Aetna Cas. & Sur. Co. v. PPG Industries, Inc., CIV 79-661 PHX CLH.

• Decision Date: 07 January 1983
• Docket Number: No. CIV 79-661 PHX CLH.,CIV 79-661 PHX CLH.
• Citation: 554 F. Supp. 290
• Parties: AETNA CASUALTY & SURETY COMPANY, a Connecticut corporation, Plaintiff, v. PPG INDUSTRIES, INC., a Pennsylvania corporation; Reichhold Chemicals, Inc., a Delaware corporation; Upjohn Company, a Delaware corporation; State of Arizona, in its own behalf and on behalf of its agencies, departments, commissions and political subdivisions; C.W.R. Citrus Processors, Inc., an Arizona corporation; Sun Country Citrus, Inc., an Arizona corporation; Yerba Corporation, an Arizona corporation; Yuma Citrus Exchange, an Arizona corporation; Joseph M. Battersby and Beverly J. Battersby, husband and wife; Mesa Citrus Growers, an Arizona corporation; and Louis Lufty, Defendants.
• Court: U.S. District Court — District of Arizona

554 F. Supp. 290

AETNA CASUALTY & SURETY COMPANY, a Connecticut corporation, Plaintiff, v. PPG INDUSTRIES, INC., a Pennsylvania corporation; Reichhold Chemicals, Inc., a Delaware corporation; Upjohn Company, a Delaware corporation; State of Arizona, in its own behalf and on behalf of its agencies, departments, commissions and political subdivisions; C.W.R. Citrus Processors, Inc., an Arizona corporation; Sun Country Citrus, Inc., an Arizona corporation; Yerba Corporation, an Arizona corporation; Yuma Citrus Exchange, an Arizona corporation; Joseph M. Battersby and Beverly J. Battersby, husband and wife; Mesa Citrus Growers, an Arizona corporation; and Louis Lufty, Defendants.

No. CIV 79-661 PHX CLH.

United States District Court, D. Arizona.

January 7, 1983.

Leo R. Beus, Neil Vincent Wake, David H. Colby, Beus, Gilbert, Wake & Morrill, Phoenix, Ariz., for defendant The Upjohn Co. Newman R. Porter, Randall S. Yavitz, Evans, Kitchel & Jenckes, P.C., Phoenix, Ariz., for defendant Reichhold Chemicals, Inc.

John G. Ryan, Fennemore, Craig, von Ammon & Udall, Phoenix, Ariz., for defendants CWR Citrus, et al.

John J. Bouma, Joel P. Hoxie, Snell & Wilmer, Phoenix, Ariz., David J. Armstrong, M. Richard Dunlap, Dickie, McCamey & Chilcote, Pittsburgh, Pa., for defendant PPG.

Steven D. Copple, Black, Robertshaw & Copple, P.C., Phoenix, Ariz., for plaintiff.

MEMORANDUM OPINION AND ORDER

HARDY, District Judge.

This is an action for declaratory judgment to determine the rights of the parties under contracts for insurance issued by Aetna Casualty and Surety Company (Aetna) to PPG Industries, Inc. (PPG), Reichhold Chemicals, Inc. (Reichhold), and The Upjohn Company (Upjohn).

PPG, Reichhold and Upjohn manufactured and sold polyurethane foam during the 1960's and early 1970's for installation in buildings as insulation. Each of them insured itself with Aetna against liability incurred in the sale of this material. Aetna was the insurer of PPG from July 1, 1969 to July 1, 1971; of Reichhold from January 1, 1965 to January 1, 1972; and of Upjohn from January 1, 1965 to September 30, 1977. Each of the insurance contracts provided, subject to certain exclusions:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence (if the bodily injury or property damage is included within the products hazard) and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage even if any of the allegations of the suit are groundless, false or fraudulent.... (The phrase in parenthesis is in the Upjohn policy only.)

In 1973 the three manufacturers and others were sued in federal court by a number of plaintiffs seeking damages for conspiracy to violate Section 1 of the Sherman Act, negligence, strict liability, and fraudulent representation. The action was dismissed. The reason for dismissing the negligence and strict liability claims was that the plaintiffs were seeking damages for economic losses which are not recoverable on those types of tort theories. State of Arizona v. Cook Paint and Varnish Co., 391 F.Supp. 962, 971 (D.Ariz.1975), aff'd, 541 F.2d 226 (9th Cir.1976), cert. denied, 430 U.S. 915, 97 S.Ct. 1327, 51 L.Ed.2d 593 (1977).

The three manufacturers tendered defense of the action to Aetna. It declined to defend, contending that the allegations of damages did not invoke the insurance policies.

Following the dismissal of the federal court action, the plaintiffs in that case and others filed suit in the Superior Court of Arizona seeking recovery on theories of strict liability, negligence, breach of warranty, and fraudulent representation. The superior court dismissed with prejudice the claims of the plaintiffs who were plaintiffs in the prior federal action for damages for negligence and strict liability on grounds of res judicata. However, as to the additional plaintiffs in the superior court action, all counts remain.

