Great Am. E & S Ins. Co. v. Power Cell LLC

• Decision Date: 20 December 2018
• Docket Number: No. 17 C 6658,17 C 6658
• Citation: 356 F.Supp.3d 730
• Parties: GREAT AMERICAN E & S INSURANCE COMPANY, Plaintiff/Counter-Defendant, v. POWER CELL LLC, d/b/a Zeus Battery Products, Defendant/Counter-Plaintiff.
• Court: U.S. District Court — Northern District of Illinois

356 F.Supp.3d 730

GREAT AMERICAN E & S INSURANCE COMPANY, Plaintiff/Counter-Defendant,

v.POWER CELL LLC, d/b/a Zeus Battery Products, Defendant/Counter-Plaintiff.

No. 17 C 6658

United States District Court, N.D. Illinois, Eastern Division.

Signed December 20, 2018

Michael John Duffy, Ashley L. Conaghan, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Patrick A. Fleming, Elizabeth Carlson Wolicki, Richard George Douglass, Novack & Macey LLP, Brandon M. Thompson, Fletcher & Sippel LLC, Chicago, IL, for Plaintiff/Counter-Defendant.

Patrick A. Fleming, Elizabeth Carlson Wolicki, Richard George Douglass, Novack & Macey LLP, Brandon M. Thompson, Fletcher & Sippel LLC, Chicago, IL, for Defendant/Counter-Plaintiff.

MEMORANDUM OPINION AND ORDER

REBECCA R. PALLMEYER, United States District Judge

Power Cell, LLC, d/b/a/ Zeus Battery Products ("Zeus") is a battery manufacturer. In this lawsuit, Zeus's insurer, Plaintiff Great American E & S Insurance Company, seeks a declaration that it has no duty to provide a defense to Zeus in a suit filed against Zeus by one of its customers, Spring Windows Fashions LLC. Both sides seek summary judgment on a number of issues. For the reasons that follow, the court concludes that Great American has a duty to defend Zeus in the Spring Windows lawsuit and this duty extends to Zeus's affirmative claims.

FACTS

Though Great American formally objects to many the statements in Zeus's Rule 56.1 statement, the facts of this case are largely undisputed.¹ Great American is an insurance company formed in Delaware with its principal place of business in Ohio. (Great American's Response to Zeus's LR 56.1 Statement [47] ("GA 56.1 Resp.") ¶ 1.) Zeus is an Illinois limited liability company whose members are Illinois citizens and whose principal place of business is in Illinois. (Id. ¶ 2.) The origin of the parties' dispute is a product recall on the part of Spring Window Fashions, LLC ("SWF"), a business that sells battery-operated window shades and coverings in the United States. See generally Power Cell LLC v. Spings Window Fashions, LLC , No. 17 C 4382, 2018 WL 1911765 (N.D. Ill. April 23, 2018) (Leinenweber, J.) After some customer complaints about the window shades, SWF initiated the recall, assigning blame for the window shade failures to the Zeus batteries.

Zeus believes the window products' failure was a product of a design flaw in the SWF product, and that SWF's false recall notices have harmed Zeus's reputation in the industry. 2018 WL 1911765, *1. When Zeus sued SWF, seeking recovery for the alleged misrepresentations under various theories, SWF counterclaimed, alleging breaches of warranty and negligence and demanding indemnification for the cost of replacing the batteries in the window products. (GA 56.1 Resp. ¶ 5; Answer and Counterclaim of Spring Window in 17 C 4382, Exhibit B to Complaint [1-2].) In the lawsuit before this court, Zeus seeks a declaration that its insurer, Defendant Great American, is liable to provide coverage for losses SWF is seeking to recover from Zeus.

A. SWF Reports of Battery Performance Issues

In September 2016, March 2016, July 2016, and August 2016, Zeus and SWF entered into a series of purchase orders in which Zeus, a private labeler of batteries, supplied SWF with AA lithium ion batteries for use in SWF's motorized window shade products. (GA 56.1 Resp. ¶¶ 6, 7.) On June 7, 2016, a customer of one of the retail stores that distribute SWF's products complained about a problem involving the batteries for one of those products; the customer reported that one of the battery tubes was so hot that it almost burned his hands, and the batteries inside were charred and melted. (Id. ¶ 8; Incident Report, Exhibit H to GA 56.1 Resp.) SFW prepared an incident report about the June 7 complaint, but did not immediately notify Zeus. (Id. ¶ 9; Incident Report, 6/7/2016, Exhibit H to GA 6.1 Resp.)

Four more complaints followed. For the first two of these, in September 2016, SWF again prepared incident reports, but did not notify Zeus. (Id. ¶ 11.) Zeus did receive reports concerning two more incidents, the first in November 2016 and another in February 2017. (Id. ) Zeus contends that the report it received on November 11, 2016 did not identify the "subject battery" as the cause of the incident (Zeus Local Rule 56.1 Statement ("Zeus 56.1 Stmt.") [18] ¶ 12), but in the e-mail message Zeus cites, SWF described "a very serious incident with Zeus batteries" resulting in "damages depicted in the attached photos." (Nov. 11, 2016 e-mail message from Keith Carlson, Exhibit 1 to Decl. of Mills Rendell [19], at 6.) The message stated, further, that SWF was "very concerned" about "safety and liability" issues, as well as SWF's own reputation. (Id. ) The message noted that this was the "fourth major concern [SWF had] had with Zeus batteries in about a month," the other three involving "leaking batteries," and that "all indications" concerning testing of the SWF product suggested "a catastrophic battery failure." (Id. at 7.) The court concludes that Zeus was in fact on notice as of November 2016 that its batteries were involved in a product failure.

