Hartford Fire Ins. v. St. Paul Surplus Lines Ins., 01-1946.

Decision Date06 February 2002
Docket NumberNo. 01-1946.,01-1946.
Citation280 F.3d 744
PartiesHARTFORD FIRE INSURANCE COMPANY, Plaintiff-Appellant, v. ST. PAUL SURPLUS LINES INSURANCE COMPANY, Defendant-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

Stephen J. Peters (argued), Stewart & Irwin, Indianapolis, IN, for Hartford Fire Ins. Co.

John C. Trimble, Richard K. Shoultz (argued), Lewis & Wagner, Indianapolis, IN, for St. Paul Surplus Lines Ins. Co.

Before POSNER, KANNE, and EVANS, Circuit Judges.

POSNER, Circuit Judge.

This diversity suit, governed all agree by California law, involves a dispute between two insurance companies over the scope and applicability of the form of insurance known as a "vendor's endorsement." A manufacturer will often add to its products liability insurance an endorsement extending coverage to distributors of its product who may be sued for breach of warranty or for strict products liability should the product turn out to be defective or unreasonably dangerous and cause an injury. "When a manufacturer produces a product which contains a defect in design or one caused by faulty workmanship and it is sold to a distributor who in turn sells it to a retailer, the latter two links in the chain to the ultimate consumer ordinarily are merely conduits in the stream of commerce which ends at the ultimate consumer. The manufacturing or design defect, as to which they had no creative role, was in existence when each of them received the product and each is merely a nonculpable accessory in the eventual sale. Nevertheless, each, in that role, is strictly liable to the injured ultimate user.... The nonculpable distributor or retailer is not, however, without remedy and has `an action over against the manufacturer who should bear the primary responsibility for putting the defective products in the stream of trade.'... Since, in the ordinary case, the liability trail eventually leads back to the manufacturer, and consequently to his insurer, it is a matter of common sense and fair dealing that the coverage of the manufacturer should be extended to the distributor and the insurance of the distributor in turn cover the retailer." American White Cross Laboratories, Inc. v. Continental Ins. Co., 202 N.J.Super. 372, 495 A.2d 152, 155-56 (N.J.App.1985) (citations omitted); see also Hartford Accident & Indemnity Co. v. Bennett, 651 So.2d 806, 808 (Fla.App.1995); Dominick's Finer Foods, Inc. v. American Manufacturers Mutual Ins. Co., 163 Ill.App.3d 149, 114 Ill.Dec. 389, 516 N.E.2d 544, 546 (Ill.App.1987); Peter J. Kalis, Thomas M. Reiter, & James R. Segerdahl, Policyholder's Guide to the Law of Insurance Coverage § 19.06[B][4][a], pp. 19-37 to 19-38 (1997). We don't think "fair dealing" has much to do with anything, but one can perceive the economic logic of this form of insurance easily enough; it allows the insurer to coordinate the defense of multiple suits arising out of the same injury and spares the distributor the expense of hiring a lawyer to defend against a suit arising out of a design or manufacturing defect with which the distributor had nothing to do.

Wendy Como suffered a stroke on August 31, 1995. Claiming that it had been caused by a diet pill she had been taking, "Trim Easy," manufactured by Nion Laboratories and distributed by Team Up International, she sued both companies. Team Up was not just a distributor, however; it had supplied Nion with the formula for Trim Easy and it had also designed the contents of the label, including the warnings, and provided printed labels to Nion, which placed them on the bottles of the pill. Como's suit included a charge that the labels had failed to warn adequately of the risks created by the product. The suit was settled for a sum exceeding $1 million (the exact amount is unclear from the record), paid by the Hartford insurance company, the insurer of Team Up.

Hartford's policy was excess, meaning that Hartford would be responsible only for those losses that exceeded the caps on Team Up's other insurance policies. St. Paul, the defendant, had written a primary policy of liability insurance for Weider Nutrition Group, which had acquired Nion. That policy contained a vendor's endorsement, and Hartford brought this suit to obtain a declaration that Team Up was covered by the endorsement and so St. Paul, as Team Up's primary insurer by virtue of the endorsement, should bear the expense of the settlement of Como's suit up to St. Paul's policy limit of $1 million.

All this is quite a tangle, so let us recapitulate. St. Paul insured Weider, which acquired the manufacturer of the pills, Nion. Hartford insured Team Up, Nion's distributor. Both policies were in force when Como was injured. If by virtue of the vendor's endorsement in St. Paul's policy, that policy also covered Team Up, so that Team Up was insured by both Hartford and St. Paul, then Hartford, as the excess insurer, is entitled to lay off a chunk of the settlement that it paid Como on St. Paul, the primary insurer. The district court, however, held that the vendor's endorsement did not cover Team Up, and granted summary judgment for St. Paul.

As we noted at the outset, the purpose of a vendor's endorsement is to protect the vendor (i.e., dealer or other distributor) against the expense of being dragged as an additional defendant into a lawsuit arising from a defect in a product that it distributes. It makes sense for the manufacturer to buy the insurance, as he has a better sense of the risk that there will be suits complaining about defects in his products. This assumes, however, that the vendor's role in the distribution of the product is passive. The manufacturer would be unlikely to insure the vendor against defects introduced by the vendor himself, SDR Co. v. Federal Ins. Co., 196 Cal.App.3d 1433, 242 Cal.Rptr. 534, 538 (Cal.App.1987); American White Cross Laboratories, Inc. v. Continental Ins. Co., supra, 495 A.2d at 156-57, the risk of those defects being better known to the vendor than to the manufacturer. The vendor's endorsement even contains an express exception for cases in which a claim of products liability is based on the labeling or relabeling of the product by the vendor, for example because he has omitted a warning without which the product poses an unreasonable danger to the consumer. Id. at 157; Lee R. Russ & Thomas F. Segalla, 9 Couch on Insurance § 130:10 (3d ed. Supp.2000).

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