SECOND DIVISION May 17, 2011
No. 1-10-2214
UNITED NATIONAL INSURANCE COMPANY, ) Appeal from the ) Circuit Court of Plaintiff-Appellee, ) Cook County ) ) v. ) No. 08 CH 13595 ) ) FAURE BROTHERS CORPORATION, ) Honorable ) Sophia H. Hall, Defendant-Appellant. ) Judge Presiding.
JUSTICE HARRIS delivered the judgment of the court, with opinion. Justices Karnezis and Connors concurred in the judgment and opinion.
OPINION
Here we are called upon to determine whether a duty to defend arises under a general
liability insurance policy. Plaintiff, United National Insurance Company (United National), issued
a commercial general liability insurance policy to defendant, Faure Brothers Corporation (Faure
Brothers). One of Faure Brothers divisions, Gateway Warehouse Company, Inc. (Gateway), is in
the business of warehousing chemical products, relabeling them and having them shipped as per
the direction of it’s customers. Gateway was sued by Air Products and Chemicals, Inc. (Air
Products), alleging negligence resulting in the mislabeling of its products. Faure Brothers
demanded that United National defend the negligence lawsuit, which was refused, and Faure
Brothers undertook its own defense. United National filed a complaint for declaratory judgment,
seeking a declaration that it had no duty to defend Faure Brothers, or to indemnify it, in the No. 1-10-2214
underlying action. Faure Brothers answered and filed a counterclaim for declaratory judgment,
seeking a declaration that United National had a duty to defend and a duty to indemnify Faure
Brothers in the underlying action. The parties each filed motions for summary judgment. The
circuit court granted summary judgment in United National’s favor holding it had no duty to
defend. The circuit court reasoned that the complaint filed by Air Products in the underlying
action did not allege an “occurrence” as defined by the policy. After construing the allegations of
the underlying complaint liberally in favor of the insured, Faure Brothers, we hold that the
allegations fall within, or potentially fall within, the policy’s coverage. United National has a duty
to defend Faure Brothers in the underlying action. We reverse the circuit court’s summary
judgment order.
JURISDICTION
On June 9, 2010, the circuit court granted United National’s motion for summary
judgment and denied Faure Brothers’ motion for summary judgment and set the matter for status
on June 30, 2010. On June 30, 2010, the circuit court ordered that the June 9, 2010, entry of
summary judgment in United National’s favor is final and appealable, stating “[t]here is no just
cause to delay the enforcement or appeal of the order of June 9, 2010.” Accordingly, this court
has jurisdiction pursuant to Illinois Supreme Court Rule 304(a) (eff. Feb. 26, 2010).
BACKGROUND
United National issued its commercial general liability insurance policy No. L7169715-B
to Faure Brothers with an effective date of February 1, 2006 through February 1, 2007. Section I
of the policy outlines the insurance coverage and exclusions United National agreed to provide
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Faure Brothers. Section I also includes what was excluded from United National’s coverage.
Section I of the policy, states in relevant part:
“1. Insuring Agreement.
a. We will pay those sums that the insured becomes
legally obligated to pay as damages because of ‘bodily
injury’ or ‘property damage’ to which this insurance applies.
We will have the right and duty to defend any ‘suit’ seeking
those damages. However, we will have no duty to defend
the insured against any ‘suit’ *** to which this insurance
does not apply. ***. But:
***
b. This insurance applies only to ‘bodily injury’ and
‘property damage’ only if:
(1) The ‘bodily injury’ or ‘property damage’
is caused by an ‘occurrence’ that takes place in the
‘coverage territory’; and
(2) The ‘bodily injury’ or ‘property damage’
occurs during the policy period.
2. Exclusions.
This insurance does not apply to:
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(n) Recall of Products, Work, or Impaired
Property
Damages claimed for any loss, cost or expense
incurred by you or others for the loss of use, withdrawal,
recall, inspection, repair, replacement, adjustment, removal
or disposal of:
(1) ‘your product’;
(2) ‘your work’; or
(3) ‘impaired property’;
if such product, work, or property is withdrawn or recalled
from the market or from use by any person or organization
because of a known or suspected defect, deficiency,
inadequacy or dangerous condition in it.”
