American Home Assur. Co. v. Libbey-Owens-Ford Co.

• Decision Date: 18 March 1986
• Docket Number: 85-1411,LIBBEY-OWENS-FORD,Nos. 85-1373,s. 85-1373
• Citation: 786 F.2d 22
• Parties: AMERICAN HOME ASSURANCE CO., Plaintiff, Appellee, v.CO., Defendant, Appellant. AMERICAN HOME ASSURANCE CO., Plaintiff, Appellant, v.CO., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 22

786 F.2d 22

AMERICAN HOME ASSURANCE CO., Plaintiff, Appellee, v. LIBBEY-OWENS-FORD CO., Defendant, Appellant.

AMERICAN HOME ASSURANCE CO., Plaintiff, Appellant, v. LIBBEY-OWENS-FORD CO., Defendant, Appellee.

Nos. 85-1373, 85-1411.

United States Court of Appeals First Circuit.

Argued Nov. 13, 1985.

Decided March 18, 1986.

Erik Lund, with whom David J. Hatem, Posternak, Blankstein & Lund, James E. Grumbach, and Morrison, Mahoney & Miller, Boston, Mass., were on brief for American Home Assur. Co.

Michael A. Nims, Jones, Day, Reavis & Pogue, Cleveland, Ohio, with whom James M. Oathout, Sibley P. Reppert, and Herrick & Smith, Boston, Mass., were on brief for Libbey-Owens-Ford Co.

Before COFFIN and BOWNES, Circuit Judges, and WYZANSKI, ^* Senior District Judge.

COFFIN, Circuit Judge.

This case turns on the interpretation of the provisions of a comprehensive general liability policy. The Libbey-Owens-Ford Company (LOF) appeals from a summary judgment of the district court finding that the American Home Assurance Company, issuer of LOF's excess liability insurance, is not liable for any of LOF's liability damages. For the reasons set forth below, we reverse and remand for trial.

I. BACKGROUND FACTS

In 1967, the John Hancock Insurance Company contracted with I.M. Pei Associates for the design and construction of an office building in Boston, Massachusetts. The Gilbane Building Company undertook to construct the building and entered into a subcontract with the H.H. Robertson Company to construct the glass surface of the structure. The appellant, the Libbey-Owens-Ford Company (LOF), contracted with Robertson to provide approximately 10,344 "Bondermetric Vari-Tran" (BVT) windows for the building.

Installation of the windows began in April 1971 and continued through January 1983. From November 1972 through January 1973, substantial breakage of the windows occurred following major storms. In late January 1973, I.M. Pei, architect of the Hancock Building, concluded that a "clear and present danger" to the public existed because of the window breakage and an inspection of the BVT windows was initiated by Hancock. In June 1973, Pei concluded that the windows in the lower half of the building did not conform to contract specifications and ordered them replaced. In September 1973, Pei concluded that the windows in the upper half of the building did not conform to the contract and ordered those windows replaced as well. Replacement of the windows resulted in various increased construction and operating costs and delayed the occupancy date of the Hancock Building from April 1, 1973 to June 1, 1975.

In September 1975, Hancock sued LOF, Robertson, Gilbane, Pei and others in Massachusetts state court. Hancock alleged various items of damage totalling approximately $90 million. For purposes of this litigation, the claims for damages may be grouped into two categories. The first category consists of approximately $11 million attributed to the immediate costs of removing and replacing the BVT windows. ¹ The second category consists of approximately $88 million of consequential losses suffered by Hancock as the result of the need to replace the windows. Among these damages was a claim of $25.9 million for loss of rentals and deprivation of use of the Hancock Building for thirty-three months. ² In August 1981, most of the parties joined in a settlement with Hancock for approximately $30 million. LOF contributed $26 million to this settlement amount.

During the three year period commencing April 1, 1969, LOF carried general liability insurance under a primary policy and an excess policy. The primary policy was with Aetna Casualty and Surety Company and provided coverage for up to $1,000,000 for each policy year. The excess or umbrella liability policy was issued by Commercial Union Assurance Company of Boston ("Commercial Union") and provided coverage of $9,000,000 for each policy year. In April 1972, LOF renewed both policies, increasing Commercial Union's coverage to $10,000,000. In addition, effective June 1972, LOF purchased a $10,000,000 second layer excess policy from American Home Assurance Company (American Home).

