St. Paul Fire & Marine Ins. Co. v. THREE" D" SALES

Decision Date16 July 1981
Docket NumberCiv. No. A2-79-110.
Citation518 F. Supp. 305
PartiesST. PAUL FIRE AND MARINE INSURANCE COMPANY, a foreign corporation, Plaintiff, v. THREE "D" SALES, INC., a corporation; Leon F. Dubourt and C. Maurice Dunnigan, d/b/a Arctic Farms Company; and Jack Alderson & Robert Alderson, d/b/a Perfection Produce, Defendants.
CourtU.S. District Court — District of South Dakota

Patrick J. Maddock, Degnan, McElroy, Lamb, Camrud, Maddock & Olson, Ltd., Grand Forks, N. D., for plaintiff.

Patrick W. Fisher, Shaft, McConn, Fisher & Thune, Ltd., Grand Forks, N. D., for Three "D" Sales, Inc., Leon F. Dubourt, C. Maurice Dunningan, d/b/a Arctic Farms.

Richard A. Clapp, Letnes, Marshall & Fiedler, Ltd., Grand Forks, N. D., for Jack Alderson & Robert Alderson, d/b/a Perfection Produce.

MEMORANDUM AND ORDER

BENSON, Chief Judge.

Plaintiff in this diversity action seeks a judgment pursuant to 28 U.S.C. § 2201 declaring that under the provisions of insurance policies issued by it to defendants Three "D" Sales, Inc. (hereinafter referred to as Three "D" Sales), and Leon F. Dubourt and C. Maurice Dunnigan, d/b/a Arctic Farms Company (hereinafter referred to as Arctic Farms), plaintiff had no duty to defend or indemnify said defendants in a negligence suit brought against them by Jack Alderson and Robert Alderson, d/b/a Perfection Produce (hereinafter referred to as Perfection Produce). Defendants Three "D" Sales and Arctic Farms successfully defended the civil suit. As a result, Perfection Produce has indicated that it was not taking any further action in this declaratory judgment suit. Three "D" Sales and Arctic Farms have both filed a counterclaim seeking damages for their expenses in defending the negligence action. The case has been bifurcated and the only issue before the court at this time is whether, under the policies of insurance issued to Three "D" Sales and Arctic Farms, plaintiff had a duty to defend against and supply coverage for the claims made by Perfection Produce in its complaint. The matter has been presented to the court on a stipulation of facts.

On or about April 30, 1977, plaintiff issued a comprehensive general liability insurance policy, No. 582JF8067, to defendant Three "D" Sales, a potato storage and brokerage business, providing personal property liability coverage in the amount of $100,000 for each occurrence. On or about the same date, plaintiff issued a similar comprehensive policy, No. 582JF8198, to defendant Arctic Farms, a potato farming business, in the amount of $50,000 for each occurrence. The insurance policies issued to defendants, under the heading, "COMPREHENSIVE GENERAL LIABILITY INSURANCE COVERAGE FORM — BROAD," provide in part as follows:

1. COVERAGE A — BODILY INJURY LIABILITY
COVERAGE B — PROPERTY DAMAGE
The company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of:
Coverage A. bodily injury or
Coverage B. property damage
to which this insurance applies, caused by an occurrence, 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 policies also carry an endorsement entitled "COMPLETED OPERATIONS HAZARD AND PRODUCTS HAZARD EXCLUSION ENDORSEMENT," which stated that the "endorsement modifies such insurance as is afforded by the provisions of the policy relating to COMPREHENSIVE GENERAL LIABILITY INSURANCE. ..." It provides in part as follows: "It is agreed that such insurance as is afforded by the Bodily Injury Liability Coverage and the Property Damage Liability Coverage does not apply to liability injury or property damage included within the Completed Operations Hazard or the Products Hazard."

The following definition of "Products Hazard" is contained in the policy.

"Products hazard" includes bodily injury and property damage arising out of the Named Insured's products or reliance upon a representation or warranty made at any time with respect thereto, but only if the bodily injury or property damage occurs away from the premises owned by or rented to the Named Insured and after physical possession of such products have been relinquished to others.

In addition to this comprehensive general liability insurance, Arctic Farms had a Farm and Ranch Liability Insurance Form attached to and made part of the main policy, providing $300,000 personal liability coverage for each occurrence.

