Opinion
Case Nos. A3-97-03, A3-97-22, and A3-97-23.
January 8, 1999.
MEMORANDUM AND ORDER
Before the Court are the following motions: (1) Motion of Indiana Lumbermens Insurance Company for Summary Judgment, (docket # 21 in Case No. A3-97-03); (2) Motion of The Travelers Indemnity Company of Illinois for Summary Judgment, (docket # 26 in Case No. A3-97-22); and (3) Motion of St. Paul Mercury Insurance Company and St. Paul Fire and Marine Insurance Company for Summary Judgment, (docket # 25 in Case No. A3-97-23). The cases were combined for purposes of oral argument, which was heard on December 18, 1998. For the reasons set out below, the Motion of Indiana Lumbermens Insurance Company for Summary Judgment is hereby GRANTED; the Motion of The Travelers Indemnity Company of Illinois for Summary Judgment is hereby GRANTED; and the Motion of St. Paul Mercury Insurance Company and St. Paul Fire and Marine Insurance Company for Summary Judgment is hereby DENIED.
I. FACTUAL BACKGROUND
PrimeWood, Inc., manufactures cabinet doors. From 1989 through 1994, PrimeWood used in its manufacturing process a white plastic foil supplied by Roxan GmbH Co. Veredelungen (Roxan), a German company. From 1989 through 1991, the cabinet doors incorporating the white plastic foil were apparently of satisfactory quality. In 1992, PrimeWood began to receive complaints from its customers, cabinet manufacturers, about premature yellowing of the cabinet doors. PrimeWood in turn complained to the foil supplier. Roxan initially insisted the yellowing problem was due to PrimeWood's manufacturing process, not Roxan's product. In 1994, independent testing indicated that the Roxan product was chemically unstable. After discontinuing use of the Roxan foil in October of 1994, the yellowing problem disappeared as to new production. PrimeWood eventually brought a civil action to recover damages from Roxan.
In the instant cases, PrimeWood asserts that its commercial general liability (CGL) insurance policies and commercial umbrella liability (CUL) insurance policies for various time periods involved cover damages incurred from addressing its customers complaints. St. Paul Fire and Marine Insurance Companies (St. Paul) issued CGL and CUL policies to PrimeWood from December 15, 1989, through December 15, 1994. Indiana Lumbermens Insurance Company (Lumbermens) issued PrimeWood a CGL policy and a CUL policy effective December 15, 1994, through December 31, 1995. The Travelers Indemnity Company of Illinois (Travelers) provided similar coverage from January 1, 1996, through January 1, 1998. The insurers have all denied coverage.
Lumbermens filed a Complaint for Declaratory Judgment with this Court January 13, 1997. On February 19, 1997, PrimeWood filed similar actions against the two other insurers, Travelers and St. Paul. The Court's jurisdiction in these cases is based on diversity, 28 U.S.C. § 1332. All three insurers have filed motions for summary judgment in their respective cases.
II. SUMMARY JUDGMENT/INSURANCE CONTRACT INTERPRETATION
Under Federal rule of Civil Procedure 56(c), summary judgment is appropriate when "there is no genuine issue as to any material fact." F.R.Civ.P. 56(c). A "material" fact is one which might affect the outcome of the case, and a "genuine" dispute exists if a reasonable jury could find for the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). The evidence must be viewed "in the light most favorable to the nonmoving party."AgriStor Leasing v. Farrow, 826 F.2d 732, 734 (8th Cir. 1987). The issue is whether the evidence submitted presents a sufficient disagreement as to the material facts so that submission to a jury is required, or whether it is so one-sided that one party must prevail as a matter of law. Anderson, 477 U.S. at 251-52.
Since jurisdiction in these cases is based on diversity, the Court applies the substantive law of North Dakota. The determination of the legal effect of an insurance contract is a question of law for a court to decide. Fisher v. American Family Mut. Ins. Co., 579 N.W.2d 599, 602 (N.D. 1998) (interpreting a commercial general liability policy) (citations omitted). Terms in insurance policies "should be construed to mean what a reasonable person in the position of the insured would think it meant," but "any ambiguity or reasonable doubt as to the meaning of an insurance policy is strictly construed against the insurer." Id. (citations omitted). "Limitations or exclusions from broad coverage must be clear and explicit," and "[e]xclusions from broad coverage in an insurance policy are strictly construed against the insurer," with an exception to an exclusion from broad coverage resulting in coverage. Id. (citations omitted). Nonetheless, where the "language of an insurance policy is clear and explicit, the language should not be strained in order to impose liability on the insurer." Id. (citations omitted).