Section V of the policy provides definitions for the terms “occurrence”, “property
damage”, and “your work.” The policy does not define the term “accident.” Section V, states, in
relevant part:
“12. ‘Occurrence’ means an accident, including continuous
or repeated exposure to substantially the same general harmful
conditions.
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15. ‘Property damage’ means:
a. Physical injury to tangible property, including all
resulting loss of use of that property. All such loss of use
shall be deemed to occur at the time of the physical injury
that caused it; or
b. Loss of use of tangible property that is not
physically injured. All such loss of use shall be deemed to
occur at the time of the ‘occurrence’ that caused it.
19. ‘Your work’ means:
a. Work or operations performed by you or on your
behalf; and
b. Materials, parts or equipment furnished in
connection with such work or operations.
‘Your work’ includes:
a. Warranties or representations made at any time
with respect to the fitness, quality, durability, performance
or use of ‘your work’; and
b. The providing of or failure to provide warnings
or instructions.”
In March of 2008, Air Products filed the underlying lawsuit in this case, Air Products &
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Chemicals, Inc. v. Gateway Warehouse Co., Inc. No. 08 L 02503 (Cir. Ct. Cook Co.). Air
Products, a customer of Gateway, which is a division of Faure Brothers, alleged one count of
negligence and one count of negligence-res ipsa loquitur against Gateway. In its complaint, Air
Products alleged they stored various chemical products in Gateway’s warehouse facility and that
Gateway was to relabel certain of the chemicals for Air Products. Air Products alleged Gateway
affixed the proper label on the wrong or improper chemicals. In October of 2006, Gateway
shipped the mislabeled chemicals to one of Air Product’s customers, the Henkel Corporation.
Henkel used the mislabeled chemical in producing one if its adhesive products. Henkel then sold
adhesive products that were made with the mislabeled chemical to Becton, Dickinson and
Company Medical Systems (BD) and Smiths Medical ASD, Inc. (Smiths). The adhesive product
bought by BD and Smiths “did not perform or otherwise work as the products were intended due
to the inclusion of the mislabeled chemical product.” BD and Smiths notified Henkel of the
damages they sustained, which in turn made a claim against Air Products for damages sustained
by all three companies. Air Products satisfied and paid the claims brought by Henkel and BD “in
an amount in excess of $380,000.00.” The complaint alleged that Air Products “expects to satisfy
and pay Smith’s claim in excess of $14,000.00.”
In count I of its complaint, Air Products alleged Gateway owed Air Products a duty “to
use due care and caution while storing, labeling, shipping into the stream of commerce and
otherwise handling the subject chemicals and other chemical product in its warehouse.” Air
Products alleged that the damages they paid to Henkel, BD, and Smiths were directly and
proximately caused by Gateway’s negligence. Specifically, Air Products alleged that Gateway
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was negligent in the following ways:
“a. carelessly and negligently mislabeling chemical product;
b. failing to adhere to the instructions provided by [Air
Products] for properly labeling the subject chemicals;
c. failing to take the proper protections, safeguards and
other measures to ensure that the subject chemicals were labeled
properly;
d. failing to properly direct, supervise, train or manage its
employees, agents and/or contractors with respect to properly
labeling the subject chemicals;
e. failing to properly direct, supervise, train or manage its
employees, agents and/or contractors with respect to taking the
proper precautions, safeguards and other measures to ensure that
the subject chemicals were labeled properly;
f. shipping into the stream of commerce mislabeled,
hazardous chemical product;
g. failing to comply with governing codes, regulations,
ordinances and/or standards ***;
h. failing to comply with governing codes, regulations,
ordinances and/or standards,***; and/or
i. otherwise failing to use due care under the
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circumstances.”
Count II incorporated count I, and added that “[u]nder the doctrine of res ipsa loquitur,
*** Gateway was negligent while storing, labeling, shipping into the stream of commerce and
otherwise handling the subject chemicals and other chemical product in its warehouse.”
Faure Brothers tendered defense of Air Products’ complaint to United National. United
National denied Faure Brothers’ request to defend it. Faure Brothers undertook its own defense
and paid Air Products $210,000 under the terms of a settlement agreement between the parties.