Aetna, and subsequently Commercial Union, defended LOF in the action brought by Hancock. ³ At the time of the settlement with Hancock, Commercial Union had already expended part of LOF's policy coverage on defense costs in the Hancock suit and claims brought by other parties. After negotiations with LOF, Commercial Union paid out the balance of LOF's 1972-73 policy year coverage, totalling $7,643,272, as a contribution to the settlement between LOF and Hancock. LOF's out-of-pocket cost for the settlement was thus reduced to approximately $18 million.

LOF also requested contribution from American Home, issuer of its second layer excess policy. American Home's policy terms were identical to those of Commercial Union. American Home, however, disclaimed coverage and in June 1981, shortly before the settlement with Hancock, filed this action seeking a declaratory judgment that its policy did not cover any of the claims asserted by Hancock.

The district court found that only the loss of use claim of $25.9 million was covered under the American Home policy. Because the record did not disclose how LOF's settlement payment of $26 million had been apportioned among the several Hancock claims, the district court assumed that the percentage of the $26 million settlement amount that could be attributed to the loss of use claim was the same percentage the loss of use claim held to the overall claim amount--that is, 29% or $7,507,913. ⁴ The district court then assumed that the entire amount paid by Commercial Union, $7,643,272, was attributable solely to the loss of use claim because that was the only claim Commercial Union would have been legally obligated to pay had it litigated its coverage. Given these calculations, the district court found that LOF had already been overly compensated for its only covered claim ⁵ and that there was no excess liability to be borne by American Home.

LOF appeals from the district court's interpretation of the American Home policy and from the court's apportionment analysis. American Home cross-appeals from the district court's conclusions that loss of use may be covered without accompanying physical injury and that the relevant occurrence fell within the time period covered by the American Home policy.

II. POLICY COVERAGE

A. Property Damage

American Home agreed to indemnify LOF for all sums that LOF became obligated to pay, by law or by agreement, "because of ... property damage as hereinafter defined." ⁶ Property damage was defined in the policy as "physical injury to, or physical destruction of, tangible property, including the loss of use thereof." The policy expressly excluded claims made against LOF for damage to LOF's own products or for the improper performance or design of LOF's products. ⁷

LOF maintains that the exclusion for "damage to the named insured's products arising out of such products" excludes only coverage for the actual repair and replacement costs of its product, the BVT windows. Thus, according to LOF, only Hancock's claim of $6,748,000 directly attributable to the removal and replacement of the failed windows is excluded under the policy. ⁸ By contrast, all Hancock's claims for consequential damages stemming from the broken windows are covered under this reading of the policy. The policy expressly covers all damages "because of ... property damage" (emphasis added) and, LOF argues, it therefore covers all consequential damages resulting from covered property damage. According to LOF, breakage of its windows constitutes the required "property damage" because such breakage meets the policy definition of "physical injury to tangible property".

The district court did not address the argument that breakage of the LOF windows could constitute "property damage" as contemplated by the policy and that Hancock's claims were therefore covered as consequential losses flowing from such damage. Rather, the district court stated that LOF must be arguing that "a variety of intangible items of loss" were themselves included under the term "property damage". American Home Assur. Co. v. Libbey-Owens-Ford Co., 588 F.Supp. 766, 768 (D.Mass.1984). The court noted that although a number of courts have held that intangible losses, such as loss of use or diminution of value, are "property damage", see, e.g., McDowell-Wellman Eng. v. Hartford Acc. and Indem., 711 F.2d 521, 525-26 & n. 7 (3rd Cir.1983) (and cases cited therein); Hauenstein v. St. Paul-Mercury Indemnity Co., 242 Minn. 354, 65 N.W.2d 122, 124-26 (1954), all such decisions had interpreted policy language defining property damage as "injury to tangible property" rather than "physical injury to tangible property." In cases in which courts have interpreted more recent policies in which property damage is defined as "physical" injury to tangible property, such courts have held that intangible damages, such as diminution in value, are not considered property damage. See, e.g., Wyoming Sawmills v. Transportation Ins. Co., 282 Or. 401, 578 P.2d 1253 (1978); Federated Mutual Insurance Co. v. Concrete Units, Inc., 363 N.W. 751, 757 (Minn.1985).

We agree with the district court's analysis on this issue, although we decide the coverage issue on different grounds. The critical difference in policy language is the result of a 1973 revision of the Comprehensive General Liability Policy, used by most insurance companies, which expressly added the modifier "physical" injury to the definition of "property damage" in order to restrict recovery for intangible losses. See generally, Note, Liability Coverage for "Damages Because of Property Damage" Under the Comprehensive General Liability Policy," 68 Minn.L.Rev. 795, 800-813 (1984); Tinker, Comprehensive General Liability Insurance--Perspectives and Overview, 25 Fed'n Ins....