Eljer Mfg., Inc. v. Liberty Mut. Ins. Co.

• Decision Date: 14 August 1992
• Docket Number: 91-3251 and 91-3298,Nos. 91-3203,s. 91-3203
• Citation: 972 F.2d 805
• Parties: ELJER MANUFACTURING, INCORPORATED, Plaintiff-Appellant, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee, and Travelers Indemnity Company of Illinois, Intervening-Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 805

972 F.2d 805

61 USLW 2136

ELJER MANUFACTURING, INCORPORATED, Plaintiff-Appellant, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee and Travelers Indemnity Company of Illinois Intervening-Defendant-Appellee.

Nos. 91-3203, 91-3251 and 91-3298.

United States Court of Appeals Seventh Circuit.

Argued June 3, 1992.

Decided Aug. 14, 1992.

David E. Bennett, Karen L. Pszanka-Layng, Jeanne M. Hoffmann, Vedder, Price, Kaufman & Kammholz, Constantine L. Trela, Melville W. Washburn, Thomas W. Merrill, Howard J. Trienens (argued), Sidley & Austin, Chicago, Ill., for plaintiff-appellant, Eljer Mfg. Inc.

James P. DeNardo, Christine L. Olson (argued), Samuel A. Purves, Kathleen H. Jensen, McKenna, Storer, Rowe, White & Farrug, Chicago, Ill., for defendant-appellee, Liberty Mut. Ins. Co.

Alan M. Posner, Robert C. Johnson (argued), Sanford M. Pastroff, John C. Furman, Sonnenschein, Nath & Rosenthal, Michael J. Sehr, Jon E. Elenius, Haskell & Perrin, Chicago, Ill., for intervening-defendant-appellee.

Before CUDAHY, POSNER, and KANNE, Circuit Judges.

POSNER, Circuit Judge.

The appeal and cross-appeals in this diversity suit bring before us a difficult and important question of insurance law, one that we must decide under Illinois law but that has nationwide significance because it involves the interpretation of language that appears in the industry-wide standard-form policy known as Comprehensive General Liability Insurance. George H. Tinker, "Comprehensive General Liability Insurance- --Perspective and Overview," 25 Federation of Ins. Counsel Q. 217, 218-21 (1975); Abex Corp. v. Maryland Casualty Co., 790 F.2d 119, 121 (D.C.Cir.1986). If a manufacturer sells a defective product or component for installation in the real or personal property of the buyer, but the defect does not cause any tangible change in the buyer's property until years later, can the installation itself nonetheless be considered a "physical injury" to that property? The defective product or component in such a case is like a time bomb placed in an airplane luggage compartment: harmless until it explodes. Or like a silicone breast implant that is harmless until it leaks. Or like a defective pacemaker which is working fine now but will stop working in an hour. Is the person or property in which the defective product is implanted or installed physically injured at the moment of implantation or installation--in a word, incorporation--or not until the latent harm becomes actual?

The product at issue is a plumbing system, called "Qest," that appellant Eljer's U.S. Brass subsidiary manufactured and sold to plumbing contractors all over the United States between 1979 and 1986 (some have continued to be sold for installation in mobile homes, but we can ignore that detail). Between a half million and three-quarters of a million Qest systems were installed in houses and apartments, invariably behind walls or below floors or above ceilings, so that the repair or replacement of the unit requires breaking into walls, floors, or ceilings. Within a year after the first units were sold and installed, complaints about leaks began coming in and the first products-liability lawsuit was brought against U.S. Brass in 1982. By 1990 several hundred additional suits had been filed, some of them class actions, involving altogether almost 17,000 of the systems; and it is estimated that ultimately 5 percent of the total number of Qest systems ever sold will have failed in circumstances likely to provoke a tort suit. Eljer reckons U.S. Brass's potential tort liability in the hundreds of millions of dollars, most of which Eljer hopes to recover from insurers--but only if it wins this case.

The tort claims are of two basic types--leak and nonleak--with the second requiring further subdivision:

(1) Claims that the system leaked, and caused water damage to the homeowner or forced him to repair or replace the system or deprived him of the use of his property (the leak, or the process of repair or replacement, may have made the home temporarily uninhabitable) or reduced the value of his home; or inflicted more than one of these harms.

