
and did, perform repairs to a third party’s home without the insurer’s knowledge or
consent. Thus, the case does not involve the present circumstances, where a third party
withholds payment from the insured. Moreover, the Askren case was decided on the
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issue of the insured’s failure to give the insurer timely notice, and not on the issue of the
voluntary payment clause. 721 N.E.2d at 279.
There appear to be only two other cases involving Indiana law which shed any
light, and very little light it is. In Governmental Interins. Exch. v. City of Angola, Ind., 8 F.
Supp. 2d 1120, 1135 (N.D. Ind. 1998), the City of Angola sought to recover from its
general liability insurer costs it had incurred, without the insurer’s consent, in cleaning
up contaminated soil caused by a leaking underground storage tank. The insurer
denied coverage based on a number of policy provisions, including a voluntary
payment provision. This court, speaking through then-Chief Judge William C. Lee in
the Fort Wayne Division, held that the voluntary payment provision did not bar
coverage, primarily because the clean-up costs expended by the city were required by
state and federal environmental laws, and so were not truly voluntary. Id. at 1134-35.
That is a significant distinguishing factor from the present case, despite Crown’s
argument that it did nothing voluntary here. Crown’s established practice of accepting
Ecolab’s chargebacks lends a voluntary quality to Crown’s conduct that is absent in City
of Angola. However, other comments in City of Angola put the present case in a different
light. For example, in addition to the primary reason for rejecting application of the
voluntary payment provision, Judge Lee also observed that: 1) the insurer, when
notified of the claim, immediately denied coverage based on other policy provisions, so
nothing would have turned out differently had Angola notified it of the claim before
incurring the clean-up expenses, and; 2) there was no evidence of collusion between the
15
city and the contractors it paid. For both reasons, the insurer had not suffered the
prejudice the clause was designed to prevent. Id. at 1135. It can also be said in the
present case that it appears nothing would have turned out differently had Crown
demanded payment from Ecolab.12
The second case involving Indiana law is Liberty Mut. Ins. Co. v. OSI Indus., Inc.,
831 N.E.2d 192 (Ind. App. 2005). In Liberty Mutual, the insured incurred defense
expenses before notifying its insurer of litigation brought against it. Although the court
mentioned both the voluntary payment provision and a provision requiring the insured
to give the insurer prompt notice of any claims, its analysis focused solely on the notice
provision. It subsumed any consideration of the voluntary payment provision within its
analysis whether the insurer was prejudiced by its insured’s failure to give notice. Id. at
200-204. An important distinction from the present case is that the insured in Liberty
Mutual was actually being sued. The Liberty Mutual court found the insurer was
prejudiced because, in the period before it was notified of the suit, it was denied the
opportunity to propose a settlement or guide the course of the litigation; denied the
opportunity to choose the attorney it preferred; and denied the chance to negotiate the
Crown also argues that American has not shown, or even alleged, the existence
of collusion between Crown and Ecolab. Based on existing Indiana case law, American
would have seen no need to do so. Thus, although it appears there was no collusion, in
the sense of fraudulent conduct directed against American, American should have the
opportunity to make that showing if it becomes necessary to do so. Moreover, the court
does not reject out-of-hand the possibility that Crown’s uncritical acceptance of the
amount of Ecolab’s chargebacks might serve as a form of collusive conduct, for the
purpose of showing prejudice.
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amount of attorneys’ fees. Id. at 204. Based on the facts the parties have provided, none
of those factors is present in the controversy before this court. Thus, to the extent, if any,
that Liberty Mutual is helpful, it appears to suggest that the notice/prejudice inquiry
may be relevant to the voluntary payment issue, and that typical types of prejudice
which result from failure to give notice are not apparent in an acceptance of nonpayment situation.
What this all boils down to is that in the present case, American is essentially
asking the court to follow the reasoning of Coil Anodizers, and hold that Crown’s noncompliance with the voluntary payment provision precludes coverage, without any
consideration whether that non-compliance caused American prejudice. Although
Crown objects that, unlike Coil Anodizers and every other case cited by American, it did
not affirmatively authorize Ecolab to take the chargeback credits at issue, American’s
point is well-taken: Crown effectively consented to those chargebacks based on the
twenty-five year course of dealing between the parties allowing similar credits, and by
its failure to object in the present case. Having said that, however, on the facts before the
court it is difficult to see how American suffered prejudice, that is, what would have
been different if Crown had demanded Ecolab full payment. Giving Crown the benefit
of reasonable inferences, Ecolab would have refused: as American states, “Crown
admittedly manufactured defective containers.” (DE # 38 at 15.)13
Then, presumably, Crown would have had to bring suit demanding payment,
and Ecolab would counterclaim for the cost of the defective containers and
consequential damages therefrom. The obvious question raised is whether by bringing
13
17
This is the basis of the additional argument that Crown makes in its
supplemental memorandum (DE # 44): that even if the chargebacks come within the
voluntary payment provision, American has not shown how it suffered any prejudice,
and based on the circumstances just outlined, there is at least a question of fact on the
issue of prejudice. The court agrees that American hasn’t shown, as an undisputed fact,
that it suffered actual prejudice from Crown not having demanded that Ecolab stop
taking chargebacks and making full payment. The problem is, there is no Indiana case
definitively establishing whether American must do so with respect to the voluntary
payment provision, and in the circumstances herein.
It is this court’s task, sitting in diversity, to predict how the Indiana Supreme
Court would decide the issue. Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087,
1090 (7th Cir. 1999). Decisions by the state’s appellate courts are given great weight in
making this prediction, Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 637 (7th Cir. 2002),
but in the present case that gives the court only Liberty Mutual, discussed above,
bolstered by the commentary in City of Angola. When there is an absence of authority,
relevant cases from other jurisdictions may be consulted. Amerisure, Inc. v. Wurster
Const. Co., Inc., 818 N.E.2d 998, 1004 (Ind. App. 2004) (abrogated on other grounds by
Sheehan Constr., 935 N.E.2d 160).
that suit, Crown would incur attorneys’ fees and other expenses which American might
contend were voluntary, and so not covered by the Policy.
18
As already noted, Coil Anodizers did not consider the issue of prejudice. The court
stated only that the insurer had been deprived of its bargained-for contractual right to
contest the liability of its insured, essentially treating the matter as a breach of a
contractual condition precedent, barring coverage, with a showing of prejudice
unnecessary. The only other relevant case14 identified by the parties, New England
Extrusion, is essentially the opposite. It explains that under Massachusetts law, the
insurer must prove that it suffered actual prejudice in order to rely on the voluntary
payment provision to deny coverage.
