Ramco, Inc. v. Pacific Ins. Co.

• Decision Date: 24 April 1968
• Citation: 249 Or. 666,439 P.2d 1002
• Parties: RAMCO, INC., an Oregon corporation, Respondent, v. PACIFIC INSURANCE COMPANY of New York, a New York corporation, Appellant.
• Court: Oregon Supreme Court

Page 1002

439 P.2d 1002

249 Or. 666

RAMCO, INC., an Oregon corporation, Respondent, v. PACIFIC INSURANCE COMPANY of New York, a New York corporation, Appellant.

Supreme Court of Oregon, Department 2.

Argued and Submitted March 7, 1968.

Decided April 24, 1968.

Tom P. Price, Portland, argued the cause for appellant. On the briefs were Morrison & Bailey, and Thomas S. Moore, Portland.

Bruce L. Engel, Portland, argued the cause for respondent. On the brief were Gygi and Engel, Portland.

Before PERRY, C.J., and SLOAN, GOODWIN, HOLMAN and LUSK, JJ.

SLOAN, Justice.

This is an action by plaintiff to recover on a policy of products liability insurance issued to plaintiff by defendant for that purpose. Plaintiff is the manufacturer of electric baseboard heaters. When a claim was made against plaintiff for the malfunction of a number of its heaters that had been installed in a motel, defendant denied coverage of the claim. Plaintiff settled the claim and brought this action to recover. Plaintiff's complaint alleged two causes of action; one for the actual loss plus an attorney's fee; the second was for consequential loss of good will and credit. The trial court directed a verdict for plaintiff on its first cause of action and sustained a demurrer to the second cause. Defendant appeals from the verdict and judgment against it. Plaintiff cross-appeals on the second cause of action.

The facts are not disputed. Sixty-nine of plaintiff's heaters were installed in the motel units of a motel in Yakima, Washington. Not long after, when the first extremely cold weather was experienced the heaters failed to produce the heat they were designed to produce. The motel suffered substantial damage as a result. Upon examination of the heaters it was found that they contained defective coils. The cause of the defect could not be definitely determined but it was a fault in plaintiff's manufacture.

The motel made a claim for its damage to plaintiff. Plaintiff promptly submitted the claim to defendant. After some investigation and negotiations between plaintiff and defendant, the latter denied coverage. Plaintiff then settled the claim with the motel and then brought this action.

The crucial question concerns the meaning to be applied to the word 'accident' as it appears in the insuring words of the policy. ¹ Defendant, of course, claims that the events described did not constitute an accident within the meaning of the policy contract. It was not seriously urged that no damage resulted from the event.

Generally, the definition of the word 'accident' in our decision in Finley v. Prudential Life & Casualty Ins. Co., 1963, 236 Or. 235, 388 P.2d 21, 4 A.L.R.3d 1161, would include the events described in this action. The cases that are directly concerned with products liability policies, similar to this one uniformly hold that a loss caused by a defective product can be an accident.

Before proceeding to mention specific cases that have considered the questions presented here it seems appropriate to first quote from 7A Appleman, Insurance Law and Practice, 1962, § 4508, at p. 98, in which he states the basic difference between 'public liability' coverage and products liability coverage:

'It is apparent that liability under what we ordinarily term 'public liability' coverages can arise fundamentally in three distinct ways. An injury or a loss may result while an activity is in progress, and prior to the completion thereof, either as the result of an act of negligence or an omission. That is what is embraced within the ordinary liability aspect of a public liability policy. But if the operation has been completed, and liability results thereafter either by reason of a defect in merchandise or improper workmanship, that is called 'products liability' or 'completed operations', the protection of which can be purchased for a premium. Neither type of coverage is intended to supplant the other, nor would the premiums charged be adequate for that purpose.'

The third category relates to damage to the product itself.

The language above quoted is not of particular help in applying a meaning to the word 'accident' as used in the policy involved. It does reflect that products liability coverage is obtained and premiums are paid for purposes differing from the more common form of public liability insurance. Appleman further notes that there have not been enough products liability insurance cases decided, as yet, to 'clarify the constructions applicable thereto.' There have been several cases decided that are particularly analogous to the instant case.

The most comparable case in Bundy Tubing Company v. Royal Indemnity Company, (CCA 6, 1962) 298 F.2d 151. Bundy was the manufacturer of the kind of metal tubing that is used in concrete floors for radiant heating. Hot water passing through the tubes create the heat. Bundy manufactured some defective tubing that caused losses in various places. Defendant in the case, Royal Indemnity Company, claimed no accident occurred and refused coverage. The court held that 'property was damaged by the installation of defective tubing in a radiant heating system which caused the system to fail and become useless. * * * The failure of the tubing in the heating system in a relatively short time was unforeseen, unexpected and unintended. Damage to the property was therefore caused by accident.' 298 F.2d at p. 153.

A case note on the Bundy Tubing Company v. Royal Indemnity Company decision at 16 Vand.L.Rev. 240, at 241, states that "caused by accident' as used in most products liability policies has been uniformly held to mean any unexpected and unintended event; * * *.' The case note reflects that the more serious 'difficulty' in the cases is related to the extent of the recovery i.e.: whether or not the manufacturer's cost of repair and replacement of the damaged property is recoverable under a products liability policy. That issue is not involved in the instant case.

In the Bundy Tubing Company case the court relied particularly on Hauenstein v. St. Paul-Mercury Indemnity Co., 1954, 242 Minn. 354, 65 N.W.2d 122. Hauenstein was concerned with defective building plaster manufactured by plaintiff Hauenstein. The defect in the plaster caused it to shrink and crack after it had been applied to several houses. The court was primarily concerned with deciding whether or not damage which was limited to loss in value of a building was property damage in the sense of damage caused by accident. The court compared this to the loss in value of land caused by depositing foreign substances on the land and held this kind of loss to be property damage. The court also held it was caused by accident, within the meaning of the insurance contract, since that damage was the result of 'an unexpected, unforeseen or undesigned happening or consequence from either a known or unknown cause' and was an accident. The same reasoning was applied in Economy Mills of Elwell, Inc. v. Motorists Mut. Ins. Co., 1967, 8 Mich.App. 451, 154 N.W.2d 659.

Other like cases with comparable reasoning and results are: Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co., 1959, 51 Cal.2d 558, 334 P.2d 881, involving damage caused by defects in the manufacture of doors used in a housing development. The defects caused the doors to sag and to prevent closing. The court held this to be an unexpected event and that it was an accident within the meaning of the policy.

In reaching that conclusion the California court emphasized these considerations which are identical to the instant case:

'The door failures were unexpected, undesigned, and unforeseen. They were not the result of normal deterioration, but occurred long before any properly constructed door might be expected to wear out or collapse. Moreover, they occurred suddenly. It bears emphasis that w...