Opinion
Case No. 5:00-cv-149-Oc-10GRJ
February 8, 2002
ORDER ON MOTIONS FOR SUMMARY JUDGMENT
This is an action brought by the Plaintiff insurance companies against their insured, Cutrale Citrus Juices USA, Inc., seeking a declaratory judgment concerning the proper interpretation and application of certain insurance policies issued by the Plaintiffs to Cutrale.
Jurisdiction is predicated upon diversity of citizenship, 28 U.S.C. § 1332, and the Declaratory Judgments Act, 28 U.S.C. § 2201. The parties agree that Florida law supplies the rule of decision.
All parties have filed motions or cross motions for summary judgment pursuant to Federal Rule of Civil Procedure 56, and a hearing was held on January 23, 2002. The Court has determined that the motions should be granted in part and denied in part.
Zurich's motion for partial summary judgment (Doc. 16); Cutrale's cross motion for partial summary judgment (Doc. 22); Northern's motion for summary judgment (Doc. 58); and Cutrale's motion for summary judgment (Doc. 46).
Facts
Cutrale is a Florida corporation that processes, packages and sells vegetable and fruit juices. It has experienced two distinct losses for which it has made claims against the Plaintiffs under the subject insurance policies thereby giving rise to this litigation.
The 1998 claim. In May of 1998, Cutrale discovered that trace amounts of food grade propylene glycol refrigerant had leaked into its not-from-concentrate orange juice during production at its Leesburg, Florida, facility. The leak was determined to be the result of a failed stainless steel pipe within the plant's heat exchange pasteurization equipment. Because of this failure Cutrale incurred costs and expenses attributable to replacement of the defective equipment, the destruction of approximately 10,000 gallons of affected juice, and the reprocessing of an additional 138,000 gallons of juice produced prior to discovery of the leak.
The 1999 claim. Prior to discovery of the leak, Cutrale shipped to one of its customers, Tropicana Products, Inc., 250,000 gallons of adulterated juice, a substantial portion of which Tropicana had mixed with other juice in 1999 before it detected the adulteration. Cutrale has paid $2.4 million to Tropicana for a portion of the product that Tropicana returned, and has agreed to settle the balance of Tropicana's claim of damages for $4.4 million.
It appears that the presence of trace quantities of propylene glycol does not render orange jurice unfit for human consumption; it does affect, however, the labeling that must be applied to the product in such circumstances, and the term "adulterated" is used in that limited sense.
The Insurance Policies
The 1998 claim. Zurich issued two insurance policies to Cutrale under which Cutrale has made claims for its costs and expenses in 1998 due to the equipment failure and resulting leak. One policy was a "Commercial Package" insurance policy and the other was a "Boiler and Machinery" policy. Both provided insurance during the period October 4, 1997 to October 4, 1998. There appears to be no dispute that the kinds of losses claimed by Cutrale in its 1998 claim are within the coverages provided by those policies. Zurich denies liability, however, because it did not receive "prompt notice" of the claim from Cutrale, or notice "as soon as practicable," as variously required by the terms of both policies. The facts supporting the claim became known to Cutrale in May, 1998, but no notice was given to Zurich until August, 1999, some fifteen months later.
Cutrale effectively admits, as it must, that notice of its claim was not timely as required by the governing provisions of the policies. It relies, however, upon Tiedtke v. Fidelity Casualty Co., 222 So.2d 206 (Fla. 1969) establishing the law in Florida that late notice of an insurance claim in violation of a policy obligation of the insured does not necessarily defeat the claim. Rather, the late notice raises a rebuttable presumption of prejudice to the insurer that the insured can overcome if it can demonstrate that the insurer was not in fact prejudiced by the delay. And, here, Cutrale has offered evidence tending to show that Zurich had sufficient opportunity to investigate the 1998 claim and suffered no prejudice in fact despite the late notice. Nevertheless, on that point, whether Cutrale can overcome the presumption favoring Zurich presents a fact intensive issue not suitable for resolution in deciding a motion for summary judgment.