The question is whether Indiana would follow either of these two approaches, or
adopt some other. As is explained in New England Extrusion, the purpose of the
voluntary payment provision is the same as a policy provision requiring the insured to
provide notice to the insurer of a claim: to allow the insurer to become involved,
conduct a timely investigation, and protect its interests. 874 F. Supp. at 470. Not
coincidentally, the notice and voluntary payment provisions appear together in the
standard CGL policy, as they do in this case. Indiana is in agreement with
Massachusetts on the purposes served by the notice requirement in an insurance policy.
See Brunner v. Economy Preferred Ins. Co., 597 N.E.2d 1317, 1319 (Ind. App. 1992).
Unlike Massachusetts, however, Indiana does not require an insurer to
demonstrate actual prejudice before asserting a breach of the policy’s notice provision
Crown also cites Pacific Ins. Co. Ltd. v. Eaton Vance Mgmt., 260 F. Supp. 2d 236
(D. Mass. 2002). Because it is simply another application of Massachusetts law, it
doesn’t add to the weight of Crown’s argument.
14
19
to deny coverage. Instead, the insurer enjoys a presumption of prejudice, which the
insured may rebut by showing an absence of prejudice. Tri-Etch, Inc. v. Cincinnati Ins.
Co., 909 N.E.2d 997, 1005-05 (Ind. 2009).15 The insurer has to demonstrate prejudice only
if the insured rebuts the presumption. Id.; see Liberty Mut. Ins. Co., 831 N.E.2d at 203.
This is a third approach, also different from both New England Extrusion and from Coil
Anodizers, in which no showing of prejudice was required.16
In light of the foregoing, especially considering that voluntary payment
provisions serve the same purpose as notice provisions, and the Indiana Liberty Mutual
and Askren decisions, which seem to treat notice provisions and voluntary payment
provisions on the same footing, it is this court’s informed guess that, were the Indiana
Supreme Court to decide the issue, it would apply Indiana’s rule on notice to the
voluntary payment provision. In other words, there is a rebuttable presumption of
Another important point from Tri-Etch must be mentioned. To the extent this
court’s decision in City of Angola can be read to suggest that an insurer’s reliance on
other policy provisions to deny coverage rebuts the presumption of prejudice as a
matter of law, Tri-Etch holds otherwise. Instead, it is a fact issue whether the insurer
would have relied on the other provisions had it been given timely notice. 909 N.E.2d at
1005.
15
Coil Anodizers dates from 1982. In 1998 Michigan joined Massachusetts,
requiring insurers relying on late notice to deny coverage to show actual prejudice.
Koski v. Allstate Ins. Co., 456 Mich. 439, 444, 572 N.W.2d 636, 639 (1998). Thus, it is
unclear whether Coil Anodizers remains good law. Michigan might extend Koski to
voluntary payment provisions, or it could treat Koski as a limited to notice provisions
only. See DeFrain v. State Farm Mut. Auto Ins. Co., – N.W.2d –, 2011 WL 832181 (Mich.
App. 2011) (Koski carved out a narrow prejudice requirement).
16
20
prejudice from an insured’s having made a voluntary payment. If the presumption is
rebutted, the insurer must then demonstrate prejudice.
In the present case, there are undisputed facts which rebut the presumption. As
American admits in its statement of undisputed facts (DE # 28 at 8, ¶ 23), the Ecolab
chargebacks spanned the period from March 2003 to September, 2004. American first
had notice of the claim17 June 16, 2003, (DE # 38 at 16; DE # 31-7 at 18), and American
was actively investigating the claim as early as June 25, 2003, and was aware through its
claims adjuster, Richard Bragg, that Ecolab had already charged back about $40,000 to
Crown, and would be “putting together . . . a list of their damages and will be sending
to our insd.” (Id.)(DE # 31-31 at 25.) In other words, at that point less than 10% of the
amount of alleged damages at issue in this case had been taken as chargebacks by
Ecolab.18
Whether or not Crown is solely responsible for the chargebacks which had
already occurred, there is no reason apparent in the facts before the court why
American could not have intervened between the parties at that point, by hiring a
American disputes this, arguing that at that time it only had notice of the datecode aspect of the claim. (DE # 34 at 4, ¶ 8.) Accepting this as true, the distinction makes
no difference to the court’s analysis.
17
American contends that Bragg didn’t receive “supporting information and
documentation” of the chargebacks until December 2004, when they totaled $114,871.
(DE # 38 at 8, 17.) Accepting this as true, Bragg nevertheless had notice of the
chargebacks as early as June 25, 2003; and approximately 75% of the chargebacks still
occurred after he/American received the supporting information and documentation in
December.
18
21
lawyer of its choice to pursue full payment from Ecolab—in other words, have availed
itself of the rights which the voluntary-payment provision is designed to
create/preserve. If Ecolab resisted, there is nothing in the facts before the court
suggesting why American could not have indemnified Crown, subrogating itself to
Crown’s rights, and then sued Ecolab for payment, which would have allowed
American to determine if Ecolab were inflating its damages or scrapping soap which
instead could have been easily and cost-effectively reworked and reused. (As American
states in its specification of undisputed facts, Ecolab did not decide to scrap the
remaining quantities of soap until March, 2004. (DE # 28 at 10, ¶ 31.).) In this court’s
view, these facts are enough to rebut any presumption of prejudice resulting from at
least those chargebacks occurring after American had notice. American has made no
showing that prejudice in fact did occur;19 therefore, American is not entitled to a
summary judgment on Count VII of its complaint, regarding the voluntary payment
provision.
The court has not ignored American’s argument that it informed Crown’s
President, Dennis Tilles, of the voluntary payment provision in a letter dated
January 27, 2004, but that Crown continued to “allow” the chargebacks after that date. It
is true that a letter was sent to Tilles directing his attention to the voluntary payment
provision and quoting it. (DE # 38 at 20-21.) The letter did not, however, do anything
more, such as explain that American viewed or might view the credits Ecolab was
taking as falling within that provision. That interpretation of the provision would not
manifest itself easily to a layperson; indeed, it was not obvious to the court, and even
after the research resulting in this order the court is not positive it is a correct
interpretation. Moreover, the letter did not advise Tilles what steps Crown should take
to prevent, or resist, further chargebacks from occurring. The court does not mean to
suggest, however, that it agrees with Crown’s argument that this shows American
consented to the chargebacks, but these facts are relevant to the issue of prejudice.
