St. Paul Surplus Lines v. Diversified Athletic

• Decision Date: 19 January 1989
• Docket Number: No. 87 C 5041.,87 C 5041.
• Citation: 707 F. Supp. 1506
• Parties: ST. PAUL SURPLUS LINES INSURANCE COMPANY, Plaintiff, v. DIVERSIFIED ATHLETIC SERVICES, d/b/a H. Julicher & Company, and Roger Lauritzen, Defendants.
• Court: U.S. District Court — Northern District of Illinois

707 F. Supp. 1506

ST. PAUL SURPLUS LINES INSURANCE COMPANY, Plaintiff, v. DIVERSIFIED ATHLETIC SERVICES, d/b/a H. Julicher & Company, and Roger Lauritzen, Defendants.^*

No. 87 C 5041.

United States District Court, N.D. Illinois, E.D.

January 19, 1989.

Thomas H. Hamilton, Katherine S. Dedrick, Keith L. Hunt, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for plaintiff.

J. Herbert Landon, Erica Tina Helfer, Landon & Wojteczko, Ltd., Donal Rendler-Kaplan, Martin Y. Joseph, Katz, Kaplan & Associates, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

NORDBERG, District Judge.

The Court referred plaintiff's motion for summary judgment to Magistrate James T. Balog for a Report and Recommendation. Magistrate Balog recommended that the Court deny plaintiff's motion and find that plaintiff has a duty to defend under the insurance policy at issue. Pursuant to Fed. R.Civ.P. 72(b), plaintiff (hereinafter "St. Paul") filed specific written objections to the magistrate's report and defendants filed their response to these objections. Having considered the pleadings and all relevant submissions, the Court does not adopt Magistrate Balog's recommendation and now grants St. Paul's motion for summary judgment for the following reasons.

The pertinent factual details are set out in the magistrate's report and will not be repeated here except as necessary. One point of clarification that should be made at the outset is that St. Paul's action in this Court seeks a declaration that it has neither a duty to defend nor to indemnify under the insurance contract with defendants. Accordingly, this Court's entry of summary judgment for St. Paul's constitutes a determination in St. Paul's favor as to both issues.

This Court's inability to adopt the magistrate's report stems primarily from its disagreement with his application of the governing principles of Pennsylvania law.¹ Under Pennsylvania law, an insurer has a duty to defend an insured until it can limit the potential scope of recovery against the insured to a claim that falls outside the coverage of the insurance policy. Pacific Indemnity Co. v. Linn, 766 F.2d 754, 760 (3d Cir.1985). "The obligation to defend is determined solely by the allegations of the complaint in the action." Id.²

The underlying complaint against the insured asserts the following damages:

1. Loss of use of the real property prepared for the use of the defective skating rink;

2. Money spent to maintain the defective rink, including the purchase of equipment;

3. Purchase price of the defective rink;

4. Money spent to prepare the site for installation of the rink;

5. Punitive damages.

Looking to the complaint, the magistrate identified what he deemed to be three claims potentially falling within the declaration of coverage: (1) loss of use of the site; (2) claims for the damage to the product itself; and (3) "damage to the site of the installation of the product." Report, at 7-8. The Court agrees that these are the only claims in the underlying complaint that are arguably covered.

Before considering the policy's terms, it should be noted that the policy is a standard contract developed by the insurance industry and known as the Comprehensive General Liability Policy (CGLP). See Note, Liability Coverage for "Damages Because of Property Damage" Under the Comprehensive General Liability Policy, 68 Minn. L.Rev. 795 (1984). As such, its terms have been the frequent subject of litigation. See Report, at 9-11.

For purposes of resolving this dispute, the contract has three relevant sets of provisions. The first is the declaration of coverage, which provides in pertinent part:

The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

bodily injury or

property damage

to which this insurance applies, caused by an occurrence....

The definitions constitute the second set of relevant provisions. In relevant part, they provide as follows:

Occurrence means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

Property damage means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.