To the extent Zurich has sought summary judgment on the issue of late notice or the untimeliness of the claim (Doc. 16), that motion will be Denied. Cutrale can overcome the late notice if it can prove a lack of prejudice to Zurich, and an issue of fact exists concerning that question. Cutrale's cross motion for summary judgment based upon Florida Statute 627.426 (Doc. 22) will also be Denied. The 1999 Claim. Northern also issued two insurance policies to Cutrale under which Cutrale has made demand for the amounts it has paid to Tropicana in settlement of Tropicana's claim against Cutrale. Both policies provided coverage for the period October, 1998 to October, 1999. One is a general liability "Policy For Manufacturers," and the other is an umbrella policy.
The statute provides that in some cases an insurer must give notice of a "coverage defense" within thirty days after discovery of the defense. Cutrale had claimed that Zurich failed to raise the late notice defense within thirty days; but, at the hearing on the motion, Cutrale conceded that the statute is not applicable in this instance. See authorities cited by Zurich in its response (Doc. 28) to Cutrale's motion (Doc. 22).
The two policies will be treated as one for purposes of this order because the arguments advanced by the parties are not dependent upon any difference between the policies' governing provisions.
Northern disputes liability under these policies on several grounds: (1) that general liability insurance does not afford coverage to an insured for its contractual as distinguished from tort liability; (2) that there was no covered "property damage;" (3) that coverage is vitiated by the "no action" and "voluntary payments" clauses in the policies; and (4) that coverage is obviated by "Exclusion M."
1. Tort or Contractual Liability. Northern first contends that Tropicana's claim against Cutrale was based entirely upon the contract between those parties governing the quality of the orange juice to be supplied by Cutrale to Tropicana, and that the general liability policies issued by Northern simply do not cover such claims sounding in contract rather than tort law. In support of this proposition Northern cites several Florida decisions for the proposition that "liability insurance covers bodily injury or property damage caused by the product only and does not encompass coverage for replacing or repairing defective workmanship."
Aetna and Casualty Ins. Co. v. Deluxe Systems. Inc., 711 So.2d 1293 (Fla. 4th DCA 1998); Commercial Union Ins. Co. v. R. H. Barto Co., 440 So.2d 383 (Fla. 4th DCA 1983); Centex Homes Corp. v. Prestressed Systems, Inc., 444 So.2d 66 (Fla. 3d DCA 1984).
Centex Homes Corp., 444 So.2d at 68. See also, Redevelopment Authority of Cambria County v. International Ins. Co., 685 A.2d 374 (Pa.Super. 1996); WDC Venture v. Hartford Accident and Indemnity Co., 938 F. Supp. 671 (D.Hawaii 1996); and Hartford Accident and Indemnity Co. v. A. P. Reale Sons. Inc., 644 N.Y.S.2d 442 (App.Div. 1996), in which statements are made to the effect that liability insurance generally protects against claims sounding in tort, not for breach of contract.
In all but one of the decisions cited by Northern, however, there was no claim of physical damage to the property of a third party, and that is a key distinction. In general liability policies, as in this case, coverage extends to "occurrences" which "means an accident" resulting in "property damage" which means "physical injury to tangible property." Thus, where there is no physical damage to tangible property and the claim being made against the insured arises out of a contractual relationship between the insured and the claimant, the insured's general liability policy affords no coverage.
The one decision cited by Northern in which the actions of the insured had caused physical damage to tangible property that was held not to be covered by the insured's general liability policy is Unigard Security Ins. Co. v. Murphy Oil USA Inc., 962 S.W.2d 735 (Ark. 1998). In that case the insured, Murphy Oil, a lessee of certain real property, had caused damage to the land by allowing spillage of petroleum products on the ground during the term of the lease. The third party lessor sued Murphy Oil on separate grounds of negligence (tort) and breach of the lease (contract), but the negligence claim was dismissed as a matter of law under the statute of limitations and the jury verdict against Murphy Oil was predicated entirely upon the breach of lease or breach of contract claim. Thus, when Murphy Oil then sought indemnification from its general liability insurer, recovery was denied because the Arkansas court found that the indemnity being sought related exclusively to damages paid for breach of the lease and not the tortious physical injury to the property.
