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Essex Insurance Co. v. Chemical Formula

April 7, 2006

ESSEX INSURANCE COMPANY, PLAINTIFF
v.
CHEMICAL FORMULA, LLP, D/B/A FORMULA TECHNOLOGY, JANITORIAL SUPPLY CENTER, INC., MIRRORED LAKE FLOOR SYSTEMS, INC., AND SILVERLINE, INC., DEFENDANTS



The opinion of the court was delivered by: Sylvia H. Rambo United States District Judge

MEMORANDUM

Before the court is Plaintiff's motion for partial summary judgment. (Doc. 29.) The parties have briefed the issues, and the motion is ripe for disposition. For the reasons that follow, the court will grant Plaintiff's motion in part and deny it in part.

I. Background

A. Factual History

Chemical Formula Plus, LLP d/b/a Formula Technology (hereinafter "Formula Technology") manufactured a number of chemicals and floor care products including a floor care product known as Cold Fusion. Janitorial Supply Center, Inc. (hereinafter "Janitorial Supply") is a wholesale cleaning supply business. Janitorial Supply purchased Cold Fusion from Formula Technology and sold it to Mirrored Lake Floor Systems, Inc. (hereinafter "Mirrored Lake"), Paragon Floor Systems, Inc. (hereinafter "Paragon"), and Silverline, Inc. (hereinafter "Silverline"). Mirrored Lake, Paragon, and Silverline used the Cold Fusion product in performing floor cleaning and janitorial services. Mirrored Lake, Paragon, and Silverline allege that when Cold Fusion was applied to their customers' floors "the product proved to be nonconforming and defective and unfit for its intended use as a floor finish because it failed to resist normal wear, failed to retain a lasting finish, revealed traffic patterns, was discolored and unattractive in appearance." (Compl. ¶ 14.)*fn1 The undesirable result of the product required Mirrored Lake, Paragon, and Silverline to strip and restore their customers' floors.

Formula Technology notified Essex Insurance Company (hereinafter "Essex") of the possibility of a claim under its Commercial General Liability Policy. (Compl. ¶ 12.) Subsequently, Essex issued a reservation of rights letter advising Formula Technology of its various rights to restrict coverage. (Id. ¶ 13.) As predicted, Janitorial Supply, Mirrored Lake, Paragon, and Silverline filed suit against Formula Technology. See Janitorial Supply Center, Inc., et al. v. Chemical Formula Plus, LLP d/b/a Formula Technology, No. 1-04-cv-0628 (M.D. Pa. filed March 24, 2004) (hereinafter referred to as the "Underlying Litigation"). The complaint in the Underlying Litigation seeks recovery for the cost of the product and incidental and consequential damages, including loss of profits, costs of restoring floor surfaces to which Cold Fusion was applied, and damage to commercial reputation and loss of goodwill. (Id.)

B. Procedural History

Essex filed for a declaratory judgment to define its obligations to Formula Technology with respect to the Underlying Litigation. In response, Formula Technology along with Janitorial Supply, Mirrored Lake, Paragon, and Silverline filed their respective answers, affirmative defenses, and counterclaims. (Docs. 8, 9.) However, on October 13, 2005, default was entered against Formula Technology for failure to defend diligently. (See Docs. 25-27.) Therefore, the only remaining Defendants are Janitorial Supply, Mirrored Lake, Paragon, and Silverline.

II. Legal Standard

Summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); accord Saldana v. Kmart Corp., 260 F.3d 228, 231-32 (3d Cir. 2001). A factual dispute is "material" if it might affect the outcome of the suit under the applicable law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is "genuine" only if there is a sufficient evidentiary basis that would allow a reasonable fact-finder to return a verdict for the non-moving party. Id. at 249. The court must resolve all doubts as to the existence of a genuine issue of material fact in favor of the non-moving party. Saldana, 260 F.3d at 232; see also Reeder v. Sybron Transition Corp., 142 F.R.D. 607, 609 (M.D. Pa. 1992).

Once the moving party has shown that there is an absence of evidence to support the claims of the non-moving party, the non-moving party may not simply sit back and rest on the allegations in its complaint. See Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Instead, it must "go beyond the pleadings and by [its] own affidavits, or by the depositions, answers to interrogatories, and admissions on file, and designate specific facts showing that there is a genuine issue for trial." Id. (internal quotations omitted); see also Saldana, 260 F.3d at 232 (citations omitted). Summary judgment should be granted where a party "fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden at trial." Celotex, 477 U.S. at 322-23. " 'Such affirmative evidence -- regardless of whether it is direct or circumstantial -- must amount to more than a scintilla, but may amount to less (in the evaluation of the court) than a preponderance.' " Saldana, 260 F.3d at 232 (quoting Williams v. Borough of West Chester, 891 F.2d 458, 460-61 (3d Cir. 1989)).

