Sterilite Corp. v. Continental Cas. Co.

Decision Date02 February 1984
Citation17 Mass.App.Ct. 316,458 N.E.2d 338
PartiesSTERILITE CORPORATION v. CONTINENTAL CASUALTY COMPANY.
CourtAppeals Court of Massachusetts

Terrance J. Hamilton, Boston, for defendant.

Stephen H. Oleskey, Boston (Lisa G. Arrowood, Boston, with him), for plaintiff.

Before GRANT, KAPLAN and KASS, JJ.

KAPLAN, Justice.

Sterilite Corporation (Sterilite), a manufacturer of molded plastics, was the insured under a so-called "comprehensive general liability policy," issued by Continental Casualty Company (Continental). 1 This provided protection against certain forms of products liability. In the present suit Sterilite sought a declaration that Continental was obliged to undertake its defense in a third-party action in which it was named as a defendant.

More particularly: Henry Heide, Inc. (Heide), purchased from WRH Products Co., Inc. (WRH), for a price of about $100,000, some 23,130 plastic "starch trays," i.e., trays carrying starch, to be used in the process of candy manufacture. On July 21, 1975, Heide commenced an action in Federal court against WRH, as seller; Sterilite, as manufacturer of the trays; and Dow Chemical Company, as supplier of material entering into the composition of the trays, claiming damages of not less than $600,000 for property damages arising from alleged defects in the trays. 2 Notified by Sterilite of the pending action, Continental provisionally assumed the defense on Sterilite's behalf, then on August 21, 1975, disclaimed responsibility with regard to any damage to the trays, 3 and subsequently, on January 5, 1976, disclaimed all responsibility. Accordingly, Sterilite started to defend itself in Heide's action by engaging and compensating counsel of its own choice.

On October 20, 1980, with the Heide action still pending, Sterilite brought the present declaratory suit. The parties cross-moved for summary judgment. A judge of the Superior Court, holding for Sterilite, declared that Continental was in breach of its duty to defend the Heide action on behalf of Sterilite, that it was liable for the counsel fees and related expenses already incurred by Sterilite to the time of judgment (fixed at $108,370.74), and was obligated for the future either to undertake the defense itself or to reimburse Sterilite the further expenses of suit. Continental appeals. We modify the disposition in one particular.

1. It is settled in this jurisdiction, and generally elsewhere, that the question of the initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions: if the allegations of the complaint are "reasonably susceptible" of an interpretation that they state or adumbrate a claim covered by the policy terms, the insurer must undertake the defense. See Vappi & Co., Inc. v. Aetna Cas. & Sur. Co., 348 Mass. 427, 431, 204 N.E.2d 273 (1965); Magoun v. Liberty Mut. Ins. Co., 346 Mass. 677, 681-682, 195 N.E.2d 514 (1964); Terrio v. McDonough, 16 Mass.App. 163, 166, 450 N.E.2d 190 (1983). See also 7C Appleman, Insurance Law and Practice § 4683 (rev. ed. 1979); 14 Couch, Cyclopedia of Insurance Law § 51.42 (2d ed. 1982); 1 Long, Law of Liability Insurance § 5.03 (1981); Windt, Insurance Claims and Disputes § 4.01 (1982); Annot., 50 A.L.R.2d 458 (1956). 4 Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy. See Gray v. Zurich Ins. Co., 65 Cal.2d 263, 274-277, 54 Cal.Rptr. 104, 419 P.2d 168 (1966). See also Baybutt Constr. Corp. v. Commercial Union Ins. Co., 455 A.2d 914, 921-922 (Me.1983). Cf. Green Bus Lines, Inc. v. Consolidated Mut. Ins. Co., 74 A.D.2d 136, 144, 426 N.Y.S.2d 981, app. denied, 52 N.Y.2d 701, 436 N.Y.S.2d 1025, 417 N.E.2d 572 (1980). Upon such analysis, we agree with the trial judge that there was enough in the Heide complaint to invoke the duty of the insurer to defend under the policy provisions. 5

The Heide complaint alleged the following: The defendants knew the particular purposes of Heide's candy manufacturing process for which the starch trays were intended; the defendants were in breach of express and implied warranties, since the trays were unfit for their intended use, were of unmerchantable quality, and did not conform to sample; moreover, the defendants were negligent in the design, manufacture, and testing of the trays. As a result, Heide "has incurred losses and suffered damages including, among other things, lost sales and profits, increased costs of obtaining replacement trays, loss of reasonable return on its capital investment in manufacturing equipment and costs of storage and handling." The complaint is an instance, although not an extreme instance, of the general or "notice" style of averment of the Federal Rules, and is not to be read with the literalness or narrowness associated with the name of the late Baron Parke. 6 "In order for the duty of defense to arise, the underlying complaint need only show, through general allegations, a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage." Union Mutual Fire Ins. Co. v. Inhabitants of Town of Topsham, 441 A.2d 1012, 1015 (Me.1982). See also Gray v. Zurich, supra, 65 Cal.2d at 276-277, 54 Cal.Rptr. 104, 419 P.2d 168; International Paper Co. v. Continental Cas. Co., 35 N.Y.2d 322, 325, 361 N.Y.S.2d 873, 320 N.E.2d 619 (1974). Even if a measure of literalness is insisted upon, the reference in Heide's complaint to loss of return on investment in manufacturing equipment would, in our opinion, embrace and admit proof of physical impairment of such equipment causally related to the failure of the trays that were conveyed and handled in the manufacturing process. 7 And this item of loss fell within the "coverage" of the policy, specifically, the coverage of the part of the policy definition of "property damage" that speaks of "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." The reference in the complaint to costs of replacing trays ought to be enough to allow proof of physical damage of the trays, and we think it would be no impermissible inflation of the complaint to extend this to any damage to the contents of the trays, although the trial judge did not go so far.

