Berry Plastics Corp. v. Ill. Nat'l Ins. Co., 17-1815

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation903 F.3d 630
Docket NumberNo. 17-1815,17-1815
Parties BERRY PLASTICS CORPORATION, n/k/a Berry Global, Inc., Plaintiff-Appellant, v. ILLINOIS NATIONAL INSURANCE COMPANY, Defendant-Appellee.
Decision Date10 September 2018

Mark J. Crandley, Charles P. Edwards, Attorneys, BARNES & THORNBURG LLP, Indianapolis, IN, for Plaintiff-Appellant.

Patrick Fredette, Attorney, MCCORMICK BARSTOW LLP, Cincinnati, OH, for Defendant-Appellee.

Before Flaum, Kanne, and Rovner, Circuit Judges.

Rovner, Circuit Judge.

Berry Plastics Corporation filed this action seeking indemnity from its excess insurer, Illinois National Insurance Company, for a multi-million dollar damage award Berry was ordered to pay to a disappointed former customer. The insurance policy covers damages that Berry is required to pay "because of ... Property Damage." R. 42-4 at 11. Berry had supplied defective laminate material to the customer, which incorporated that material into containers that subsequently failed. A jury ordered Berry to compensate the customer for the profits it could have expected to earn on future sales had the failure caused by Berry's defective material not caused buyers to turn away from the containers. Berry contends that it has been held liable for its customer's lost profits because of the property damage its defective component caused to the customer's containers. Although we agree with Berry that some portion of the lost profits theoretically might be attributable to property damage, Berry has neither undertaken to make that showing nor demanded the opportunity to do so. For that reason we affirm the district court's entry of summary judgment in favor of Illinois National.

I.

Berry is a global manufacturer of (primarily plastic) packaging products with headquarters in Evansville, Indiana. Berry produced a foil laminate product for Packgen, a small firm that manufactures specialized containers for bulk quantities of industrial chemicals, manufacturing byproducts, and other materials. Over a period of two years, Packgen worked with one of its customers, CRI Catalyst Company, to develop a new type of intermediate bulk container ("IBC")1 that could be used to store and ship a chemical catalyst that CRI produced for use in the refining of crude oil into other petroleum products. This IBC was innovative in that its outer surface was comprised primarily of a polypropylene fabric rather than metal, allowing the container to be collapsed for pre-use storage and saving users space, several hundred pounds of weight, and money. The catalyst that CRI produces is a self-heating material that can ignite when exposed to oxygen, so it poses hazards that require special care in handling. To enhance the protective characteristics of the IBC's outer surface, Packgen engaged Berry to manufacture a laminated product comprised of a woven polypropylene chemically bonded to a layer of aluminum foil; the foil would strengthen the IBC's exterior and serve as a barrier to oxygen, ultraviolet light, and infrared radiation. After extensive testing of the final product, Packgen began to manufacture and ship the IBCs to CRI in October 2007. By April 2008, Packgen was selling an average of 1,261 IBCs per month to CRI. Packgen anticipated that it would continue to sell IBCs to CRI in comparable numbers for the foreseeable future. Packgen was also making overtures to 37 petroleum refiners in North America with ties to CRI; these refiners had expressed interest in the IBCs for use in disposing of spent catalyst.

In April 2008, while CRI personnel were lifting an IBC full of catalyst in order to re-position it on a pallet, the foil layer of the container's exterior surface separated from the polypropylene, causing the outer portion of the container to come apart and expose the interior lining. Several other failures of the foil laminate followed in short order, some resulting in fires when the catalyst within the containers was exposed to air. Packgen was notified of the failures and determined through its own testing that the large roll of foil laminate that Berry had delivered to Packgen in January 2008, and which Packgen had used to produce some 2,000 IBCs since that time, was defective. Although Packgen believed it could correct the problem either by eliminating the foil laminate as a component of the containers or turning to another vendor for the foil laminate, the damage had already been done: CRI canceled all pending orders for the IBCs, destroyed the IBCs that Packgen had already shipped to it, and refused to pay Packgen for those containers. Word of the product's failure reached the oil refineries that had expressed interest in purchasing IBCs, and they made no purchases from Packgen.

