The opinion of the court was delivered by: BECHTLE
Plaintiff, Arcos Corporation, a Pennsylvania corporation with its principal place of business in Philadelphia, is engaged in the business of manufacturing and selling electrodes and welding wire for use in welding. To protect itself against products liability claims, plaintiff, Arcos Corporation, purchased from defendant, American Mutual Liability Insurance Company ("Company"), a "Comprehensive General Liability Insurance Policy" for the years 1965 through 1968.
All these policies obligated the Company to pay on behalf of Arcos all sums which Arcos became legally obligated to pay because of damages to property caused by an accident arising out of products sold by Arcos.
The firm of General Dynamics needed weld wire to be used to make welds in a nuclear power plant of a submarine. For that purpose it ordered, on November 16, 1965, one thousand (1,000) pounds of "Inconel" weld wire from Arcos at a net price of Two Thousand Nine Hundred Eighty Dollars ($2,980.00). Arcos filled this order by delivering thirty-eight (38) spools of weld wire to the Electric Boat Division of General Dynamics at Groton, Connecticut, on March 2, 1966. The weld wire was not used immediately by the buyer and was stored away until the fall of 1968 when it was used in making welds in the power plant of a nuclear submarine. After observing cracks in the welds, General Dynamics discovered through procedures devised by it that some of the welds made with wire purchased from Arcos were unsatisfactory in that they were not composed of the same substance referred to as "Inconel." Since welds not made from Inconel weld wire did not have the chemical and physical properties required by the designers of the power plant system, and since General Dynamics believed that a failure of the power plant might place the entire submarine in jeopardy, it proceeded to rip out all joints not made with Inconel weld wire and to re-weld them with that kind of wire. In the meantime, by memorandum dated October 15, 1968, General Dynamics notified Arcos that five (5) of the thirty-eight (38) spools of weld wire were "found to have 300 Series Stainless Steel" on them. On October 18, 1968, Arcos' insurance broker notified the Company that a claim was being made against Arcos for products sold by it.
On February 2, 1969, General Dynamics commenced two suits, one in trespass and one in assumpsit, against Arcos in the Court of Common Pleas of Philadelphia County. Arcos promptly forwarded the writs of summons to the Company. The attorney for the Company entered his appearance in both cases and filed a Rule in each of them. Responding to these Rules General Dynamics, on March 20, 1969, filed complaints seeking damages in excess of Eighty-Three Thousand Two Hundred Forty-Six Dollars ($83,246.00) for cost and expenses incurred by the buyer in:
1. Investigating and testing to locate and identify weld wire purchased on P.O. A-1101603 and cost of locating welds made with the aforesaid weld wire;
2. Investigating weld chits (records) to determine which weldments contained the suspect heat number;
3. Developing metal monitor techniques to ascertain metalic content of the suspect welds;
4. Cost of ripping out and re-welding joints made with defective or suspective weld wire purchased from plaintiff, Arcos Corporation.
After conducting a thorough investigation into the facts and circumstances of General Dynamics' claim and attending several conferences with representatives of that firm, and upon being convinced that if the action were tried, a verdict in excess of One Hundred Thousand Dollars ($100,000.00) against it could be anticipated, Arcos settled the suits in April of 1970, by agreeing to pay General Dynamics a sum not to exceed Fifty-Four Thousand Dollars ($54,000.00).
Are the amounts which Arcos agreed to pay General Dynamics in settlement of the two suits recoverable under the policy? The policy provided that the Company will pay on behalf of Arcos all sums which it shall become legally obligated to pay because of property damage to which the policy applies caused by an accident "which results during the policy period, in property damage neither expected nor intended from the standpoint of the insured." The Company does not dispute the fact that the damage suffered by General Dynamics as a result of the wrong weld wire being spun on spools marked "Inconel" was neither "expected" nor "intended" by Arcos.
In 1966 the insurance industry revised its standard comprehensive general liability policy. Contained in it were exclusion provisions (k) and (n), and those provisions appear in Arcos 1967-1968 policy, which the parties, for the purpose of this case, agree applies here. The Company contends that these two provisions are applicable to the property damage ...