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Erie Insurance Exchange v. Abbott Furnace Company and Innovative Magnetics

May 13, 2009


Appeal from the Judgment December 27, 2007, In the Court of Common Pleas of Elk County, Civil Division at No. 2003-846.

The opinion of the court was delivered by: Popovich, J.



¶ 1 Appellant Abbott Furnace Company appeals from the December 27, 2007 judgment entered in favor of Appellee Erie Insurance Exchange. Upon review, we affirm.

¶ 2 The trial court stated the factual and procedural history as follows.

[Appellant] manufactures annealing furnaces in the United States of America. In 1999, [Appellant] entered into a contractual relationship with Innovative Magnetics, Inc. ("IMI") to provide such a furnace for IMI's operations. In October 2002, IMI filed a five-count Complaint against [Appellant] in the United States District Court for the District of New Jersey. Its legal theories included breach of contract, breach of warranty, breach of duty of good faith and fair dealing, fraud, and consumer fraud. IMI twice amended its Complaint, incorporating a sixth count sounding in negligence.*fn1 After each was filed, [Appellant] contacted [Appellee] to request defense and indemnification. [Appellee] denied all three requests, maintaining that none of IMI's claims triggered coverage.

For purposes of this action, [] IMI's Second Amended Complaint ("IMI Complaint") was the relevant pleading.*fn2 IMI therein alleged that it was one of only three manufacturers located in the United States that produced highly sensitive metallic magnetic laminations used in the ground fault industry; that its process involved a high temperature treatment completed in a continuous annealing furnace; and that to ensure the laminations' required magnetic sensitivity, they were heated to extreme temperatures in a hydrogen atmosphere in a furnace purged with nitrogen on both ends to ensure the absence of oxygen during the heating process. IMI further alleged that during an interview with [Appellant] regarding the design, manufacture, and installation of an annealing furnace, [Appellant's] representative averred that [Appellant] had designed, manufactured, and installed several similar furnaces for one of IMI's primary competitors and that the competitor of IMI had never experienced any problems with a furnace employing welded flanges and had advised that IMI would never see a leak. IMI later discovered that the furnace manufactured for its primary competitor -- the same design recommended to IMI -- had in fact contained design defects.

Relying in part upon [Appellant's] positive averments, IMI ordered a [furnace from Appellant], advising the company of its manufacturing process, its specific needs and intended use, and that it was a start-up operation. [Appellant] subsequently designed, built, and installed an annealing furnace at IMI's Trenton, New Jersey facility, and immediately upon commencing production in October 2000, IMI noticed that the furnace was not functioning properly and concluded that the furnace was receiving a delivery of "cold" hydrogen, thereby creating fluctuations in the cooling process and adversely affecting the laminations. According to IMI, [Appellant] agreed with that conclusion and undertook to redesign and reinstall the hydrogen delivery system, which action improved the existing design defect but still left IMI unable to produce a lamination satisfying its customers' specifications. When IMI later notified [Appellant] that the problems resulted from oxygen leaks attributable to substandard welding performed during both the initial installation and the reinstallation, [Appellant] instructed IMI to secure a welder to repair the defects. Though it did precisely that, [] production ceased while another manufacturer removed and replaced the conveyor belt and the furnace's central cavity due to extreme oxidation caused by the oxygen leaks.

According to the IMI Complaint, IMI was finally able to produce adequate laminations in December 2001 but had already sustained damages that included:

a) the cost of repairing and partially replacing the furnace;

b) the cost of running the laminations through the furnace two times (before the hydrogen delivery system was designed) so that they would approach the required specifications;

c) the cost of the damaged laminations as a result of the defective furnace -- i.e. certain laminations belonging to IMI were destroyed by the defective furnace and had to be discarded while certain of the laminations were damaged and had to be resold at lower prices.

d) discounts given to IMI customers due to quality problems caused by [Appellant];

e) unfilled orders due to the delays in setting up a properly functioning furnace;

f) cash flow problems, which made it difficult for IMI to purchase raw ...

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