The policy exceptions constitute the third set of relevant provisions. The policy provides that "this insurance does not apply":

(a) to liability assumed by the insured under any contract or agreement except an incidental contract; but this exclusion does not apply to a warranty of fitness or quality of the named insured's products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner.

(m) to loss of use of tangible property which has not been physically injured or destroyed resulting from

(1) a delay in or lack of performance by or on behalf of the named insured of any contract or agreement, or

(2) the failure of the named insured's products or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness or durability warranted or represented by the named insured;

but this exclusion does not apply to loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the named insured's products or work performed by or on behalf of the named insured after such products or work have been put to use by any person or organization other than an insured.

(n) to property damage to the named insured's products arising out of such products or any part of such products.

Under accepted principles of contract construction, these provisions interact as follows. A risk is covered if it falls within the general declaration of coverage, looking, of course, to the definitions to give meaning to the terms of the general declaration. Once a risk falls within the general declaration, however, it may then be specifically removed from coverage by one of the exclusions. Each exclusion applies only against the general declaration of coverage, operating independently of every other exclusion. See Western Casualty & Surety Co. v. Brochu, 105 Ill.2d 486, 86 Ill.Dec. 493, 498, 475 N.E.2d 872, 877 (1985). Moreover, an exception to an exclusion, such as the one found in exclusion (a), does not create coverage; only the general declaration of coverage can do that. See McCorkle v. Firemen's Insurance Co., 678 F.Supp. 562, 564 (W.D.Pa.1988). Accordingly, even though an exception to an exclusion reserves coverage which the exclusion otherwise carves out of the general declaration, coverage may yet be negated by the independent operation of another exclusion. See Western Casualty, 86 Ill. Dec. at 498, 475 N.E.2d at 877.

The Court now considers the claims identified by the magistrate as potentially falling within the policy's coverage. Regarding (3) — damage to the site — the underlying complaint against the insured does not allege damage to the site other than through loss of use, which is specifically averred. Employing the rule that the duty to defend must be determined from the face of the underlying complaint, the Court must disagree with the Magistrate's conclusion. The complaint simply does not allege physical injury to the property. Furthermore, even construing the complaint as asserting a claim for damage to the plaintiff's property, coverage is excluded by the plain language of the policy, which defines property damage as "physical injury to or destruction of tangible property." Construction of a potentially useful concrete slab does not appear to constitute "physical injury" or "destruction" as contemplated by the general declaration of coverage.

Although the report is unclear on this point, the Magistrate may have assumed that installation of the concrete slab damaged the property by reducing its property value. But plaintiff has not pleaded diminution in property value, and it is quite possible that he considers his property to be increased in value, since he presumably could use the slab as the foundation for a conventional skating rink. Moreover, even if the slab did diminish the value of plaintiff's property, this would be an intangible injury, as opposed to a "physical injury," as required by the policy. Accordingly, the Court determines that there is no claim for damage to the site of installation that could create a right of indemnification under the general declaration of coverage.

By way of contrast, the other two claims identified by the magistrate would appear to fall within the general declaration of coverage. However, each of these claims is then specifically excluded from coverage by the policy's list of exclusions. As for (2) — damage to the product itself — this is specifically foreclosed by exclusion (n). Similarly, the loss of use of the real property is specifically excluded from coverage by exclusion (m), which removes coverage for "loss of use of tangible property which has not been physically injured or destroyed resulting from ... failure of the named insured's products ... to meet the level of performance, quality, fitness or durability warranted or represented."³

As the magistrate recognized, the policy does not cover the underlying claims if exclusions (m) and (n) apply. Report, at 8. The magistrate, however, determined that a Pennsylvania court would find these exclusions ambiguous when read in conjunction with exclusion (a); applying the rule that ambiguities are to be resolved against the insurer, the magistrate found at least a duty to defend under the policy. In so concluding, the magistrate believed that the Pennsylvania courts would adopt what is a minority position...