Nationwide Mut. Ins. Co. v. Cpb Intern., Inc.

• Decision Date: 14 April 2009
• Docket Number: No. 07-4772.,07-4772.
• Citation: 562 F.3d 591
• Parties: NATIONWIDE MUTUAL INSURANCE COMPANY v. CPB INTERNATIONAL, INC.; NBTY, Inc.; Rexall Sundown, Inc., CPB International, Inc., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

562 F.3d 591

NATIONWIDE MUTUAL INSURANCE COMPANY v. CPB INTERNATIONAL, INC.; NBTY, Inc.; Rexall Sundown, Inc., CPB International, Inc., Appellant.

No. 07-4772.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit LAR 34.1(a) March 3, 2009.

Opinion Filed: April 14, 2009.

Kathryn A. Dux, Esq., German, Gallagher & Murtagh, Philadelphia, PA, Charles E. Haddick, Jr., Esq., Dickie, McCamey & Chilcote, Camp Hill, PA, for Appellee.

Michael D. Collins, Esq., Shawnee Square, Buttermilk Fall Road, Shawneeon-Delaware, PA, for Appellant.

Before: BARRY, WEIS, and ROTH, Circuit Judges.

OPINION OF THE COURT

BARRY, Circuit Judge.

CPB International ("CPB") appeals the District Court's grant of Nationwide Mutual Insurance Company's ("Nationwide") motion for summary judgment in this declaratory judgment action that Nationwide filed to determine its obligations under a commercial general liability ("CGL") policy it had issued to CPB (the "policy"). The central issue is whether the policy required Nationwide to defend and indemnify CPB against an action brought by Rexall Sundown, Inc. and a related corporation, NBTY, Inc. (collectively "Rexall"). The action alleged that CPB breached a contract for the delivery of goods by providing a defective product and sought consequential damages for that breach. The District Court held that because the underlying claim was "contractual in nature," it was not covered by the terms of the policy. We will affirm, predicting, as we do so, that the Supreme Court of Pennsylvania would hold that an action arising out of a contract between the parties is not covered by a CGL policy in Pennsylvania.

I.

CPB is an importer and wholesaler of chondroitin, a nutritional supplement made from animal cartilage. CPB imports chondroitin manufactured in China and sells it to companies in the United States which combine chondroitin and glucosamine, a nutritional supplement made from crab, lobster and shrimp shells, with other ingredients to manufacture nutritional tablets. The tablets are beneficial to people who suffer from osteoarthritis. Nationwide issued a CGL policy to CPB, which the parties agree was in effect at the time of the alleged breach. Under the policy, Nationwide agreed to "pay those sums that [CPB] be[came] legally obligated to pay as damages because of ... `property damage' to which this insurance applies." (Appendix at 134.)

Although the present action is between Nationwide and CPB, the underlying dispute is between Rexall and CPB. Our focus is whether that dispute triggers Nationwide's duties under the policy.

A. The Underlying State Court Litigation.

CPB has been a Rexall vendor since at least 1997, and agreed, as recently as June 11, 2003, to Rexall's vendor compliance regulations. Pursuant to that agreement, CPB promised to deliver products of the highest industry standards, and Rexall was entitled to reject imperfect goods and all goods not conforming to purchase order requirements.

On October 1, 2004, Rexall ordered 10,000 kilograms of chondroitin at seventy-six dollars per kilogram from CPB. On October 27, 2004, Rexall ordered an additional 10,000 kilograms of chondroitin at the same price. In December 2004, CPB filled the first order, and billed Rexall $760,000 by invoice. Rexall paid the invoice in January 2005. Thereafter, CPB partially filled Rexall's second order by sending it 9,500 kilograms of chondroitin, and billing it $722,000. Rexall did not pay for the second shipment.

In April 2005, CPB filed suit against Rexall for breach of contract and demanded payment for the second shipment. Rexall filed an answer and counterclaim (the "underlying claim"), alleging that the chondroitin that was shipped to it was deficient, of improper composition, and unusable for its intended purpose, and that the delivery of the material constituted a material breach of contract. Rexall thus sought return of its initial $760,000 payment and consequential damages in an amount exceeding $1,195,465 for the shipment of the allegedly defective chondroitin. Rexall did not discover that the chondroitin was of improper composition until after it had already combined it with glucosamine and other ingredients to form the nutritional tablets. The tablets, which were mixed with ingredients valued at more than $991,015, are now allegedly useless and without value.

CPB tendered the underlying claim to Nationwide pursuant to the policy. Nationwide assumed defense of the action, but did so under a reservation of rights.