Great American insists that Zeus knew this as early as June 2016 (GA 56.1 Resp. ¶ 12), but the materials Great American cites do not support this assertion. The June 1, 2016 e-mail message Great American cites is an internal exchange at SFW describing a complaint from a customer of a leaking battery; there is no indication that Zeus batteries were identified in any such complaint. Keith Carlson of SWF forwarded the exchange to Gina Galante at Zeus, requesting that Zeus, like a competitor battery source, provide SFW with a "no leak guarantee." (June 1, 2016 Carlson e-mail, Exhibit C to GA 56.1 Resp.; Galante Dep., Exhibit A to GA 56.1 Resp. at 50:8-22.)

On June 13, 2016, Herb Holmstedt and Bert Olsen of Zeus met with six representatives of SWF. (Holmstedt Memo, June 13, 2016, Exhibit B to GA 56.1 Add'l.) According to a memo prepared by Holmstedt after the meeting, the parties met "to review patent concerns, discuss the recent battery quality issues, the battery leak warranty and new programs," with patent concerns being the "top priority." (Id. ) The three quality issues identified in Holmstedt's memo were one "battery that a customer claimed leaked" a set of batteries that were "dead on arrival"—that is, they did not function; and a recent complaint about a "melting case." (Id. ) The memo notes that it was not clear that Zeus was the source of the battery that had leaked. (Id. ) At the conclusion of the meeting, Zeus agreed to provide SWF with "a copy of the battery leak test that the products underwent" at the direction of the battery manufacturer's sales agent, as well as its standard warranty and a "no leak" guarantee. (Id. at 31:23-32:5; 33:17-34:3.) SWF also planned to conduct its own leak test. (Holmstedt Memo at 2.)

In a June 15, 2016 e-mail, Zeus engineer Kevin Oh notified Zeus's Director of Sales that Oh wanted to "receive the battery(s) with quality issue for us to evaluate and provide some feedback, given that batteries were from ZEUS." (Kevin Oh e-mail, June 15, 2016, Exhibit I to GA 56.1 Resp.) Zeus asserts, however, that after the June 13, 2016 meeting, SWF "never provided Zeus with any further information concerning the leaking battery, the batteries with short life [or] the melting case." (Galante Declaration, Exhibit A to Zeus Response to GA 56.1 Add'l.) In particular, SWF never advised that Zeus was the source of any of the returned batteries, or that any Zeus battery was the cause of any failure. (Galante Dep. 31:23–35:24.) As a result, Zeus asserts, Zeus did not engage in any "follow up" with SWF on these issues. (Zeus Resp. to GA 56.1 Add'l. ¶ 5.)

In an August 8, 2016 e-mail, Joe Weibler of SWF forwarded photos of damaged batteries. (Weibler e-mail, Aug. 8, 2016, Exhibit J to GA 56.1 Resp.) Ms. Galante acknowledged in her deposition that photos attached to the message are of "Zeus batteries," and show "leaking batteries." (Galante Dep. 73:1-4.) The message states that SWF had "some serious concerns about product reliability/durability and its potential impact on [SWF's] final product." (Id. 72:9-73:12.) The e-mail also advised that Ms. Galante could expect to receive "additional input and questions." (Weibler E-mail, Aug. 6, 2016, Exhibit J to GA 56.1 Resp.) Ms. Galante testified that to her knowledge, there was no further word from SWF; and although "a leaking battery [has] the potential to cause damage," batteries are not always the cause of problems with products in which they are installed, so she was not concerned by the photos in the absence of a formal incident report. (Id. 75:14-76:18; 79:12-80:2.)

As noted, in November 2016, SWF told Zeus about an incident with the Zeus batteries in a Menard's store display and claimed a "catastrophic battery failure." Zeus received formal incident reports on that date as well. (Galante Dep., 86:16-19.) On receipt of the November 11, 2016 e-mail, Zeus arranged for its Chief Technology Officer, Peter Foret, and a sales representative, Bert Olson, to meet with SWF personnel. (November 11, 2016 e-mail from Gina Galante, Exhibit 2 to Rendell Decl. [19], at 9.) Until that date, SWF had never refused to accept any shipment of Zeus batteries, had never refused to pay an invoice from Zeus, and had never requested a refund from Zeus. (GA Resp. ¶ 15.) In an internal e-mail, Brad Rendell of Zeus asked his colleagues, "What is the story? Is this misuse by the customer or bad batteries? Is this the first time we have heard about these issues? What about the June 7^th issue?" (Brad Rendell e-mail, November 13, 2016, Exhibit K to GA 56.1 Resp.)

The following day (November 14, 2016), SWF advised Zeus by e-mail that SWF had "quarantined some set level of inventory," claiming it was "defective." (Galante Dep., 199:2-3, 200:2-3.) Zeus was of the view that the damage resulted from customer misuse—specifically,...