Defense Digest

In the recent case of Plasticert, Inc. v. Westfield Insurance Company, 2007 Pa. Super. 124 (May 1, 2007), the Superior Court of Pennsylvania upheld the validity of a common "business risk" exclusion in a commercial general liability insurance policy and applied the exclusion to preclude coverage where the only property damage was to the insured's own product.

In Plasticert, after a lengthy period of testing and tooling production, Plasticert began making thermoplastic wheels for use in Westfalia's new gravity flow product line on April 6, 2000. As part of the agreement with Plasticert, Westfalia required Plasticert to use Stanuloy ST-150, or an equivalent material, in manufacturing the wheels. Westfalia purchased Plasticert's wheels until the end of 2002.

Beginning in March of 2003, Westfalia received complaints from several gravity flow purchasers who claimed that the wheels were breaking, cracking, and shattering. Westfalia conducted destructive testing on field samples of the wheels which confirmed the complaints. During this testing period, Westfalia noticed that the Plasticert wheel containers wore labels reading "Ashley Polymers Ashlene R6714." Westfalia replaced several of Plasticert's thermoplastic wheels with wheels obtained from undisclosed sources. Westfalia's counsel subsequently informed Plasticert that his client suffered damages due to Plasticert's "non-conforming wheels."

Westfield insured Plasticert via a commercial general liability ("CGL") policy and a commercial umbrella ("umbrella") policy. Westfield denied coverage to Plasticert for a suit filed against it by Westfalia. Plasticert then initiated a declaratory judgment action.

The trial court granted Westfield's motion for judgment on the pleadings and denied a similar motion from Plasticert. Plasticert filed a timely notice of appeal.

For purposes of the appeal, the court assumed without deciding that the facts alleged in the underlying lawsuit constituted an "occurrence" that resulted in "property damage." It first turned its attention to exclusion "k," commonly known as the "business risk" exclusion, which the court concluded was dispositive.

Exclusion "k" in the CGL policy (the umbrella policy contained a substantially similar provision) provided as follows:

k. Damage To Your Product

"Property damage" to "your product" arising out of it or any part of it.

In discussing the exclusion, the Plasticert Court noted that the Pennsylvania Superior Court addressed similar policy language in Ryan Homes, Inc. v. The Home Indem. Co., 436 Pa. Super. 342, 647 A.2d 939 (1994), appeal denied, 540 Pa. 621, 657 A.2d 491 (1995). In that case, Ryan Homes sought coverage under its various CGL policies for the expense of replacing roofs on a number of homes due to incorporation of defective products from one of Ryan Homes' subcontractors. The polices each contained an exclusion barring coverage for damage to the insured's product.

After a review of case law from Pennsylvania and other jurisdictions, the Ryan Homes Court concluded that CGL policies were designed to provide coverage where a defect in the insured's work caused personal injury or damage to the property of a third party:

Regardless of the underlying cause of action against the insured, [the exclusions] eliminate coverage for property damage caused by the lack of quality or performance of the insured's products and for any repair or replacement of the faulty work performed by or on behalf of the insured. [The exclusions] unquestionably exclude coverage for the business risk incurred by the insured. As observed by the Supreme Court of Indiana [:]

What is covered by the policy is defective workmanship which causes personal injury or property damage not excluded under some provision of the policy. So if the insured's breach of an implied warranty results in damage to property other than the insured's work or product which is excluded by exceptions, the policy would provide coverage. To hold otherwise would effectively convert the policy into a performance bond or guarantee of contractual performance and result in coverage for the repair or replacement of the insured's own faulty workmanship.

The court concluded in Ryan Homes that the insured was not entitled to coverage for the cost of repairing and replacing its customers' roofs. This was so even though a subcontractor apparently provided the defective component. A contrary holding would place the insurer "on the hook" for the general contractor's failure to ensure successful performance of the contract.

In the Plasticert case, the underlying complaint alleged simply that Plasticert's wheels failed to perform to specifications. That is, they consistently shattered under normal use. The complaint did not allege that the failure of the wheels resulted in personal injury or damage to any property other than the wheels themselves. As was the case in Ryan Homes, the business risk exclusion barred coverage for Plasticert's failure to deliver wheels that conformed to contract specifications. That Plasticert obtained the apparently defective component from another company did not change the result. Plasticert had a contractual obligation to deliver wheels that conformed to Westfalia's specifications. Per Ryan Homes, Plasticert could not turn to Westfield for coverage of Plasticert's failure to ensure that a component part of its wheels met Westfalia's terms.

Since the business risk exclusion clearly precluded coverage of the underlying lawsuit, the trial court's order granting judgment on the pleadings in favor of Westfield was affirmed.

*Tom is an associate in our Scranton, Pennsylvania, office. He can be reached at (570) 496-4619 or tmwitowski@mdwcg.com.