Policyholders facing any type of products liability scored a win in a recent decision from the District Court for the Northern District of Illinois. The court found that an insurance company must defend its insured against claims arising out of a recall while simultaneously funding the insured’s affirmative claims for recovery.
Great Am. E&S Ins. Co. v. Power Cell LLC, No. 17-C-6658, 2018 WL 6696550 (N.D. Il. Dec. 20, 2018) arose out of a product recall by Spring Window Fashions, LLC (“SWF”), a business that sold battery-operated window shades and coverings. Power Cell, doing business as Zeus Battery Products (“Zeus”), supplied batteries that were incorporated into SWF’s products. After multiple customer complaints, SWF initiated a recall and assigned blame for the window shade failures to Zeus’s batteries. Zeus maintained that the product failure was due to a design flaw in SWF’s product and that SWF’s false recall notices caused reputational harm to the battery manufacturer.
Zeus filed suit against SWF as a result of the alleged misrepresentations, seeking a declaration that its batteries were safe and not the cause of the recall. SWF counterclaimed for breach of warranty and negligence, and also sought reputational damages along with the costs of (1) the Zeus batteries, (2) replacing the defective batteries, and (3) conducting the recall. Zeus tendered the counterclaim to its liability insurer, Great American, which denied coverage and instituted a declaratory judgment action to determine its duty to defend the counterclaim.
Zeus’s insurance policy with Great American obligated the carrier to defend Zeus against any suit for property damage caused by an occurrence, where property damages was defined to include physical injury to tangible property. The insurer argued that for its policy to respond, the claim against Zeus had to be brought by the owners of the damaged property. The court disagreed, concluding that the policy covers “consequential damages precipitated by property damage, including those that do not affect the plaintiff’s own tangible property.” Here, SWF’s alleged reputational damage and the amounts necessary to coordinate the recall of its shades were sufficient to trigger Great American’s duty to defend its insured.
Equally important, the court held that Great American must pay for Zeus to prosecute its affirmative claims against SWF. Even though Zeus was the party that commenced the underlying litigation, affirmative claims that have the effect of reducing or eliminating the insured’s liability are encompassed within the insurer’s duty to defend. Because SWF would not be able to collect on its recall claims if Zeus’s batteries were deemed safe, the insurer was required to fund Zeus’s lawsuit.
The Power Cell decision is significant for several reasons. First, it confirms that coverage for recall-related liabilities may exist under general liability insurance policies even where recall coverage has not specifically been added to the policy. This is particularly the case where the recalled product affects other property or products. The decision also illustrates the breadth of the duty to defend under a typical general liability insurance policy. In Power Cell, the defense was found to extend to affirmative claims where those claims were brought for the purpose of reducing exposure to the insured and, ultimately, the insurer.