III. TRAVELERS' AND LUMBERMENS' MOTIONS FOR SUMMARY JUDGMENT
In their respective motions for summary judgment, Travelers and Lumbermens similarly assert, inter alia, that PrimeWood's claims are barred because the alleged damage occurred before the issuance of the policies. Under the plain language of the policies at issue, the "insurance does not apply to . . . `property damage' expected or intended from the standpoint of the insured." Lumbermens' Policy at Tab A of Lumbermens' Appendix Submitted in Support of Motion; Travelers' Policies at Tabs A-D of Travelers' Appendix Submitted in Support of Motion (identical exclusionary language).
It is heavily documented and often admitted in the record, and undisputed, that as early as 1992 PrimeWood knew of the yellowing problem and established reserves to cover the anticipated exposure. The Lumbermens and Travelers insurance policies at issue do not apply to damages "expected or intended from the standpoint of the insured." This Court does not agree that the degree of specificity of loss expected as argued by PrimeWood is required. This is an "occurrence" policy, not a "claims made" policy; there simply is no coverage for damages resulting from occurrences outside of, and in this case prior to, the policy period. See Kief Farmers Coop. Elevator v. Farmland Mut. Ins. Co., 534 N.W.2d 28, 36 (N.D. 1995) ("an `occurrence' policy provides coverage if the event insured against takes place within the policy period, regardless of when the injured party makes a claim") (citing 1 R. Long, The Law of Liability Insurance § 1.08[4] (1995)).
Whether North Dakota courts would apply the common law "known loss" doctrine in similar circumstances, or what standard would be employed under it, is of no import; the Court does not rely on it here. The Court notes however, that the concept is incorporated in the plain language of these policies, as discussed above. The concept is also embodied in North Dakota statutory law. See N.D. Cent. Code § 26.1-29-12 (providing that a person may be insured against "[a]ny contingent or unknown event").
Because the alleged property damage at issue here, i.e., damages arising out of the premature yellowing of cabinet doors manufactured by PrimeWood, was unquestionably "expected or intended from the standpoint of the insured" at the time the Lumbermens and Travelers policies at issue went into effect, there is no coverage for those particular damages under those policies, even assuming they are not otherwise excluded under the terms of the policies. Viewed in the light most favorable to PrimeWood, the nonmoving party, see AgriStor Leasing, 826 F.2d at 734, there is no "genuine issue as to any material fact," F.R.Civ.P. 56(c), in this regard; thus, summary judgment is appropriate. Therefore, Lumbermens' Motion for Summary Judgment and Travelers' Motion for Summary Judgment are hereby GRANTED. Since the Court concludes that PrimeWood's claims are barred because the alleged damage occurred before the issuance of the policies, it need not address the other arguments raised by Lumbermens and Travelers.
IV. ST. PAUL'S MOTION FOR SUMMARY JUDGMENT
Coverage for the yellowing related claims, if not otherwise excluded under the provisions of the policies, obviously falls on St. Paul, PrimeWood's insurer from December 15, 1989, through December 15, 1994. See Kief Farmers, 534 N.W.2d at 36 ("a real but undiscovered loss or damage, proved in retrospect to have commenced during the policy period, triggers coverage, irrespective of the time the loss or damage became manifest"). St. Paul does not contest on this ground, but rather argues that there is no coverage for PrimeWood's claims because (1) the claims are based on warranty and not for "property damage" as that term is defined in the policies, (2) that the "your products or completed work," "impaired property" and "product recall" exclusions apply, and (3) PrimeWood's delay in providing notice has prejudiced St. Paul, thus nullifying any potential coverage.
A. "PROPERTY DAMAGE" AS DEFINED BY THE POLICIES
Under the St. Paul policies at issue, St. Paul agrees to "pay amounts any protected person is legally required to pay as damages for covered bodily injury, property damage or fire damage that: happens while this agreement is in effect; and is caused by an event." St. Paul CGL 89-90 policy at Ex. 13 attached to St. Paul Memo. In Supp. Of Mot. For Summ. Judg.; St. Paul CGL 92-93 policy at Ex. 16, attached to same, (substituting "premises" for "fire"). At issue under either wording is whether there has been a claim for "property damage" as that term is defined under the insurance contracts. "Property damage" means "physical damage to tangible property of others, including all resulting loss of use of that property; or loss of use of tangible property of others that isn't physically damaged." Id. (but 92-93 policy adds: "We'll consider all loss of use of damaged tangible property to happen at the time of the physical damage which caused it. And we'll consider all loss of use of undamaged tangible property to happen at the time of the event which caused it.").
