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Centennial Insurance Co. v. Applied Health Care Systems Inc.

July 5, 1983

CENTENNIAL INSURANCE COMPANY, PLAINTIFF-APPELLANT,
v.
APPLIED HEALTH CARE SYSTEMS, INC., AND MINICOMPUTER TECHNOLOGY, INC., DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 82C 4108 -- Susan Getzendanner, Judge.

Author: Bauer

Before PELL, BAUER, Circuit Judges, and DUMBAULD, Senior District Judge.*fn*

BAUER, Circuit Judge. The genesis of the case before us lies in an action brought by Applied Health Care Systems, Inc. (Applied Health) against Minicomputer Technology, Inc. (MCT). In that case, which is pending before the United States District Court for the Northern District of Illinois, Applied Health is seeking to recover damages alleged to stem from MCT's introduction of a faulty controller*fn1 into Applied Health's data processing system. Applied Health Care Systems, Inc. v. Minnicomputer Technology, Inc., No. 81 C 6546 (N.D. Ill, filed Nov. 20, 1981). Centennial Insurance Co. (Centennial), the plaintiff-appellant on this appeal, is the issuer of a comprehensive general liability insurance policy covering Defendant-appellee MCT.

Centennial brought the action underlying this appeal in an effort to clarify its own obligations under that insurance policy. Specifically, Centennial sought a declaratory judgment that it was under no duty to either defend or indemnify MCT in the action brought by Applied Health. MCT counterclaimed for declarative relief ordering Centennial to defend and indemnify MCT in the Applied Health action.

Both parties moved for summary judgment. The district judge held that the insurance policy at issue obligated Centennial to defend the Applied Health action. Centennial Insurance Co. v. Applied Health Care Systems, Inc. and Minicomputer Technology, Inc., No. 82 C 4108 (N.D. Ill. Dec. 13, 1982). Accordingly, she granted MCT's motion for summary judgment as to that issue.*fn2 Id. We affirm.

I. BACKGROUND

Ultimately, Centennial's duty to defend the Applied Health action hinges on whether any of the allegations contained in Applied Health's complaint state facts even potentially within the coverage of the insurance policy. Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 54 Cal. Rptr. 104, 419 P.2d 168 (1966).*fn3 Thus, an understanding of the Applied Health action is necessary to our consideration of Centennial's duty to defend that action.

From 1975 until 1981, Applied Health provided a computerized data processing service to facilities providing drug-related patient care in the Chicago area. The facilities subscribing to this service used Applied Health's data processing system for storage and retrieval of patient care and billing records.

Pursuant to an oral contract with Applied Health, MCT delivered and installed four controllers in Applied Health's data processing system in April of 1980. Applied Health now alleges that "the controllers were defective in that each of them had a wiring-connection defect that caused them to consistently malfunction through the random loss of customer billing and patient care information that had been stored in the system." Complaint, Applied Health Care Systmes, Inc. v. Minicomputer Technology, Inc., No. 81 C 6546 (N.D. Ill., filed Nov. 20, 1981). Applied Health further alleges that the defective controllers prevented the company from adequately serving its clients and that the ultimate result was the termination of Applied Health's business. Id. These allegations MCT.*fn4

MCT is a California corporation engaged in the manufacture, marketing, and sale of computer hardware and software products. MCT tendered its defense in the Applied Health action to Centennial under the comprehensive general liability policy issued by Centennial to MCT. Centennial disclaimed coverage for the losses allegedly sustained by Applied Health. Following MCT's demand that Centennial defend and indemnify MCT, Centennial brought this action for declaratory relief.

II. ANALYSIS

A. The Relevant Policy Provisions

The policy issued by Centennial was in full force and effect from February 1, 1980 until its cancellation on October 10, 1981. Under that policy, Centennial had both the right and the duty to defend MCT in any action seeking damages on account of property damage. The relevant clause provides that Centennial "shall have the right and duty to defend any suit against [MCT] seeking damages on account of such bodily injury ...


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