Framing of Damages Determines Duty to Defend in Recent New York Case

A New York appellate court recently upheld a supreme court ruling that an insurer had a duty to defend a manufacturer’s faulty workmanship where it resulted in third party property damage.  I.J. White Corp. v. Columbia Cas. Co., 2013 NY Slip Op 2500 (N.Y. App. Div. 1st Dep’t Apr. 16, 2013).  In determining the insurer’s duty to defend, the court found an “occurrence” caused property damage to cakes resulting from the insured’s faulty freezer.  Although this opinion likely carries little precedential value, it is instructive because it demonstrates the importance of framing the issue of damages where the insured seeks a defense for a cause of action based largely in a contract breach. 

In the underlying case, the insured manufacturer, I.J. White, sold a spiral freezer system to cake producer and distributor, Hill Country Bakery, LLC.  Hill Country integrated this system into their $21 million facility in order to quickly freeze freshly baked cakes moving through a conveyer belt before cutting them for distribution.  But the system allegedly failed to sufficiently freeze the cakes quickly enough, resulting in product loss when Hill Country attempted to cut them.  Hill Country sued I.J. White for breach of contract, seeking damages for the contract price, costs incurred to increase the freezer’s performance to contract specifications, and increased labor costs resulting from the freezer’s slow freezing time.

I.J. White sought defense and indemnity costs from Columbia Casualty under its CGL policy.  Columbia Casualty disclaimed coverage, contending that the defective freezer did not constitute an accident giving rise to an “occurrence” under the policy, and because the underlying suit did not allege “property damage.”

The supreme court disagreed and this appellate court upheld that determination.  The I.J.White court noted that although CGL policies do not insure against faulty workmanship in the product itself, damage to third party property such as the freshly baked cakes is “precisely the kind [of damage] that plaintiff’s CGL policy contemplated, and therefore, the complaint properly alleges an ‘occurrence’ within the meaning of the policy.”  The court also held that the policy covers Hill Country’s loss of use of the facility because it defines “property damage” as a “[l]oss of use of tangible property that is not physically injured,” though it did not address this issue in great detail.

Most courts considering whether faulty workmanship constitutes an “occurrence” have found that it does where it results in property damage to something other than the insured’s work product.  Indeed, the court’s framing of this damages issue seemed determinative of the finding of an “occurrence,” and explains the difference between the majority and dissenting opinions.  Whereas the majority presumed the defective freezer destroyed Hill Country’s cakes, the dissenting judges posited that the defective freezer simply delayed the freezing of the cakes since it performed slower than contractually promised but that no property damage resulted.  The dissenting judges concluded that no “occurrence” existed because the complaint “sound[ed] in breach of contract, breach of implied and express warranty, and fraudulent inducement,” and that it sought damages only related to the contract breach rather than for a destroyed product.

The court did not address the “your work” or the “impaired property” exclusions, which often factor into coverage determinations in cases with similar facts and issues.

While policy holders may point to I.J. White Corp. v. Columbia Cas. Co. to argue for an expansive view of what constitutes an “occurrence,” New York courts considering these issues will likely look instead to George A. Fuller Co. v. U.S. Fid. & Guar. Co., 613 N.Y.S.2d 152, 155 (N.Y. App. Div. 1994) (considered by the court here) (holding that damage resulting from a contractor’s failure to properly supervise the installation of various parts of the building did not constitute an occurrence because the policy does not insure faulty workmanship to the work product itself) and Transp. Ins. Co. v. Aark Constr. Group, 526 F. Supp. 2d 350 (E.D.N.Y. 2007) (holding that repair costs and loss of use to a building resulting from construction failures did not constitute an “occurrence” given that only the property owner’s economic interests were affected). 

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Posted in Duty to Defend, Food Manufacturer, Insurance Coverage, Liability Policy, Occurrence, Property Damage

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Cozen O’Connor has a national team of attorneys experienced in handling food contamination and product recall coverage matters related to first-party, third-party and specialty policies. The firm also developed a Food, Beverage & Nutritional Products Industry Team to provide advice and counsel to a wide range of companies connected directly and indirectly to the food and beverage industry.
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