III. Discussion

Plaintiff Essex raises three primary arguments in its motion for partial summary judgment. First, Plaintiff seeks to establish that claims for lost profits, damage to commercial reputation, and loss of goodwill are not "property damage" as defined by the policy, and thus, it does not have a duty to defend or indemnify with respect to these claims. Second, Plaintiff asserts that the cost of the product and the cost to repair, replace or correct the product are excluded from coverage under the policy. Finally, Plaintiff asserts that the policy's deductible applies to each person or organization that sustained damage because of alleged damage caused by Cold Fusion. Defendants' responsive brief addresses each of Plaintiff's arguments and also argues that summary judgment should be entered on their behalf with respect to the issues identified by Plaintiff regarding the interpretation and implementation of the insurance policy. After setting forth the applicable law governing insurance contracts, the court will address each argument in turn.

A. Applicable Law

The burden of establishing coverage under an insurance contract lies with the insured, while the burden of establishing policy exclusion, which preclude coverage, rests with the insurer. Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363, 1366 (Pa. 1987). Minding these burdens, the court interprets insurance contracts as a matter of law. Sphere Drake v. 101 Variety, Inc., 35 F. Supp. 2d. 421, 427 (E.D. Pa. 1999).

The primary consideration in evaluating an insurance contract is to "ascertain the intent of the parties as manifested by the language of the written instrument." Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983). However, the court must keep in mind that insurance coverage is evaluated in light of the reasonable expectations of the insured. Dibble v. Sec. of Am. Life Ins. Co., 590 A.2d 352, 354 (Pa. Super. Ct. 1991). To determine the reasonable expectations of the insured and the overall intent of the parties, the court must read the policy as a whole, construe the policy according to the plain meaning of its terms, C.H. Heist Carbide Corp. v. American Home Assurance Co., 640 F.2d 479, 481 (3d Cir. 1981), and examine the totality of the insurance transactions, Britamco Underwriters, Inc. v. Grzeskiewicz, 639 A.2d 1208, 1210 (Pa. Super. Ct. 1994).

If the plain terms of the policy are susceptible to more than one interpretation, they are regarded as ambiguous, and all ambiguous terms must be construed against the insurer. C.H. Heist Carbide, 640 F.2d at 481. However, when terms are clear and unambiguous an insured "may not complain that his or her reasonable expectations were frustrated." Grzeskiewicz, 639 A.2d at 1210.

B. Claims for Lost Profit, Damage to Commercial Reputation, and Loss of Goodwill

In the Underlying Litigation, Mirrored Lake, Paragon, and Silverline seek to recover lost profits, damage to commercial reputation, and loss of goodwill resulting from the application of Cold Fusion. Plaintiff's motion for summary judgment seeks a declaratory judgment that it has no duty to indemnify for damages such as lost profits, damage to commercial reputation, and loss of goodwill resulting from the application of Cold Fusion. According to Plaintiff, said damages are intangible and are not property damage as defined by the insurance policy; thus, these damages are not covered under the insurance policy.*fn2 Mirrored Lake, Pargon, and Silverline respond that claims for loss of profits, damage to commercial reputation, and loss of goodwill are remedies to compensate claimants for losses sustained "because of" physical injury to tangible property. For the following reasons, the court finds Plaintiff's argument to be convincing.

To begin, the court looks to the insurance policy, which provides in relevant part that [Essex] will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages.

However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. (Pl.'s Mot. Summ. J., Ex. B at 21.) Property damage as defined by the policy means: "physical injury to tangible property, including all resulting use of the property . . . or . . . loss of use of tangible property that is not physically injured." (Id. at 29.)

According to Plaintiff, damages such as lost profits, damage to commercial reputation, and loss of goodwill do not constitute a physical injury to tangible property. In support of its position, Plaintiff cites to Lucker Manufacturing v. Home Insurance Co., 23 F.3d 808 (3d Cir. 1994). Lucker provides that "tangible property is property that can be felt or touched, or property capable of being possessed or realized." Id. at 818 (citing In re Estate of Mcfarlane, 459 A.2d 1292 (Pa. Super. 1983)). In contrast to tangible property, intangible property "is defined as property that does not have intrinsic value but which is merely representative or evidence of value. . . ." Id. Lucker went on to cite with approval U.S. Fidelity & Guaranty Co. v. Barron Industries, Inc., 809 F.Supp. 355, 360 (M.D. Pa. 1992), and stated that U.S. Fidelity stood for the position that under Pennsylvania law CGL policy does not cover intangible property, such as property that represents value but has no ...


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