In this instance, by contrast, Cutrale emphasizes that Tropicana's claim against it involved the assertion that Cutrale's adulterated product caused physical damage to Tropicana's juice when the two were mixed or blended, and that such physical property damage is within the coverage of the policy whether Tropicana's claim against Cutrale for that physical damage sounds in tort or in contract or in both. A case on point presenting indistinguishable facts is Chubb Insurance Company of New Jerse v. Hartford Fire and Insurance Company, 1999 WL 760206 (S.D.N.Y. 1999)affirmed, 229 F.3d 1135 (2d Cir. 2000).
I conclude, therefore, that the adulteration of Cutrale's juice, which it sold to Tropicana, was an "occurrence" which "means an accident," and that such accidental occurrence resulted in "property damage" which means "physical injury to tangible property" when, and to the extent that, the adulterated juice was blended by Tropicana in the regular course of business with Tropicana's other juice products. The Plaintiff's motion for summary judgment on this issue, urging a contrary result, will be Denied
The Court's resolution of this coverage issue against the Plaintiffs does not mean that all of the sums being sought by Cutrale with respect to the Tropicana claim are necessarily recoverable. That sub-issue has not been addressed by the pending motions.
2. Property Damage. Northern also contends that the mixture of Cutrale's adulterated juice with Tropicana's juice did not cause "physical damage" to the latter; it merely gave rise to what Northern describes as a "labeling or branding problem" (Doc. 67, page 8) which, at most, resulted in a claim for "economic losses [that] do not constitute property damage." (Id. at 11). No persuasive authority is cited in support of this proposition and I find it unconvincing. Fruit juice is tangible property, and the accidental introduction of an adulterant is a physical event that causes injury or damage just as surely as the damage resulting from the collision of two automobiles. Further, the fact that the adulteration does not make the resulting blend totally unfit for human consumption (so that the blended juice might still be marketed under different labeling), does not alter the conclusion that damage has occurred. A battered automobile may still be usable — and thus marketable — but at a lower value or price, the difference being the measure of damages chargeable to the party who caused the loss.
See Eljer Manufacturing. Inc. v. Liberty Mutual Ins. Co., 972 F.2d 805, 814 (7th Cir. 1992) (". . . the incorporation of a defective product into another product inflicts physical injury in the relevant sense on the latter at the moment of incorporation . . ."), andGoodyear Rubber Sup. Co. v. Great American Ins. Co., 471 F.2d 1343, 1344 (9th Cir. 1973) (". . . when one product is integrated into a larger entity and the product proves defective, the damage is considered as damage to the entity to the extent that the market value of the entity is reduced by an amount in excess of the value of the defective product.")
To the extent that Northern seeks summary judgment on the ground that there was no "physical damage" to the tangible property of a third party in the circumstances of this case, the motion will be Denied.
3. The "no action" and "voluntary payment" clauses. The Northern policies provide that:
No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense . . . without our consent.
* * * *
A person or organization may sue us to recover on an agreed settlement or on a final judgment against an insured obtained after an actual trial . . . An agreed settlement means a settlement and release of liability signed by us, the insured and the claimant or the claimant's legal representative.
