Judy Greenwald

9/13/2018 8:50:00 AM

Source: Business Insurance

A federal appeals court has upheld a lower court ruling that an American International Group Inc. unit is not liable under its property coverage for financial losses stemming from its policyholder’s defective material.

Evansville, Indiana-based Berry Plastics Corp. produced a foil laminate product for Auburn, Maine-based Packgen, a small firm that manufactures specialized containers for bulk quantities of industrial chemicals, manufacturing byproducts and other material, according to Monday’s ruling by the 7th U.S. Circuit Court of Appeals in Chicago in Berry Plastics Corp., n/k/a Berry Global Inc. v. Illinois National Insurance Co.

Over two years, Packgen worked with one of its customers to develop a new type of intermediate bulk container that could be used to store and ship a chemical catalyst the customer produced for use in refining crude oil into other petroleum products. Packgen engaged Berry to manufacture a laminated product for this container, according to the ruling.

But a large roll of foil laminate Berry had delivered was defective, leading to several fires, and no market for the containers developed. Packgen sued Berry over the issue, and a jury awarded Packgen the full $7.2 million it had sought in damages.

Berry then sought coverage from AIG unit Chicago-based Illinois Indemnity under its property coverage for all but the first $1 million of the award, which Berry’s primary insurer, Federal insurance Co., a Chubb Inc. unit, agreed to pay.

Berry’s policy covered damages the company was required to pay “because of…Property Damage,” according to the ruling.

Berry argued it was entitled to coverage because it had “been held liable for its customer’s lost profits because of the property damage its defective component caused,” said the ruling.

Illinois National’s position was the $6.2 million for which Berry was seeking indemnification “represented Packgen’s lost profits” and “there was no property damage for which it had the duty under the policy to indemnify Berry.”

The U.S. District Court in Evansville, Indiana, ruled in Illinois National’s favor, which a unanimous three-judge appeals court panel upheld after an extensive analysis.

“Although we agree with Berry that some portion of the lost profits theoretically might be attributable to property damage, Berry has neither undertaken to make that showing nor demanded the opportunity to do so,” said the ruling in upholding the lower court’s decision.