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Fireman's Fund Insurance Co. v. Amstek Metal

August 27, 2008

FIREMAN'S FUND INSURANCE COMPANY PLAINTIFF,
v.
AMSTEK METAL, LLC, AND P.J. WALLBANK SPRINGS, INC., DEFENDANTS.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Defendant Amstek Metal, LLC ("Amstek") buys and sells wire. P.J. Wallbank Springs, Inc. ("Wallbank") bought wire from Amstek, made springs from the wire, and incorporated those springs into transmission spring packs for its customers, including General Motors ("GM"). The springs began to break, however, and GM returned the transmission spring packs to Wallbank. Wallbank claims the spring breakage resulted from Amstek's providing defective wire, and filed a lawsuit against Amstek for breach of contract and warranties (the "underlying litigation"). In the case before this court, Plaintiff Fireman's Fund Insurance Company ("FFIC") seeks a declaratory judgment that it has no duty to defend or indemnify Amstek, its insured, in the underlying litigation. Both parties have moved for summary judgment on the issue of duty to defend. For the reasons explained below, the court grants Amstek's motion, denies FFIC's motion, and stays Amstek's claim for indemnification pending resolution of the underlying dispute between Amstek and Wallbank.

FACTUAL BACKGROUND

The following facts are taken from the parties' Local Rule 56.1 Statements: FFIC's Statement of Material Facts ("FFIC 56.1"); Amstek's Statement of Undisputed Material Facts ("Amstek 56.1"); and FFIC's Response to Amstek 56.1 ("FFIC 56.1 Resp."). Amstek did not file a Rule 56.1(b)(3)(A) statement in opposition to the FFIC 56.1. Thus, Amstek has admitted any facts in the FFIC 56.1 that are not specifically refuted in its own Rule 56.1 Statement. N.D. Ill. R. 56.1(b)(3)(C).

Before setting forth the facts, the court must resolve a preliminary dispute concerning the scope of the record. FFIC argues that certain exhibits Amstek filed in support of its Motion for Summary Judgment should be stricken because they fall outside the four corners of the complaint filed in the underlying lawsuit, P.J. Wallbank Springs, Inc. v. Amstek Metal, LLC, Case No. 06002864-CK(Mich. Cir. Ct.) (the "Wallbank Complaint"). Under Illinois law, "because the duty to defend is gauged by the allegations of the complaint, what the facts subsequently show is immaterial." Carr v. Vogelzang (In re Country Mut. Ins. Co.), __ Ill.2d __, 889 N.E.2d 209, 209 (2007). According to FFIC, the only exception to this rule is that true but unpleaded facts known to the insurer may be admissible to assess the insurer's duty to defend. (FFIC Resp. to Amstek Mot. at 5.) As this court understands the "true but unpleaded facts" exception, however, it is not so narrow.

The First District Illinois Appellate Court has recently addressed the "true but unpleaded facts" exception in some depth. Am. Econ. Ins. Co. v. Holabird & Root, __ Ill. App. 3d __, 886 N.E.2d 1166 (1st Dist. 2008). The court concluded that, when determining an insured's duty to defend, the trial court may sometimes consider evidence outside the underlying complaint. Id. at 1172; see also Fremont Compensation Ins. Co. v. Ace-Chicago Great Dane Corp., 304 Ill. App. 3d 734, 742, 710 N.E.2d 132, 138 (1st Dist. 1999) (rejecting the notion that "a court, in a declaratory judgment proceeding where an insurer's duty to defend is at issue, may never look beyond the allegations of the underlying complaint"); West Bend Mut. Ins. Co. v. Sundance Homes, Inc., 238 Ill. App. 3d 335, 338, 606 N.E.2d 326, 328 (1st Dist. 1992) ("though the action at bar is for declaratory judgment, the court 'need not wear judicial blinders' and may look beyond the complaint at other evidence appropriate to a motion for summary judgment (for example, the statements of [underlying plaintiff's] co-workers as well as the third-party complaint against [insured]") (internal quotation marks and citations omitted). In Holabird, the underlying plaintiff, claiming to have been injured by exposure to fluorescent lighting, filed suit against three defendants: DePaul University, L&L Engineers, and Holabird. 886 N.E.2d 1166 at 1168. Holabird tendered its defense to American Economy, who was the insurer for the electrical subcontractor that Holabird hired when working on the building. Id. In the resulting coverage action, the trial court granted Holabird summary judgment on the duty to defend issue. Id. American Economy appealed, arguing that the underlying complaint made no mention of its insured, and that the trial court improperly relied on a third-party complaint filed by DePaul when making its determination; it was that third-party complaint that named American Economy's insured as the installer of the fluorescent lighting in question. Id. at 1172. After a thorough consideration of Illinois law regarding the "true but unpleaded facts" doctrine, the First District concluded "that consideration of a third-party complaint in determining a duty to defend is in line with the general rule that a trial court may consider evidence beyond the underlying complaint if in doing so the trial court does not determine an issue critical to the underlying action." Id. at 1178. Ultimately, the court found that American Economy had a duty to defend, based on its consideration of the relevant insurance policy, the underlying complaint, and the third-party complaint. Id.*fn1