Northern invokes these clauses and argues that it is relieved from liability under the policies because there was no lawsuit or legal action by Tropicana against Cutrale which Northern refused to defend, and no settlement to which it consented. The decisions cited in support of this argument, however, are easily distinguishable. For example, in American Reliance Ins. Co. v. Perez, 712 So.2d 1212 (Fla. 3d DCA 1998), a pending action against the insured was being defended by the insurer when the insured entered into a collusive agreement with the claimant stipulating to liability and agreeing to a $200,000 judgment subject to a covenant by the claimant not to execute against the insured and to seek, instead, recovery exclusively from the insurer. Similarly, in First American Title Ins. Co. v. National Union Fire Ins. Co., 695 So.2d 475 (Fla. 3d DCA 1997) and in GAB Bus. Serv. Inc. v. Syndicate, 809 F.2d 755 (11th Cir. 1987), the insured settled a claim without notice to the insurer. Here, by contrast, there is no suggestion of lack of notice by Cutrale to Northern relating to Tropicana's claims, and no suggestion of collusion between Cutrale and Tropicana in settling those claims to Northern's prejudice. Cutrale has actually paid to Tropicana the sums it now seeks to have Northern indemnify.
Of course, Cutrale will still bear the burden of proving that any payment it made was reasonable in amount and was for a claim or claims within the coverage afforded by the Northern policies. GAD Bus. Serv. Inc. v. Syndicate, supra, and Steel v. Florida Physicians Ins. Reciprocal, 448 So.2d 589 (Fla. 2d DCA 1984).
In Steel v. Florida Physicians Ins. Reciprocal, 448 So.2d 589, 591 (Fla. 2d DCA 1984) the court recognized "the general rule that if an insurer wrongfully refuses to defend, an insured is entitled to make a reasonable settlement without requiring the suit to be carried to judgment even though the policy purports to avoid liability for a settlement made without the insurer's consent," and in Post Houses, Inc. v. Fireman's Fund Ins. Co., 469 So.2d 863, 864 (Fla. 1st DCA 1985), the court said that "the fact of voluntary payment [by an indemnitee to a claimant] does not negate the right to indemnity, since the person confronted with an obligation that he cannot legally resist is not obligated to wait to be sued and lose a reasonable opportunity for compromise."
These principles apply to the facts of this case and neither the "no action" or the "voluntary payment" clauses of Northern's policies may be invoked to defeat Cutrale's claims for indemnity. Northern's motion for summary judgment on those grounds will be Denied.
4. Exclusion M. Finally, Northern relies upon Exclusion M in the Policy for Manufacturers which excludes coverage with respect to:
m. Damage To Impaired Property or Property Not Physically Injured `Property damage' to `impaired property' or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in `your product' or `your work'. . .
Having already determined that the blending of Cutrale's adulterated juice with Tropicana's product caused "physical injury" to the latter, it necessarily follows that this exclusion, by its terms, does not apply in this case.
Conclusion
Zurich's motion for partial summary judgment (Doc. 16) is DENIED. Cutrale's cross motion for summary judgment (Doc. 22) is DENIED. Northern's motion for summary judgment (Doc. 58) is DENIED. Cutrale's motion for summary judgment is GRANTED IN PART and DENIED IN PART as consistent with the terms of this Order.
The issues remaining to be tried include (1) Cutrale's assertion that Zurich suffered no prejudice in fact from the late notice given with respect to the 1998 claim; (2) the amount of the recoverable costs, expenses or losses attributable to the 1998 claim; (3) the reasonableness of Cutrale's settlement with Tropicana, i.e., the amount of damages reasonably paid to Tropicana by Cutrale attributable to the mixing or blending of Cutrale's adulterated juice with Tropicana juice (not including costs, expenses or damages attributable to returned adulterated juice not blended or mixed with Tropicana goods).
Entry of this Order necessitates a reevaluation of the case by the parties and the court with respect to the need, if any, for any additional discovery and the establishment of new dates for pretrial conference and trial. Accordingly, the parties are directed to meet within twenty (20) days for the purpose of preparing and filing within thirty (30) days a new pretrial report under Rule 3.05, M.D.Fla. Rules, after which the Court will schedule by separate notice such proceedings as are necessary to bring the case to a conclusion.
IT IS SO ORDERED.
DONE and ORDERED