Summary
stating the insurer must affirmatively establish an exclusion to deny coverage on the basis of the exclusion's terms
Summary of this case from Collins v. Auto-Owners Ins. Co.Opinion
No. 80-369
Decided December 30, 1980.
Insurance — Liability — Exclusions — Burden of proof — Evidence — Sufficiency.
When an insurer denies liability coverage on the basis of a "business risk" exclusion that exempts coverage for "bodily injury or property damage, resulting from the failure of the named insured's products or work completed by or for the named insured to perform the function or serve the purpose intended by the named insured," the burden is on the insurer to prove that the product failed to perform the function or serve the purpose intended by the insured.
APPEAL from the Court of Appeals for Cuyahoga County.
On June 20, 1972, Michael Rupp, age six, was injured when a "Wild Rider" toy in which he was riding collided with an automobile in front of a driveway near his parents' home. The six-wheeled "Wild Rider" was designed and manufactured by defendant-appellant Louis Marx Co., Inc. (Marx).
Thereafter, suit was filed on behalf of Michael Rupp against Marx and the driver of the auto. Recovery against appellant was based on allegations that, inter alia, Marx "was negligent in designing and manufacturing an unsafe toy," and that Marx "expressly warranted by means of enticing advertisements that said toy***was safe for the use intended when in fact it was not."
Plaintiff-appellee, Continental Insurance Co. (Continental), undertook the defense of Marx pursuant to the terms of its comprehensive general liability insurance policy. On September 17, 1975, Continental notified Marx that it would continue to defend against the Rupp action, but it reserved the right not to indemnify Marx for any liability which fell within the terms of policy exclusion (k), which reads as follows:
"This insurance does not apply:***(k) to bodily injury or property damage, resulting from the failure of the named insured's products or work completed by or for the named insured to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specifications, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury or property damage resulting from the active malfunctioning of such products or work."
Subsequently, Continental and Marx entered into a settlement of the Rupp action, whereby each agreed to pay Rupp $55,550. The instant parties then agreed between themselves that the applicability of exclusion (k) would be determined in an action for declaratory judgment. Continental filed such an action in the Court of Common Pleas, praying for reimbursement by Marx to the extent of plaintiff's settlement contribution. Defendants counterclaimed for, essentially, the same relief.
The cause was submitted to the trial court on the basis of stipulations of fact and 15 exhibits, the latter of which, inter alia, included the insurance policy, Rupp's second amended complaint, Rupp's answers to interrogatories, reports of three experts who examined the "Wild Rider" and Marx's advertisement of the toy. The trial court found that the claims of Rupp were not based upon "a failure of the***["Wild Rider"] to perform the function or serve the purpose intended" by Marx, so that exclusion (k) did not apply. Concluding that plaintiff's insurance policy did afford coverage against Rupp's claims, the Court of Common Pleas granted judgment for Marx in the amount of its settlement contribution.
The parties stipulated that the second amended complaint and the answers to interrogatories contain the claims of Rupp against Marx. The answers to interrogatories basically aver negligence by Marx in the design of the "Wild Rider."
The Court of Appeals subsequently reversed, finding that exclusion (k) was applicable, and ordered Marx to reimburse Continental for the latter's settlement contribution.
The cause is now before this court upon the allowance of a motion to certify the record.
Messrs. Gallagher, Sharp, Fulton, Norman Mollison, Mr. John B. Robertson and Mr. Alan M. Petrov, for appellee. Messrs. Spangenberg, Shibley, Traci Lancione, Mr. John D. Liber, Messrs. Vorys, Sater, Seymour Pease, Mr. John C. Elam, Mr. Robert E. Leach and Mr. Philip A. Brown, for appellants.
Exclusion (k), known in the insurance community as a "business risk" exclusion, contains essentially three provisos. In order for liability for bodily injury or property damage to be excluded from coverage under Continental's policy, the following conditions must all occur:
(1) the injury or damage must result from the failure of the insured's product to perform the function or serve the purpose intended by the insured;
(2) such failure must be due to a mistake or deficiency in design or design-related areas; and
(3) the injury or damage must not result from active malfunctioning of the product.
Herein, we are primarily concerned with the applicability of the first condition. In this regard, the essential controversy concerns the nature of the function or purpose that Marx intended for the "Wild Rider." Marx contends that the purpose intended was that of a toy, which would provide amusement and enjoyment to children age three to ten. On the other hand, Continental points to an advertising circular for the "Wild Rider" which mentioned the product's safety as evidence that the function or purpose intended was to assure a safe and controlled ride. This latter view was adopted by the Court of Appeals in its conclusion that the product did fail to serve its intended purpose.
The parties stipulated that the "Wild Rider" "was operating according to and consistent with its design," and that "[t]here was no evidence of any damage to or mechanical defect" in the product. Thus, under condition (3), it appears the product did not actively malfunction. As to condition (2), there is some evidence indicating that the product was negligently designed; however, because of our disposition with regard to condition (1), this court need not decide whether condition (2) was met.
At the outset, it is important to note that "[a] defense based on an exception or exclusion in an insurance policy is an affirmative one, and the burden is cast on the insurer to establish it." Arcos Corp. v. American Mut. Liability Ins. Co. (D.C. E.D. Pa. 1972), 350 F. Supp. 380, 384. Thus, in order for Continental to deny coverage on the basis of the terms of exclusion (k), the foregoing maxim requires the insurer to prove that the purpose for which Marx intended the "Wild Rider" was to provide a safe, controlled ride.
Similarly, see American Employers' Ins. Co. v. Maryland Cas. Co. (C.A. 1, 1975), 509 F.2d 128, 130; and Cargill, Inc., v. Liberty Mut. Ins. Co. (D.C. Minn. 1979), 488 F. Supp. 49, 52. In both these cases the courts determined the purpose the products were to serve from the fiewpoint of the insured's intent.
The only evidence presented regarding the product's intended purpose was the aforementioned advertisement. We find that this exhibit is insufficient, as a matter of law, to establish that the "Wild Rider's" purpose was to provide a safe ride, as opposed to being an amusing toy. In fact, taken as a whole, the contents of the ad tend to support the conclusion that the latter function was intended. While the circular once mentions "safe" as an attribute, it also describes the product as a "thrill toy" with "[d]river controlled thrills — tame enough for the timid, wild enough for the adventurous***." Although Marx most likely considered safety a desirable characteristic of the "Wild Rider," the product's primary purpose was not to provide a secure mode of transportation for three to ten year old children. Rather, the product appears to have been intended as a device for amusement, a toy.
If Continental's safety argument were to prevail, insurers could deny liability coverage in most instances where bodily injury or property damage arose from a product's defective design. The injury or damage itself would usually establish that the product failed to perform its function of assuring safety in operation.
There was no evidence of failure of the "Wild Rider" to serve its purpose as a toy. Thus, the first condition of exclusion (k) was not met, and Marx was entitled to coverage under the policy for the entire amount of the settlement. The trial court, therefore, correctly entered judgment for Marx in the amount of its contribution to the settlement.
For the above reasons, the judgment of the Court of Appeals is reversed.
Judgment reversed.
CELEBREZZE, C.J., W. BROWN, P. BROWN, LOCHER and HOLMES, JJ., concur.
DOWD, J., dissents.