45 F.3d 1170 (7th Cir. 1995), 94-2614, Charter Oak Fire Ins. Co. v. Color Converting Industries Co.

Docket Nº:94-2614, 94-2615.
Citation:45 F.3d 1170
Party Name:CHARTER OAK FIRE INSURANCE COMPANY, Plaintiff-Appellee, v. COLOR CONVERTING INDUSTRIES COMPANY, Defendant-Third Party/Plaintiff-Appellant, v. The TRAVELERS INSURANCE COMPANY, Third Party/Defendant-Appellee. COLOR CONVERTING INDUSTRIES COMPANY, Plaintiff-Appellant, v. CHARTER OAK FIRE INSURANCE COMPANY and The Travelers Insurance Company, Defendants
Case Date:February 03, 1995
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 1170

45 F.3d 1170 (7th Cir. 1995)

CHARTER OAK FIRE INSURANCE COMPANY, Plaintiff-Appellee,

v.

COLOR CONVERTING INDUSTRIES COMPANY, Defendant-Third

Party/Plaintiff-Appellant,

v.

The TRAVELERS INSURANCE COMPANY, Third Party/Defendant-Appellee.

COLOR CONVERTING INDUSTRIES COMPANY, Plaintiff-Appellant,

v.

CHARTER OAK FIRE INSURANCE COMPANY and The Travelers

Insurance Company, Defendants-Appellees.

Nos. 94-2614, 94-2615.

United States Court of Appeals, Seventh Circuit

February 3, 1995

Argued Dec. 8, 1994.

Rehearing and Suggestion for Rehearing En Banc Denied March

15, 1995.

Page 1171

Frank Steeves (argued), Brian Peacy, Crivello, Carlson, Mentkowski & Steeves, Milwaukee, WI, for Charter Oak Fire Ins. Co., Travelers Ins. Co.

David E. Jarvis, Quarles & Brady, Milwaukee, WI, Kevin P. Crooks, Crooks, Low & Connell, Wausau, WI, Lawrence L. Marcucci (argued), Thomas M. Cunningham, Brenton D. Soderstrum, Ronald M. Kaplan, Shearer, Templer, Pingel & Kaplan, P.C., West Des Moines, IA, for Color Converting Industries Co.

Before POSNER, Chief Judge, and REAVLEY [*] and COFFEY, Circuit Judges.

POSNER, Chief Judge.

Travelers Insurance Company refused to reimburse Color Converting Industries Company, which it had insured against products liability, for a $200,000 settlement that Color Converting had made with a valued customer, American National Can Company. The basis of the insurance company's refusal to cover this loss was the "voluntary payments" provision of the insurance policy. A standard provision, it states that "no insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without consent." Color Converting has sued Travelers (and an affiliate of Travelers', Charter Oak, but that is a detail), charging that Travelers breached an implied duty to settle and acted in bad faith to boot, and in consequence should not be allowed to set up the voluntary-payments clause as a defense. The district judge granted summary judgment for Travelers. The parties agree that Iowa law governs the substantive issues in this diversity litigation; Color Converting has its principal place of business there and the insurance contract was made there.

Color Converting makes ink. American National, its biggest customer, asked one of Color Converting's salesmen whether it could use a certain type of ink, made by Color Converting, on a particular type of packaging. The salesman said yes. American National switched to that ink, and as a result some output was ruined. That was in the fall of 1990. Shortly afterward, American National demanded $235,000 in compensation for the ruined output from Color Converting, which notified its insurance agent though not Travelers directly. In June of 1991 representatives of American National and Color Converting met. American National agreed to reduce its products liability claim to $200,000. Travelers construes this as Color Converting's having agreed to settle American National's products liability claim for that amount. But the characterization is disputed, so we do not rely on it, the case having been decided as we noted on summary judgment. Color Converting notified the insurance agent that the claim was now $200,000, and the agent notified Travelers. By then it was July. Travelers assigned claims handlers to investigate the claim. We do not understand Color Converting to be arguing that Travelers should have done so earlier.

In November, Travelers decided that the accident was covered by the insurance policy, but it was unsure about its insured's liability to American National and it was particularly uncertain about the size of the loss--and this in two respects. First, American National might have been at fault as well as Color Converting--might have known that the substitute ink could cause problems. In that event, Color Converting's liability might be reduced (though not eliminated), in accordance with the principle of comparative negligence. Second, Travelers could not be sure that American National had actually lost $200,000. It wanted invoices and other documentation that would show the material and labor costs that American National had incurred in producing the output ruined by the use of the wrong ink. Why that information was germane is unclear. If a tortfeasor destroys your goods, you are entitled to their market value and not merely to the costs that you incurred to produce them. Barnhouse v. Hawkeye State Bank, 406 N.W.2d 181, 183 (Ia.1987); Ruden v. Hansen, 206 N.W.2d 713, 718 (Ia.1973); Transcraft, Inc. v. Galvin, Stalmack, Kirschner & Clark, 39 F.3d 812, 821 (7th Cir.1994). But Color Converting does not question the relevance of

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the cost information sought by Travelers. Apparently all that American National was seeking was the cost of the ruined output, not the cost plus the anticipated profit built into the market price. If so, this is some indication that $200,000 was a reasonable--even a modest--demand. So it seems to us, at any rate. But Color Converting does not argue that American National may have been seeking less than it was legally entitled to, so we do not pursue the point.

American National refused to turn over the cost data sought by Travelers, on the ground that the data were proprietary. Travelers offered to sign an agreement not to disclose the data. American National refused, believing, whether rightly or wrongly, that Color Converting had acknowledged the legitimacy of the $200,000 claim, so that American National had nothing to gain from playing ball with the insurance company. Color Converting, in an effort to satisfy Travelers that $200,000 was a reasonable settlement (an effort that supports, by the way, Travelers' characterization of its insured's agreement of June 1991 with American National), estimated American National's costs from industry averages. Travelers refused to accept the estimate, on the ground that American National's costs might well be below the average for its industry, since American National was a very successful firm. Color Converting argues that Travelers was being overcautious; and for purposes of this appeal we accept the argument.

Matters were at an impasse when on August 27, 1992, American National told Color Converting that unless it received $200,000 by September 4 it would stop doing business with it. Color Converting informed Travelers of this demand, but the insurance company refused to make a settlement offer to American National. It took the position that if Color Converting yielded to American National's demand, Travelers would invoke the voluntary-payments clause of the insurance contract and refuse to reimburse Color Converting. Unwilling to lose its biggest customer, Color Converting paid American National $200,000. Travelers refused to reimburse it, and this litigation ensued.

We do not find any basis in Iowa law, or in that of any other state except Louisiana, Emile M. Babst Co. v. Nichols Construction Corp., 488 So.2d 699 (La.App.1986), and possibly (though possibly not) Nebraska and California, see Otteman v...

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