In March of 2009, United National filed its first amended complaint for declaratory
judgment, seeking a declaration that it had no duty to defend Faure Brothers, or to indemnify it, in
the underlying action. In April of 2009, Faure Brothers answered and filed a counterclaim for
declaratory judgment, seeking a declaration that United National had a duty to defend and
indemnify it in the underlying action. The parties each filed motions for summary judgment. The
circuit court granted summary judgment in United National’s favor as to the duty to defend the
claim. The circuit court reasoned that the complaint filed by Air Products in the underlying action
did not allege an “occurrence” as defined by the policy issued to Faure Brothers.
ANALYSIS
Before this court, Faure Brothers argues the circuit court erred in granting summary
judgment in United National’s favor as to the duty to defend the claim because the underlying
action was for negligence. Faure Brothers argues that its negligence, the mislabeling of the
chemicals, was an “accident” and, consequently, an “occurrence” under the policy issued to it by
United National. Faure Brothers argues, based on the insurance policy, that United National had
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a duty to defend it in its lawsuit with Air Products. United National argues that it did not have a
duty to defend the underlying lawsuit and, thus, summary judgment was proper because the
mislabeling of the chemical was not an “occurrence” under the policy and Air Product’s claim
against Faure Brothers was not a claim for “property damage” under the policy. In the
alternative, United National argues Air Product’s claim in the underlying action is excluded from
coverage.
Summary judgment is proper where “the pleadings, depositions, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of law.” 735 ILCS 5/2-1005(c) (West
2008). In ruling on a motion for summary judgment, the circuit court is to determine whether a
genuine issue of material fact exists, not try a question of fact. Williams v. Manchester, 228 Ill.
2d 404, 417 (2008). When determining whether a genuine issue of material fact exists, the
pleadings are to be liberally construed in favor of the nonmoving party. Id. We recognize that
“[a]lthough summary judgment can aid in the expeditious disposition of a lawsuit, it remains a
drastic means of disposing of litigation and, therefore, should be allowed only where the right of
the moving party is clear and free from doubt.” Id. We review summary judgment rulings de
novo. Id.
The Illinois Supreme Court, in Outboard Marine Corp. v. Liberty Mutual Insurance Co.,
explained an insurer’s duty to defend:
“An insurer’s duty to defend its insured is much broader
than its duty to indemnify. [Citations.] In order to determine
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whether the insurer’s duty to defend has arisen, the court must
compare the allegations of the underlying complaint to the policy
language. [Citations.] The allegations in the underlying complaint
must be liberally construed in favor of the insured. [Citation.] If
the court determines that these allegations fall within, or potentially
within, the policy’s coverage, the insurer has a duty to defend the
insured against the underlying complaint. [Citation.]” (Emphasis in
original.) Outboard Marine Corp. v. Liberty Mutual Insurance Co.,
154 Ill. 2d 90, 125 (1992).
The “duty to defend arises even if only one of several theories is within the potential coverage of
the policy.” General Agents Insurance Co. of America, Inc. v. Midwest Sporting Goods Co., 215
Ill. 2d 146, 155 (2005). Even if the underlying complaint contains allegations that are false or
fraudulent, the insurer will still have a duty to defend its insured if the underlying complaint
alleges facts that potentially fall within the policy’s coverage. Id. In order for a insurer to deny
defending an action, it must be “clear from the face of the underlying complaint that the
allegations set forth in that complaint fail to state facts that bring the case within or potentially
within the insured’s policy coverage.” Id. at 154.
It is the burden of the insurer to affirmatively prove that an exclusion in an insurance
policy applies. Pekin Insurance Co. v. Miller, 367 Ill. App. 3d 263, 267 (2006). Provisions in
insurance policies that exclude or limit coverage must be construed liberally against the insurer.
Id. The same liberal standard applied to determinations of whether an insurer has a duty to
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defend is applied to determinations of whether an exclusion applies. United States Fidelity &
Guaranty Co. v. Wilkin Insulation Co.,144 Ill. 2d 64, 78 (1991).
