Amerisure Mut. Ins. Co. v. Microplastics Inc.

Decision Date20 September 2010
Docket NumberNo. 09-3764.,09-3764.
Citation622 F.3d 806
PartiesAMERISURE MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. MICROPLASTICS, INC., Defendant-Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

OPINION TEXT STARTS HERE

Katherine Streicher Arnold, Attorney (argued), Tressler LLP, Chicago, IL, for Plaintiff-Appellee.

Christopher M. Cano, Attorney (argued), Bollinger, Ruberry & Garvey, Chicago, IL, for Defendant-Appellant.

Before CUDAHY, RIPPLE, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

This case presents a recurring problem under Illinois insurance law governing an insurer's duty to defend under a commercial general liability policy. Suppose a buyer sues a manufacturer for supplying defective products, but the buyer does not specify the elements of its claims for damages in the complaint. A commercial general liability policy is intended to cover, among other risks, the insured's liability for accidental bodily injury and property damage caused by its defective products. The policy is not intended, however, to cover the costs of replacing or repairing the defective products themselves. The parties agree here that if the unhappy buyer alleges that the defective products have caused bodily injury or damage to property other than the defective products themselves, a commercial general liability policy will require the insurer to defend its insured. They also agree that if the unhappy buyer alleges only a claim for repair or replacement of the defective products, the policy will not require the insurer to defend what amounts to only a breach of contract claim against its insured.

The problem presented here is whether the insurer has a duty to defend the insured when the unhappy buyer makes only general allegations for costs incurred as a result of the defective products, without explicitly disavowing any claim for damage to property other than the defective products themselves. The unhappy buyer's claim in this case has all the earmarks of a pure breach of contract claim for costs of repair, replacement, or similar economic losses not covered by the insurance policy. There is no indication that the insured manufacturer's products caused damage to any property other than the defective products themselves. Although the insured manufacturer offers speculative hypotheses about scenarios that are not literally inconsistent with the unhappy buyer's allegations, those speculative hypotheses are not sufficient to trigger the insurer's duty to defend under the commercial general liability policies. We affirm the district court's decision to that effect.

I. The Dispute Between Microplastics and Valeo

The district court granted summary judgment for the insurer, plaintiff-appellee Amerisure Mutual Insurance Company. The relevant facts are undisputed, consisting primarily of the terms of the relevant insurance policies and the contents of various pleadings in the underlying lawsuit between the unhappy buyer and defendant-appellant Microplastics, Inc. Microplastics manufactures insert molding components, which are plastic pieces used to manufacture various mechanical devices. The unhappy buyer in this case was Valeo Security Systems. In 2004, Valeo began buying Microplastics components and used them to manufacture automobile door latch assemblies that it sold to automobile manufacturers (referred to in industry jargon as “original equipment manufacturers” or “OEMs”). The supply relationship between Microplastics and Valeo was governed by purchase orders that included quality specifications and prices. 1

The relationship soured quickly. By October 2004, one unidentified OEM began complaining to Valeo about problems with the door latch assemblies. It became clear to all involved that Microplastics was selling Valeo defective parts. Microplastics has forwarded some creative hypotheses for how these defects manifested themselves, but the only details with any factual support in the record are found in a February 2005 email from Valeo to Microplastics president Mike Roberts identifying the following defects:

The issue is that when we launched with production parts from Microplastics we had no idea your process was allowing some parts which:

1) The potting material did not fill the voids under the terminals.

2) The potting was not adequately cured to prevent water intrusion.

3) The potting material did not bond to the upper housing.

In addition the bus bar was not over-molded as it should have been, limiting protection, and elevating the effect of every issue above. Each of these is the direct result of your process which you must test and qualify to assure compliance, not Valeo.

R. 37, Ex. A ¶¶ 31, 32. An internal email from Roberts to Microplastics managers a few months earlier seemed to acknowledge both the problem and Microplastics' responsibility for it:

[W]e have to get rid of Valeo .... I am convinced that this piece of crap is a major recall in the making. It will take a while to make it go away but it NEEDS to go away .... I apologize for being greedy and wishful thinking that Valeo would turn out [okay]. Nothing comes from being greedy and stupid. I was both. Saw the train wreck coming two years ago but kept it going because we needed the work. Next time I do that somebody, or all of you, slap me.