Packgen sued Berry in Maine (where the suit was removed from state to federal court) on theories of breach of contract, breach of express warranty, breach of implied warranty for a particular purpose, and breach of implied warranty of merchantability,2 all based on the failure of Berry's foil laminate product. The jury found in Packgen's favor on each of these claims, and pursuant to instructions which directed it to compensate Packgen for the foreseeable losses (actual, incidental, and consequential) stemming from Berry's breaches of contract and warranties (R. 55-4 at 10–11, 13–15) awarded Packgen the full $7.2 million that it had sought in damages. The jury did not itemize its damage award, but the award was obviously based on the testimony of Mark Filler, Packgen's expert on damages, who put the company's out-of-pocket costs (including unpaid invoices for IBCs that had already been shipped to CRI3 ) at $643,039.30, and its future lost profits at $6,563,607.00 (producing the total of approximately $7.2 million). To arrive at the latter figure, Filler assumed that, had the foil laminate not caused the IBCs to fail, CRI would have continued to sell the containers to CRI at the April 2008 level for the full 10-year expanse of his projections, yielding profits to Packgen of $4,606,405.00. Filler also assumed that Packgen would have made more modest sales of the IBCs to some petroleum refiners over the same 10-year period, yielding profits of $1,957,202.00. The Court of Appeals for the First Circuit subsequently affirmed the judgment in favor of Packgen. Packgen v. Berry Plastics Corp. , 847 F.3d 80 (1st Cir. 2017).

Berry demanded that Illinois National indemnify it for all but the first $1 million of the award—which Berry's primary liability insurer, Federal Insurance Company, has agreed to cover—but Illinois National refused, prompting Berry to file suit. The $25 million liability policy issued to Berry obliged Illinois National to "pay on behalf of [Berry] those sums in excess of the Retained Limit [i.e. , the $1 million covered by the Federal policy] that [Berry] becomes legally obligated to pay as damages by reason of liability imposed by law because of ... Property Damage ... to which this Insurance applies...." R. 42-4 at 11. The policy in turn defines "property damage" to include both "physical injury to tangible property, including all resulting loss of use of that property" and "loss of use of tangible property that is not physically injured." R. 42-4 at 33.4 Illinois National took the position that because the entirety of the $6.2 million for which Berry was seeking indemnification from Illinois National represented Packgen's lost profits on IBCs that had yet to be ordered and manufactured, there was no property damage for which it had the duty under the policy to indemnify Berry. Berry, on the other hand, contended that the entirety of the damages it had been ordered to pay Packgen, including future lost profits, were "because of" the property damage Berry's defective foil laminate product had caused to Packgen's failed IBCs. Berry sought a declaration of Illinois National's obligation to indemnify it; it also asserted claims for breach of contract and bad faith based on Illinois National's refusal to do so.

On the parties' cross-motions for summary judgment, the district court entered judgment in favor of Illinois National. Berry Plastics Corp. v. Ill. Nat'l Ins. Co. , 244 F.Supp.3d 839 (S.D. Ind. 2017). The court in the first instance rejected Berry's contention that collateral estoppel barred Illinois National, which had declined to participate in Berry's defense at the Packgen trial, from re-litigating the nature and extent of the damages resulting from the failure of Berry's product. The court noted, inter alia , that the jury in the Packgen suit had not been called upon to determine whether and to what extent Packgen's future lost profits were "because of" property damage, which is the question determinative of Illinois National's duty to indemnify Berry. Id. at 846–47.

As to that issue, there was no Indiana case law on point, and so the court was required to predict how the Indiana Supreme Court would resolve the question. Upon surveying the case law from other jurisdictions, the district court concluded that "damages for lost profits are not covered as ‘damages because of ... Property Damage’ unless they are a measure of the actual physical injury to tangible property or for the loss of use of that property." Id. at 849. The profits that Packgen lost on future sales of its IBCs did not constitute such a measure of physical injury or loss of property. Accordingly, the court was convinced that the Indiana Supreme Court would conclude that Illinois National had no duty to indemnify Berry for those lost profits. Id. at 849–50. The court went on to reject Berry's contention that the policy language was ambiguous in this respect and as such should be construed in its favor. "[T]he court finds the language of the Policy to unambiguously provide for damages arising from the physical damage to tangible property. Lost future profits arising from sales not yet made are not causally related to physical property damage." Id. at 850. Given that...

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