Insurance company Insco insures a technology company that makes parts for computers. The company sells those parts to Compco for incorporation into Compco’s computers, which are then sold in the retail market. After Compco installs a number of the company’s parts into its computers, the parts allegedly fail and cause physical damage to the computers sold by Compco.

Compco refuses to pay the insured its outstanding invoices for the purchase of the allegedly defective parts, and then it sues the insured for breach of contract and negligence to recoup the $13 million in costs associated with repairing and replacing the damaged computers. The insured counterclaims against Compco for $10 million — the value of the unpaid invoices — contending that its parts did not fail. The insured technology company tenders defense and indemnity of the lawsuit to Insco under the terms of its general liability policy, which accepts the defense under a reservation of rights, paying for defense counsel of the insured’s choice.

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