We will first address whether the underlying complaint alleged an “accident” and, thus, an
“occurrence” under the policy. The policy covers only “property damage” caused by an
“occurrence.” The policy defines “occurrence” as “an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.” The policy does not define the
term “accident.” The Illinois Supreme Court has, however, defined the term “accident” in
insurance cases. Rich v. Principal Life Insurance Co., 226 Ill. 2d 359, 378-79 (2007). In Illinois:
“ ‘ [I]f an act is performed with the intention of accomplishing a
certain result, and if, in the attempt to accomplish that result,
another result, unintended and unexpected, and not the rational and
probable consequence of the intended act, in fact, occurs, such
unintended result is deemed to be caused by accidental means.’ ”
Rich, 226 Ill. 2d at 378 quoting Yates v. Bankers Life & Casualty
Co., 415 Ill. 16, 19 (1953)).
Christ v. Pacific Mutual Life Insurance Co., 312 Ill. 525 (1924); United States
Mutual Accident Ass’n v. Barry,131 U.S. 100 (1889).
Determination of whether an occurrence is an accident is focused on “whether the injury is
expected or intended by the insured, not whether the acts were performed intentionally.
(Emphasis in original.) Lyons v. State Farm Fire & Casualty Co., 349 Ill. App. 3d 404, 409
(2004).
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Our review of the complaint in the underlying action shows that the allegations focused
solely on negligent acts of Faure Brothers and did not make any allegations that Faure Brothers
expected or intended the resulting mislabeled chemicals. From the point of view of Faure
Brothers, it was contracted to label the chemicals before putting them into the stream of
commerce. However, unexpectedly, it mislabeled the chemicals. Therefore, the result was not
expected and, thus, an accident. The underlying complaint made an allegation of an “accident,”
and, therefore, an “occurrence,” under the policy.
United National also argues that Air Products’ complaint does not make a claim for
“property damage” under the policy. The policy defines “property damage” as “physical injury to
tangible property, including all resulting loss of use of that property *** or *** [l]oss of use of
tangible property that is not physically injured.” The Illinois Supreme Court defines “ ‘physical
injury’ ” as “damage to tangible property causing an alteration in appearance, shape, color or in
other material dimension.” Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill. 2d 278,
312 (2001). It “does not include intangible damage to property, such as economic loss.” Id.
Further, “the diminution in value of a whole, resulting from the failure of a component to perform
as promised, does not constitute a physical injury.” (Emphasis omitted.) Id.
The underlying complaint contains allegations Gateway shipped the mislabeled chemical
product to one of Air Products’ customers, Henkel Corporation. Henkel used the mislabeled
chemical “by incorporating it into the formulation of one of Henkel’s adhesive products.” The
adhesive products were then sold to BD and Smiths. In its complaint, Air Products alleges “as
such, BD’s product and Smith’s product *** did not perform or otherwise work as the products
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were intended due to the inclusion of the mislabeled chemical product in the formulation of the
adhesive product produced by Henkel.” Air Products further alleged that “BD and Smiths
notified Henkel of the damage sustained in assembly of their products.” Construing the
allegations in the complaint liberally in favor of Faure Brothers, we find the allegations potentially
fall within the policy’s coverage. The allegations do not concern an intangible loss, the diminution
of value, or the failure to perform as promised; rather, they concern damages based on the wrong
chemical being used in formulating the adhesive product. The harm did not occur because the
chemicals did not perform as promised but, rather, because Henkel was negligently given the
wrong chemical. Furthermore, the second definition of property damage contained in the policy
does not require physical injury, but rather the “[l]oss of use of tangible property that is not
physically injured.” Under this definition, it is clear that the allegations in the complaint allege
damages based on Faure Brothers’ improper labeling of the chemicals. Henkel, BD, and Smiths
all had damages based on the loss of use of the defective adhesive products.
Liberally construing the allegations of the complaint in favor of Faure Brothers, we find
the allegations either fall within, or potentially within, the coverage of United National’s policy
with Faure Brothers. Therefore, United National had a duty to defend Faure Brothers in the
underlying action. Outboard Marine Corp.,154 Ill. 2d at 125 (“The allegations in the underlying
complaint must be liberally construed in favor of the insured. [Citation.] If the court determines
that these allegations fall within, or potentially within, the policy’s coverage, the insurer has a
duty to defend the insured against the underlying complaint.” (Emphasis in original.)).