It is clear, and apparently conceded by PrimeWood, that there is no coverage under the CGL policies for warranty based claims. See e.g., Fisher, 579 N.W.2d at 605-06 (discussing CGL policies in general and noting that the goal of the CGL "is to protect the insured from the claims of injury or damage to others, but not to insure against economic loss sustained by the insured due to repairing or replacing its own defective work or products" (citation omitted). But, it is also clear that, to the extent PrimeWood can prove "physical damage to tangible property of others" or "loss of use of tangible property of others," then there is coverage for those damages under the policies, provided that they are not otherwise excluded under the contract. It does not appear on the record at this juncture that PrimeWood has conclusively established any physical damage to property of others, or loss of use of tangible property of others, but that is not to say that they will not be able to do so at trial. If not otherwise excluded under the provisions of the policies, PrimeWood may be entitled to recover for "property damage" as defined by the policies. This coverage does apply; however, the Court sees as a difficulty PrimeWood's ability to prove damage to property of others.
B. EXCLUSIONS
St. Paul also argues that the "your products or completed work," "impaired property" and "product recall" exclusions apply, thus precluding coverage for PrimeWood's claims.
1. "your products or completed work" exclusion
Under the "your products or completed work" exclusion, St. Paul is not obligated to cover "damage to any of [the insured's] products that's caused by the product itself or by any of its parts." St. Paul CGL 89-90 policy at Ex. 13 attached to St. Paul Memo. In Supp. Of Mot. For Summ. Judg.; St. Paul CGL 92-93 policy at Ex. 16, attached to same. St. Paul argues that PrimeWood seeks only to recover for business losses associated with satisfying its customers' warranty based claims, which are not covered damages under the policies. PrimeWood argues that the "your products" exclusion doesn't apply to damage to property other than PrimeWood's products or work.
Both are correct, and it boils down to a rehash of the "property damage" definition argument addressed above. To the extent that PrimeWood seeks to recover for their own defective product, i.e., the doors, and costs associated with the replacement and or repair of the doors themselves, the "your products" exclusion precludes recovery. See Fisher, 579 N.W.2d at 606 (excluding from CGL policy coverage costs associated with repair or replacement of the insured's defective work or products) (citation omitted). However, to the extent that PrimeWood can prove physical damage to property of others, or loss of use of tangible property of others, they are not precluded from recovery under the "your products" exclusion. Again, PrimeWood's obstacle is proving the property damage to others.
2. "impaired property" exclusion
Under the "impaired property" exclusion, St. Paul is not obligated to cover "property damage to impaired property, or property that hasn't been physically damaged, that's caused by: [the insured's] faulty or dangerous products or completed work; or a delay or failure in fulfilling the terms of a contract or agreement." St. Paul CGL 89-90 policy at Ex. 13 attached to St. Paul Memo. In Supp. Of Mot. For Summ. Judg.; St. Paul CGL 92-93 policy at Ex. 16, attached to same. "Impaired property" is defined as "tangible property, other than [the insured's] products or completed work, that can only be restored to use by: the adjustment, repair, replacement or removal of [the insured's] products or completed work which forms a part of it; or [the insured's] fulfilling the terms of a contract or agreement." Id. (but note that 92-93 policy replaces "that can only be restored to use by: the" with "that can be restored to use by nothing more than: an"). There is also an exception to the exclusion which provides that the exclusion won't apply "to damages that result from the loss of use of other property not physically damaged that's caused by sudden and accidental physical damage to [the insured's] products . . . after they've been put to their intended use." St. Paul CGL 89-90 policy at Ex. 13 attached to St. Paul Memo. In Supp. Of Mot. For Summ. Judg.; St. Paul CGL 92-93 policy at Ex. 16, attached to same (providing similar exception to the exclusion but employing different wording).
St. Paul argues that the cabinets incorporating the doors constitute "impaired property" as defined in the policy and coverage is precluded by the "impaired property" exclusion. PrimeWood, apparently conceding that the cabinets are "impaired property" as that term is defined or "property that hasn't been physically damaged" argues that the exception to the exclusion applies because the yellowing of PrimeWood's cabinet doors has occurred in a "sudden and accidental" manner. The parties contest whether the premature yellowing of the doors can be fairly characterized as sudden and accidental.
