Arcos Corporation v. American Mutual Liability Ins. Co., Civ. A. No. 71-1319.

• Decision Date: 31 October 1972
• Docket Number: Civ. A. No. 71-1319.
• Parties: ARCOS CORPORATION v. AMERICAN MUTUAL LIABILITY INSURANCE COMPANY.
• Court: U.S. District Court — Eastern District of Pennsylvania

350 F. Supp. 380

ARCOS CORPORATION v. AMERICAN MUTUAL LIABILITY INSURANCE COMPANY.

Civ. A. No. 71-1319.

United States District Court, E. D. Pennsylvania.

October 31, 1972.

William S. Rawls, Philadelphia, Pa., for plaintiff.

Gerald A. Dennehey, Philadelphia, Pa., for defendant.

OPINION

BECHTLE, District Judge.

This matter is before the Court on plaintiff's motion for summary judgment in the amount of at least Fifty-Six Thousand Five Hundred Dollars ($56,500.00), on a claim under a comprehensive liability insurance policy, and defendant's cross motion for summary judgment mainly on the ground that the claim is of the type that falls within two of the exclusionary provisions of the policy. The parties have entered into a stipulation of facts, accompanied by exhibits, which together, they assert, encompasses all facts which are material to this controversy. Save those issues as to certain items of damages, the parties agree there is no genuine issue as to any material fact in this case.

Plaintiff, Arcos Corporation, a Pennsylvania corporation with its principal place of business in Philadelphia, is engaged in the business of manufacturing and selling electrodes and welding wire for use in welding. To protect itself against products liability claims, plaintiff, Arcos Corporation, purchased from defendant, American Mutual Liability Insurance Company ("Company") a "Comprehensive General Liability Insurance Policy" for the years 1965 through 1968.¹ All these policies obligated the Company to pay on behalf of Arcos all sums which Arcos became legally obligated to pay because of damages to property caused by an accident arising out of products sold by Arcos.

The firm of General Dynamics needed weld wire to be used to make welds in a nuclear power plant of a submarine. For that purpose it ordered, on November 16, 1965, one thousand (1,000) pounds of "Inconel" weld wire from Arcos at a net price of Two Thousand Nine Hundred Eighty Dollars ($2,980.00). Arcos filled this order by delivering thirty-eight (38) spools of weld wire to the Electric Boat Division of General Dynamics at Groton, Connecticut, on March 2, 1966. The weld wire was not used immediately by the buyer and was stored away until the fall of 1968 when it was used in making welds in the power plant of a nuclear submarine. After observing cracks in the welds, General Dynamics discovered through procedures devised by it that some of the welds made with wire purchased from Arcos were unsatisfactory in that they were not composed of the same substance referred to as "Inconel." Since welds not made from Inconel weld wire did not have the chemical and physical properties required by the designers of the power plant system, and since General Dynamics believed that a failure of the power plant might place the entire submarine in jeopardy, it proceeded to rip out all joints not made with Inconel weld wire and to reweld them with that kind of wire. In the meantime, by memorandum dated October 15, 1968, General Dynamics notified Arcos that five (5) of the thirty-eight (38) spools of weld wire were "found to have 300 Series Stainless Steel" on them. On October 18, 1968, Arcos' insurance broker notified the Company that a claim was being made against Arcos for products sold by it.

On February 2, 1969, General Dynamics commenced two suits, one in trespass and one in assumpsit, against Arcos in the Court of Common Pleas of Philadelphia County. Arcos promptly forwarded the writs of summons to the Company. The attorney for the Company entered his appearance in both cases and filed a Rule in each of them. Responding to these Rules General Dynamics, on March 20, 1969, filed complaints seeking damages in excess of Eighty-Three Thousand Two Hundred Forty-Six Dollars ($83,246.00) for cost and expenses incurred by the buyer in:

1. Investigating and testing to locate and identify weld wire purchased on P.O. A-1101-603 and cost of locating welds made with the aforesaid weld wire;

2. Investigating weld chits (records) to determine which weldments contained the suspect heat number;

3. Developing mental monitor techniques to ascertain metalic content of the suspect welds;

4. Cost of ripping out and rewelding joints made with defective or suspective weld wire purchased from plaintiff, Arcos Corporation.

No damages were claimed for lack of use of the submarine or its parts. By letter dated April 15, 1969, the Company notified Arcos that it disclaimed all obligations under the policy and would take no further action to defend the suits. The reason given was that the claim made by General Dynamics is not a claim for damage to property and that the claim was not caused by an accident within the meaning of the policy because of the exclusions set forth in provisions (k) and (n) thereof. Arcos proceeded with the defense of the suits through its own counsel, and was later advised by General Dynamics that the damages amounted to One Hundred Eight Thousand Dollars ($108,000.00).

After conducting a thorough investigation into the facts and circumstances of General Dynamics' claim and attending several conferences with representatives of that firm, and upon being convinced that if the action were tried, a verdict in excess of One Hundred Thousand Dollars ($100,000.00) against it could be anticipated, Arcos settled the suits in April of 1970, by agreeing to pay General Dynamics a sum not to exceed Fifty-Four Thousand Dollars, ($54,000.00).

Are the amounts which Arcos agreed to pay General Dynamics in settlement of the two suits recoverable under the policy? The policy provided that the Company will pay on behalf of Arcos all sums which it shall become legally obligated to pay because of property damage to which the policy applies caused by an accident "which results during the policy period, in property damage neither expected nor intended from the standpoint of the insured." The Company does not dispute the fact that the damage suffered by General Dynamics as a result of the wrong weld wire being spun on spools marked "Inconel" was neither "expected" nor "intended" by Arcos.

In 1966 the insurance industry revised its standard comprehensive general liability policy. Contained in it were exclusion provisions (k) and (n), and those provisions appear in Arcos 1967-1968 policy, which the parties, for the purpose of this case, agree applies here. The Company contends that these two provisions are applicable to the property damage sustained by General Dynamics and therefore its claims against Arcos are not covered by the policy.

I

Provision (k), the so-called "business risk exclusion," provides that:

"This insurance does not apply: (k) to . . . property damages resulting from the failure of the named insured's products . . . to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specification, advertising material or printed instructions prepared or developed by the insured; . . ."

The damage suffered by General Dynamics resulted from the failure of weld wire, shipped as Inconel, to perform the function or serve the purpose intended by Arcos. Arcos knew and expected that the weld wire that it delivered to General Dynamics would be used in securing the joints of a nuclear submarine. The nature of the use was such that the weld wire had to be a certain alloy to accommodate extraordinary stresses attending atomic reactors. The weld wire in question failed to possess the properties necessary to resist these extraordinary stresses. The damage which General Dynamics sustained from the use of the weld wire purchased from Arcos was "property damage" within the meaning of the policy. Bowman Steel Corporation v. Lumbermens Mutual Casualty Co., 364 F.2d 246, 249-250 (C.A.3, 1966); Pittsburgh Plate Glass Co. v. Fidelity and Casualty Co. of New York, 281 F.2d 538, 541-545 (C.A.3, 1960).

Provision (k) excludes coverage for property damage resulting from the failure of a product to serve the purpose intended only if such failure is due to one or more of the six reasons set forth therein. The Company claims that the failure in this case was due to a physical or chemical failure of the weld wire's design or formula. As Arcos points out, a product may fail to serve its intended purpose for either of two reasons: first, it may be improperly designed from the beginning; or second, it may be rendered defective by an error in production. Arcos concedes that property damage resulting from...