Opinion
Civil No. 02-3696 (DWF/JGL)
July 31, 2003
Alan L. Kildow, Esq., Sonya R. Braunschweig, Esq., and Timothy C. Krsul, Esq., Oppenheimer Wolff Donnelly, Minneapolis, Minnesota, counsel for Plaintiff.
David E. Bland, Esq., Robins Kaplan Miller Ciresi, Minneapolis, Minnesota, counsel for Defendant.
MEMORANDUM OPINION AND ORDER
Introduction
The above-entitled matter is before the undersigned United States District Judge pursuant to Plaintiff Pentair, Inc.'s motion for partial summary judgment and Defendant American Guarantee and Liability Insurance Company's motion for summary judgment. For the reasons set forth below, Plaintiff's motion is denied and Defendant's motion is granted.
Background
This case arises from Plaintiff Pentair, Inc.'s losses that were indirectly caused by an earthquake in Taiwan in September 1999. Pentair seeks reimbursement for its losses from its insurer, Defendant American Guarantee and Liability Insurance Company ("American Guarantee").
Pentair and its subsidiaries manufacture and distribute industrial and consumer products throughout the world. One of Pentair's subsidiaries is Century Manufacturing Company ("Century"). Century purchased "Booster Pac" portable power supply units manufactured in Taiwan by Kosta Machinery Manufacturing Corporation and battery chargers manufactured by Joinery Industrial Company, Ltd. Kosta and Joinery were Century's sole and exclusive suppliers for these products, and the two companies uniquely branded the Booster Pacs and battery chargers for Century. Century distributed these products to retail outlets in the United States.
On September 21, 1999, a large earthquake hit Taiwan. The earthquake damaged an electrical substation that supplied power to Kosta and Joinery, resulting in a power failure at Kosta's and Joinery's manufacturing facilities. As a result of the power failure, Kosta and Joinery were unable to manufacture Booster Pacs and battery chargers for approximately two weeks. The power failure occurred just as Century's retailers were stocking Booster Pacs and battery chargers for the Christmas season.
Because of the two-week delay caused by the power failure, Century was compelled to ship Kosta's and Joinery's products from Taiwan to the United States by airfreight rather than by ocean-going vessels in order to ensure that the products would arrive in time for the Christmas season. The cost for shipping the products by airfreight was $680,205, rather than the $45,474 it would have cost to ship the products by sea. Pentair sought to recover the difference in shipping costs under an all-risk policy issued to Pentair by American Guarantee. Pentair's claim was denied. The terms of the Policy are in dispute.
The Policy defines the "Insured" as "Pentair, Inc. and any affiliated, subsidiary, and associated or allied companies and/or corporations as now exist or may hereafter be constituted or acquired." Thus, both Pentair and its subsidiary Century were insured under the terms of the Policy. The general coverage under the terms of the Policy provides coverage for losses occurring to Pentair's real and personal property located in Taiwan. Policy at ¶ 9. The "perils insured against" by the Policy include "all risk of direct physical loss of or damage to property described herein." Policy at ¶ 11. Under the "Coverage" portion of the Policy, the Policy specifically insures the interest of the Insured in "real and personal property." Policy at ¶ 10(a). In addition, the Policy covers limited losses for business interruption to covered property. Policy at ¶ 10(b, c).
The parties apparently do not dispute that the general coverage of the Policy does not cover the losses incurred as a result of the electrical failure. Nor do the parties dispute that physical damage occurred to the Taiwanese electrical substations, ultimately resulting in Pentair's monetary losses when it was compelled to ship the Booster Pacs and battery chargers by air rather than by sea. However, the Parties dispute whether Pentair's monetary losses are covered by the "Extension of Coverage" portion of the Policy. This portion of the Policy provides:
EXTENSION OF COVERAGE:
This policy, subject to all provisions and without increasing the amount of said policy, also insures against loss resulting from damage to or destruction by the perils insured against, of:
(2) CONTINGENT TIME ELEMENT
property of a supplier of goods and/or services to the Insured, or a receiver of goods and/or services from the Insured, such supplier or receiver to be located within the territory defined in Section 9, but such supplier or receiver shall not be an Insured under this policy
Policy at ¶ 10(h). The Policy uniformly defines "perils insured against" as "all risk of direct physical loss of or damage to property described herein." Further, the Policy covers interests in "real or personal property." Thus, in order to trigger coverage under the "Contingent Time Element" provision of the Policy, Pentair must establish that a "supplier[s] of goods or services [to Pentair or its subsidiaries]" suffered "direct physical loss of or damage" to its "real or personal property."
