In Westchester Surplus Lines Insurance Company v. Maverick Tube Corporation, No. 09-20071, 2009 WL 4680813 (5th Cir. Dec. 10, 2009), the U.S. Court of Appeals for the Fifth Circuit held that a contract for general liability insurance would afford coverage for a breach of warranty claim resulting from a product defect.
This coverage dispute arose out of the failure of a product known as a P-110 casing, manufactured by the insured, Maverick Tube Corporation (“Maverick”). Maverick sold the casing to Dominion Exploration and Production Company (“Dominion”) for use and operation in its gas wells. After Dominion experienced catastrophic failure in gas wells using the P-110 casing, Maverick informed Dominion that its warranty would cover the cost of the casings. Maverick then sought indemnification from its insurer, Westchester Surplus Lines Insurance Company (“Westchester”). Westchester insured Maverick under contracts for general liability insurance for, among other things, “property damage” resulting from an “occurrence.” The general liability policies defined “property damage” as “physical injury to tangible property, including all resulting loss of use of that property.” The contracts defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
Dominion sent a demand letter to Maverick, alleging that the defective casing constituted a breach of warranty. Dominion demanded that Maverick indemnify it for damages arising from the casing failure. Maverick’s investigation of the product failure determined that a defect in Maverick’s production process led to the failure. Maverick provided its investigation findings to Westchester and then settled with Dominion before any lawsuit was filed. Maverick sought reimbursement of the settlement amount from Westchester.
Westchester refused to indemnify Maverick and brought a declaratory judgment action, asserting that Dominion’s breach of warranty claim was not covered. Applying Missouri law, the district court granted summary judgment to Westchester, finding that the breach of warranty claim against Maverick did not constitute an “occurrence.” Maverick appealed to the Fifth Circuit, where the judgment below was reversed.
On appeal, Maverick argued that because Dominion’s warranty-based demand also identified other bases for recovery, Westchester had a duty to indemnify Maverick for settling all of the claims made in the letter. Maverick also argued that the settlement agreement, which resolved “all matters related to the Incident,” established coverage under the Westchester policy for the loss, even though Dominion’s demand letter did not specifically articulate that an “occurrence” had taken place. Westchester, on the other hand, argued that the district court properly found there was no coverage since Dominion’s demand letter only alleged a breach of warranty, which did not meet the definition of an “occurrence.” Westchester argued that it was improper for the district court to consider the parties’ settlement agreement when determining whether the alleged claims triggered coverage under the policy.
The court interpreted Westchester’s argument as acknowledging, implicitly, that had Dominion filed a complaint against Maverick alleging negligence or product liability, it would have triggered coverage under the policy. Since there was no lawsuit against Maverick, however, the Fifth Circuit looked beyond the demand letter itself and examined the underlying facts. The court concluded that while Dominion, in its demand letter, had categorized its claim as one for breach of warranty, the facts also supported a products liability cause of action under Missouri law.
The court then analyzed the facts supporting the alleged breach of warranty to determine whether those facts also alleged an “occurrence” under the Westchester policy. The court noted that the Eighth Circuit, applying Missouri law, had previously found a breach of warranty claim to constitute an “occurrence” where the insured, though reckless in its design and installation of a product, did not intend for the product to fail. Thus, even though the cause of action was breach of warranty, the facts alleged a covered occurrence.
Following the Eighth Circuit precedent, the Fifth Circuit held that Maverick’s breach of warranty amounted to more than just nonperformance of a contract. Rather, the court found that the breach stemmed from an unforeseen and unexpected defect in the product’s production and that the defect caused the gas well failure. The court concluded, therefore, that Dominion’s claim against Maverick, although labeled in the demand letter as a claim for breach of warranty, in fact involved an unforeseen and unexpected event constituting an “occurrence” under the policy. Further, the court found that the “occurrence” resulted in damage to Dominion’s property since the defective casing caused physical damage to Dominion’s drilling operations and wells.
Maverick illustrates the significance of examining a claim based on its facts, rather than its label. Indeed, in Maverick, on its face, the breach of warranty claim would appear to be a noncovered claim because it did not constitute “property damage” caused by an “occurrence.” However, upon examination of the facts, it was clear to the Fifth Circuit that the warranty claim was, in fact, a claim for property damage accidentally caused by a defective product.