The Holabird court relied on a number of cases in reaching this decision, one of which is particularly relevant here. In Ace-Chicago, the First District approved consideration of deposition testimony in a coverage dispute. 304 Ill. App. 3d at 743-4, 710 N.E.2d at 139. There, the underlying plaintiff filed suit for injuries he suffered from falling off a ladder; four years later, he amended his complaint to add a negligent spoliation of evidence claim against Ace-Chicago, the insured, related to the ladder in question. Id. at 736, 710 N.E.2d at 134-5. Ace tendered defense to its insurers, one of whom (Potomac) moved to dismiss. Id. at 737, 710 N.E.2d at 135. In its motion, Potomac argued that Ace had failed to demonstrate that the spoliation was due to an occurrence within the policy period; according to Potomac, deposition testimony taken in the underlying lawsuit established that the ladder was not destroyed until the policy period had expired. Id. Based on the deposition testimony, the court found that the spoliation could not have occurred within the policy period and dismissed the coverage claim. Id. at 744, 710 N.E.2d at 139. The court deemed it proper to consider the deposition testimony because determining whether coverage exists for the spoliation claim did not resolve any dispute in the underlying action. Id. at 743, 710 N.E.2d at 139.

Thus, this court will consider true but unpleaded facts--including those contained in a declaration from Melvyn Wallbank regarding the Amstek wire and Wallbank springs manufactured from it--to the extent it is able to do so without "decid[ing] an ultimate fact of the underlying action." Holabird, 886 N.E.2d at 1174; Ace-Chicago, 304 Ill. App. 3d at 742; 710 N.E.2d at 138.

I. Parties

FFIC is a California insurance company with its principal place of business in California. (FFIC 56.1 ¶ 1.) Amstek is an Illinois limited liability company, with its principal place of business in Illinois. (Id. ¶ 2.) No member of Amstek is a California citizen. (2d Am. Compl. ¶ 3; Ans. ¶ 3.) Wallbank is a Michigan corporation with its principal place of business in Michigan. (FFIC 56.1 ¶ 4.) Because Wallbank seeks damages from Amstek in excess of $700,000 in the underlying litigation, this court has diversity jurisdiction over the parties' coverage dispute. (Id. ¶ 5.)

II. The Underlying Dispute

Amstek is in the business of buying and selling wire. (Amstek 56.1 ¶ 8.) According to Wallbank's lawsuit, Wallbank and Amstek executed a Blanket Purchase Order in March 2005. (Wallbank Compl. ¶ 5, Ex. A to FFIC 56.1.) Pursuant to that agreement, in June 2005, Amstek supplied Wallbank with steel wire to be used in spring assemblies. (Amstek 56.1 ¶ 9; Wallbank Compl. ¶ 12.) Melvyn Wallbank, Wallbank's President and CEO, explains that Wallbank manufactures spring packs (a combination of springs with brackets affixed on either end) that it sells to companies such as GM and Ford for use in automatic transmission clutches. (Decl. of Melvyn Wallbank dated 2/4/08 ("Wallbank Decl.") ¶¶ 1-2, 4, Ex. B to Amstek Mem.) Mr. Wallbank attests that, to create springs, Wallbank "cold-works" the wire it purchases.*fn2 (Id. ¶ 4.) Then, according to Mr. Wallbank, Wallbank uses electrical current to relieve the stress in the springs. (Id.) Finally, Wallbank assembles these springs into transmission spring packs for sale. (Id.) FFIC urges the court not to consider Mr. Wallbank's Declaration, but it acknowledges that Wallbank manufactured and sold "spring assemblies" using Amstek's wire. (FFIC 56.1 Resp. ¶ 10.) According to Mr. Wallbank, in June 2006, a GM division discovered that some of the springs in Wallbank's transmission spring packs were breaking, rejected those spring packs, and returned them to Wallbank. (Wallbank Decl. ¶¶ 6-7.) Later that month, Wallbank learned it was that the wire Amstek provided that caused the springs within the spring assembly packs to break. (Wallbank Compl. ¶ 13.) Wallbank notified Amstek of the spring breakage in July 2006 and directed Amstek to stop shipping wire. (Id. ¶ 14.)