19
22
(2) Property Damage Caused by an Occurrence
For the Policy to provide coverage for damage caused to a third person’s
property, that “property damage” must result from an “occurrence,” within the
meaning of those terms as defined in the Policy itself. Count I of American’s complaint
seeks a declaration that there was no “property damage.” Count II seeks a declaration
that there was no “occurrence.” The Policy, using bold face to indicate the use of
defined terms, in “Coverage A, Bodily Injury and Property Damage Liability,” provides
in part as is relevant here:
1. Insuring Agreement
a. We [American] will pay those sums that the insured becomes legally
obligated to pay as damages because of bodily injury or property damage
to which this insurance applies. We will have the right and duty to defend
the insured against any suit seeking those damages. . . .
b. This insurance applies to bodily injury and property damage only if:
(1) The bodily injury or property damage is caused by an
occurrence that takes place in the coverage territory.
(DE # 52-2 at 5.)
The Policy defines “property damage” in Section V, paragraph 17(a)-(b) as
“[p]hysical injury to tangible property, including all resulting loss of use of that
property” and “[l]oss of use of tangible property that is not physically injured.” (DE
# 52-2 at 21.) An “occurrence” is defined by Section V, paragraph 13, as “an accident,
including continuous or repeated exposure to substantially the same general harmful
conditions.” (DE # 52-2 at 12.) Although the term “accident” is not defined by the CGL
23
Policy, under Indiana law an “accident” is “an unexpected happening without an
intention or design.” Tri–Etch, Inc., 909 N.E.2d at 1002 (internal quotation marks and
citation omitted).
American maintains that there is no coverage because there was neither
“property damage” to Ecolab’s property nor did anything that happened to Ecolab’s
property result from an “occurrence.” In its cross-motion, Crown maintains exactly the
opposite: that the facts show that Ecolab suffered “property damage” caused by an
“occurrence” as is defined by the Policy.
(a) Property Damage
As stated above, the Policy covers two types of damage to a third person’s
property: physical injury to the property; or loss of its use, even if it is not physically
injured. First, American contends that there was no physical injury to Ecolab’s property.
The rubbing and flaking off of date codes and graphics on the outside of the containers
manufactured by Crown did not cause a physical injury to Ecolab’s soap products
inside the containers. Second, American argues that the loss of use provision does not
apply, because it is undisputed that Ecolab reworked and reused some of the soap, and
could have done so with all of it, but instead made a financial decision to scrap most of
the faulty containers and soap therein.
Crown’s response, and its argument on this issue in support of its own motion
for partial summary judgment, are one and the same. Crown argues its product—the
containers—was incorporated into Ecolab’s product; that is, Ecolab’s “product was
24
comprised of both the Soap and the Containers.” (DE # 36 at 17.) The problems with the
containers did not become apparent until after the soap was placed in the containers
and hardened; thus, at that point the containers of soap could not be sold, and could not
be salvaged without destroying the containers to remove the hardened soap. Therefore,
Crown argues, there was physical injury to Ecolab’s property (the containers which had
to be cut apart), and Ecolab suffered a loss of use of both the containers and the soap
therein which had to be scrapped. (DE # at 11-12; DE # 36 at 17-18.)
As to the “physical injury” aspect of “property damage,” American argues in its
reply that “Crown has confused the distinction between what constitutes Ecolab’s
product versus what constitutes Ecolab’s property,” and that “[w]hile generically it is true
that the plastic containers filled with Ecolab’s soap are Ecolab’s property in that Ecolab
maintains ownership interest, the plastic containers do not become Ecolab’s product for
coverage purposes.” (DE # 38 at 9, 10.) Actually, it is American that has become
somewhat confused, by looking at the forest—whether Crown is ultimately entitled to
indemnity—and losing sight of the trees: whether “property damage” as defined by the
Policy has occurred.
To explain, it is useful to consider the Indiana Supreme Court’s brief explanation
of how a CGL policy operates:
Most CGL policies are written on standardized forms developed by an
association of domestic property insurers known as the Insurance Services
Office (“ISO”). Hartford Fire Ins. Co. v. California, 509 U.S. 764, 772, 113 S.
Ct. 2891, 125 L. Ed. 2d 612 (1993). “[These] policies begin with a broad
grant of coverage, which is then limited in scope by exclusions. Exceptions
25
to exclusions narrow the scope of the exclusion and, as a consequence, add
back coverage. However, it is the initial broad grant of coverage, not the
exception to the exclusion, that ultimately creates (or does not create) the
coverage sought.” David Dekker, Douglas Green & Stephen Palley, The
Expansion of Insurance Coverage for Defective Construction,28 Constr. Law,
Fall 2008, at 19, 20.
Sheehan Constr. Co. v. Continental Cas. Co., 935 N.E.2d 160, 162 (Ind. 2010). American’s
argument, that Crown has ignored the distinction between property and product, itself
is an example of American ignoring the distinction between the coverage provisions of
its Policy, and the exclusions from coverage that only come into question if coverage
exists in the first instance. The definition of “product” may be relevant once it becomes
necessary to consider exclusions, but the term “product” is nowhere to be found in the
initial insuring agreement, defining the “property damage” that is covered by the
Policy. Thus, by admitting that “generically it is true that the plastic containers filled
with Ecolab’s soap are Ecolab’s property,“ (DE # 38 at 10), American has made irrelevant
its argument that property damage did not occur because the soap inside the containers
was undamaged, and conceded that manufacturing defects in the containers
necessitating their destruction was physical damage to Ecolab’s property, making that
property damage potentially covered by the Policy.20
As stated, American’s admission results from the fact that it is only necessary
to consider the definition of “product” in the Policy exclusions if there is covered
property damage in the first instance. Cf. Sheehan Constr. Co., 935 N.E.2d at 167 (quoting
with approval, internal citation and quotation omitted, Travelers Indem. Co. of Am. v. Moore &
Assocs., Inc., 216 S.W.3d 302, 307 (Tenn. 2007): “[r]eliance upon a CGL’s ‘exclusions’ to
determine the meaning of ‘occurrence’ has resulted in regrettably overbroad
generalizations concerning CGLs.”). In fact, American’s attorneys should be
embarrassed for making a coverage argument based on Policy exclusions, because they
20
26
As to the “loss of use” aspect of “property damage,” the parties’ dispute centers
on whether the soap inside the containers, although not physically damaged in any
way, was in fact useless, as Crown contends, or whether Ecolab simply made a business
decision to scrap soap which it could have salvaged.21 It is undisputed that, after
attempting to rework and reuse the soap in the defective containers, Ecolab decided to
scrap any containers which could not be reworked within 90 days. (DE # 27-3 at 8.)
