American Ins. Co. v. Crown Packaging Int'l, 2:05 CV 68.

Citation813 F.Supp.2d 1027
Decision Date24 August 2011
Docket NumberNo. 2:05 CV 68.,2:05 CV 68.
CourtUnited States District Courts. 7th Circuit. United States District Court of Northern District of Indiana


Renee J. Mortimer, Hinshaw & Culbertson LLP, Schererville, IN, Carol Proctor, Hinshaw & Culbertson LLP, Chicago, IL, for Plaintiff.

Jonathan L. Marks, Katten Muchin Rosenman LLP, Chicago, IL, Michael F. Gallagher, Michael I. Verde, Katten Muchin Rosenman LLP, New York, NY, for Defendant.


JAMES T. MOODY, District Judge.

During the times relevant herein, plaintiff, The American Insurance Company (American), had in force a commercial general liability insurance policy (hereinafter, the “CGL Policy,” “American Policy” or “Policy”) issued to defendant, Crown Packaging International (Crown).1 Crown sells plastic containers manufactured by a wholly-owned subsidiary, Polycon Industries.2 Crown's largest customer, Ecolab, bought an ongoing supply of the containers in which to package its liquid soap products. Ecolab began experiencing problems with some of the containers already filled with soap, and began deducting its expenses associated with the defective containers from invoices from Crown. In other words, Ecolab began taking credits for past purchases of defective containers against current purchases from Crown. The parties refer to these credits as “chargebacks.”

Crown sought indemnification for the amount of the chargebacks from American. American denied the claim, and filed the present case seeking a judgment declaring that, for multiple reasons, its CGL Policy does not apply. Before the court for resolution is American's motion for summary judgment and Crown's cross-motion for partial summary judgment.

A. Factual Background 3

Unless the context makes it clear otherwise, the following facts are not in dispute. Crown has sold containers to Ecolab for approximately thirty-five years, and Ecolab is Crown's largest customer, accounting for thirty to thirty-five percent of Crown's revenue. During the period relevant to this litigation—and as was their normal course of business—Ecolab sent Crown blanket purchase orders approximating the quantity of containers needed during a specific ensuing period of time. Crown would then make daily and weekly shipments of the containers pursuant to the purchase orders. On average, Ecolab purchased one million containers a month.

As part of the manufacturing process, Crown silk-screened graphics, for example, the name of the product and directions for its use, on the containers using art provided by Ecolab. After Ecolab received the containers, it filled them with its liquid soap products, and printed a date code on them using an ink-jet printer. In February 2003, Ecolab began experiencing a problem with about 20% of the Crown containers, causing the date code to fail to adhere and to be easily rubbed off (“the date-code problem”). In June 2003, Ecolab notified Crown of an additional problem, that the silk-screened graphics put on the containers by Crown were flaking off of some of the containers (“the graphics problem”). Both of the problems only became apparent after Ecolab had filled the containers with its soap products.

Crown attempted to determine the reason for the date-code problem by renting a printer from Ecolab like the ones Ecolab was using. Crown was unable to determine the basis of the problem (DE # 31–6 at 62), but the issue occurred only on containers manufactured by Crown, and not on similar containers Ecolab purchased from other manufacturers. (DE # 31–6 at 20, 39; # 31–10 at 19; 21.) Crown resolved the issue by purchasing a new laser printer for Ecolab that created an indelible code. (DE # 31–6 at 62.) As to the graphics problem, Crown investigated and discovered that the ink was flaking off because of three issues: improper strength of an ultraviolet light used to cure the ink printed on the container; additives in the ink interfering with its ability to adhere to the containers; and shipment of the containers to Ecolab too soon after manufacture, which did not allow long enough for them to cure.

Before the problems were resolved, however, Ecolab had to manually inspect its inventory of containers at the end of the manufacturing process, and dispose of or “rework” the soap found in defective containers,4 employing additional labor to accomplish these tasks. Reworking the soap involved removing it from the containers by cutting them off the solidified soap, then “reblend[ing] the material into new batches at small percentages.” (DE # 31–7 at 10–11.) In March 2004, Ecolab decided to dispose of the remaining defective containers filled with their product instead of reworking the soap because the amount of defective material being dealt with was impacting its manufacturing process. Whatever product could not be reworked within ninety days was scrapped. In addition, product was scrapped which had been returned to Ecolab by its customers because of the graphics flaking off, and product held in inventory in containers with the graphics flaking off was deemed unsaleable and scrapped.

