Hamilton Die Cast, Inc. v. U.S. Fidelity & Guar. Co., 74-1077

• Citation: 508 F.2d 417
• Decision Date: 03 January 1975
• Docket Number: No. 74-1077,74-1077
• Parties: HAMILTON DIE CAST, INC., Plaintiff-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 417

508 F.2d 417

HAMILTON DIE CAST, INC., Plaintiff-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant-Appellee.

No. 74-1077.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 6, 1974.

Decided Jan. 3, 1975.

Barry T. McNamara, Chicago, Ill., for plaintiff-appellant.

Robert L. Kiesler, Chicago, Ill., for defendant-appellee.

Before SWYGERT, Chief Judge, MARIS, Senior Circuit Judge, ^* and CUMMINGS, Circuit Judge.

CUMMINGS, Circuit Judge.

In November 1972, plaintiff brought this declaratory judgment action seeking a determination of its rights under a contract of insurance issued by defendant which insured plaintiff against its liability for personal injuries and property damage caused by an 'occurrence.' In November 1971, Midland Sporting Goods ('Midland') sued plaintiff, which had agreed to Manufacture for Midland all of its requirements of aluminum die cast tennis rackets. ¹ Midland claimed that the tennis racket frames were to be of good and merchantable quality and 'porosity and oxide free, of optimum metal density and free of shrinkage.' According to Midland's complaint, the number of rejects in the lots produced by plaintiff was not to exceed 1% And an implied warranty that the goods would be merchantable attached under Section 2-314 of the Uniform Commercial Code (Ill.Rev.Stats. ch. 26, 2-314 (1973)). Midland sought $2,000,000 in damages from plaintiff for the following reasons set forth in its complaint:

'6. Defendant failed to make timely shipment and delivery of the said tennis rackets.

'7. Defendant failed to furnish to plaintiff all its requirements of said tennis rackets.

'8. The tennis rackets which were manufactured by defendant and sold and delivered to plaintiff were not of good and merchantable quality. The said tennis rackets were not porosity and oxide free, were not of optimum metal density and were not free of shrinkage.

'9. The number of rejects in the lots of tennis rackets manufactured by defendant and sold and delivered to plaintiff exceeded 1%.'

Paragraph 10 of the complaint describes the damages that Midland claims:

'10. As a result of the matters set forth in the foregoing paragraphs 6, 7, 8 and 9, plaintiff's supply of tennis rackets was not sufficient for it to satisfy the demand for such rackets, plaintiff was required to refund the purchase price of defective tennis rackets which were returned to it, and the reputation of plaintiff and its tennis racket in the market was damaged. By reason of the foregoing, plaintiff has suffered damages to the extent of $2,000,000.'

As a result of the alleged defects Midland withdrew its tennis rackets from the market. As of the time of the oral argument before us, Midland's suit had not yet been tried.

Plaintiff tendered the defense of the Midland action to defendant under its comprehensive general liability insurance policy, but defendant refused the tender on various grounds. In its answer to the instant complaint, defendant asserted that (1) there was no 'occurrence,' as required by the insurance policy; (2) there was no 'property damage' within the meaning of the policy; and (3) the so-called 'sisterhood' exclusion (Exclusion N of the policy) was applicable. ² We agree. Since we uphold the validity of these three defenses, we do not reach other defenses asserted in defendant's answer.

After both parties filed motions for summary judgment, then District Judge Tone issued an unreported memorandum opinion denying plaintiff's motion and granting defendant's, holding that 'Midland's claim is essentially one for loss of investment, loss of anticipated profits, and loss of goodwill' and that damages from injury to such intangible property rights were excluded from the policy's coverage. In a supplemental opinion, he also held that the 'sisterhood' exclusion (N) precluded coverage. He did not determine whether there was an 'occurrence' within the meaning of the policy. We affirm.

In pertinent part, the policy covers plaintiff's liability for 'property damage' which is 'caused by an occurrence.' In our judgment, the district court correctly held that any sums plaintiff may be obligated to pay as a result of the Midland action will not be a result of 'property damage' as defined in the policy. The definition is: 'injury to or destruction of tangible property.' As Judge Tone rightly observed, Midland is claiming damages for injury to intangible property, ³ so that coverage does not exist under the policy. See St. Paul Fire & Marine Ins. Co. v. Northern Grain Co., 365 F.2d 361, 367 (8th Cir. 1966); Hartford Accident & Indemnity Co. v. Case Foundation Co., 10 Ill.App.3d 115, 294 N.E.2d 7 (1st Dist. 1973). Since this is a diversity case, Illinois rules on choice of law are applicable because that is the state where the district court is located. Illinois choice of law rules dictate the choice of Ohio law, as the state wherein the insurance contract was apparently executed. However, plaintiff has cited no applicable authority from Ohio that is contrary to the Hartford case. ⁴

Using an inventive, if farfetched, approach, plaintiff contends in this Court, that there was 'property damage' to the finished product, the racket, by reason of the incorporation of the allegedly defective part, the frame. We do not think that the mere inclusion of a defective component, where no physical harm to the other parts results therefrom, constitutes 'property damage' within the meaning of the policy. For example, if an automobile crash results from the failure of its defective tire, the defective component can be said to have caused 'property damage' to the finished product. If, however, some of the tires purchased by the automobile manufacturer are found to be defective and the manufacturer therefore withdraws draws its cars from the market, there has not been 'injury to or destruction of tangible property,' which is (as noted) the definition of 'property damage' in the policy. We also reject plaintiff's contention that because Midland's complaint implicitly seeks compensation for the loss of use of its machinery for finishing the rackets idled by the alleged lack of quality frames,...