Ecolab made this decision because reworking the soap was having too great a
detrimental impact on its production: “the amount of material that was backing up in
the system became unmanageable.” Id. In other words, what American characterizes as
a “business decision” was dictated by economic reality: while the soap literally could
have been reworked and so was useable, the cost of doing so—presumably, but this is
addressed further below—made that option unprofitable and so not viable.22 It should
understand the difference well. When Crown does essentially the same thing, arguing
that an exclusion does not apply because property damage occurred, American labels
the argument “illogical” because the exclusion “like any other exclusion, serves to
exclude coverage once coverage is triggered in the first instance” and so need not be
considered before then. (DE # 38 at 14.)
Obviously, in addition to physical injury, Ecolab lost the use of the containers
which had to be destroyed to remove the soap therein.
21
To be clear, the court assumes this is so: it is unlikely that a company would
choose to destroy product if it were more profitable to rework and re-use it. However,
neither party has pointed to evidence establishing as an undisputed fact whether the
cost of re-use was greater, or less than, the cost of destruction. Because there are crossmotions for summary judgment, Crown is entitled to an inference of the former, and
American to an inference of the latter. The court comments further on this issue when it
considers the Policy’s exclusion for “damage to impaired property.”
22
27
go without saying that insurance companies are familiar with this concept. When the
cost of repairing an automobile damaged in an accident is greater than the cost of
buying an equivalent replacement vehicle, an auto insurer declares the vehicle a total
loss, and the owner receives a check for its market value.
Nevertheless, the court has been unable to find, and neither have the parties
identified, any Indiana cases discussing whether an economic loss of use (a complete
loss, not simply a diminution in value) comes within the “loss of use” provision in a
typical CGL policy.23 However, the court thinks that even a layperson (many of whom
have first-hand experience with the damaged auto hypothetical above) would answer
affirmatively, if asked whether a party whose use of an item is to sell it at a profit has
lost the item’s use when it is so damaged that it is cheaper to throwing it away is less
expensive than salvage. Moreover, this is the conclusion reached in the most relevant
cases the court has found, such as by the Third Circuit in Lucker Mfg. v. Home Ins. Co., 23
F.3d 808 (3rd Cir. 1994).
In that case, Lucker designed and manufactured a “lateral mooring system”
(“LMS”) used to anchor offshore drilling platforms. Because of defectivelymanufactured castings Lucker purchased from a supplier to incorporate into the LMS,
Lucker had to increase its costs to include additional safety features in its design;
Aetna Life & Cas. v. Patrick Industries, Inc., 645 N.E.2d 656, 659 (Ind. App. 1995)
considers only the physical injury aspect of property damage, not loss of use. In
addition, the diminution in value therein resulting from the damage did not cause a
complete economic loss of the third party’s property.
23
28
without those additional features, its customer, Shell Oil, would not accept the original
design. When Lucker sued its supplier for the increased costs, the supplier’s CGL
insurer denied coverage on the basis that Lucker’s purely economic loss was not a “loss
of use” of its property. The Third Circuit rejected this argument:
Of course, Lucker did not suffer physical injury to the LMS (since it did
not exist) or the LMS design. Nor did it lose the physical use of the LMS or
LMS design. Indeed, Lucker could still have manufactured it and offered
it for sale, and, even according to Lucker, the original LMS design would
still have worked properly. Nevertheless, Lucker did lose the economic use
of the original LMS design: because of the defective castings, Shell was no
longer willing to buy the product, and Lucker could no longer use the
LMS design as a source of income.
The question in this case, therefore, reduces to whether the lost “use” has
to have been a lost physical use of the property, or whether it can also
include a lost non-physical or economic use of the property. The district
court thought that loss of use should cover only lost physical use, and that
customer acceptance simply was not a “use.” We believe, however, that
both the purposes behind liability insurance and the case law interpreting
liability insurance suggest that the loss of a non-physical use of a product,
such as offering it for sale, should be considered a “loss of use”; and that
the decreased value of a product because of loss of customer acceptance of
the product is a “loss of use” within the meaning of the standard CGL
policy.
Lucker Mfg., 23 F.3d at 815-16. 808 (3rd Cir. 1994)24 (internal citation omitted); see also
Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F.3d 1049 (9th Cir. 2002) (third
party’s economic loss caused by replacing scanners in which insured’s defective circuit
boards were installed was loss of use of its tangible property, the scanners); American
Family Mut. Ins. Co. v. Teamcorp., Inc., 659 F. Supp.2d 1115, 1130 (D. Colo. 2009) (where
It should be noted that the Lucker court ultimately determined that no coverage
existed because the design of the LMS was not tangible property. 23 F.3d at 821.
24
29
defects in construction would require house to be torn down, both physical injury and
loss of use provisions of CGL policy arguably applied); Wells Dairy, Inc. v. Travelers
Indemnity Co. of Illinois, 241 F. Supp. 2d 945, 966 (N.D. Iowa 2003) (diminution in value
of perishable ingredients within property damage provision of CGL policy where
potential use of ingredients completely lost);25 Elizabethtown Water Co. v. Hartford Cas.
Ins. Co., 998 F. Supp. 447, 454 (D.N.J. 1998) (real-estate developer’s complete inability to
put property to intended use as saleable residential lots because of insured’s negligence
within loss-of-use provision in CGL policy); Sola Basic Indus., Inc. v. United States Fidelity
& Guar. Co., 90 Wis.2d 641, 280 N.W.2d 211, 213 (1979) (third party unable to use
However, the court in Wells Dairy noted:
“There is case law from other states supporting the general
premise that “[d]iminution in value—even to the point of
worthlessness—is not the same as ‘loss of use damages.’”
Vogel v. Russo, 236 Wis. 2d 504, 613 N.W.2d 177, 184 (2000);
see Smartfoods, Inc. v. Northbrook Prop. & Cas. Co., 35 Mass.
App. Ct. 239, 618 N.E.2d 1365, 1368 (1993); see also Nutmeg
Ins. Co. v. Pro-Line Corp., 836 F. Supp. 385, 388 (N.D. Tex.
1993) (holding that loss of sales of plaintiff’s product did not
constitute the “loss of use of tangible property” within
property damage definition); Hawaiian Ins. & Guar. Co. v.
Blair, Ltd., 6 Haw. App. 447, 726 P.2d 1310, 1313 (1986)
(holding that allegations showing diminution in value of
plaintiff’'s “product-line” did not constitute the “loss of use
of tangible property” within property damage definition).