Upjohn and Reichhold have moved for partial summary judgment declaring that Aetna breached its duty to defend the claims against them in the previous federal action and is breaching its duty by failing to defend them in the pending superior court action. They also have moved to dismiss without prejudice, on grounds of prematurity, Aetna's claim that it has no duty under its insurance contracts to indemnify them for liabilities which may be adjudicated against them in the pending superior court action.

1. The Duty to Defend

Reichhold and Upjohn contend that summary judgment as to Aetna's duty to defend them in the previous federal suit and the pending state suit is proper because the allegations of the complaint in those actions come within the coverage of the insurance policies, thus triggering the duty to defend. As support for this contention, these parties cite the general rule that a liability insurer is obligated to defend whenever it would be bound to indemnify the insured if the injured person prevailed on the allegations of the complaint in the underlying action. See e.g. Kepner v. Western Fire Insurance Co., 109 Ariz. 329, 509 P.2d 222 (1973); Paulin v. Fireman's Fund Insurance Co., 1 Ariz.App. 408, 403 P.2d 555 (1965).

Aetna denies the duty to defend, relying upon two arguments. First, it contends that the general rule that the allegations of the complaint control the issue of the duty to defend does not apply in this instance where the insureds successfully defended themselves. Alternatively, Aetna contends that the allegations of the complaint do not bring the underlying federal and state claims within the terms of the insurance policies.

The Court disagrees with Aetna's suggestion that the duty to defend may be discharged by the insured's successful defense of the underlying action. The substance of the duty to defend cannot be altered by the decision of the insurer to await the result of the underlying action. The duty arises whenever the allegations of the complaint come within the policy coverage. See Waite v. Aetna Casualty and Surety Co., 77 Wash.2d 850, 467 P.2d 847 (1970); Torres v. Sentry Insurance, 558 P.2d 400 (Okl.1976); Grieb v. Citizens Casualty Co. of New York, 33 Wis.2d 552, 148 N.W.2d 103 (1967). Arizona case law does indicate that true facts outside the complaint may justify a refusal to defend, Kepner v. Western Fire Insurance Co., supra, but such a rule merely creates an exception to the general rule that the complaint controls the duty to defend. In all cases, the duty to defend does not rest upon a finding of liability against the insured in the underlying litigation. Indemnity for liability of the insured is an obligation separate from the duty to defend. Paulin v. Fireman's Fund Insurance Co., supra.

Aetna's first contention that the finding of no liability in the underlying federal suit discharged the duty to defend is, therefore, incorrect. Dismissal of the previous federal suit did not discharge Aetna's duty to defend, since the dismissal was not based on the ground that the insurance policies would not cover the allegations of the complaint.

Aetna's second contention, that the allegations of the complaint and other outside facts do not bring the action within the coverage of the policy, requires an analysis of some of the terms of the policies, specifically the indemnity covenant and exclusions.

A. The Covenant

The covenant in each of the policies provides that Aetna will pay on behalf of Reichhold and Upjohn any damages because of "property damage" caused by an "occurrence" during the policy period.

The property damage alleged in the complaint includes a diminution in the value of the buildings caused by the installation of defective or hazardous insulation. As held in State of Arizona v. Cook Paint and Varnish Co., supra, this form of loss is economic harm and is not actionable as property damage under the theories of strict liability and negligence. Aetna seizes upon this finding and argues that it controls the issue of property damage as a term of the insurance policy. The Court, however, does not accept this reasoning. An allegation of damages to property is more limited than and, therefore, cannot be equated with the term "property damage" as used in an insurance clause. Diminution in value of property caused by installation of a defective product sufficiently alleges property damage to give rise to a duty to defend. See Goodyear Rubber and Supply Co., Inc. v. Great American Insurance Co., 471 F.2d 1343 (9th Cir.1973); Western Casualty and Surety Co. v. Polar Panel Co., 457 F.2d 957 (8th Cir.1972); Bowman Steel Corporation v. Lumbermen's Mutual Casualty Co., 364 F.2d 246 (3rd Cir.1966).

As a final point concerning this issue of property damage, it should be noted that Aetna contends that the insulation's hazardous nature is repairable or remediable by removal and, therefore, no property damage has occurred. Assuming arguendo that repair or removal of the insulation are possible remedies, property damage still exists. See Goodyear Rubber and Supply Co. v. Great American Insurance Co., supra; Western Casualty and Surety Co. v. Polar Panel Co., supra. Repair or removal goes not to the issue of property damage but to the issue of damages caused by the property damage. Id.

Before the covenant in each policy is invoked, property damage must have been caused by an "occurrence" during the policy period. "Occurrence" is defined in each policy as "an action including injurious exposure to conditions, which results, during the policy period, in ... property damage not intended from the standpoint of the insured." It appears well settled that where a policy insures against an "occurrence", rather than an "accident", coverage is based not upon the time when the wrongful act was committed but at the time the damage...