Prior to the events in the present case, during the course of the lengthy business relationship between Ecolab and Crown, when Ecolab had experienced any problems with the containers Crown supplied, it typically resolved them using the chargeback method, i.e., giving itself a credit on current invoices. Pursuant to this customary practice, Ecolab deducted from its payments to Crown the cost of the defective containers at issue in the present case, along with the consequential costs incurred in dealing with the problem and scrapping significant portions of its product. Ecolab provided Crown with a series of nineteen “Chargeback Advisory” forms, informing Crown of the basis for the deductions from its payment. Thus, although Crown never affirmatively authorized the chargebacks, it was aware of them and Crown never demanded full payment by Ecolab, consistent with past practice. Before the incidents involved in the present case, Ecolab had never paid Crown for any other chargebacks taken. Nevertheless, in the present case Crown continues to carry the relevant chargebacks on its books as aging accounts receivable.

Ecolab's charge backs totaled about $454,122.68 5 between March 2003 and September 2004, $91,035.28 of which was from the ink date-code adhesion problem. (DE # 28 at 8, ¶ 23.) The $91,035.28 figure was comprised of Ecolab's costs for reworking the soap and inspection, Ecolab's material loss, and “rental” 6 of the date code printer. (DE # 28 at 8–9, ¶¶ 24–26.) The remaining portion of the total chargeback amount resulted from the graphics problem, which affected 15 to 20% of the containers and also caused Ecolab to rework some of the soap and place it in new containers, and to scrap some product. (DE # 27–2 at 69; DE # 28 at 9–10, ¶ ¶ 28–31.) As of June 16, 2004, the chargebacks to Crown from Ecolab totaled $346,953.98 for this graphic adhesion problem. (DE # 28 at 10, ¶ 32.)

Crown never expressly consented to the chargebacks for the date code ink adhesion or graphics adhesion problems. However, Crown's production manager's name (David Wilbourn) appears on the Chargeback Advisory forms as having authorized them on behalf of Crown. Wilbourn never discussed this with anyone from Ecolab nor did he know that his name appeared on the Chargeback Advisories.

In June 2003, Crown contacted Lockton Companies, its insurance broker, to notify American of its claim 7 under the Policy arising from the chargebacks for damage caused to Ecolab's property by Crown. In progress notes dated June 25, 2003, the claims adjuster investigating for American opined that a product recall was not involved, because the product was not sent into the market, and indicated that Ecolab had already taken credit of about $40,000 in the form of chargebacks to Crown. (DE # 31–31 at 25.) From June 2003 through October 2004, Crown, directly and through Lockton, furnished American with documentation and information regarding the Ecolab claim, including all of the investigation records and chargeback records. However, American has refused to pay Crown for the claim, contending that several policy provisions apply to preclude any coverage.

American initiated this action by filing a complaint seeking a declaratory judgment that its CGL Policy does not provide indemnity to Crown for any of the chargebacks taken by Ecolab. In simple terms, the Policy issued to Crown covers “property damage” caused by an “occurrence.” The Policy excludes coverage when the insured voluntarily makes a payment, assumes any obligation, or incurs any expense without first receiving American's consent. Furthermore, the Policy excludes property damage to the insured's product itself, or to property of a third party which is “impaired” because of a defect in the insured's product which has been incorporated into the third party's product; and excludes coverage of expenses associated with the recall of a product. The complaint contains seven counts, each of which seeks a declaration as to one of these Policy provisions.

American moved for summary judgment on each count of the complaint, contending that some of the Policy provisions operate so that Crown is not entitled to any indemnity, and some (most notably, the exclusion for recalled products) operate to exclude part of the damages for which Crown seeks indemnity. Crown moved for partial summary judgment, claiming that the policy provisions at issue apply to provide coverage. Crown's motion is for partial summary judgment because it concedes that a question of fact may exist as to count VII of the complaint, concerning the voluntary payment provision.8 Both parties supported their motions with memoranda, responses to the other party's motion, and replies in support of their own. In addition, at the request of Judge Lozano, who formerly presided over this case, the...

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