The Wells Dairy court distinguished each case, and in addition to that court’s analysis,
this court notes that in Vogel, the third party couple did not completely lose use of their
home; in Smartfoods, cancellation of a distribution agreement led to excess inventory,
but there was nothing wrong with that inventory; in Nutmeg Ins., the third-party’s
product was unsaleable because its reputation was damaged by slanderous remarks,
but nothing was otherwise wrong with its product; and in Hawaiian Ins., there was
nothing wrong with the third party’s product, but it had become unsaleable because of
the insured’s damage to the market by selling similar goods that were fakes.
25
30
furnace to manufacture goods because of damage to insured’s electrical transformer
which powered furnace, and incurred additional costs to keep its plant in operation;
those costs recoverable as a diminution-in-value measure of the loss of use of the
furnace); Pittway Corp. v. American Motorists Ins. Co., 56 Ill. App. 3d 338, 342, 370 N.E.2d
1271, 1274 (1977) (manufacturer of aerosol hair spray had to scrap cans which
incorporated insured’s defective spray valve: “we have found what we conclude to be a
majority position which holds that the term ‘property damage’ includes tangible
property which has been diminished in value or made useless irrespective of any actual
physical injury to the tangible property”).26
The court thinks that Indiana would employ eminently-sensible logic as in
Lucker, and adopt what the Illinois appellate court described in Pittway Corp. as the
majority view that “the term ‘property damage’ includes tangible property which has
been diminished in value or made useless irrespective of any actual physical injury to
But cf. Hamilton Die Cast, Inc. v. U. S. Fidelity & Guar. Co., 508 F.2d 417, 419 (7th
Cir. 1975) (tennis-racket manufacturer withdrew rackets from the market because frame
supplied by insured was defective: “We do not think that the mere inclusion of a
defective component, where no physical harm to the other parts results therefrom,
constitutes ‘property damage’ within the meaning of the policy”); Dreis & Krump Mfg.
Co. v. Phoenix Ins. Co., 548 F.2d 681, 687 (7th Cir. 1977) (third-party lost use of special
structure built to house insured’s defective component). However, Hamilton Die Cast
does not consider whether the manufacturer lost the use of those rackets. In Dreis &
Krump the policy required loss of use resulting from damage to tangible property, 548
F.2d at 687, unlike the American Policy herein, which includes loss of use damages for
property which is not physically injured. In addition, Pittway Corp. distinguishes both
cases. In Pittway Corp. the court stated that where the third party therein had to scrap
product because of the insured’s defective component “there is injury in the sense of the
diminution in value of the product manufactured and owned by a third party.” 56 Ill.
App. 3d at 248, 370 N.E.2d 1275.
26
31
the tangible property.” 56 Ill. App. 3d at 342, 370 N.E.2d at 1274. See Amerisure, Inc., 818
N.E.2d at 1004 (Ind. App. 2004) (defining “occurrence” in CGL policy: “Our case law in
this area is limited, so we look to other jurisdictions for guidance”). Ecolab could not
sell its soap in the containers manufactured by Crown without incurring substantial
additional costs, which may have been so great that it would cause a smaller loss to
simply scrap the soap. If that is the case, then there was a loss of use of the soap.
The problem that remains is that neither party has established, as an undisputed
fact, how the cost of salvaging the soap compared to the cost of scrapping it. Crown’s
assertion that the soap had to be destroyed is based on the deposition statement of an
Ecolab representative that too much soap was “backing up” in the system. American
argues this means that Ecolab simply made a financial decision, but as has just been
explained, a rational financial decision means that coverage exists. Presumably, Ecolab
would not choose to destroy product if it were more profitable to rework and re-use it.
However, companies sometimes make poor or wrong decisions. There is also
conflicting evidence in the record on the matter. For example, Crown’s President,
Dennis Tilles, stated in his deposition that Ecolab “tried to reformulate [the soap], but it
was just too labor intensive. It was cheaper just to scrap it.” (DE # 31-7 at 10.) On the
other hand, William Greiner, of Ecolab, stated that at least for those containers only
impacted by the date-code problem, they could be “either run back through the date
coder again or a small pre-printed label was applied . . . with the date code on it.” (DE
# 31-10 at 23.) Because there are cross-motions for summary judgment, Crown is
32
entitled to an inference that Ecolab’s soap could not be re-used in a cost-effective
manner, and American is entitled to an inference that it could.
For the reasons above, there was both physical damage to, and loss of use of,
Ecolab’s property at least to the extent of containers which had to be destroyed to
remove the soap. There is a question of fact whether Ecolab’s soap could be costeffectively reworked and re-used, or whether it was cheaper to scrap it. As a result,
Crown is entitled to a partial summary judgment on count I, in that Ecolab suffered
property damage to some extent.27 Whether the extent of that damage includes the soap
in the containers remains a question of fact. American’s motion on count I is denied.
(b) Occurrence
Although, as just explained, there was both physical damage to, and loss of use
of, Ecolab’s property constituting property damage under the Policy, the Policy in
addition requires that such property damage result from an “occurrence.” As noted
earlier herein, the Policy defines “occurrence” as “an accident, including continuous or
repeated exposure to substantially the same general harmful conditions.” (DE # 52-2 at
20.) Although the term “accident” is not defined in the Policy, Indiana has defined the
term as “an unexpected happening without an intention or design.” Tri–Etch, Inc., 909
Section I(1)(a) of the Policy covers property damage which Crown “becomes
legally obligated to pay as damages.” (DE # 52-2 at 5.) Crown admits that no cause for
the date-code problem was ever found, making it unclear that Ecolab would be able to
prove, unless perhaps by res ipsa loquitur (except the containers were no longer in
Crown’s control), that Crown was liable for damages caused by the problem. American
has not argued this as reason to avoid coverage, however.
27
33
N.E.2d at 1002 (internal quotation marks and citation omitted; Newnam Mfg. v.
Transcontinental Ins. Co., 871 N.E.2d 396, 402 (Ind. App. 2007).
Until recently, Indiana adhered to the view that poor workmanship is not
unintentional; therefore, damages which result from poor workmanship are not an
accident, and so not an “occurrence” as the term is used in a standard CGL policy:
“[F]aulty workmanship is not an accident and, therefore, not an occurrence.” Amerisure
v. Wurster Const. Co., 818 N.E.2d 998, 1004 (Ind. Ct. App. 2004). Thus, in Amerisure,
where a subcontractor did a poor job installing an exterior sheathing and insulation
system on a building project, the general contractor’s CGL policy did not cover
replacement costs, because there was no property damage caused by an occurrence.28
American relies on Amerisure and its precursors, to argue that the problems with
the containers were the “natural and ordinary consequences of” Crown’s faulty
workmanship, and therefore there was not an “occurrence” which caused property
damage. (DE # 28 at 20.)29 Last year, however, and after American filed its motion, the
Indiana Supreme Court abrogated the rule in Amerisure, holding “we align ourselves
The court found it significant, however, that there were “no allegations that
any person or property, other than these interconnected systems on the buildings being
constructed by Wurster, was damaged due to these defects.” Amerisure, 818 N.E.2d at
1004. This is unlike the present case, where there was damage to other property, the
soap Ecolab put in the containers, and lost use of. Thus, even before more recent
Indiana precedent, there may have been an “occurrence” in the present case.
