Kyllo v. Northland Chemical Co.

Decision Date12 July 1973
Docket NumberNo. 8871,8871
PartiesRobert L. KYLLO, et al., Plaintiffs, v. NORTHLAND CHEMICAL CO., Defendant, Third-Party Plaintiff and Appellant, v. DIAMOND ALKALI CORPORATION, a corporation, Third-Party Defendants, and Insurance Company of North America, Third-Party Defendants and Respondents. Civ.
CourtNorth Dakota Supreme Court

Syllabus by the Court

1. Where liability insurance policy issued to retail distributor of pre-emergent herbicide contains an exclusion clause denying coverage to bodily in jury or property damage resulting from the failure of the named insured's products or work completed by or for the named insured to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specifications, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury or property damage resulting from the active malfunctioning of such products or work, the insured is not covered against judgments rendered against it where the herbicide sold by it failed to kill weeds in pinto bean fields and where there was not an active malfunction of the herbicide causing actual physical damage to the pinto bean plants.

2. A liability insurer's obligation to defend its insured is measured by the terms of the insurance policy and the pleading of the claimant who sues the insured; if the allegations in the claimant's complaint would support a recovery upon a risk covered by the insurer's policy the duty to defend is present. If there is doubt as to whether the duty to defend is present, such doubt will be resolved in favor of the insured.

3. For the reasons stated in the opinion, there was no duty on the part of the insurance company to defend the actions brought against the insured because the complaints of the injured parties did not allege injury covered by the liability insurance policy.

Garry A. Pearson, Grand Forks, for defendant, third-party plaintiff and appellant, Northland Chemical Co.

Stokes, Vaaler, Gillig, Warcup & Woutat, Grand Forks, for third-party defendants and respondents, Ins. Co. of North America.

PAULSON, Judge.

This is an appeal from a judgment of the Grand Forks County District Court which held that Northland Chemical Company (hereinafter Northland) was not protected by its liability insurance policy from judgments rendered against it for the failure of its products to perform as expected, and that the Insurance Company of North America (hereinafter INA) had no duty to defend Northland in actions brought by customers of Northland who were displeased with the performance of Northland's products.

In May of 1968 the Kyllos, plaintiffs in the primary action, purchased a pre-emergent herbicide known as Dacthal W-75 from the defendant and third-party plaintiff, Northland Chemical Company. The Kyllos relied on the representations of a salesman for Northland that the Dacthal W-75 would control the weeds in their pinto bean fields.

The Kyllos had the Dacthal W-75 applied to their fields by means of aerial spraying, following the directions on the container of Dacthal W-75 for such application and the directions given to them by Northland's salesman. Despite such application of Dacthal W-75, weeds grew in the Kyllos' pinto bean fields, causing decreases in the yields expected by the Kyllos from their fields.

Because of the decreased yields, the Kyllos brought action against Northland to recover the difference between the profits anticipated and the profits actually received. In their complaint, the Kyllos referred to their damage as 'property damage' and prayed for damages in the amount of their lost profits.

In this action Northland impleaded its liability insurer, Insurance Company of North America, as third-party defendant, and claimed that INA should indemnify Northland for the amount of any judgments rendered against northland in the primary action and should defend Northland in the action. INA refused to defend Northland, urging that the allegations contained in the complaint in the primary action were not covered by the insurance policy issued to Northland. The Kyllos recovered judgments in varying amounts from Northland. The district court, pursuant to a judgment dated June 28, 1972, held that INA was under no duty to defend Northland in the action and that the Kyllos' judgments were not covered by the liability insurance policy because such policy did not cover claims for lost profits nor passive malfunction claims.

Northland appeals from the judgment dated June 28, 1972, and charges as error the district court's failure to find that INA breached its contract by refusing to defend Northland; and the district court's failure to find that the Kyllos suffered damage to tangible personal property and that INA was therefore obligated to indemnify Northland.

In this appeal Northland prays for reversal of the judgment below and for remand to the district court for a hearing to determine the costs, disbursements, and attorneys' fees to which it claims to be entitled.

We are first confronted with the issue of whether INA should indemnify Northland for the judgment rendered against Northland and in favor of the Kyllos. That is: were the injuries suffered by the Kyllos covered under the liability policy issued by INA to Northland? We conclude that the Kyllos' judgment was not covered by the policy of insurance.

The allegations in the Kyllos' complaint are in the nature of products liability claims, with the loss of anticipated profits being the measure of damages. The insurance policy, however, is intended to indemnify Northland for damages it is legally obligated to pay for physical damage done to a claimant's body or property. This is evidenced by Exclusion (h) of the policy in question, Policy No. LAB 1 81 73, which provides:

'This insurance does not apply:

'(h) to bodily injury or property damage resulting from the failure of the Named Insured's products or work completed by or for the Named Insured to perform the function or serve the purpose intended by the Named Insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specifications, advertising material or printed instructions prepared or developed by any Insured; but this exclusion does not apply to bodily injury or property damage resulting from the active malfunctioning of such products or work;'

Though the Dacthal W-75 weed spray involved in this case was made for Northland by an out-of-State corporation, the spray still comes within the purview of the definition of 'Named Insured's Products' given in the policy:

'Named Insured's Products--'Named Insured's products' means goods or products manufactured, sold, handled or distributed by the Named Insured or by others trading under his name, including any container thereof (other than a vehicle) . . ..'

The position that the policy covers only physical damage is buttressed by reference to Hartford Accident & Indemnity Co. v. Olson Bros., Inc., 187 Neb. 179, 188 N.W.2d 699 (1971), wherein the liability policy insured Olson, a roofing contractor, who constructed a defective roof for a customer. In the Olson Bros. case, Supra, the provisions of the policy quoted in that case are identical to the provisions in the policy in the instant case. Though coverage was excluded in Olson Bros. on the basis of an exclusion, other than Exclusion (h) previously quoted herein, the court stated in Olson Bros., supra 188 N.W.2d at 703: 'It is only physical damage which the policy covers.' In Olson Bros. the roof constructed was defective, but such defect did not damage any other part of the building or injure any person, so there was no coverage. In the instant case the exception to Exclusion (h) is liability for the active malfunctioning of the named insured's products. This means actual physical damage caused by application of the product. There was no such physical damage in ...

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