Dreis & Krump Mfg. Co. v. Phoenix Ins. Co.

Decision Date25 February 1977
Docket NumberNo. 76-1355,76-1355
Citation548 F.2d 681
PartiesDREIS & KRUMP MANUFACTURING COMPANY, Plaintiff-Appellee, v. The PHOENIX INSURANCE COMPANY and Travelers Insurance Company, Successor by Merger to the Phoenix Insurance Company, Defendants-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

Francis B. Libbe, Gary M. Elden, Samuel Fifer (argued), Chicago, Ill., for defendants-appellants.

Ronald Wilder, Chicago, Ill., for plaintiff-appellee.

Before CASTLE, Senior Circuit Judge, and SPRECHER and WOOD, Circuit Judges.

SPRECHER, Circuit Judge.

This appeal involves the necessity of construing several provisions and definitions in an insurance policy.

Jurisdiction is based upon diversity of citizenship and inasmuch as the insurance policy was apparently executed in Illinois, Illinois law governs and apparently was applied by the district court, but we reconfirm Judge Cummings' request in Carboline Company v. Home Indemnity Company, 522 F.2d 363, 368 (7th Cir. 1975) that "(i)t would be helpful to this Court in the future if the district courts in diversity cases would include a determination of the applicable law in any appealable order or decision."

I

Dreis & Krump Manufacturing Company, the plaintiff-insured, sold a press brake to Joseph T. Ryerson & Son, Inc. Ryerson sold the brake to Bustin Steel Products, Inc. Bustin brought suit against Dreis & Krump and Ryerson, claiming the brake was defective. Dreis & Krump tendered the defense of the Bustin suit to the defendant-insurer, the Phoenix Insurance Company, which refused to defend on the ground that the allegations in the complaint filed by Bustin indicated there was no coverage. Ryerson filed a cross-claim against Dreis & Krump in the Bustin action. Dreis & Krump and Ryerson were held jointly liable in the Bustin suit.

Dreis & Krump instituted the present action against Phoenix to establish that Phoenix breached its duty to defend Dreis & Krump in the Bustin suit, and therefore is liable for the judgment and costs of defense in that action. The district court entered summary judgment against Phoenix and in favor of Dreis & Krump for $49,601.95, representing one-half of the judgment entered jointly against Dreis & Krump and Ryerson in the Bustin litigation, in the amount of $14,533.70 plus costs, expenses and fees in connection therewith of $35,068.25. Phoenix has appealed, raising three issues:

(1) Whether Phoenix breached its duty to defend under the Contractual Liability insurance endorsement (hereinafter referred to as the Endorsement or as the Contractual Endorsement);

(2) Whether Phoenix breached its duty to defend under its Comprehensive General Liability insurance policy (hereinafter referred to as the CGL); and

(3) Whether there is some other basis for finding that Phoenix had a duty to defend.

II

As the Illinois court in Sherman v. Home Insurance Co., 25 Ill.App.3d 519, 323 N.E.2d 550, 552 (1st Dist. 1975), noted:

An insurer must defend a suit brought against its insured when the complaint states facts which fall within the potential coverage of the policy. If the complaint does not state facts bringing it within the policy, the insurance company may decline to defend the suit. . . . An unjustified refusal to defend makes the company liable for the amount recovered from (the) insured . . . by way of judgment . . ., for his costs in defending the suit and for any additional damages caused by its refusal to defend. (Citations omitted, emphasis added.)

Accordingly, Phoenix's duty to defend is determined by examining the " 'four corners' of the (pertinent) complaint and the policy to determine if the contents of the complaint, when taken at face value, alleged a cause of action which is potentially covered by the policy." Fragman Construction Co. v. Preston Construction Co., 1 Ill.App.3d 1002, 274 N.E.2d 614, 616 (2d Dist. 1971). 1

The Contractual Endorsement provides that Phoenix will "pay on behalf of the Insured all sums which the Insured by reason of the liability assumed by him under any written contract shall become legally obligated to pay as damages because of . . . injury to or destruction of property including the loss of use thereof, caused by accident. . . . (Supp.App. at 28; emphasis added.)

The Endorsement designates "Purchase Order Agreements" as the contracts covered by the Endorsement. Ryerson purchased the press brake which it sold to Bustin through the medium of a Ryerson Purchase Order.