(2) Claims that although the system has not yet leaked, (a) the value of the property in which it was installed has fallen as a result of the danger that the system may leak in the future, or the homeowner has as a precaution against that danger incurred the expense of replacing the system without waiting for it to leak; (b) the homeowner has been deprived of the use of his property while his Qest system was being replaced; (c) merely the ominous presence of the nonleaking, but perhaps some day destined to leak, Qest has deprived the homeowner of the use of his home (he's afraid to turn on the water)--as when a building is evacuated in response to a bomb threat.

Liberty Mutual, the principal defendant, issued a series of annual Comprehensive General Liability Insurance policies to Eljer covering the years 1979 through 1988. Travelers, the other defendant, provided excess coverage for Eljer between 1982 and 1986. The policies cover liability for "property damage" accidentally caused by Eljer or its subsidiaries, defined as "(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence [defined, so far as relevant here, as an accident, including continuous or repeated exposure to conditions] during the policy period." This language was changed in the last three policies (covering 1986 through 1988), but, the parties agree, not materially.

Eljer brought this declaratory judgment suit to establish that the physical injury to the property of the buyer of a Qest system occurs when the system is installed in the buyer's house or apartment, not when it begins to leak or is replaced or is recognized to have reduced the value of the buyer's property. If this is right, essentially all the "property damage" inflicted by the defective systems occurred during the years in which Liberty's insurance policies were in force, because those were the years in which the systems were sold and installed. Liberty, however, contends that with respect to Eljer's liability (actually U.S. Brass's liability, but we can disregard that detail too) for leaking systems, the "property damage" to which the policies refer does not occur until the system leaks. If it hasn't leaked, but has been replaced in anticipation of its proving defective, or the value of the home has diminished, or the homeowner has lost the use of his property because he's afraid to use the plumbing, then, provided at least one other Qest system somewhere else has leaked, there is "property damage" as of the time when the homeowner realizes that the Qest is reducing the value of his home and (or) must be replaced. Liberty argues in the alternative that in the nonleaking case the physical damage occurs when the homeowner replaces his Qest system, since the process of removing the old system causes unquestioned damage to the house.

Many of the leaks upon which tort claims against Eljer are based did not occur until after the expiration of Liberty's last insurance policy at the end of 1988. And many people did not realize till then that their Qest systems were potentially defective and reducing the value of their homes and ought to be replaced and maybe the home not used until it was replaced because the water should be shut off immediately as a precaution. So if the insurance companies' arguments prevail, Eljer will not be able to shift a substantial part of the burden of the tort claims against it to Liberty--or to Travelers, whose coverage expired even sooner.

The district judge agreed with the insurance companies that property damage within the meaning of the Comprehensive General Liability Insurance form contract does not occur upon installation of the defective system, except in the case of claims for loss of use where there is no leak (categories (2)(b) and (2)(c) in our typology). In the case of claims that arise from leaks, property damage occurs, in the district judge's view, when the leak occurs, while in the case of claims for the cost of repair or replacement incurred in anticipation of a leak it occurs at the time of repair or replacement. Eljer challenges these rulings. Liberty and Travelers cross-appeal, arguing mainly that the judge should not have ruled on loss of use claims when there is no leak, because the issue was not presented to him. The insurance companies are correct. Eljer failed to develop evidence or argument concerning this rather esoteric category of claims. It is not even clear that any claims of type (2)(c) have been or will be lodged against it--for how many people will vacate their home because they're afraid the pipes will leak unless the water is turned off?--in which event there might not even be an actual controversy between Eljer and its insurers over reimbursement for such claims. There are (2)(b) claims--loss of use of property incident to the replacement of a possibly defective Qest system. But because of the absence of evidence or argument concerning loss of use claims, the insurance companies, which may have had grounds for showing that such claims are within a policy exclusion, did not have a fair chance to defend themselves. Burdett v. Miller, 957 F.2d 1375, 1380 (7th Cir.1992). Eljer is not entitled to a declaratory judgment concerning such claims.

The central issue in the case--when if ever the incorporation of one product into another can be said to cause physical injury--pivots on a conflict between the connotations of the term "physical injury" and the objective of insurance. The central meaning of the term as it is used in everyday English--the image it would conjure up in the mind of a person...