28
American mainly discusses Jim Barna Log Sys. Midwest v. General Cas. Ins. Co. of
Wisconsin, 791 N.E.2d 816 (Ind. App. 2003), and R.N. Thompson & Assoc. v. Monroe Guar.
Ins. Co., 686 N.E.2d 160 (Ind. App. 1997).
29
34
with those jurisdictions adopting the view that improper or faulty workmanship does
constitute an accident so long as the resulting damage is an event that occurs without
expectation or foresight.” Sheehan Const. Co., 935 N.E.2d at 169.
In Sheehan, water damage occurred to homes because of the faulty workmanship
of a subcontractor in installing windows, shingles and flashing. Id. at 163. The general
contractor’s CGL insurer obtained summary judgment declaring that it had no duty to
indemnify because, among other reasons, the subcontractor’s faulty workmanship was
not an “occurrence.” Id. at 164, 171. The Indiana Supreme Court, abrogating the rule
from Amerisure and earlier cases, reversed that judgment. In the Court’s view:
The question presented is whether faulty workmanship is an accident
within the meaning of a standard CGL policy. In our view the answer
depends on the facts of the case. For example, faulty workmanship that is
intentional from the viewpoint of the insured cannot be an “accident” or
an “occurrence.” On the other hand if the faulty workmanship is
“unexpected” and “without intention or design” and thus not foreseeable
from the viewpoint of the insured, then it is an accident within the
meaning of a CGL policy.
Id. at 170. The court reasoned that if the faulty workmanship was unintentional, then
any damage that resulted would be unexpected and unforeseeable, and so be an
accident constituting an “occurrence.” Id. at 170. The court reversed the judgment in
favor of the insurer because there was no evidence whether the faulty workmanship
resulted from intentional, or unintentional, conduct. Id. at 172.
In the present case, American’s argument is:
There is no evidence of record that Polycon somehow manufactured its
containers for Ecolab in a manner or method contrary to the manner of
35
[sic] method it intended to employ. Rather, the evidence is clear that after
Polycon containers were manufactured and sold to Ecolab, the date codes
and/or labels were coming off of a percentage of the containers. . . . [T]hat
the date codes or labels were rubbing or flaking off of the Polycon
containers are the natural and ordinary consequences of Polycon’s faulty
workmanship. And, the natural and ordinary consequences of an act do
not constitute an “occurrence.”
(DE # 28 at 20.) Even if this is all true, applying Sheehan to this argument, American’s
conclusion based on Amerisure is now incorrect. Viewing the evidence in the light most
favorable to Crown, it may have followed the manufacturing steps it meant to follow,
but its intention was to manufacture containers which Ecolab would find acceptable, on
which date codes and labels could be printed; Crown did not intend to manufacture
defective containers, on which the date codes and labels would flake off, resulting in
Ecolab having to destroy the containers to remove the soap placed therein, and
eventually having to destroy much of the soap itself.
On the other hand, viewing the evidence in the light most favorable to American,
Crown has not established that there is undisputed evidence that all of its
manufacturing problems were unexpected. For example, did Crown decide to ship its
containers sooner than it had previously, assuming there would be time for them to
cure before Ecolab used them? Did Crown decide to use a cheaper and less powerful
ultraviolet light, not worrying that it would be too weak to perform the job? In short,
applying Sheehan to the facts of record, neither party has shown it is entitled to
summary judgment on Count II of American’s complaint.
36
(3) “Business Risk” Exclusions
The American Policy, as a typical CGL policy, contains a number of exclusions
commonly referred to as “business risk” exclusions. See Sokol and Co. v. Atlantic Mut. Ins.
Co., 430 F.3d 417, 423 (7th Cir. 2005) (“so-called ‘business risk’ exclusions . . . are
standard fare in contemporary CGL policies.”) The purpose of business risk exclusions
is to exclude coverage of risks that could be avoided by the insured company itself; that
is, to effectuate the intent of the parties that the CGL coverage be for tort liability
resulting from the product and/or work of the insured company, and not a warranty on
the quality of the product or work itself. United Capitol Ins. Co. v. Special Trucks, Inc., 918
F. Supp. 1250, 1257 (N.D. Ind. 1996). In counts III - VI of its complaint, American argues
that three of the business risk exclusions operate to preclude coverage for all or most of
the damages Ecolab held Crown accountable for.
(a) “Damage to Your Product” and “Damage to Your Work” Exclusions
Sections I .2(k) and (l) of the Policy (DE # 52-2 at 9) exclude coverage for property
damage to “your product” or “your work,” when the damage arises from the product
or work itself. The “your”means the insured party, Crown. As is relevant for the
purposes of the present discussion, section V(21) of the Policy defines “your product” as
goods and products manufactured and/or sold by Crown, and section V(22) defines
“your work” as work and operations performed by Crown, or on its behalf. (DE # 52-2
at 21.) These two provisions “clearly exclude insurance coverage for damages to the
insured’s product or work when such damages are confined to the product or work and
37
caused by the product or work, or any part thereof.” Indiana Ins. Co. v. DeZutti, 408
N.E.2d 1275, 1280 (Ind. 1980).
American argues that Ecolab’s cost of purchase of all of the unusable Crown
containers is excluded because the containers were Crown’s product and/or work, and
damage to Crown’s product and work (loss of use being a form of damage) is exactly
what is excluded. In addition, American argues that Ecolab’s labor costs for inspecting,
and either reworking or destroying, the defective containers are excluded because they
are “nothing more than consequential damages arising out of the defective containers
manufactured by Polycon and are no way related to ‘property damage’ of another.” (DE
# 28 at 22.) Crown’s response is that “American’s argument can be boiled down to the
incorrect assertion that the only damage that occurred was to Crown’s product.” (DE
# 36 at 21.)
Both parties are half right and half wrong. Crown’s argument ignores the fact
that even if American is wrong that the only damage was to Crown’s product, it is
nevertheless true that a significant portion of the damage which occurred was to
Crown’s product; that is, the cost of the defective containers. That cost, charged back by
Ecolab to Crown, is clearly excluded by the “your product” and/or “your work”
exclusions.
