Esicorp Inc. v. Liberty Mutual Ins. Co.

• Decision Date: 11 June 2001
• Docket Number: No. 00-2810,00-2810
• Citation: 266 F.3d 859
• Parties: (8th Cir. 2001) ESICORP, INC.; ST. LOUIS TESTING LABORATORIES, INC., PLAINTIFFS - APPELLEES, v. LIBERTY MUTUAL INSURANCE COMPANY, DEFENDANT - APPELLANT. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 859

266 F.3d 859 (8th Cir. 2001)

ESICORP, INC.; ST. LOUIS TESTING LABORATORIES, INC., PLAINTIFFS - APPELLEES, v. LIBERTY MUTUAL INSURANCE COMPANY, DEFENDANT - APPELLANT.

No. 00-2810

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: June 11, 2001

Filed: September 17, 2001

Appeal from the United States District Court for the Eastern District of Missouri.

Before Loken and Morris Sheppard Arnold, Circuit Judges, and Tunheim,^* District Judge.

Loken, Circuit Judge.

Esicorp, Inc. ("Esicorp"), sued St. Louis Testing Laboratories, Inc. ("SLT"), for losses arising out of the need to repair defective pipe welds that SLT's testing had failed to discover. Liberty Mutual Insurance Company ("Liberty Mutual") refused to defend SLT under the comprehensive general liability ("CGL") policies Liberty Mutual issued to SLT for the period in question. SLT settled with Esicorp for $2,125,000, paying $125,000 and satisfying the remainder of its settlement obligation by assigning its rights against Liberty Mutual to Esicorp. Esicorp then sued Liberty Mutual to recover SLT's agreed liability.

In Esicorp, Inc. v. Liberty Mutual Insurance Co., 193 F.3d 966 (8th Cir. 1999), we agreed with the district court that Liberty Mutual had breached its duty to defend SLT but remanded for a determination of what portion of the settlement was covered by the CGL policy and, if necessary, for an apportionment of the settlement amount between covered and uncovered losses. On remand, the district court concluded that all of Esicorp's claimed losses were covered by the policy and ordered Liberty Mutual to pay the full settlement amount of $2,125,000, SLT's attorney's fees in the underlying action, and prejudgment interest. Liberty Mutual appeals. We conclude that most of Esicorp's claimed losses were not "property damage" covered by the policy and that Liberty Mutual has paid all covered losses. Accordingly, we reverse.

Esicorp's predecessor, acting as prime contractor, purchased large diameter, welded steel pipe sections from a St. Louis fabricator for a construction project at a California hydroelectric plant. SLT inspected and approved the welded pipe sections at the fabricator's shop before they were shipped to the project site in California. On site, the pipe sections were field-welded together to form an integrated pipe system. When the project was well under way, spot checks revealed defects in the fabricator's shop welds. The project owner suspended work and required Esicorp to discover and repair defective welds. Esicorp repaired more than four hundred defective shop welds at the job site, a process that required invasion of pipe sections already integrated into the new pipe system. Esicorp's damage experts opined that Esicorp incurred losses of more than $3,000,000 as a result of SLT's failure to discover the defective welds in the fabricator's shop in St. Louis. The losses included substantial repair costs, increased costs of contract performance, and liquidated damages to the project owner because of project delays.

The relevant insuring agreement in Liberty Mutual's CGL policies provided, "We will pay those sums that [SLT] becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." The sole issue presented on appeal is the extent to which the SLT settlement reimbursed Esicorp for losses that were covered "damages because of... 'property damage.'"¹ The policies defined "property damage" as follows:

"Property damage" means:

a. Physical injury to tangible property, including all resulting loss of use of that property; or

b. Loss of use of tangible property that is not physically injured.

The interpretation of an insurance policy is an issue of law we review de novo. Esicorp I, 193 F.3d at 969. The parties agree that Missouri law governs. Under Missouri law, the language in an insurance policy is to be given its ordinary meaning unless another meaning is plainly intended. Farmland Indus., Inc. v. Republic Ins. Co., 941 S.W.2d 505, 508 (Mo. banc 1997).

The key policy terms are "damages because of... 'property damage'" in the insuring agreement and "physical injury to tangible property" in the definition of property damage. It is significant that the defectively welded pipe sections did not collapse or burst or otherwise cause accidental injury to surrounding property as a result of SLT's negligent inspection. Compare Scottsdale Ins. Co. v. Ratliff, 927 S.W.2d 531, 533 (Mo. App. 1996) (termite inspector's negligent inspection caused property damage when undetected termites continued to destroy the home). Instead, Esicorp argues that the incorporation of the defectively welded pipe sections into the partially completed pipe system was covered property damage, and therefore all direct and consequential costs resulting from that damage are covered losses. We disagree.

Before 1973, "property damage" in the standard CGL policy was defined as "injury to or destruction of tangible property." Applying that definition, a number of courts held that diminution in the value of a building resulting from the incorporation of a defective component was covered property damage. See Western Cas. & Sur. Co. v. Polar Panel Co., 457 F.2d 957, 960 (8th Cir. 1972), applying Minnesota law and following Hauenstein v. St. Paul-Mercury Indem. Co., 65 N.W.2d 122 (Minn. 1954). This line of cases supports Esicorp's incorporation argument.

However, in 1973, the definition of "property damage" in the standard CGL policy was changed to "physical injury to or destruction of tangible property," the language used in the policies here at issue. The Supreme Court of Minnesota and other courts construing this new definition have concluded that the mere incorporation of a defective component is not "property damage" because it does not result in "physical injury." See Federated Mut. Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751, 756 (Minn. 1985); Wyoming Sawmills, Inc. v. Transportation Ins. Co., 578 P.2d 1253, 1256-57 (Or. 1978). There is one notable decision to the contrary, the Seventh Circuit's divided panel opinion in Eljer Manufacturing, Inc. v. Liberty Mutual Insurance Co., 972 F.2d 805 (7th Cir. 1992), cert. denied, 507 U.S. 1005 (1993). But the Eljer panel applied Illinois law, and Illinois state courts have now expressly rejected Eljer and adopted the majority view of Federated and Wyoming Sawmills. See Travelers Ins. Co. v. Eljer Mfg., Inc., 718 N.E.2d 1032, 1041 (Ill. App. 1999) ("some physical injury to tangible property must be shown in order to trigger coverage"), rev'd in part on other grounds, 2000 WL 1763322, 2000 Ill. LEXIS 1712, at *6 (Ill. Dec. 1, 2000) (mere installation of a defective plumbing system is not covered property damage), reh'g granted, 2001 Ill. LEXIS 231 (Ill. Jan. 29, 2001).

Although the Supreme Court of Missouri has not addressed this issue, the Missouri Court of Appeals...