In March, 1976, Perfection Produce agreed to purchase potato seed from Three "D" Sales and others for delivery in early 1977. The seed provided by Three "D" Sales was grown in part by Arctic Farms. In December, 1977, Perfection Produce commenced an action in state court in Washington against Three "D" Sales, Arctic Farms, and others. The complaint charged that plaintiffs' 1977 potato crop was infected by disease; that the defendants were negligent in the preparation, certification and distribution of the potato seed; and that the defendants expressly and impliedly warranted the potato seed to be free from any and all defects. Damages of $750,000 were prayed for.

An insurer's obligation to defend and an insurer's obligation to indemnify are separate and distinct contractual elements. Smith v. American Family Mut. Ins. Co., 294 N.W.2d 751, 759 (N.D.1980). Yet the obligation to defend can be defined only by reference to the indemnity coverage. An insurer is under an obligation to defend only if it would be held bound to indemnify the insured in case the injured person prevailed upon the allegations in his complaint. Kyllo v. Northland Chemical Co., 209 N.W.2d 629, 634 (N.D.1973). If there is any doubt whether the facts alleged in the complaint are sufficient to bring the injury within the coverage of the policy, the doubt should be resolved in favor of the insured and the insurer should be deemed to have the obligation to defend. Id.

Here the allegations in the complaint are that Perfection Produce purchased potato seed from the insureds and that due to the insureds' negligence in the preparation, certification, and distribution of the seed, Perfection Produce's crop was diseased.

As previously stated, the comprehensive general liability policies issued to defendants provide that there is no property damage indemnity coverage for anything defined as a products hazard. A products hazard is clearly defined as any property damage arising out of the insured's products if the property damage occurs away from the premises owned by or rented to the insured and after physical possession of such products have been relinquished to others. The claim alleged in the complaint against the insureds is a clear example of a products hazard as that term is defined in the policy. The complaint alleges that Perfection Produce sustained property damage to their crop arising out of the insureds' potato seed. The crop damage occurred away from the premises owned by or rented to the insureds and after the seed had been relinquished to Perfection Produce. It is likewise equally clear from the provision that any property damage arising from the insureds' warranties concerning the seed, as alleged in the complaint against the insureds, is also excluded from coverage.

Although a fair reading of the complaint would indicate that the acts of negligence in preparing, certifying, and distributing the seed are alleged to have occurred on the insureds' premises, such a factor is not controlling. It has generally been held in construing a products hazard clause that it is the place of the occurrence of the property damage, and not the place of the negligent acts causing the damage, which is controlling. See e. g., Hagen Supply Corp. v. Iowa National Mutual Insurance Co., 331 F.2d 199, 202-03 (8th Cir. 1964); National Farmers Union Property Cas. Co. v. Iverson, 346 F.Supp. 660, 662-63 (D.S.D.1972); Steinheider & Sons v. Iowa Kemper Ins., 204 Neb. 156, 281 N.W.2d 539, 543 (1979). The plain language in the products hazard exclusion of the instant policy can lend itself to no other interpretation. Defendants' reliance on Brant v. Citizens Mutual Automobile Insurance Co., 4 Mich.App. 596, 145 N.W.2d 410 (1966), is misplaced. In Brant, a civil action had been commenced against the insured for selling the complainant the wrong type of space heater. A products hazard clause excluded coverage for accidents connected with products occurring off the premises. The court held that an accident occurred on the premises when the wrong heater was supplied, even though the damage occurred elsewhere, so that the exclusion was inapplicable. The Michigan court has since had an opportunity to address a products hazard clause similar to the one in the instant case, referring only to damages occurring off the premises, and found that the location of the damage was the controlling factor. Tiano v. Aetna Cas. and Sur. Co., 102 Mich.App. 177, 301 N.W.2d 476, 480 (1980).

Defendants attempt to draw a distinction between acts of omission, and acts of malfeasance, suggesting that a cause of action based on a failure to inspect the seed potatoes is not clearly excluded by the products hazard provision. The argument is specious. The products hazard clause makes no distinction between acts of omission and malfeasance. It clearly excludes damage arising out of the insureds' products, whatever the cause of action.

Defendants further argue that the policy must be construed most strongly against the insurance company. See Hughes v. State Farm Mut. Auto. Ins. Co., 236 N.W.2d 870, 885 (N.D.1975). However, if there is no ambiguity in the policy, there is no room for construction. Bosch v. Garcia, 286 N.W.2d 26, 28 (Iowa 1979); Dairyland Ins. Co. v. Implement Dealers Ins. Co., 294 Minn. 236, 199 N.W.2d 806, 811 (1972). The comprehensive general liability policies and the products hazard exclusion...

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