In light of North Dakota's approach to interpreting insurance contracts, see Fisher, 579 N.W.2d at 602 (discussed above), this Court is inclined to generously construe the phrase "sudden and accidental" in favor of the insured. See Just v. Land Reclamation, Ltd., 456 N.W.2d 570, 573 (Wis. 1990) (concluding the phrase "sudden and accidental" susceptible to more than one reasonable meaning, including "abrupt and immediate" as well as "unexpected and unintended," thus ambiguous, and consequently construed in favor of the insured); Patz v. St. Paul Fire Marine Ins. Co., 15 F.3d 699, 703 (7th Cir. 1994) (acknowledging Wisconsin Supreme Court interpretation of "sudden and accidental" as "unintended and unexpected" as set out in Just). The conflict in authority on this phrase's meaning only highlights the phrase's susceptibility to more than one reasonable interpretation. See e.g., Liberty Mut. Ins. Co. v. FAG Bearings Corp., 153 F.3d 919, 923 (8th Cir. 1998) (interpreting Missouri law and concluding that the phrase "sudden and accidental" includes a "temporal element such that it is abrupt, immediate and unexpected").
The premature yellowing of the doors here certainly was "unexpected and unintended" on the part of PrimeWood. Even if a temporal element requirement is presumed, the relative rate of the yellowing of the doors here is "sudden" in comparison to the normal rate of yellowing to be expected. The Court concludes that the exception to the impaired property exclusion is applicable; consequently, St. Paul may not deny coverage under the impaired property exclusion. Nonetheless, PrimeWood is still limited to recovering for property damage to others as previously discussed.
3. "product recall" exclusion
St. Paul also asserts that the product recall exclusion precludes coverage for PrimeWood's claims. The St. Paul policies at issue set out the exclusions as follows:
Product recall. We won't cover damages that result from the:
• loss of use;
• recall, withdrawal;
• adjustment, inspection, repair, replacement; or
• removal or disposal of;
impaired property or your products or completed work from the market or from use by anyone for any reason.
St. Paul CGL 89-90 policy at Ex. 13 attached to St. Paul Memo. in Supp. of Mot. for Summ. Judg.
Product recall. We won't cover any loss, cost or expense that:
• is incurred by you or others; and
• results from the recall, removal or withdrawal of impaired property, or your products or completed work, from the market or from use by any person or organization for any reason.
Nor will we cover any loss, cost, or expense that is incurred by you or others and results from the:
• loss of use;
• adjustment, inspection, repair;
• replacement; or
• disposal; of such property, products or completed work.
St. Paul CGL 92-93 policy at Ex. 16 attached to St. Paul Memo. in Supp. of Mot. for Summ. Judg.
The product recall exclusion in the 89-90 policy at issue is extremely difficult to read and give meaning to each phrase. The 92-93 version is somewhat clearer in that it requires a "recall, removal or withdrawal" of some sort; but even the language in that version is so broadly worded, i.e., "from the market or from use by any person or organization for any reason," that it is still difficult to apply. It is noted that these product recall exclusions are worded more broadly than those treated in most of the case law; but the Court does find the case law instructive on their interpretation.
The exclusions appear to be forms of a common provision in comprehensive liability insurance policies referred to as a "sistership exclusion," this term being derived from aircraft industry use describing the situations in which one plane crashed and its "sisterships" were thereafter grounded and recalled by the manufacturer in order to correct the common defect which had caused the crash. See Bigelow-Liptak Corp. v. The Continental Ins. Co., 417 F. Supp. 1276, 1281 (E.D. Mich. 1976) (citing Arcos Corp. v. American Mut. Liability Ins. Co., 350 F. Supp. 380, 385 (E.D. Penn. 1972) (discussing recall/"sistership" exclusion in CGL policy)). The recall exclusion typically applies only if the product or property of which it is a part is recalled, removed or withdrawn from the market, and even in such situations, the policy still covers damages caused by the product that failed. See Arcos, 350 F. Supp. at 385; see also Todd Shipyards Corp. v. Turbine Service, Inc., 674 F.2d 401, 419 (5th Cir. 1982) (discussing recall/"sistership" exclusion) (citing 2 Long, The Law of Liability Insurance, other citations omitted); Olympic Steamship Co. v. Centennial Ins. Co., 811 P.2d 673, 676 (Wash. 1991) (discussing same); Sethenss-Greenleaf, Inc. v. Cigna Property and Cas. Ins. Co., 1995 WL 571866 (N.D. Ill. 1995) (discussing same). Here, there is no evidence that PrimeWood's product was recalled or withdrawn, as those terms are typically used, and PrimeWood's claim for damages does not include any expenses for such action.See id. There may be some argument that a withdrawal from use by someone has occurred, but even so there would be coverage for damages stemming from product that had been put to its use and failed before any withdrawal commenced.
