Opinion
Case No. 00 C 3088
September 11, 2002
ORDER
Plaintiff Massachusetts Bay Insurance Company ("Massachusetts Bay") issued to defendant La Hispamex Corporation ("La Hispamex") a General Comprehensive Liability insurance policy, number ZDC 542021700, which was effective between September 16, 1997 and September 16, 1998, and which obligated Massachusetts Bay to indemnify La Hispamex for damages because of covered "bodily injury" or "property damage" and to defend La Hispamex against any suit seeking such damages. (Pl.'s Local R.56.1 Statement ¶ 6.) "Property damage" is defined to include both physical injury to tangible property and loss of use of tangible property that is not physically injured. ( Id. ) Coverage extends only to injuries and damages caused by an "occurrence," which means "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." ( Id.) The policy also includes the following relevant provisions:
2. Exclusions
This insurance does not apply to:
. . .
n. Recall of Products, Work or Impaired Property Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdraw, recall, inspection, repair, replacement, adjustment, removal or disposal of:
(1) "Your Product";
(2) "Your Work"; or
(3) "impaired property";
If such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
. . .
SECTION V — DEFINITIONS
. . .
18. "Your product" means:
a. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:
(1) You;
(2) Others trading under your name;
(3) A person or organization whose business assets you have acquired;
b. Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.
"Your product" includes:
a. Warranties or representations made at any time with respect to the fitness, quantity, durability, performance or use of "your product"; and
b. The providing of or failure to provide warnings or instructions.
( Id.)
On February 22, 2000, Ole Mexican Foods, Inc. filed suit against La Hispamex in Georgia state court seeking to recover damages related to the Spring 1998 state-ordered recall of cheese products it had purchased from La Hispamex. Ole Mexican Foods, Inc. v. La Hispamex Food Products, Inc., No. 00-A01586 7 (Ga. Super. Ct. Gwinnett County flied Feb. 2, 2000). The alleged basis for the recall was contamination with Listeria monocytogenes, a bacteria unsafe for human consumption. The complaint alleges breach of contract, breach of warranty, and fraud, with a separate count for punitive damages, each claim on the theory that the cheese was contaminated when sold by La Hispamex.
Massachusetts Bay filed this action seeking a declaration that it has no duty under the policy to defend or indemnify La Hispamex in the Ole Mexican case. No bodily injury is at issue, and La Hispamex concedes that there is no physical injury either. (Pl.'s Local R. 56.1 Statement ¶ 12.) Hence, the only potentially covered damages are "property damage" in the form of loss of use of tangible property that is not physically injured.
A strong argument can be made that none of the damages sought by Ole Mexican were caused by an "accident." This is obviously true with respect to Ole Mexican's intentional fraud claims and almost certainly true as well for all of the breach of contract damages sought. Under Illinois law, which the parties agree controls, an insurance policy limited to property damage from accidents "does not provide coverage for damages resulting from breach of contractual obligations." Indiana Ins. Co. v. Hydra Corp., 615 N.E.2d 70, 73 (Ill.App.Ct. 1993).
In response, La Hispamex argues that Ole Mexican's allegations of negligence under one of its breach of warranty counts and its count for punitive damages indicate that some of the damages sought in these counts may qualify as accidentally caused. The legal relevance of negligence to either of these two counts is a mystery. But even if Ole Mexican may recover some damages on a negligence theory, all such damages would nonetheless fall within exclusion "n." This exclusion exempts all losses and expenses incurred for the loss of use of a product and for its recall where the product was recalled for a known or suspected defect. Ole Mexican seeks no other types of damages. Accordingly, Massachusetts Bay has no obligation under policy number ZDC 542021700 to defend or indemnify La Hispamex in the Georgia case.
La Hispamex argues for the opposite result based on an exclusion relating to its "work." Exclusion "I" provides that the insurance policy generally does not cover property damage arising from La Hispamex's "work" but includes an exception for work performed by a subcontractor. Because La Hispamex bought the cheese from a third party, it argues that the resulting damages may be covered. This argument suffers from two fatal flaws: (1) the damages sought by Ole Mexican relate to La Hispamex's "product," not to its "work"; and, more fundamentally, (2) an exception to an exclusion cannot expand coverage. The cheese and associated warranties plainly qualify as La Hispamex's "product," since that term is defined by the policy to include "any goods . . . sold by" La Hispamex and "warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of `[La Hispamex's] product.'" See supra. In contrast, La Hispamex's "work" means "work or operations performed by" or on behalf of La Hispamex and includes warranties and representations pertaining to La Hispamex's "work." Delivery of the cheese might be described as "work," but Ole Mexican's damages arise from the condition of the cheese itself, not from its delivery. La Hispamex's "work" argument also fails for the more fundamental reason that an exception to an exclusion cannot expand coverage. W. Cas. Sur. Co. v. Brochu, 475 N.E.2d 872, 877-78 (Ill. 1985). As explained above, even assuming that the allegations of negligence could qualify some damages as accidental, exclusion "n" would foreclose coverage. The inapplicability of another exclusion does riot matter.
Massachusetts Bay muddies the water by erroneously substituting the word "product" for "work." (Compare Pl.'s Local R. 56.1 Statement ¶ 6 with Compl. Ex. A, CGL Policy at 13.)