Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79 C 3500 -- Frank J. McGarr, Judge .
Before Swygert, Senior Circuit Judge, Fairchild and Sprecher, Circuit Judges.
This case involves a retailer's attempt to receive legal representation and indemnity for products liability from two insurance companies. The underlying products liability suit alleges that fabric used in girls slacks was defective and that the design and manufacture of the slacks was defective. The insurance carriers for the fabric manufacturer and the slacks manufacturer had each named the retailer as insured in a vendor's endorsement. The carrier for the fabric manufacturer declined coverage on the ground that the fabric was "changed" when it was used as slacks. The carrier for the slacks manufacturer declined coverage on the ground that the retailer "provided" the fabric to the slacks manufacturer. Because we find that the argument of each carrier would render the vendor's endorsement a nullity, we find that both carriers must defend the retailer.
This case arises out of a products liability suit filed against Sears, Roebuck and Company ("Sears") by Rollie and Francine Cumberland in the Circuit Court of St. Clair County, Illinois. In that lawsuit, the Cumberlands alleged that their daughter died of injuries sustained when a pair of girls slacks purchased from Sears caught fire.
The Riegel Textile Corporation ("Riegel") manufactured the fabric from which the slacks were made. Sears purchased the fabric from Riegel. Riegel was insured for products hazard liability claims by the Commercial Union Insurance Company ("Commercial"). The Commercial policy covering Riegel named Sears as a "person insured" in a vendor's endorsement.
After Sears purchased the fabric from Riegel, it instructed Riegel to send the fabric to Rollic, Inc. Sears contracted with Rollic for finished slacks; the fabric was measured, cut, sewn, labeled, and packaged for Sears by Rollic. Rollic was insured for products hazard liability with the Reliance Insurance Company ("Reliance"). The Reliance policy covering Rollic named Sears as an "additional insured" in a vendor's endorsement.
The Cumberland lawsuit advanced two specific and separate claims with regard to the slacks purchased from Sears. First, the complaint alleged that the fabric from which the slacks were made was inherently and unreasonably flammable. Second, the complaint alleged that the final slacks were defective, aside from any defect in the fabric, because they were defectively produced and manufactured.
Both the Commercial and the Reliance policies provide that the carrier shall defend any suit, even if groundless, brought on account of goods or products manufactured, sold, handled, or distributed by the named insured. Each policy further provides that the carrier shall pay on behalf of the named insured all sums which the insured shall become legally obliged to pay as damages. But when Sears requested a defense for the Cumberland suit, each insurance company refused to provide such a defense.
Sears then brought this action seeking a declaratory judgment that each carrier must defend and indemnify Sears in the Cumberland suit. The district court granted Sears' motion for summary judgment against Reliance. But the district court denied Sears' motion for summary judgment against Commercial and instead, granted summary judgment in favor of Commercial. Reliance and Sears now appeal the respective rulings awarding summary judgment against them. For the reasons discussed below, we affirm the award of summary judgment against Reliance and reverse the award of summary judgment against Sears.
We begin with Commercial, insurer of Riegel, the fabric manufacturer. Commercial argues that exclusions in its policy preclude coverage to Sears. The relevant exclusions in the vendor's endorsement state that:
1. The insurance with respect to the vendor does not apply to
(b) bodily injury or property damage arising out of
(i) any physical or chemical change in the form of the product made intentionally by the vendor,
(ii) repacking, unless unpacked solely for the purpose of inspection, demonstration, testing or the substitution of parts under instructions from the manufacturer and then repacked in the original container,
(iv) products which after distribution or sale by the named insured have been labeled or relabeled or used as a container, part or ingredient of any other thing or substance by or for the vendor.
("Exclusion 1"). Commercial argues that because the Riegel fabric was fashioned into slacks and labeled by Rollic, Exclusion 1 excludes coverage of Sears. This argument must be rejected.
The law is clear that an insurance carrier's duty to defend is determined by reference to the allegations of the underlying complaint. Where, as here, the complaint contains allegations which may be covered by the policy, the carrier's duty continues until such time, if ever, as the claim might be confined to non-covered allegations. This well settled rule was stated by Judge Learned Hand in the landmark case of Lee v. Aetna Cas. & Surety Co., 178 F.2d 750, 753 (2d Cir. 1949):
(I)f the plaintiff's complaint against the insured alleged facts which would have supported a recovery covered by the policy, it was the duty of the defendant to undertake the defence, until it could confine the claim to a recovery that the policy did not cover.
This rule has been applied on numerous occasions by this and many other courts. See Carboline Co. v. Home Indemnity Co., 522 F.2d 363, 366 (7th Cir. 1975) (carrier must defend "if there is doubt whether the claim comes within the coverage of the policy"); and Sears, Roebuck and Co. v. Travelers Ins. Co., 261 F.2d 774, 777 (7th Cir. 1958) (carrier required to defend suit "until it could confine the claim to a recovery that the endorsement clearly did not cover, not merely one which it might not cover") (emphasis added).*fn1
In the recent case of Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178 (7th Cir. 1980), we set forth the test for determining, under the above rule, whether a carrier has a duty to defend. In Solo Cup, the district court held that an insurance carrier did not have a duty to defend because the underlying complaint contained allegations which were inconsistent with the policy's definition of "occurrence". We reversed, stating:
It is well settled under the law of Illinois that
(this) duty to defend extends to cases where the complaint alleges several causes of action or theories of recovery against an insured, one of which is within the ...