In the alternative, United National argues that exclusion “n” of the policy precludes
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coverage, where the exclusion provides,
“Damages claimed for any loss, cost or expense incurred by
you or others for the loss of use, withdrawal, recall, inspection,
repair, replacement, adjustment, removal or disposal of:
(2) ‘Your Work[.]’
if such product, work, or property is withdrawn or recalled from
the market or from use by any person or organization because of a
known or suspected defect, deficiency, inadequacy or dangerous
condition in it.”
In United States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64 (1991),
the Illinois Supreme Court addressed a similar exclusion clause, which read:
“ ‘Damages claimed for the withdrawal, inspection, repair,
replacement or loss of the use of the named insured’s products or
work completed by or for the *** 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.’ ” Wilkin
Insulation Co.,144 Ill. 2d at 80.
The supreme court described the exclusion clause in Wilkin as a “ ‘sistership’ exclusion” that
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“excludes coverage ‘in cases where, because of the actual failure of the insured’s product, similar
products are withdrawn from use to prevent the failure of these other products, which have not yet
failed but are suspected of containing the same defect.’ ” Id. at 81 (quoting Honeycomb Systems,
Inc. v. Admiral Insurance Co., 567 F. Supp. 1400, 1406 (D.C. Cir. 1983)). The supreme court
held the “ ‘sistership’ ” exclusion “does not apply, however, to the product that has already failed
while in use and caused damage to the property of a third party.” Id. (citing Honeycomb Systems,
Inc., 567 F. Supp. at 1407). The supreme court held that the exclusion clause did not preclude
coverage because the product in Wilkin had already failed, resulting in damage. Id.
As in Wilkin, the product in this case, the mislabeled chemicals, already failed and caused
damage to a third party, Air Products. This is shown in Air Products’ complaint, which alleges
that it has already satisfied and paid claims based on the damages of Henkel and BD and that it was
expecting to satisfy Smith’s claim. It did not seek to withdraw products to prevent future failure
of products. In construing the exclusion provision in this case liberally in Faure Brothers’ favor
and against United National, we find that exclusion (n) does not preclude coverage. Pekin
Insurance Co., 367 Ill. App. 3d at 267 (provisions in insurance policies that exclude or limit
coverage must be construed liberally against the insurer).
CONCLUSION
Following our review of the record, and in construing the underlying complaint liberally in
favor of the insured, Faure Brothers, we conclude that the allegations in the underlying complaint
fall within, or potentially within, the coverage of the policy. Therefore, we find that United
National did have a duty to defend Faure Brothers in the underlying action. The circuit court erred
15 No. 1-10-2214
when it entered summary judgment as to the duty to defend in United National’s favor. On
remand, the circuit court should enter judgment in favor of Faure Brothers as to the issue of
whether United National had the duty to defend Faure Brothers in the underlying action.
For the foregoing reasons, the judgment of the circuit court of Cook County is reversed
and remanded.
Reversed and remanded.
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REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT
UNITED NATIONAL INSURANCE COMPANY,
Plaintiff-Appellee,
v.
FAURE BROTHERS CORPORATION,
Defendant-Appellant.
Appellate Court of Illinois First District, Second Division
May 17, 2011
JUSTICE HARRIS delivered the judgment of the court, with opinion. Justices Karnezis and Connors concurred in the judgment and opinion.
Appeal from the Circuit Court of Cook County.
The Honorable Sophia H. Hall, Judge Presiding.
Horvath & Weaver, P.C., 10 South LaSalle Street, Suite 1400, Chicago, IL 60603, (John F. Horvath, Rosemarie J. Guadnolo and Renata M. Koleda, of counsel), for APPELLANT.
Cray Huber Horstman Heil & VanAusdal LLC, 303 West Madison, Suite 2200, Chicago, IL 60606, (James K. Horstman and Melissa H. Dakich), for APPELLEE.