Next, the complaint by the same reference to return on investment in manufacturing equipment would invite proof of causally connected loss of use of the equipment apart from any physical impairment thereof. This item of loss was covered by the further part of the policy definition of "property damage" which mentions "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." 8 (There is no dispute that there was an "occurrence," as defined.) 9

So much for the stated coverage. Now we go to the "exclusions." By exclusion (n), "This insurance does not apply: ... (n) to property damage to the named insured's products arising out of such products or any part of such products." This means that the loss of the trays is withdrawn from coverage. The exclusion appears not to speak to the other items above mentioned. 10

An exclusion, often called a "business risk" exclusion, appears in (m), as follows: "This insurance does not apply: ... (m) to loss of use of tangible property which has not been physically injured or destroyed resulting from ... (2) the failure of the named insured's products ... 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 ... after such products ... have been put to use by any person or organization other than the insured." 11 The language up to the word "but" removes from coverage standard situations where loss of use of equipment occurs simply by the failure of the insured's products to come up to the contract level. 12 It is understandable that the policy should not serve as a guaranty of the quality and suitability of the insured's products: these risks are of a kind that the insured may be expected to bear itself--and load into the prices of its products. 13 The "but" language of the (m) exclusion, however, removes from the business risk exclusion and retains coverage for instances where there is loss of use of tangible property, e.g., equipment, occasioned by "sudden and accidental" damage to the insured's products (even though, we interpolate, this damage may be related to inadequacies of the insured's products). The effect of (m) is to distinguish "between a physical breakdown of the insured's product and a mere failure of the product to perform as well as warranted, presumably because the latter is a typical business risk whereas the former is more likely to have catastrophic consequences." Honeycomb Syss., Inc. v. Admiral Ins. Co., 567 F.Supp. 1400, 1407 (D.Me.1983) (Gignoux, J.) (loss of use of paper manufacturing machine held covered, when insured's component product cracked, not merely failed to perform as warranted). The allegations of Heide's complaint seem to us, as they evidently did to the trial judge, ample enough to harbor a "breakdown" situation, and they surely do not expressly bar it. Therefore the insurer's duty to defend attached. See Carboline Co. v. Home Indem. Co., 522 F.2d 363, 367 (7th...

To continue reading

Request your trial
214 cases
  • Rubenstein v. Royal Ins. Co. of America
    • United States
    • Appeals Court of Massachusetts
    • 27 Mayo 1998
    ...Continental Cas. Co. v. Gilbane Bldg. Co., 391 Mass. 143, 146, 461 N.E.2d 209 (1984), quoting from Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 318, 458 N.E.2d 338 (1983). SMLP's complaint alleged that the trustees were the owners of the property when the oil leak occurred.......
  • American Mut. Liability Ins. Co. v. Beatrice Companies, Inc., 86 C 1874.
    • United States
    • U.S. District Court — Northern District of Illinois
    • 25 Abril 1996
    ...reasonably generated by the terms of the policy.'" Gilbane Bldg. Co., 461 N.E.2d at 212 (quoting Sterilite Corp. v. Continental Casualty Co., 17 Mass.App. 316, 458 N.E.2d 338, 341 (1983)); accord SCA Servs., Inc., 588 N.E.2d at The Liberty Mutual and National Surety policies contain standar......
  • Ricchio v. Bijal, Inc.
    • United States
    • U.S. District Court — District of Massachusetts
    • 22 Noviembre 2019
    ...the coverage." Billings v. Commerce Ins. Co. , 458 Mass. 194, 200-01, 936 N.E.2d 408 (2010) (quoting Sterilite Corp. v. Cont'l Cas. Co. , 17 Mass. App. Ct. 316, 319, 458 N.E.2d 338 (1983) ). "[I]f the allegations of the complaint are reasonably susceptible of an interpretation that they sta......
  • Allstate Ins. Co. v. Davis
    • United States
    • U.S. District Court — District of Hawaii
    • 1 Mayo 2006
    ...in the declaratory judgment action." Dairy Road, 92 Hawai`i at 422 n. 13, 992 P.2d 93 (citing Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 458 N.E.2d 338, 344 (1983)). Relying on this conclusion, Plaintiff has submitted the state Criminal Complaint and Criminal Judgment as ......
  • Request a trial to view additional results
1 books & journal articles
  • Investigating coverage
    • United States
    • James Publishing Practical Law Books How Insurance Companies Settle Cases
    • 1 Mayo 2021
    ...Inc. , 250 N.W.2d 663 (N.D. 1977); INVESTIGATING COVERAGE 4-13 Investigating Coverage §408 Sterilite Corp. v. Continental Cas. Co. , 17 Mass. App. Ct. 316, 458 N.E. 2d 338, 341 (1984); Raska v. Farm Bureau Mut. Ins. Co. , 412 Mich. 355, 314 N.W.2d 440, 445 (1982); American Economy Ins. Co. ......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT