Staley, Chief Judge, and Ganey, Circuit Judge, and Sheridan, District Judge.
In 1960 the American Steel Band Company*fn1 began to manufacture a type of metal siding under the trade name of Steelbestos. The product, which consisted of asbestos felt bonded onto steel sheets, was sold and distributed through American Steel Band's wholly owned subsidiary, the Bowman Steel Corporation. Steelbestos, however, was ill-starred; it proved to be defective after it had been erected and installed on several buildings. It became discolored and began to delaminate, i.e., the asbestos felt separated from the steel sheets exposing the latter to the elements.*fn2 On receipt of complaints from numerous customers, Bowman examined the defective siding and conducted an extensive campaign to replace the already-installed siding.
Lumbermens Mutual Casualty Company ("Lumbermens") had issued to American Steel Band and Bowman Steel comprehensive liability insurance policies covering the years 1960, 1961 and 1962.*fn3 Coverage D of the policy, "Property Damage Liability -- Except Automobile," obligated Lumbermens "To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property, including the loss of use thereof, caused by accident." Though the policy excluded coverage for injury to or destruction of the property of the insured, American Steel Band Company*fn4 had insurance coverage for bodily injury or property damage which arose by reason of the "products hazard" as defined therein.*fn5 Briefly, the policy definition of "products hazard" extended coverage for bodily injury or property damage which resulted from the insured's "goods or products manufactured, sold, handled or distributed * * * if the accident occurs after possession of such goods or products has been relinquished to others * * *, [or] operations, if the accident occurs after such operations have been completed or abandoned * * *."
Bowman incurred expenses of approximately $417,000 in removing and replacing the defective siding for fifty-six customers. The cost figure recited above did not include the cost of manufacturing the new siding. In December of 1963, Bowman brought suit in the district court against Lumbermens to recover for losses it claimed it was due under its liability policies. Recovery was sought for losses of $59,803.41 for the policy year of 1960, $100,000 (the policy limit) for the policy year of 1961, and $42,063.48 for the 1962 policy year. Lumbermens denied coverage, and the district court granted its motion for summary judgment, holding that the only damage which resulted from the defective siding was to the siding itself and not to the buildings to which it had been attached. The court stated that there was no "extrinsic damage" to the purchasers by reason of the failure of the siding and that "there is no liability for the mere failure [of the purchaser] to obtain the anticipated advantages derived from the ownership of the purchased article."*fn6
We cannot agree with the district court's conclusion that no damage resulted to the purchasers' buildings by reason of the installation of defective siding, and accordingly we must reverse.
Jurisdiction of this action is based on diversity of citizenship. The parties have relied on Pennsylvania law and have properly done so on the record before us. Cf. Eastcoast Equipment Co. v. Maryland Cas. Co., 207 Pa. Super. 383, 218 A.2d 91, 95 at n. 5 (1966).
As we have stated, the primary issue raised on this appeal is whether there was damage to the property other than that of the insured on which liability under the policy's products hazard provision may be predicated.*fn7 This is not a novel question; this court has been faced with it before, Pittsburgh Plate Glass Co. v. Fidelity & Cas. Co., 281 F.2d 538 (C.A. 3, 1960), as have other appellate courts, Dakota Block Co. v. Western Cas. & Surety Co., 81 S.D. 213, 132 N.W.2d 826 (1965); Bundy Tubing Co. v. Royal Indem. Co., 298 F.2d 151 (C.A. 6, 1962); Geddes & Smith, Inc. v. St. Paul-Mercury Indem. Co., 51 Cal. 2d 558, 334 P. 2d 881 (1959); Hauenstein v. St. Paul-Mercury Indem. Co., 242 Minn. 354, 65 N.W. 2d 122 (1954). The Pennsylvania courts have yet to rule on this issue; however, this court was applying Pennsylvania law when it decided the Pittsburgh Plate Glass case, supra. Therefore, that case is controlling unless it is distinguishable from the present case.
In determining whether there was damage other than to the product itself, a quote from the Hauenstein case, the root case in this area of decisional law, is illuminating.
"* * * Aside from any injury to the plaster itself, was the building injured and damaged by its application? It is undisputed that after this new type of plaster had been applied it shrunk and cracked to such an extent that it was of no value and had to be removed so that the walls and ceilings could be replastered with a different material. No one can reasonably contend that the application of useless plaster, which has to be removed before the walls can be properly replastered, does not lower the market value of the building. Although the injury to the walls and ceilings can be rectified by the removal of the defective plaster, nevertheless, the presence of the defective plaster on the walls and ceilings reduced the value of the building and constituted property damage." 242 Minn. at 357, 65 N.W. 2d at 125.
The Minnesota court analogized that the injury to the building was similar to the case in which sand was wrongfully dumped on one's land. It stated that though there would be no intrinsic damage to the land, the owner could recover for the loss of use or the cost of removal.
We went even further in the Pittsburgh Plate Glass case in holding that "once the [defective] paint has been baked on to the steel and aluminum parts of the jalousies, the paint is no longer identifiable as a separate entity but is intended to and does become a part of the finished product. Thereafter, any damage to the finished product, such as flaking or peeling of the paint, is property damage covered by the liability insurance policies here in question." 281 F.2d at 541.
We need not go so far as to rely on some theory of accession or fixtures to sustain the result we reach. The sound reasoning of the Hauenstein opinion, quoted above, leaves no doubt that once the siding had been installed and proved to be defective, the building to which it had been attached suffered a diminution in market value and was damaged to that extent.*fn8 The result recently reached by the South Dakota Supreme Court in Dakota Block Co. v. Western Cas. & Surety Co., 81 S.D. 213, 132 N.W. 2d 826 (1965), fully supports our conclusion. For all practical purposes, that case is identical with the one presently before us. There, the plaintiff manufactured and sold a type of concrete block with a pre-finished exterior, the purpose of which was to eliminate the necessity of some other exterior covering, i.e., paint, siding, etc. Citing and reciting the facts in Hauenstein, Geddes & Smith, Bundy, Pittsburgh Plate Glass, supra, and Volf v. Ocean Acc. & Guarantee Corp., 50 Cal. 2d 373, 325 P. 2d 987 (1958) (dissenting opinion), the court concluded:
"We do not align ourselves with or reject the reasoning employed in any of the cases discussed or mentioned, except insofar as the element of property damage is concerned. We are satisfied that common sense dictates that there was substantial property damage to the entire school building when the exterior walls presented a faded, discolored, mottled and unsightly appearance in contrast to a uniform and eye-pleasing manifestation envisioned by the original plans. To say the damage in such instance can be confined to the blocks as distinct ...