It is hornbook insurance law that the failure of an insured’s product, in and of itself, does not constitute “property damage” for the purpose of a standard liability policy. Rather, to trigger coverage under a liability policy, there must be damage to the property of a third-party. Determining whether there is “property damage” to third-party property often requires a very exacting factual analysis. This is evidenced by the recent decision by the United States Court of Appeals for the Ninth Circuit in Silgan Containers Corp. v. National Union Ins. Co. of Pittsburgh, PA, 2011 U.S. App. LEXIS 10861 (9th Cir. May 27, 2011).
The insured, Silgan, sought coverage under an umbrella policy for loss arising out of the failure of “pull tab” lid cans that had manufactured for Del Monte. Del Monte used these cans for various fruit products. These “pull tabs” proved to have a high failure rate, making it difficult for consumers to easily remove the lids. After receiving thousands of complaints, Del Monte removed the defective cans from the market, and subsequently asserted a claim against Silgan for an amount in excess of $6 million. Del Monte’s claim included costs associated with the value of the fruit, value of the packaging, and value of the cans. National Union, Silgan’s umbrella insurer, denied coverage to Silgan for the claim based on a lack of “property damage” as well as the application of various “business risk” exclusions.
The Ninth Circuit affirmed the lower court decision that Del Monte’s claim was not one for “property damage,” which was defined by the National Union policy as either “physical injury to tangible property, including all resulting loss of use of that property” or “loss of use of tangible property that is not physically injured.” The court concluded that Del Monte did not allege physical injury to its property – the fruit – since there was no allegation that the defective lids caused harm to the fruit contained within the cans, i.e., “[t]here was no alteration in the appearance, shape, or color of the fruit and the fruit remained edible.” The court also rejected Silgan’s assertion that Del Monte experienced a loss of use of tangible property, again basing its decision on the fact that the fruit contained in the otherwise defective cans was not rendered inedible. As the court explained “[a]lthough Del Monte may have made a business decision not to sell the fruit cups, Silgan has not shown that the edible fruit was unsuitable for other purposes, such as sale on a secondary market.”