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FEDERAL INS. CO. v. GENERAL MACH. CORP.

November 16, 1988

FEDERAL INSURANCE COMPANY
v.
GENERAL MACHINE CORPORATION



The opinion of the court was delivered by: BECHTLE

 LOUIS C. BECHTLE, UNITED STATES DISTRICT JUDGE

 Presently before the court are the parties' cross motions for summary judgment and a joint stipulation of facts. For the reasons stated herein, summary judgment will be entered in favor of defendant and against plaintiff.

 I. BACKGROUND

 a. Underlying Litigation

 Plaintiff, Federal Insurance Company ("Federal") and defendant General Machine Corporation ("General") entered into an insurance contract whereby Federal would provide certain liability insurance coverage to General, and General would pay stated premiums for such coverage.

 Federal brings this declaratory judgment action pursuant to 28 U.S.C. ยงยง 2201, 2202 against General to determine whether the comprehensive general liability insurance policy issued by Federal to General affords coverage for certain property damage claims asserted against General. This coverage dispute arose as a result of an underlying action filed in the Denver County District Court, Denver, Colorado, Civil Action No. 84-CV-11025. On November 6, 1984, the Public Service Company of Colorado ("PSC") filed an action against P.A.R. Alloy, Inc. ("PAR") for monetary damages incurred by PSC due to the delivery of allegedly defective dust collector cones by PAR. PSC alleged that these dust collector cones did not meet the hardness specifications contained in the October, 1980 contract between PSC and PAR. PAR joined General as a third-party defendant. PAR had contracted with General for the manufacture of the dust collector cones. PSC, alleging itself as a third-party beneficiary of the contract between PAR and General, filed a counterclaim against General for breach of contract, breach of implied warranty of fitness for a particular purpose and breach of implied warranty of merchantability. In accordance with local court rules governing mediation in Denver, a confidential settlement memorandum was filed on behalf of General. The parties to this civil action agree that the information contained in the settlement memorandum will constitute the facts in this case.

 The dust collector cones or mechanical collector cones ("cones") were installed by PSC in the pollution control system for Unit No. 4 of PSC's Cherokee Station coal-fired electrical generating plant. The cones were used to remove abrasive and corrosive ash particles from the plant's emissions. On October 3, 1980, PSC ordered 1,475 cones from PAR with an approximate Brinnell hardness of 550. *fn1" On October 7, 1980, PAR ordered 1,334 cones from General. *fn2" In November or December, 1980, General sold and delivered these cones to PAR for resale to PSC. General states that these cones met the specified requisite 500 Brinnell hardness. Neither PAR nor PSC performed any inspection or testing of the cones in 1980 for either hardness or wall thickness.

 In April 1984, PSC shut down Unit No. 4 for periodic maintenance and repairs. At that time, PSC employees determined that many of the 1980 cones supplied by General were badly worn. PSC performed hardness tests on the cones and based upon these results claimed that the hardness levels of the cones failed to meet specifications. As a consequence, PSC removed and replaced all of the cones. *fn3"

 PSC states that it expected ten to twenty years of useful life from the cones, and it received less than four years. As a result of this unmet expectation, PSC instituted suit in Denver District Court. PSC's complaint alleged causes of action for breach of contract, breach of implied warranty of fitness for a particular purpose and breach of the implied warranty of merchantability. PSC sought damages for the cost of the cones, freight, installation of the cones, removal of the cones and lost electrical generation due to downtime at Unit No. 4. PAR's amended third-party complaint against General set forth claims of common law indemnity, contractual indemnity and contribution among joint tortfeasors. PAR also claimed lost profits of $ 250,000 to $ 325,000 from General.

 Federal had issued to General a general liability - automobile policy for the period June 30, 1982 to June 30, 1984, with a subsequent renewal to June 30, 1985. The limit of liability for property damage was $ 100,000 for each policy year.

 General forwarded PAR's amended third-party complaint to Federal on February 18, 1985. General made a demand upon Federal to defend it from and indemnify it for PAR's claims. Federal agreed to provide a defense on behalf of General subject to a reservation of its right to deny coverage. Thereafter, Federal assigned Colorado counsel to defend the case. The Colorado action was eventually settled by a payment of $ 225,000.00. PAR's insurance carrier paid $ 100,000.00 and the remaining $ 125,000.00 was paid by General and Federal. Federal contributed $ 96,298.75 to the settlement because of payment of other General claims. Federal's reimbursement, if any, is contingent on the outcome of this declaratory judgment action.

 b. Applicable Insurance Policy Provisions

 The insuring clause of Federal's comprehensive general liability policy to General found on page six of the policy provides in pertinent part:

 
The Company [Federal] will pay on behalf of the insured [General] all sums which the insured shall become legally obligated to pay as damages because of
 
Coverage A. bodily injury or
 
Coverage B. property damage
 
to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the ...

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