A

An important preliminary issue is which pleading in the Bustin suit must be examined to determine whether Phoenix had a duty to defend under the Contractual Endorsement the complaint by Bustin or the cross-claim by Ryerson. The coverage provision of the Endorsement requires that before there can be coverage the party seeking to recover against the insured must be in a contractual relationship with Dreis & Krump. The complaint filed by Bustin against Dreis & Krump does not claim that it has any right against Dreis & Krump based on a contract. 2 Therefore, the pertinent pleading for purposes of coverage under the Endorsement must be the Ryerson cross-claim, since Ryerson was the only party with whom Dreis & Krump had entered into a contract. However, the letters from Dreis & Krump to Phoenix indicate that Dreis & Krump tendered the defense solely on the basis of the allegations in the Bustin complaint, and there is no indication in the record that Dreis & Krump, when it tendered the defense to Phoenix, apprised Phoenix of either the existence of the Ryerson cross-claim or of the allegations contained therein. This fact in itself poses a serious obstacle to finding that Phoenix breached its duty to defend under the Endorsement. 3

Basically, Dreis & Krump makes two arguments to support its contention that Phoenix had a duty to defend it under the Contractual Endorsement. First, the Ryerson purchase order contains express warranties and the Ryerson cross-claim (Count I) sought recovery against Dreis & Krump for breach of these warranties. In the second place, the Ryerson purchase order contains an indemnification clause (Paragraph 3) which Dreis & Krump contends required it to indemnify Ryerson under the facts of this case.

B

Dreis & Krump's argument is basically that since "Purchase Order Agreements" are designated as covered contracts under the Endorsement and since the Ryerson purchase order contained express warranties and since Ryerson's cross-claim alleged breach of these warranties, there was a duty to defend under the Endorsement.

There are two problems with this argument, in addition to the earlier problem dealing with proper notice to the insurer. First, Exclusion 1(a) of the Contractual Liability Endorsement expressly states that "(t)his endorsement does not apply . . . to liability for any warranty of goods or products." Although there appears to have been some suggestion by the district court and Dreis & Krump that the coexistence of this exclusion and exclusion (a) of the CGL creates an ambiguity which must be construed against the insurer, it is difficult to support this conclusion.

Exclusion (a) in the CGL provides that "this insurance (CGL) does not apply . . . to liability assumed by the insured under any contract or agreement . . .; but this exclusion does not apply to a warranty of fitness or quality of the named insured's products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner."

When read together, the two exclusions do not appear inconsistent. Under the CGL, "tangible property" damage resulting from the insured's breach of warranties is covered, but contracts of indemnification are not. Thus, if the insured desires coverage for liability resulting from such indemnification agreements, he must purchase the contractual endorsement at an additional premium. But the contractual endorsement, if purchased, only covers liability resulting from written indemnification agreements and not warranty liability, which is covered, if at all, by the CGL policy. This court in Carboline Company v. Home Indemnity Co., 522 F.2d 363, 365-66 (7th Cir. 1975), had little difficulty in giving effect to an exclusion of warranties from coverage under a Contractual Endorsement similar to the one involved in this case.

The second problem with Dreis & Krump's express warranty argument is that this circuit has construed the coverage language in the endorsement "liability assumed by him under any written contract" to mean a specific written agreement between the insured and some third party whereby the insured agrees to "indemnify" the third party. J. L. Simmons Co. v. Fidelity & Casualty Co., 511 F.2d 87, 96 (7th Cir. 1975). 4 See also Haugan v. Home Indemnity Co., 86 S.D. 406, 197 N.W.2d 18 (1972). Under this interpretation of the endorsement's coverage, an express warranty would not constitute a written "indemnification" agreement.

C

Paragraph three of the Ryerson purchase order provides You (Dreis & Krump) agree to indemnify us (Ryerson) and our successors and assigns, against all liabilities and expenses, resulting from any claim or infringement of any patent in connection with the production of goods or the performance of services hereby or the use or sale of such goods (Supp.App. at 46).

Dreis & Krump contends that Phoenix had a duty to defend under the contractual endorsement because of this "indemnification" clause.

Unlike the express warranties, this clause clearly satisfies the Simmons requirement that there be a specific written agreement to indemnify, when the policy requires "liability assumed by . . . the insured under any written contract." However, for several reasons, it is questionable that paragraph three of the Ryerson Purchase Order can properly serve as a basis for finding that Phoenix had a duty to defend the Bustin action.

Again, as noted at the outset, there is no indication...

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