Nat'l Union Fire Ins. v. Stroh Companies Inc.

• Decision Date: 01 August 2000
• Docket Number: DEFENDANTS-APPELLEES,Docket No. 00-7345,PLAINTIFF-APPELLANT
• Citation: 265 F.3d 97
• Parties: (2nd Cir. 2001) NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.,, v. THE STROH COMPANIES, INC. AND THE STROH BREWERY COMPANY,
• Court: U.S. Court of Appeals — Second Circuit

Page 97

265 F.3d 97 (2nd Cir. 2001)

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., PLAINTIFF-APPELLANT, v. THE STROH COMPANIES, INC. AND THE STROH BREWERY COMPANY, DEFENDANTS-APPELLEES.

Docket No. 00-7345

August Term, 2000

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: November 29, 2000

Decided September 6, 2001

Appeal from orders of the United States District Court for the Southern District of New York (Denise Cote, Judge) granting summary judgment in favor of the defendants in the plaintiff's declaratory judgment action. The plaintiff insurer sought a declaration that it is not required to pay an insurance claim filed by The Stroh Companies, Inc. relating to a product recall. We hold that the plaintiff failed to raise a triable issue of fact as to any of its defenses to coverage, and that the defendants were therefore entitled to summary judgment.

Affirmed.

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Eugene Wollan, Mound, Cotton & Wollan (Jeffrey S. Weinstein and Alyssa DeSimone, of counsel), New York, New York, for Plaintiff-Appellant.

Dwight B. Palmer, Bell Jones Quinlisk & Palmer (Stanley Nardoni, of counsel), Chicago, Illinois; James J. Maloney, Kavanagh Maloney & Osnato, Llp, New York, New York, for Defendants-Appellees.

Before: Pooler and Sack, Circuit Judges, and Martin, District Judge^*

Sack, Circuit Judge

On November 30, 1998, plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National Union") brought this declaratory judgment action against The Stroh Companies, Inc. and its wholly owned subsidiary, The Stroh Brewery Company (collectively, "Stroh"), in the United States District Court for the Southern District of New York. National Union seeks to avoid liability under a "Contaminated Products Insurance" policy (the "Policy") issued to The Stroh Companies and its affiliates and subsidiaries. The claim arose from a product recall initiated by Stroh in response to glass contamination discovered in beverages bottled at a plant that was formerly owned by the Heileman Companies ("Heileman") and was acquired by Stroh, along with Heileman's other assets, after the Policy took effect. At Stroh's request, National Union extended coverage to Heileman and its assets under the Policy as of the date of the acquisition. Stroh initiated the recall at issue in this case approximately six weeks after Heileman was added to the Policy.

National Union's amended complaint alleges that Stroh and Heileman knew or should have known of the contamination problem and the need for a recall before Heileman was added to the Policy, and that coverage is therefore barred both by the express terms of the Policy and by the insurance-law principles of "fortuity" and "known loss." National Union further claims that Stroh breached several other provisions of the Policy, including the requirement that Stroh disclose material facts to National Union. Finally, National Union seeks a declaration that even if covered under the Policy, Stroh's claim is subject to more than one deductible. The district court (Denise Cote, Judge) granted summary judgment to Stroh on all of National Union's claims. This appeal followed.

We conclude that (1) the district court correctly interpreted the Policy to exclude coverage only for losses known to the insured as of the original inception date of the Policy; (2) assuming that the fortuity and known loss doctrines operate independently of specific policy provisions, they do not bar coverage in the present case; (3) neither Stroh nor Heileman breached the Policy's due diligence, cooperation, or disclosure provisions; and (4) Stroh's claim is subject to a single deductible. We therefore affirm the district court's grant of summary judgment for Stroh as to all of National Union's claims.

BACKGROUND

On May 12, 1995, National Union issued a "Contaminated Products Insurance" policy to Stroh and its "subsidiary and affiliated companies or entities." The Policy requires National to reimburse Stroh for "Loss[es]," a defined term that includes costs incurred by Stroh in the course of recalls of Stroh products resulting from "Accidental Contamination." The Policy excludes coverage of "Loss[es]" that the insured, "as of the inception date of [the] [P]olicy," knew or should have known had occurred or were likely to occur.

The original policy period ran from May 12, 1995 to May 12, 1996. In April 1996, Stroh, through its insurance broker Aon Risk Services, contacted National Union, through its underwriting manager American International Underwriters, regarding possible renewal of the policy. On May 1, 1996, Stroh completed an application for an extension of the policy, and on May 10, 1996, the parties executed Endorsement No. 4, which "extended" the policy period for the period from May 12, 1996 to May 12, 1997.