B. The Policy.

Nationwide is bound to pay damages that CPB "becomes legally obligated to pay ... because of ... `property damage' to which [the policy] applies." The policy applies "only if ... `property damage' is caused by an `occurrence' that takes place in the `coverage territory.'" (Appendix at 134.) Both "property damage" and "occurrence" are defined terms. Property damage means "[p]hysical injury to tangible property, including all resulting loss of use of that property ... or [l]oss of use of tangible property that is not physically injured." (Id. at 147.) "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Id. at 146.)

The policy also features express exclusions, including one that is particularly relevant here. Exclusion "b" is entitled "Contractual Liability," and states that the "insurance does not apply to ... `property damage' for which the insured is obligated pay damages by reason of the assumption of liability in a contract or agreement." (Appendix at 135.)¹

C. The Present Action.

On February 16, 2006, Nationwide filed this action seeking a declaratory judgment that it owed no duty to defend or indemnify CPB against Rexall's claims. Nationwide asserted that the underlying claim did not allege an "occurrence" covered under the policy, and, alternatively, that the contractual liability exclusion barred coverage. CPB, in turn, filed a counterclaim on May 8, 2006, seeking a judgment declaring precisely the opposite—that Nationwide does owe CPB a duty to defend and indemnify it against the claims asserted by Rexall.

The parties filed cross-motions for summary judgment, and the District Court granted Nationwide's motion. It held that "[b]oth the allegation that CPB did not provide the material it was obligated to under the contract [with Rexall], and the allegation that such breach caused consequential damage to [Rexall's] property are claims based on duties CPB owed [Rexall] only by virtue of having entered into a contract with [it]. As such, the underlying claims are based in contract, and do not arise from covered `occurrences.'" (Appendix at 18-19.) Alternatively, the Court held that the contractual liability exclusion applied to Rexall's claims.

II.

"Our standard of review of a grant of summary judgment is plenary." Gardner v. State Farm Fire & Cas. Co., 544 F.3d 553, 557 (3d Cir.2008).²

"Under Pennsylvania law, which the parties agree is applicable here, the `interpretation of an insurance contract regarding the existence or non-existence of coverage is generally performed by the court.'" Id. at 558 (quoting Donegal Mut. Ins. Co. v. Baumhammers, 595 Pa. 147, 938 A.2d 286, 290 (2007)); see Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888, 897 (2006) ("The interpretation of an insurance contract is a question of law that we will review de novo").

Our inquiry is straightforward. We look first to the terms of the policy which are a manifestation of the "intent of the parties." Baumhammers, 938 A.2d at 290. "When the language of the policy is clear and unambiguous, we must give effect to that language." Id. (quoting Kvaerner, 908 A.2d at 897). "However, `when a provision in the policy is ambiguous, the policy is to be construed in favor of the insured....'" Id. (quoting Kvaerner, 908 A.2d at 897). Next, we compare the terms of the policy to the allegations in the underlying claim. "It is well established that an insurer's duties under an insurance policy are triggered by the language of the complaint against the insured." Kvaerner, 908 A.2d at 896.³ "In determining the existence of a duty to defend, the factual allegations of the underlying complaint against the insured are to be taken as true and liberally construed in favor of the insured." Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742, 746 (3d Cir.1999).

Thus, we look to the language of the policy "to determine in which instances [it] will provide coverage, and then examine [Rexall's counterclaim] to determine whether the allegations set forth therein constitute the type of instances that will trigger coverage." Kvaerner, 908 A.2d at 897. If we conclude that a "single claim in a multi-claim lawsuit is potentially covered, the insurer must defend all claims until there is no possibility that the underlying plaintiff could recover on a covered claim." Frog, 193 F.3d at 746. Because it is clear that the underlying complaint alleges property damage as that term is used in the policy, this appeal turns on whether the alleged breach is an occurrence.

A. Claims Based on Faulty Workmanship.

In Kvaerner, the Supreme Court of Pennsylvania interpreted policy language identical to that at issue here. See 908 A.2d at 897 (policy defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same or general harmful conditions"). The court noted that the "key term in the ordinary definition of `accident' is `unexpected.'" Id. at 898. There, the underlying claim, filed by Bethlehem Steel Corporation, alleged that the insured failed to construct a coke oven battery that met the agreed-upon contract specifications. Id. at 891. Bethlehem sought damages for breach of contract and breach of warranty. Id. The court characterized the claim as one for "faulty workmanship," and held that "the definition of `accident'...