Olympic S.S. Co. v. Centennial Ins. Co.
| Decision Date | 16 April 1990 |
| Docket Number | No. 24105-2-I,24105-2-I |
| Citation | 57 Wn.App. 517,789 P.2d 309 |
| Parties | OLYMPIC STEAMSHIP COMPANY, INC., Respondent, v. CENTENNIAL INSURANCE COMPANY and Atlantic Mutual Insurance Company, Appellants, and New York Marine and General Insurance Company and Marsh and McLennan, Inc., Defendants. |
| Court | Washington Court of Appeals |
Eric Richter, Seattle, for Olympic S.S. Co.
Centennial Insurance Company and Atlantic Mutual Insurance Company (Centennial) appeal from the grant of summary judgment finding coverage in favor of Olympic Steamship Company, Inc. (Olympic) and from the award of attorney fees to Olympic. We reverse and remand for the entry of summary judgment in favor of Centennial.
Olympic was a commercial warehouseman of canned salmon, whose business was to receive unlabeled cans from commercial salmon packers, to store the cans until the In June 1985, Olympic made demand on Centennial and Atlantic Mutual. They did not respond, and Olympic paid the claims made by the packers. Olympic, through its insurance agent, asked Centennial to delete the completed operations exclusion from Olympic's policy, effective at the effective date of the policy, September 19, 1984. On May 12, 1986, Centennial issued Endorsement 12, which deleted the completed operations exclusion effective December 31, 1984. Centennial later backdated the policy to make the deletion effective at the effective date of the policy. 1
The material part of Exclusion O, the sistership exclusion, reads as follows:
[This insurance does not apply] to damages claimed for the withdrawal, inspection, repair, replacement or loss of use of the named insured's products or work completed by or for the named insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;
The trial court found that the exclusion was inapplicable on the grounds that the FDA, rather than the insured, had ordered the withdrawal of the cans from the market until the inspection was complete. We disagree. On discovering the defect, Olympic recognized its responsibility by notifying NFPA. This action culminated in the FDA order prohibiting distribution until inspection ensured the safety of the product. It is the relationship between the defect (cases containing damaged cans) and the nature of the damage (inspection costs) that determines the applicability of Exclusion O, not whether FDA issued an order or whether The rationale behind the sistership exclusion has been explained as follows:
the packers voluntarily held the product in their warehouse. Nothing in the language of the exclusion suggests that coverage depends on the source of the withdrawal decision. We deem it irrelevant. As stated in Yakima Cement Products Co. v. Great American Ins. Co. 3
The recall of equipment or parts discovered to have a common fault involve expenses incurred to prevent accidents which have not occurred. While the insurance covers damages for bodily injuries and property damage caused by the product that failed, it was never intended that the insurer would be saddled with the cost of preventing other failures, any more than it was intended that the insurer would pay the cost of preventing the first failure if the product had been discovered to be in a dangerous condition before the occurrence.
3 R. Long, Law of Liability Insurance, § 15, App. at 47 (1966).
Thus, the insurer is not liable for the cost of preventative or curative action taken by its insured. Instead, the insured must bear the cost of withdrawing a product from the market in situations in which a danger is apprehended although no accident has occurred. Wyoming Sawmills, Inc. v. Transportation Ins. Co., 282 Ore. 401, 578 P.2d 1253 (1978).
Olympic argues that sistership exclusions have been held inapplicable when a third party requires the withdrawal of the product from the market. Elco Indus., Inc. v. Liberty Mut. Ins. Co. 4 ; Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co. 5 These cases are inapplicable. In Elco Industries, an engine manufacturer incorporated components manufactured by the insured into its engines. These components were found to be faulty, and the engine manufacturer recalled the engines and replaced the component. The insurer argued that the sistership exclusion applied. The court rejected the full application of the exclusion on a number of grounds, one of which was that the insured had We believe the policy provides coverage for the costs of the paper gaskets and welsh plugs which were destroyed and replaced in the process of removal and repair. It would also encompass such labor expenses as might be attributable to the disassembly, reassembly, removal or replacement of parts of Kohler's engines other than the Elco pins, which was necessitated by correction of the pins. No recovery may be had for the value of the defective pins, or the cost of the new case hardened pins or caps placed upon the unhardened pins. ... We therefore remand the cause for a factual determination of the costs of materials and labor involving the removal and replacement process, excluding the costs of replacing the defective governor regulating pins themselves.
not recalled the components. However, even in rejecting complete application of the exclusion, the court limited coverage as follows
(Emphasis added, citations omitted.) Elco Industries, 46 Ill.Dec. at 324-325, 414 N.E.2d at 46-47. The damages for which Olympic seeks coverage are not damages to other property caused by the defective product; they are the costs of remedying the defect in the product. The Elco Industries case is not persuasive.
In Lipton, the soup company purchased noodles from the insured, Giola, which were incorporated into its products. When the noodles were discovered to be contaminated, Lipton withdrew its products from the market and then brought an action against Giola. The court rejected application of the sistership exclusion on the grounds that Giola did not recall the product. We do not find this case persuasive. Of the six categories of loss claimed by Lipton against Giola, five involved consequential damage to Lipton's products caused by the contaminated noodles. Only one involved the losses incurred in destroying the noodles that had not yet been incorporated into Lipton's products. We do not believe that this was a significant part of Lipton's damages, and therefore the court did not analyze the difference between the destruction of Giola's product and the plainly consequential damages. The case is further distinguished by the fact that Lipton took all the necessary action at its own expense before suing Giola and its insurer. In our case the value of the damaged cans (the equivalent The federal cases cited by Olympic are similarly inapplicable. In Todd Shipyards Corp. v. Turbine Services, Inc., 6 the court rejected application of the sistership exclusion because the damages claimed were the damages to a turbine caused by a defective component installed by the insured, not damages to the insured's product. In American Home Assur. Co. v. Libbey-Owens-Ford Co., 7 the court did not definitively decide whether the sistership exclusion should apply because it affirmed the district court's assumption that the claimed damages were consequential to the failure of the insured's products and were not damages to the products themselves. In Dayton Independent Sch. Dist. v. National Gypsum Co., 8 the court held that the sistership exclusion did not apply because the insured had not recalled its product. However, the damages being claimed against the insured were not for damages to the insured's product--in that case, building materials containing asbestos--but rather were for the consequential damages to the buildings that contained the building materials.
of the noodles) is de minimis and no claim is asserted in regard thereto. To the extent that Lipton may hold that Exclusion O does not apply to defects in
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Olympic S.S. Co., Inc. v. Centennial Ins. Co.
...of the cost Olympic incurred when it paid its customers for the expense they suffered recalling their product from the market. 57 Wash.App. 517, 789 P.2d 309. We hold that the sistership exclusion does not apply when a third party withdraws the insured's product from the market and that Oly......
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