Much of the case law discusses the source of the recall, whether made by the insured or third party, and the effect of that on coverage. See e.g., Olympic Steamship, 811 P.2d at 675-79 (discussing at length the issue of whether there is coverage where a third party recalls a product or the insured itself, but notes that the 1985 CGL policy form amended the language of the sistership exclusion to avoid the confusion surrounding the applicability of the exclusion when a third party recalls a product at 677 and n. 3). In any event, a majority of the courts who have considered the issue require a recall by someone to exclude coverage under the recall exclusion. See e.g., Aetna Cas. Surety Co. v. PPG Indus., Inc., 554 F. Supp. 290, 295 (D. Az. 1983) (citing Bigelow-Liptak, 417 F. Supp. 1276) (finding the recall exclusion inapplicable since there had been no recall). Certainly, a reasonable person in the position of PrimeWood, the insured here, could assume that the product must be recalled from the market in order for the recall exclusion to apply. Fisher, 579 N.W.2d at 602 (providing that terms in insurance policies "should be construed to mean what a reasonable person in the position of the insured would think it meant," "any ambiguity or reasonable doubt as to the meaning of an insurance policy is strictly construed against the insurer," and "[l]imitations or exclusions from broad coverage must be clear and explicit," and "are strictly construed against the insurer").
St. Paul's reliance on Maple Island, Inc. v. St. Paul Mercury Ins. Co., 1997 WL 406647 (Minn.Ct.App.) is malapropos. The court inMaple Island did address the same version of the product recall exclusion as set out in the 89-90 policy at issue here and interpreted it broadly. Id. (finding exclusion applied to damages that result from the recall of a product "for any reason," not just to exclude coverage for the costs of recalling products to prevent additional product failures). Nonetheless, even that opinion still assumes a recall of some sort. Further, it is noted that unpublished opinions of the Minnesota Court of Appeals are not precedential in Minnesota state courts, let alone here. Minn. Stat. § 480A.08; see also Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800-01 (Minn.Ct.App. 1993) (concluding that district court erred in relying upon an unpublished opinion; noting persuasive value but warning of danger of mis-citation).
St. Paul's citation to United Steel Fabricators, Inc. v. Fidelity Guaranty Ins. Underwriters Inc., 1993 WL 69258 (Ohio Ct.App.) is also misplaced as it too supports PrimeWood's position. The court in United Steel determined that the product recall exclusion did not apply since there was no product recall and the broadening of the exclusion language was not intended to include "no recall" situations. See id. There is no evidence that a recall was involved in this case, thus the exclusion is not applicable.
C. NOTICE
The Court agrees with PrimeWood in its assertion that the issue of reasonableness of notice and prejudice to the insurer due to delay in receiving notice are jury questions. See Home Ins. Co. v. Arkansas Mechanical Contractors, Inc., 531 F.2d 906, 908-09 (8th Cir. 1976) (issue of reasonableness of notice to insurer properly submitted to jury); Reid v. Connecticut Gen. Life Ins. Co., 17 F.3d 1092, 1098 (8th Cir. 1994) (noting that the presence or absence of prejudice in the context of notice to insurer is a fact issue). Consequently, the notice issue does not establish a basis for the Court to grant the insurer summary judgment. See F.R.Civ.P. 56.
Because the Court does not find PrimeWood's claims conclusively foreclosed by the arguments raised by the insurer, St. Paul's Motion for Summary Judgment is DENIED.
V. SUMMARY
For the reasons set out above, the Motion of Indiana Lumbermens Insurance Company for Summary Judgment, (docket # 21 in Case No. A3-97-03), is hereby GRANTED; the Motion of The Travelers Indemnity Company of Illinois for Summary Judgment, (docket # 26 in Case No. A3-97-22), is hereby GRANTED; and the Motion of St. Paul Mercury Insurance Company and St. Paul Fire and Marine Insurance Company for Summary Judgment, (docket # 25 in Case No. A3-97-23), is hereby DENIED.
IT IS SO ORDERED.
RODNEY S. WEBB, CHIEF JUDGE UNITED STATES DISTRICT COURT