American is wrong, however, in arguing that Ecolab’s labor costs for inspecting,
and either reworking or destroying, the defective containers are excluded as
consequential damages arising out of the defective containers manufactured by Crown
38
and so completely unrelated to any damage to Ecolab’s property. American ignores the
fact that the soap in the defective containers was Ecolab’s property, and the cost of
inspecting, reworking and destroying the defective containers was incurred by Ecolab
to avoid shipping soap which would only be returned, to salvage soap from defective
containers, and to resume its normal manufacturing process.
Moreover, American’s argument that the exclusions apply to any consequential
damages “arising out of” Crown’s product or work, results from a bad misreading of
the exclusions. Using the “your product” exclusion to explain, the exclusion states that
what is not covered is: “Property damage to your product arising out of it or any part of
it.” (DE # 52-2 at 9, ¶ (k).) The phrase “arising out of” does not mean, as American
argues, that property damage suffered by a third party as a consequence of a defect in
the insured’s product are excluded. If it did, the CGL Policy would, practically
speaking, provide no property damage coverage at all. Instead the provision excludes
only property damage to the insured’s product itself, when that damage arises from
some condition in the product itself or a part of it. To reiterate and perhaps be
redundant, the exclusion only applies to “damages to the insured’s product or work
when such damages are confined to the product or work and caused by the product or
work, or any part thereof.” Indiana Ins. Co., 408 N.E.2d at 1280 (emphasis added). In
sum, the cost of Crown’s defective containers is excluded from coverage; Ecolab’s costs
incurred in inspecting, reworking and disposing of the defective containers are not.
What this means is that while the court denies both parties’ motions for summary
39
judgment as to counts III and IV of the complaint, the parties’ rights and obligations
with respect to the exclusions addressed by those counts are clarified.
(b) “Damage to Impaired Property” Exclusion
Count V of the complaint seeks declaratory relief on a third business risk
exclusion in the Policy, which states that there is no coverage for:
Property damage to impaired property or property that has not been
physically injured arising out of: (1) A defect, deficiency, inadequacy or
dangerous condition in your product or your work.
(DE # 52-2 at 9 ¶ (m).) As the court has already determined herein, there was loss-of-use
property damage to Ecolab’s soap, resulting from Crown’s defective containers.30
American argues that Ecolab’s soap was “impaired property,” and as its loss of use was
caused by a defect in Crown’s product, the containers, this exclusion negates coverage.
The Policy defines “impaired property” as:
tangible property, other than your product or your work, that cannot be
used or is less useful because . . . [i]t incorporates your product or your
work : that is known or thought to be defective, deficient, inadequate or
dangerous . . . if such property can be restored to use by . . . repair,
replacement, adjustment or removal of your product or your work[.]
(DE # 52-2 at 18 ¶ 8.) American argues that “applicability of the ‘Damage to Impaired
Property’ exclusion contained in the American Policy to the facts at hand is
unmistakable, and the case of Sokol and Co. v. Atlantic Mut. Ins. Co., 430 F.3d 417 (7th Cir.
2005) is controlling.” (DE # 28 at 23.) This is hyperbole: although Sokol is highly
This determination is only for the purpose of deciding the Policy coverage
issues raised in this action. It is not a conclusive determination, should American
contend otherwise vis-a-vis Ecolab, that Crown caused Ecolab’s property damage.
30
40
useful—but perhaps in a way unanticipated by American—it is an application of Illinois
law, and so not “controlling” in this case governed by Indiana law.
Crown’s response is, first, that the exclusion does not apply to property which is
physically damaged, and Ecolab’s soap was physically damaged when it had to be
scrapped. Second, Crown argues that the Sokol case, along with Hamlin Inc. v. Hartford
Accident & Indemn. Co., 86 F.3d 93 (7th Cir. 1996), shows that the exclusion applies only
when the insured’s defective component can simply be replaced, leaving the thirdparty’s property useable. This is unlike the present case, where Ecolab’s soap was
rendered unuseable and had to be scrapped. In its reply memorandum, American has
responded to the first argument, but not the second.
Crown’s first argument is that Ecolab’s soap was physically damaged, and the
exclusion does not apply when there is physical damage. The court disagrees with both
propositions. Ecolab’s soap, inside the containers, was physically undamaged and
remained in the condition Ecolab intended for it to be in, until Ecolab scrapped it.
Ecolab’s economic decision to throw out undamaged soap is not physical damage to the
soap. The only damage that occurred was loss of use.
But even were this not the case, the exclusion nevertheless applies even when
there is physical damage. The exclusion applies to property damage “to impaired
property or property that has not been physically injured.” (Italics added.) If it is
necessary to specify that the exclusion applies equally to property not physically
injured, then “impaired property” must include property which might be physically
41
injured. The Policy’s definition of “impaired property” as tangible property that cannot
be used, or is less useful, because it incorporates the insured’s defective product does
not rule out physical injury to the tangible property. Moreover, as American points out
in its reply, the exclusion doesn’t even come into play until there has been property
damage, and property damage is either physical injury, or loss of use. In short, Crown’s
first argument is a lost cause.
But Crown’s second argument, unaddressed by American, is potentially fruitful.
Crown argues that Sokol and Hamlin both show that the exclusion applies only when the
insured’s defective component can be replaced, making the third party’s product
useable again, but Ecolab’s soap had to be destroyed. Like so many of the arguments
made in the pending cross motions, this is only partially correct, or, more precisely, is
an incomplete analysis. Consistent with Crown’s interpretation of the cases, the
exclusion in the American Policy specifically states that it applies only if the impaired
property “can be restored to use by . . . repair, replacement, adjustment or removal of
your [Crown’s] product or your work[.]” Where Crown goes astray is in asserting that
Ecolab’s soap had to be destroyed. The facts show that it could have been reworked and
placed in new containers, and some of it in fact was, but the time came when Ecolab
decided it was no longer feasible to do so, and scrapped what remained. The question
that remains is whether the exclusion applies no matter how great the cost of restoring the
impaired property to use might be: that is, does the phrase “can be restored to use”
42
mean that if it is literally possible to do so, even if economically unreasonable, the
property is only “impaired” and the insured has no coverage?
This is why a close look at the facts in Sokol and Hamlin is critical. In both cases
the impaired property exclusion applied (although this appears to be dicta in Hamlin).