At the time of the extension, Stroh was in negotiations with Heileman regarding Stroh's possible acquisition of Heileman's assets. Sometime early that month, Stroh asked National Union whether it would be willing to extend the Policy's coverage to Heileman after the acquisition was complete. On May 3, 1996, National Union asked Stroh for information relating to among other things, Heileman's revenues, "[p]roduction facilities location," and other information "concerning 'Heileman' inclusion [sic] under the [Policy]." Stroh complied. On May 21 and May 28, National Union offered either to "[i]nclude Heileman under the existing policy with no changes to terms" for an additional premium, or to "[c]ancel the existing policy" and issue a "new policy for Stroh & Heileman" with revised terms. Stroh chose the former, and National Union agreed.

On July 1, 1996, Stroh completed its acquisition of Heileman's assets and liabilities. On August 5, 1996, Stroh and National Union executed Endorsement No. 5 to the Policy, which extended coverage to Heileman and its products under the existing Policy effective July 1, 1996. National Union agreed to the Endorsement without requiring a new application or asking Stroh to disclose specific risks carried by Heileman or its products.

Among the Heileman assets acquired by Stroh was a plant in Perry, Georgia, which bottled "Arizona Iced Tea" brand beverages pursuant to a contract with the manufacturer of the product, Hornell Brewing Companies ("Hornell"). The disputed insurance claim in this case involves a recall of "Arizona Iced Tea" products ordered by Stroh after glass shards were discovered in several bottles filled at the Perry plant. It is undisputed that these euphemistically termed "glass inclusions" were caused by a defect in the Perry plant's "hot-fill" procedure, which caused hot liquids to be poured into glass bottles that had been allowed to cool to too low a temperature. The resulting "thermal shock" apparently caused occasional breakage in the bottles.

The principal factual issue in this case concerns what Stroh and Heileman knew about this glass breakage problem and when they knew it. National Union asserts that Heileman knew and Stroh knew or should have known of the problem before July 1, 1996, the date as of which Heileman was added to the Policy. Stroh, on the other hand, contends that it first learned of the problem in August 1996, and that although Heileman was aware of some instances of glass breakage, it did not know the extent of the problem until sometime after Heileman had been added to the Policy.

On August 12, 1996, Stroh began an investigation of the problem and halted production at the Perry facility. On August 20, 1996, Stroh notified National Union that it had initiated a recall and would be seeking coverage under the Policy. National Union then began what turned out to be a seventeen-month investigation of Stroh's claim. On February 24, 1998, after the investigation was completed, National Union formally disclaimed coverage.

National Union followed up its disclaimer by initiating the present diversity action on November 30, 1998 seeking declaratory judgment on six issues: that Stroh's recall costs are not covered under the Policy because the defendants knew of the broken glass contamination problem before Heileman was added to the Policy (Count I); that Stroh failed to exercise due diligence, in breach of Condition O of the Policy (Count II); that Stroh breached Conditions Q and R by failing to cooperate with National Union's claims investigation (Count III); that Stroh breached Condition W by failing to disclose material information regarding the Heileman risks (Count IV); that Stroh breached Condition J by failing to investigate the glass inclusion problems (Count V); and that Stroh's claim, if covered, is subject to more than one deductible (Count VI).

In May 1999, Stroh filed a motion pursuant to Fed. R. Civ. P. 9(b) and 12(e) to require plaintiff to replead any allegations of fraud with greater particularity. The district court dismissed the motion as moot because National Union had stated its intention not "to prove or rely upon a theory of fraud in its case at trial." National Union Fire Ins. Co. v. The Stroh Companies, Inc., No. 98 CIV. 8428 (DLC), 1999 WL 619635, at *2, 1999 U.S. Dist. LEXIS 12580, at *6 (S.D.N.Y. Aug. 16, 1999) ("National Union I").

Prior to the completion of discovery, Stroh moved for summary judgment on all six counts. While that motion was pending, National Union moved pursuant to Fed. R. Civ. P. 56(f) for leave to conduct additional discovery.

In December 1999, the district court granted summary judgment for Stroh on Counts I, III, IV, and V, but denied summary judgment as to Counts II and VI. See National Union Fire Ins. Co. v. The Stroh Companies, Inc., No. 98 CIV. 8428 (DLC), 1999 WL 1267461, 1999 U.S. Dist. LEXIS 19801 (S.D.N.Y. Dec. 29, 1999) ("National Union II"). The court also denied National Union's motion for time to conduct additional discovery. See id., 1999 WL 1267461, at *8, 1999 U.S. Dist. LEXIS 19801, at *23-*24.

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