On November 15, 2006, Wallbank filed suit against Amstek in Michigan state court, alleging breach of contract, breach of express and implied warranties, rejection of goods, and revocation of acceptance. (Wallbank Compl.) More specifically, Wallbank alleges that the Amstek wire did not function as required by the purchase agreement, in that it broke frequently when used in springs. (Id. ¶ 24.) Wallbank seeks equitable relief and more than $700,000 in damages, including losses attributable to GM's rejection of Wallbank's spring assemblies, freight charges, scrapped parts that were manufactured but not delivered to GM, laboratory fees, and sorting costs. (Id. at 7, ¶ 38.) In other words, Wallbank asserts that it suffered a variety of damages because it was forced to discard broken spring packs, manufacture new ones, and incur related expenses. The Michigan state court lawsuit remains ongoing. (Amstek 56.1 ¶ 14.)

III. Insurance Coverage Dispute

This action involves only insurance coverage claims. FFIC issued a Commercial General Liability ("CGL") insurance policy, No. S64 MZX 80844847 (the "Policy"), to Amstek, which provided coverage for the period from July 1, 2005 through July 1, 2006. (FFIC 56.1 ¶ 16; Policy, Ex. B to FFIC 56.1.) The parties do not make clear when Amstek submitted a claim for coverage under the Policy, but FFIC's claims department initially concluded: "IT APPEARS BASED ON THE COMPLAINT THAT THE DAMAGE IS A RESULT OF THE LOSS OF USE OF THESE SPRINGS IN THE TRANSMISSIONS. . .THE COSTS ASSOCIATED WITH REPLACING THE SPRINGS, ETC. THIS WOULD FIT THE DEFINITION OF PROPERTY DAMAGE AS IT IS LOSS OF USE OF TANGIBLE PROPERTY THAT IS NOT PHYSICALLY INJURED." (Notes dated 11/16/06, Ex. G to Def.'s Mot. (emphasis in original).) The notes further conclude that "WE HAVE PROPERTY DAMAGE WHICH WOULD BRING US TO THE EXCLUSIONS UNDER THE POLICY. . ." (Id. (emphasis in original).)*fn3 The document then lists two potential exclusions (exclusion k and exclusion m) but appears to take no position on their applicability. (Id.) Despite this initial conclusion, on some unspecified date FFIC disclaimed any duty to defend or indemnify Amstek in the underlying lawsuit (Amstek 56.1 ¶ 16), contending that there has been no property damage and that exclusions k, m, or n obviate its duty to defend.

In the Policy, FFIC committed to "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." (Policy at Section I, § 1a (emphasis in original for all quoted Policy terms).) The Policy affords FFIC the right and duty to defend Amstek against any suit seeking such damages, but explicitly limits that right and duty to claims to which the insurance does apply. (Id.) No party contends that the Wallbank litigation triggers the bodily injury coverage. The Policy defines property damage as follows:

Property damage means:

a. Physical injury to tangible property, including all resulting loss of use of that property . . . ; or

b. Loss of use of tangible property that is not physically injured. . . .

(Id. at Section V, § 17.) FFIC argues that, under Illinois law, it has no duty to defend Amstek in the underlying lawsuit, because Wallbank seeks damages accrued from the repair and replacement of a defective product. In addition, the Policy only covers property damage that is "caused by an occurrence that takes place in the coverage territory," that "occurs during the policy period," and that was not known to have occurred in whole or in part prior to the policy period. (Id. at Section I, § 1b.) An occurrence is defined as "an accident, including continuous or repeated exposure to substantially the same ...


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