In Sokol the insured provided packets of peanut butter, which turned out rancid, that
were incorporated into third-party Continental’s cookie-mix boxes. Continental sold the
boxes to distributors, but before any of the boxes were sold to consumers, the rancid
peanut butter was discovered. Continental recalled the boxes, opened them, and put
new peanut-butter packets inside. The cost of performing this swap was $75,441.20,
which Continental demanded from the insured. Sokol and Co., 430 F.3d at 420, 422.
Presumably, Continental performed the swap because $75,000 was less expensive than
refunding the purchase price to the distributors and telling them to destroy the product
(and facing loss of reputation and goodwill, and unknown litigation costs, if
undestroyed packages somehow reached the market and sickened consumers). The
opinion does not mention whether it would have been cheaper for Continental simply
to recall and destroy the boxes, losing their use entirely.
In Hamlin, the insured made liquid crystal displays (“LCD”) which were sold to a
third-party which incorporated them into instrument panels it manufactured, and the
instrument panels were then sold to manufacturers who placed the panels in tractors.
Later, after the tractors were bought and being used by farmers, the LCDs quit working.
The farmers had the tractors repaired under warranty, and the cost of those repairs was
43
shifted back up the line to the LCD manufacturer. The court remarked that the facts
precisely fit the “impaired product” exclusion. Hamlin Inc., 86 F.3d at 96. Undoubtedly,
repairing and replacing the LCD display in every instrument panel was an expensive
proposition; but undoubtedly less expensive than destroying every tractor. Hamlin has
nothing to say about those alternative circumstances, for example, if every piece of steel
used in the tractor had been defective, requiring it to be dismantled and rebuilt from the
ground up, a process more expensive than simply replacing it with a new tractor.31
In the court’s view, Sokol and Hamlin do stand for the proposition that even when
the costs of restoring impaired property to its intended use are substantial, the exclusion
for damage to impaired property will apply. However, neither case suggests that when
the cost of doing so is greater than the value of the property, the exclusion will still
apply. The plain language of the exclusion in the American Policy, applied literally,
suggests this is the case: if the property “can be restored to use by . . . repair,
replacement, adjustment or removal” of the insured’s defective component, it is
impaired. Hypothetically however, if an “impaired” bucket of soap cost Ecolab $2.00 to
manufacture in the first place will cost $3.00 to salvage, the “impairment” becomes a
complete loss in economic terms.
In fact, Hamlin does not even mention whether the exclusion therein contained
the prerequisite that the impaired property be capable of being returned to use.
Presumably, as a standard CGL policy, it did, but this was simply not a factor in the
case.
31
44
Generally speaking, language in a contract which is plain need only be applied,
not interpreted. But beyond the fact that exclusions in insurance contracts are narrowly
applied, American States Insurance Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996), contracts are
also to be read to effectuate the parties’ intent, and not to produce an absurd result.
USA Life One Ins. Co. of Indiana v. Nuckolls, 682 N.E.2d 534, 539 (Ind. 1997); Allied Fidelity
Ins. Co. v. Lamb, 361 N.E.2d 174, 178-79 (Ind. App. 1977). It would be absurd to assume
that the parties meant for the impaired property exclusion to apply when the cost of
repairing the property exceeds its value. That the literal language of the Policy could
produce this absurdity makes it ambiguous, and interpreting ambiguous language to be
commercially reasonable and to make economic sense is a sound approach. Utica Mut.
Ins. Co. v. Vigo Coal Co., Inc., 393 F.3d 707, 711 (7th Cir. 2004); Hartford Fire Ins. Co. v. St.
Paul Surplus Lines Ins. Co., 280 F.3d 744, 748 (7th Cir. 2002).
Thus, the court concludes that property is “impaired property” only when the
cost of restoring it to use does not exceed its value, which, in the case of damaged
property in the possession of its manufacturer, is likely the cost of simply producing a
new replacement. If producing a replacement is cheaper, the property is a loss, not
impaired, and the exclusion for damage to impaired property does not apply.
What this means in the present case is this: neither party has shown that it is
entitled to summary judgment on the exclusion for damage to impaired property. It is
undisputed that Ecolab made a financial decision to scrap a large portion of the
damaged backlog of soap. But as was already explained above in regard to whether
45
Ecolab suffered property damage, neither party has proved the facts motivating that
decision. Giving Crown the benefit of reasonable inferences, presumably the decision
was compelled by economics, that is, it was cheaper just to replace the soap with new
soap than to rework and reuse it. But giving American the benefit of all reasonable
inferences, that isn’t the only possibility. It’s possible that Ecolab calculated its costs
incorrectly, or didn’t calculate them at all, and made a huge mistake by scrapping the
soap. As a result, neither party is entitled to a summary judgment on count V of
American’s complaint.
(c) “Recall of products” exclusion
Count VI of American’s complaint seeks a declaration on the Policy’s “recall of
products” exclusion. As relevant here, exclusion (n) in the Policy applies to any losses,
costs or expenses that are incurred by any person for the loss of use, or withdrawal or
recall from the market, of the insured’s product or work, or of any impaired property.
(DE # 52-2 at 9-10.) American argues that it is undisputed that Ecolab recalled product
from Japanese customers, so any costs associated with that recall are excluded.
Crown argues that American’s position is based on a mischaracterization of the
deposition testimony of Ecolab’s purchasing manager, William Greiner, who stated
only that some Japanese customers returned some of Ecolab’s product. (DE 31-11 at 18.)
For the purposes of summary judgment, the court accepts that this is the case. This does
not, however, show that the exclusion does not apply, as Crown believes. The exclusion
applies to “any loss, cost or expense incurred by . . .others for the loss of use . . . removal
46
or disposal of: . . . Impaired property; if such . . . property is withdrawn . . . from use by
any person or organization because of a known or suspected defect.” (DE # 52-2 at 910.) Thus, any losses, costs and expenses associated with the products returned by
Japanese customers would be excluded, if the Ecolab products being returned were
“impaired property.” As discussed in the analysis above, there is a question of fact as to
whether Ecolab’s completed soap products were impaired property. Therefore, neither
party is entitled to summary judgment on count VI of American’s complaint.
D. Conclusion
For the foregoing reasons, American’s motion for summary judgment (DE # 27)
is GRANTED IN PART AND DENIED IN PART; Crown’s motion for partial
summary judgment (DE # 29) is GRANTED IN PART AND DENIED IN PART.32
SO ORDERED.
Date: August 24, 2011
s/James T. Moody________________
JUDGE JAMES T. MOODY
UNITED STATES DISTRICT COURT
It should be noted that although the parties’ motions addressed American’s
original complaint, the only change made by the amended complaint was to correct
American’s jurisdictional allegations.
32
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