A federal district court recently held that a provision in a liability insurance contract excluding coverage for damage to personal property in the care, custody, and control of the insured applied to preclude coverage with respect to products warehoused by the insured for a customer, as well as equipment on site used in the manufacture of products for the insured’s customer. Factory Mut. Ins. Co. v. Liberty Mut. Ins. Co., Civ. No. 7:06CV00462, 2007 WL 2821482, * 9 (W.D. Va. Sept. 26, 2007).

Background

Intermet International Inc.’s (“Intermet”) manufacturing facility sustained severe damage due to an explosion and fire. Intermet had commercial general liability coverage under a primary policy with Liberty Mutual Insurance Company (“Liberty Mutual”) and excess coverage with National Union Fire Insurance Company (“National Union”). Inside Intermet’s facility at the time of the fire were materials and equipment owned by American Axle and Manufacturing Company (“American Axle”) because American Axle supplied these materials and equipment to Intermet so it could manufacture products for American Axle. The Intermet facility also housed finished product that had not yet been shipped to American Axle. Most, if not all, of the equipment and products were destroyed in the fire. Factory Mutual Insurance Company (“Factory Mutual”) insured American Axle and paid for its losses resulting from the fire at Intermet’s facility. Thereafter, Factory Mutual filed a subrogation action against Intermet to recover the amount it paid to American Axle for the loss. Intermet subsequently filed for bankruptcy and, as part of the bankruptcy plan, Intermet assigned its rights under its commercial general liability and excess liability insurance policies to Factory Mutual. Factory Mutual then sued Liberty Mutual and National Union to recover the amounts it paid under its policy.

Both Liberty Mutual and National Union filed motions to dismiss Factory Mutual’s claims against them contending that all of the damages alleged by Factory Mutual were excluded by the plain language of their respective policies. The Liberty Mutual and National Union policies contained property damage exclusions that precluded coverage for personal property that was damaged while in the “care, custody, and control” of their insured, Intermet. The Court noted the distinctions between first party property and third party liability coverage, and explained that “the purpose of the care, custody, and control exclusion is to prevent general liability insurance from becoming tantamount to property insurance when property is in the hands of a bailee or lessee, or is otherwise in the custody and control of a named insured and therefore subject to damage or loss due to the named insured’s own acts or omissions.”

The court next surveyed the decisions that analyzed the “care, custody, and control” exclusion, finding that most courts interpret the exclusion to “cover[] the notion of possessory control, … or the right to exercise dominion over the subject matter.” The court concluded that “the key to the applicability of the … exclusion appears to be the level of possessory control, responsibility, or supervision held by the insured with respect to the property.” The court then analyzed Factory Mutual’s complaint against Liberty Mutual and National Union and, taking Factory Mutual’s allegations as true—as the court must do in deciding a motion to dismiss—the court concluded that the damaged equipment and products were within the possession and control of Intermet at the time of the loss.

The court then examined Factory Mutual’s contention that the phrase “personal property” as used in the care, custody, and control exclusion was ambiguous and that, at a minimum, it should be permitted to explore that issue in discovery. The court rejected this argument, ruling that the term “personal property” was not ambiguous and is generally understood to mean “everything that is subject of ownership, not coming under the domination of real estate.”

Factory Mutual also contended that at least some of the damaged merchandise could not have been in the care, custody, or control of Intermet because the merchandise was prepared and ready to ship to American Axle and that under the purchase contract between Intermet and American Axle, possession of the merchandise passed at the time the merchandise was ready to ship. Both Liberty Mutual and National Union countered that a better reading of the purchase contract between Intermet and American Axle was that the undelivered product was still in Intermet’s custody or control because possession of the merchandise did not pass until after the merchandise was placed in the possession of the transport courier for delivery. The court closely examined the terms of the purchase contract and interpreted the contract language—“title to the goods would pass upon their delivery … to a carrier for shipment”— to mean that Intermet retained possession of the merchandise until that point when the transport courier actually picked up the merchandise for transport and delivery. Since that had not occurred, the court ruled that the merchandise was still in Intermet’s possession. The court further noted that regardless of the point at which ownership may have passed, because the property was being stored at Intermet’s facility at the time of the loss, coverage for the loss was precluded by the care, custody, and control exclusion.

Factory Mutual also argued that it had suffered many different types of damages, such as lost profits, loss of production, travel and salaried costs, and claim preparation, due to the loss of the products and merchandise and that it was too early in the case to dismiss their claims because some of their damages could be covered under the relevant policies. The court rejected this argument based on that portion of the exclusion which provided that damaged property “including all resulting loss of use of that property” is excluded if the property is in the care, custody, or control of the insured. The court ruled that “all of those damages stem from the destruction of [American Axle’s] equipment or the product manufactured for it” and were therefore excluded because the damages were for the resulting loss of use of the products or merchandise that were in the care, custody, or control of Intermet.

Finally, Factory Mutual also claimed that, if nothing else, it was entitled to recover some costs because both Liberty Mutual and National Union had a duty to defend Intermet. The court also rejected this argument, holding that neither insurer had any defense obligations because even though the duty to defend is broader than the duty to indemnify, there is no duty to defend where it appears clear that based on the allegations, “the insurer would not be liable under its contract for any judgment based upon the allegations.” Because the damaged property was in the care, custody, or control of the insured at the time of the loss, any of Factory Mutual’s claims for property damage were excluded by the plain language of the policies and there was no duty to defend.

Implications

As the Factory Mutual case illustrates, central to analyzing the care, custody, and control exclusion under a general liability policy is the level of possessory control, responsibility, or supervision held by the insured with respect to the personal property at the time of the loss. In addition, claims for economic losses related to the damaged property may also be precluded if those costs result from the loss of use of the damage property. Thus, if there is a claim for personal property damage under a general liability policy, an insurer should analyze not only whether the property is owned by the insured, but also whether the insured maintained a level of control over the damaged personal property because there may be no coverage for the damaged property by operation of the care, custody, and control exclusion within the general liability policy.