A federal district judge in Arkansas has held that a chemical company’s CGL policy does not provide coverage for claims arising out of its misappropriation of a former client’s proprietary formula for a blended lubricant.  Pinnacle Resources, Inc. v. Chartis Specialty Insurance Co., 2014 WL 3809104 (E.D. Ark. Aug. 1, 2014).

A manufacturer of lubricants entered into a contract to blend a lubricant for a client using the client’s proprietary formula.  After a short period of time, the client terminated the business relationship.  The insured continued to blend the lubricant using its former client’s formula and began to sell the lubricant directly to the former client’s customers.  The former client sued for the misappropriation of its formula, and the manufacturer tendered the claim to its CGL insurer.  The insurer denied the claim, and the manufacturer sought a declaratory judgment.  The parties filed cross-motions for summary judgment.

The court ruled that the policy did not afford coverage.  First, it held that the misappropriation did not constitute property damage because there was no allegation that the former client lost the use of its own formula.  Second, it held that there was no occurrence because the allegations were based entirely on intentional, not accidental, conduct in acquiring the formula.  Third, it held that, even if coverage were triggered, the claims were barred under the expected and intended injury exclusion because the insured caused a loss that it expected or intended to occur when it misappropriated the formula