At issue in these cross-motions is American Guarantee's assertion that because the electrical substations are not "suppliers of goods or services" to Pentair or Century as contemplated by the Policy, Pentair is not entitled to coverage for its losses indirectly incurred as a result of the physical damage to the electrical substations.
Discussion
1. Standard of Review
Summary judgment is proper if there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The court must view the evidence and the inferences that may be reasonably drawn from the evidence in the light most favorable to the nonmoving party. Enterprise Bank v. Magna Bank of Missouri, 92 F.3d 743, 747 (8th Cir. 1996). However, as the Supreme Court has stated, "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy, and inexpensive determination of every action.'" Fed.R.Civ.P. 1; Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986).
The moving party bears the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Enterprise Bank, 92 F.3d at 747. The nonmoving party must demonstrate the existence of specific facts in the record which create a genuine issue for trial. Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly supported motion for summary judgment may not rest upon mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986); Krenik, 47 F.3d at 957.
2. Coverage under the Policy
The interpretation of a contract is a legal question for the court to decide. White Consol. Indus., Inc. v. McGill Mfg Co., Inc., 165 F.3d 1185, 1190 (8th Cir. 1999). Here, on the parties' cross-motions for summary judgment, the Court is asked to decide whether the "contingent time element" provision of the Policy covers the losses suffered by Pentair when Pentair was required to ship the Booster Pacs and battery chargers by airfreight rather than by sea. The parties agree that this matter is appropriately analyzed under Minnesota law.
Generally, in a dispute regarding insurance coverage, the burden rests with the insured to prove a prima facie case of coverage. SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 311 (Minn. 1995) (citing Boedigheimer v. Taylor, 178 N.W.2d 610, 614 (Minn. 1970)). Minnesota courts have held that with all-risk policies like that at issue here, however, after the insured demonstrates that a fortuitous loss occurred, the burden shifts to the insurer to demonstrate that an express exclusion precludes coverage. See, e.g., Pillsbury Co. v. Underwriters at Lloyd's, London, 705 F. Supp. 1396, 1399 (D.Minn. 1989) (Murphy, J.).
American Guarantee asserts that the plain language of the Policy does not provide coverage for the loss suffered by Pentair because of the physical damage to the electrical substations that supplied power to Century's suppliers, Kosta and Joinery. Specifically, American Guarantee asserts that the damage to the electrical substation was not a "peril insured against" under the "Contingent Time Element" provision of the Policy, as it did not involve "direct physical loss or damage" to a "supplier of goods and/or services to the Insured." Rather, American Guarantee asserts that this loss resulted from direct physical damage to a supplier of a supplier of the Insured, and thus is not entitled to coverage.
Pentair, on the other hand, asserts that the Court should not look to whether the electrical substations were direct or indirect suppliers to Pentair and Century, as the Policy language contemplates, but rather to whether or not Pentair suffered losses as a result of the power failure. Pentair asserts that under the all-risk policy, so long as Pentair demonstrates that it suffered a fortuitous loss as a result of the earthquake, the burden shifts to American Guarantee to prove that the losses are not covered. In support of this argument, Pentair sets forth several cases where courts have addressed the policy language of all-risk insurance policies that were similar, but not identical, to the one at issue here.
First, Pentair relies upon Pillsbury Co. v. Underwriters at Lloyd's, London, 705 F. Supp. 1396 (D.Minn. 1989) (Murphy, J.), which involved a claim to establish coverage under an all-risk policy for cans of cream-style corn that were destroyed as a result of underprocessing. The policy provided: "[T]his policy insures all real and/or personal property of the Insured of every kind and description against ALL RISKS OF PHYSICAL LOSS OR DAMAGE OCCURRING DURING THE PERIOD OF THIS POLICY. . . ." 705 F. Supp. 1396, 1398-99 (emphasis in original). In construing this policy language, the court invoked the rule that an insured under such an all-risk policy first faces a limited burden to demonstrate that a fortuitous loss occurred, at which point the burden shifts to the insurer to demonstrate that an express exception to coverage applies. Id. at 1399. The court found that the defendant insurance company had not provided evidence to support its contention that no loss had occurred, and the court thus granted the insured's motion for summary judgment on the coverage issue. Pentair also cites Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 2002 WL 31185884 (D.Minn. 2002) (Tunheim, J.), in which the court reviewed policy language that provided coverage for damage to the property of "any supplier of goods or services. . . ." 2002 WL 31185884 at *3. The court construed this language to cover losses to Archer Daniels Midland resulting from the damage to the property of any supplier, direct or indirect. Id. at *4.
