Property Damage Definition and Coverage under CGL Form

The question to be resolved in this case by the United States District Court was whether a loss of a product can be considered physical injury to tangible property or loss of use of tangible property; in other words, has property damage as defined in the general liability policy occurred? This case is Silgan Containers Corp. v. National Union Fire Insurance Company of Pittsburgh, PA., 2010 WL 1267127 (N.D.Cal.).

Silgan manufactures and sells steel and aluminum containers with pull-tab lids; these containers are used by processors and packagers for food products. Del Monte is a customer of Silgan and ordered a supply of 4 ounce pull-tab fruits cups for use in packaging ready to go fruit for consumers. A number of batches of these pull-tab cans did not function properly; consumers complained; Silgan investigated and said design and manufacturing problems existed; Del Monte rejected any more of Silgan's products and disposed of the fruit cups it had in stock.

Del Monte sought to recover from Silgan the costs it had incurred as a result of the defective cans supplied by Silgan. These costs included costs of fruit that was lost as a result of the rejected products, the costs of sorting, and costs incurred by the delay in shipping non-defective cans to a packer. The total costs amounted to $6,500,956.27.

Silgan notified its insurers of the claims. Zurich provided coverage up to $1.5 million dollars for certain events, subject to a $250,000 deductible. National Union issued a commercial umbrella policy to Silgan with coverage up to $25 million for certain occurrences that cause to property damage to Silgan. Zurich informed Silgan that it would pay its policy limits. National Union denied coverage on the grounds that there had been no physical injury to the fruit that was contained in the defective fruit cup containers. Silgan filed a lawsuit against National Union, seeking coverage for the claims by Del Monte.

Silgan argued before the U.S. District Court that the National Union policy covers Del Monte's claims for damages because the loss of fruit contained within the pull-tab cups qualifies as property damage that the insurer is obligated to cover. Silgan contends that, consistent with the policy's definition of property damage, the loss of fruit in the fruit cups constitutes either physical injury to tangible property and loss of use, or loss of use of tangible property that is not physically injured. National Union contended that any loss arose from Silgan's breach of its supply contract with Del Monte and not from any physical injury to or loss of use of fruit products.

The district court noted that the parties do not dispute that there was no actual physical damage to the fruit itself that caused an alteration in appearance, shape, color, or other material dimension. The only injury being asserted is the failure of Silgan's cans to perform as intended. So, under the plain meaning that should be given the words “physical injury”, the asserted damage to Del Monte's fruit does not qualify as physical injury to tangible property under the terms of the policy.

As for a loss of use, the court noted that Silgan failed to come forward with any undisputed facts firmly establishing that the fruit contained within the defective pull-tab lid cups was completely unusable. Del Monte did not want to risk selling the fruit cups to the public, but this was a business judgment and the court was not persuaded that the fruit was actually unusable.

In summary, the court said that Silgan failed to demonstrate that the loss of fruit constituted either physical injury to tangible property or loss of use of tangible property that is not physically injured. There was no property damage as defined in the policy and National Union had no duty to pay for Del Monte's loss of fruit.

Editor's Note: It is interesting that the court did not decide this case on any exclusions in the policy. To be sure, National Union asserted that some exclusions (damage to your product, recall of products, damage to impaired property) prevented coverage, but the court looked at the insuring agreement and the definitions first to effectively end the coverage dispute. Too often, insureds and insurers look to the policy exclusions in an argument over coverage and ignore the fact that the insuring agreement in a policy has to be validated in order for any consideration of coverage to start. The insuring agreement requires the insured be legally obligated to pay damages because of bodily injury or property damage. Both bodily injury and property damage are defined terms and if the definitions are not met, there is no need to discuss any exclusions that might apply.