R. 37, Ex. G ¶¶ 11-13.

These problems remained unresolved by August 2006, when Valeo sent a demand letter to Microplastics formally asserting that Microplastics had breached the quality and engineering specifications of the purchase orders. The letter stated that Valeo had chosen to “terminate and cancel the Purchase Orders for cause” and said that Valeo would apply a debit of about $1,300,000 to offset “the damages incurred by Valeo due to Microplastics' breaches.”

II. Litigation and Valeo's Counterclaim

Settlement negotiations fell through, and in October 2006 Microplastics filed suit for breach of contract against Valeo. Microplastics alleged that Valeo had failed to pay 20 invoices for parts delivered, totaling more than $500,000. In November 2006, Valeo filed a six-count counterclaim. See Microplastics, Inc. v. Valeo Security Systems, N.A., No. 06-cv-6187 (N.D.Ill.). Count I, the only count pertinent here, reiterated the allegations of the demand letter, seeking setoff and damages for economic losses incurred as a result of Microplastics' breaches of the purchase orders by failing to comply with engineering and quality specifications.

III. The Insurance Dispute

Appellee Amerisure insured Microplastics from July 2003 to July 2007 under a series of commercial general liability policies (“the CGL policies”). The CGL policies required Amerisure to pay Microplastics if it should ever be legally obligated to pay damages to any third party as a result of “property damage” or “personal injury” caused by an “occurrence.” The CGL policies also required Amerisure to defend Microplastics against any lawsuit seeking such covered damages. The CGL policies defined “property damage” as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

Amerisure was first notified of the Valeo counterclaim on March 1, 2007 by Microplastics' insurance broker. On April 13, 2007, Amerisure sent a letter to Microplastics with the heading “Reservation of Rights.” Amerisure acknowledged receipt of the Valeo counterclaim and advised that it was “unable to provide [Microplastics] with a defense until we have completed our investigation.” The letter cited the relevant coverage provisions and stated that “there appears to be a question as to whether or not this incident is a covered claim under the general liability policies issued to Microplastics, Inc. It does not appear that there has been any ‘property damage’ caused by an ‘occurrence.’ In a June 21, 2007 letter, Amerisure informed Microplastics that it was declining coverage and would not defend Microplastics against the Valeo counterclaim. Amerisure then filed this action on July 9, 2007, seeking a declaration that it had no duty to defend or indemnify Microplastics with respect to the Valeo counterclaim.

Without the aid of Amerisure's defense, Microplastics sought to settle the pending claims. On September 12, 2007, Microplastics and Valeo entered into a settlement agreement to resolve all claims between them. No cash changed hands under the agreement, but Microplastics issued a credit memo for the amount that Microplastics had billed Valeo for its supply of the allegedly defective supply parts, more than $500,000. The record does not reveal that Microplastics or Amerisure gained any new knowledge of the nature of the “customer costs” referenced in Valeo's counterclaim.

Meanwhile, the present action between Amerisure and Microplastics proceeded. The parties filed cross-motions for partial summary judgment on whether Amerisure had a duty to defend. The district court granted summary judgment for Amerisure, finding that the Valeo counterclaim did not trigger a duty to defend because it did not allege “property damage” or “bodily injury” under the CGL policies. Microplastics appealed. 2

IV. The Duty to Defend

Microplastics contends that the Valeo counterclaim's allegations potentially fell within the CGL policies' “property damage” provision, and therefore triggered Amerisure's duty to defend under Illinois law. Microplastics' argument relies entirely on hypothetical situations rather than on any facts actually alleged in the Valeo counterclaim. Under Illinois law, an insurer has no duty to defend unless the underlying claim contains explicit factual allegations that potentially fall within policy coverage. Because the Valeo counterclaim contained no such factual...

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