Finally, Pentair relies upon Archer-Daniels-Midland Co. v. Phoenix Assurance Co. of N.Y., 936 F. Supp. 534 (S.D.Ill. 1996), where the court reviewed whether an all-risk policy's language extended to cover losses suffered as a result of flooding that disrupted rail and road transportation of the insured's corn. The policy language at issue insured against losses "caused by damage to or destruction of real or personal property . . . of any supplier of goods or services which results in the inability of such supplier to supply an insured locations [sic]." Id. at 540-41.
The court held that the phrase "'any supplier of goods or services' denote[d] an unrestricted group of those who furnish what is needed or desired." Id. at 541. Thus, the court found that the policy coverage was sufficient to extend to losses suffered by suppliers who were not in direct contractual privity with the insured. Id. at 543-44.
On the basis of these cases, Pentair asserts that it is entitled to coverage. The Court disagrees. The courts in the cases cited by Pentair appropriately construed the very broad language of the all-risk policies at issue and allowed the insured's burden to be met by proving that a fortuitous loss had occurred. However, implicit in these courts' decisions is a finding that the insured asserted a loss that involved covered damage to covered property at a covered location. If the policy language is very broad, as it was in the cases cited by Pentair, the court can conclude that all risks of loss were indeed contemplated by the policy; the court then looks to whether any losses were specifically excluded by the policy. However, if the policy language is narrow and explicitly limits the policy's coverage, as it does here, the court must carefully look to whether the insured has asserted a loss that is covered by the policy. To hold otherwise would render meaningless the explicit limitations on the policy coverage.
Here, the Court finds that the Policy language specifically limits coverage to the risk of "direct physical loss or damage" to "property of a supplier of goods and/or services to the Insured." Pentair's loss must fall within the limitations of this Policy language in order for Pentair to obtain coverage.
Pentair's loss resulted from physical loss or damage that occurred at the electrical substations that supplied electricity to Kosta and Joinery. The electrical substations were not "suppliers of goods and/or services to the Insured" as explicitly required by the terms of the Policy. Had the direct physical loss or damage occurred to Kosta or Joinery, the Policy clearly would have provided coverage, because Kosta and Joinery "supplie[d] goods and/or services to the Insured." However, under the plain language of the Policy, the physical damage that occurred to the electrical substations that, in turn, supplied electricity to Pentair's suppliers is too far removed to entitle Pentair to coverage. In so holding, the Court finds that the cases cited by Pentair recognize that if the all-risk policy language is sufficient to limit coverage to a certain class of suppliers, coverage may be limited. See, e.g., Archer-Daniels-Midland Co., 936 F. Supp. at 543-44; Archer Daniels Midland Co., 2002 WL 31185884 at *3. Here, the Policy language clearly limits the coverage to losses resulting from "direct physical loss or damage" to the "property of supplier of goods and/or services to the Insured." Direct physical loss did not occur to the Insured's suppliers, Kosta and Joinery. Thus, Pentair has not demonstrated that it suffered a loss that entitled it to coverage under the unambiguous terms of the Policy. American Guarantee's decision to deny coverage was appropriate.
Pentair asserts that "direct physical loss" can exist without actual destruction or structural damage to property so long as the insured property is injured in some way. In support of this proposition, Pentair cites Sentinel Management Co. v. New Hampshire Ins. Co., 563 N.W.2d 296 (Minn.Ct.App. 1997) and General Mills, Inc. v. Gold Metal Ins. Co., 622 N.W.2d 147 (Minn.Ct.App. 2001). Pentair asserts that under these cases, the physical damage element of an all-risk policy is satisfied so long as the function of the insured property has been impaired. The Court finds that these cases are not applicable. First, the policy language at issue in these cases was much broader than the Policy here. Moreover, these cases involved a physical contaminant or pesticide adulterant present on the insured property. Here, only the electrical substation suffered direct physical loss or damage. The only loss to the supplier was its two-week loss of use. Pentair has cited no authority for the proposition that a mere loss of use constitutes direct physical loss.
For the reasons stated, IT IS HEREBY ORDERED:
1. Plaintiff's Motion for Partial Summary Judgment (Doc. No. 16) is DENIED.
2. Defendant's Motion for Summary Judgment (Doc. No. 13) is GRANTED.
LET JUDGMENT BE ENTERED ACCORDINGLY.