Appellant, Aetna Casualty & Surety Company, sued to recover the amount contributed by it towards the settlement of a product liability claim against its insured, General Time Corporation, a subsidiary of Talley Industries, Inc. General Time counterclaimed for its contribution to the settlement.The United States District Court for the Southern District of New York, Leonard B. Sand, J., held that Aetna was liable for all damages covered by the settlement except lost profits and the contract price of the defective products. Both parties appealed. Held that the loss was covered by Aetna's policy and that the property damage insured against included a consequential loss of profits. Affirmed in part and reversed and remanded in part.
KAUFMAN, VAN GRAAFEILAND and PRATT, Circuit Judges.
VAN GRAAFEILAND, Circuit Judge:
Aetna Casualty & Surety Company (Aetna), General Time Corporation (GT), and GT's parent corporation, Talley Industries, Inc. (Talley), cross-appeal from a judgment of the United States District Court for the Southern District of New York granting Aetna a recovery of $832,864.99 against GT and Talley. We affirm in part and reverse and remand in part.
In 1970, Flair Manufacturing Company sued GT for breach of warranty because of defects in electric motors sold by GT to Flair. Flair used the motors as component parts of zone valves in radiators which it manufactured. In 1976, the United States DIstrict Court for the Southern District of New York, Werker, Jr., found GT liable and awarded Flair approximately $1,127,000 in damages. This amount included $657,920.40 for lost profits attributable to the defective motors.
GT had two liability insurance policies with Aetna, a Comprehensive General Liability Policy, with limits of $100,000, and an Excess Indemnity or Umbrella Policy with limits of $5,000,000 and a deductible of $25,000. Asserting lack of coverage, Aetna defended the Flair action under a reservation of rights. After judgment was entered, the case was settled for $1,180,000. Aetna contributed $730,000, reserving its right to disclaim coverage, and GT contributed $450,000, reserving its right to demand coverage.
Aetna then commenced this action to recover its $730,000 contribution, and GT counterclaimed to recover the $450,000 it had contributed. On Aetna's motion for summary judgment, the district court, Sand, Jr., held in part that Flair's clsim for lost profits was not covered by the policies. Following a bench trial on the remaining issues, Judge Sand held in part that the damage to Flair's zone valves, which resulted from the incorporation into them of GT's defective motors, was an "occurrence", as that term was used in the policies. We agree with the second holding, but disagree with the first.
In finding that the damages at issue resulted from an occurrence, Judge Sand did not err in taking the law of New York as his guide. This is a diversity action. Accordingly, the district court was required to apply the choice of law rules of New York, the forum State. Krauss v. Manhattan Life Co., 643 F.2d 98, 100 (2d Cir. 1981). Because the polices were issued in Connecticut, the executive offices of the parties were located there, and the General Liability Policy provided that the location of the risk was GT's Stanford's office, New York courts ordinarily would choose to apply Connecticut law. Steinbach v. Aetna Casualty & Surety Co., 81 A.D.2d 382, 385-86, 440 N.Y.S.2d 637 (1981).However, if there is any Connecticut law relating to the issues herein, it has not been revealed... Under circumstances such as these, the New York courts would presume that the law of Connecticut is the same as that of New York, and the district court might properly do the same, especially where, as here, the New York law is consistent with that of most other jurisdictions. Ogden Development Corp. v. Federal Ins. Co., 508 F.2d 583, 585 (2d Cir. 1974); Gediman v. Anheuser Busch, Inc., 299 F.2d 537, 544 n.6 (2d Cir. 1962).
Aetna's policies insured GT for property damage caused by an "occurrence" and defined "occurrence" in substance as an "accident" resulting in property damage "neither expected nor intended" from the standpoint of the insured. The term "accident" must be construed as the ordinary person or businessman would construe it when purchasing insurance coverage, Miller v. Continental Ins. Co., 40 N.Y.2d 675, 676-77, 389 N.Y.S.2d 565, 358 N.E.2d 258 (1976); Arthur A. Johnson Corp. v. Indemnity Ins. Co., 7 N.Y.2d 222, 227, 196 N.Y.S.2d 678, 164 N.E.2d 704 (1959), i.e., as meaning an "unexpected, unfortunate occurrence", id. at 228. "To the average person an accident -- the results of an act -- is something which was not done "on purpose"." Wolk v. Royal Indemnity Co., 27 Misc.2d 478, 484, 210 N.Y.S.2d 677 (1961). The transaction giving rise to the loss must be examined as a whole, Messersmith v. American Fidelity Co., 232 N.Y. 161, 166, 133 N.E. 432 (1921), and, "regardless of the initial intent or lack thereof as it relates to causation, or the period of time involved, if the resulting damage could be viewed as unintended by the fact finder the total situation could be found to constitute an accident." McGroarty v. Great American Ins. Co., 36 N.Y.2d 358, 364-65, 368 N.Y.S.2d 485, 329 N.E.2d 172 (1975).
The district court found that "GT neither intended nor expected its motors to malfunction and that the damage to Flair's zone valves was an "occurrence" within the meaning of the policies." This was a factual finding. Id. at 363. Since it was not clearly erroneous, it is affirmed.*fn1
However, the district court's interpretation of the term "property damage", which eliminated as an item of damage the loss of profits resulting from the physical injury to Flair's property, is unsupported, not only by the law of New York, but of most other jurisdictions as well. The definition of "property damage" in Aetna's General Liability Policy is patterned after the definition contained in the 1966 revised Standard Comprehensive General Liability Policy, prepared by the Mutual Insurance Rating Bureau and the National Bureau of Casualty Underwriters. 3 Long, The Law of Liability Insurance, App. B § 1, at App-30 (1981). "It is an established principle that consequential or intangible damages, as well as physical damages to other property, are within the terms of such an insuring agreement." 2 Long, supra, § 11.09, at 11-51 (1982). See also Henderson, Insurance Protection For Products Liability and Completed Operations -- What Every Lawyer Should Know, 50 Neb.L.Rev. 415, 445 (1971).
A decisive New York case on this point is Thomas J. Lipton, Inc. v. Liberty Mutual Ins. Co., 34 N.Y.2d 356, 357 N.Y.S.2d 705, 314 N.E.2d 37 (1974). Alfonso Gioia & Sons, Inc., the insured in that case, was a manufacturer of egg noodles and macaroni. Gioia was sued by Lipton, which had purchased defective Gioia products and incorporated them in Lipton's own soup mixtures. Lipton's suit sought recovery for direct damage to its mixtures and also for consequential damages, including loss of profits and good will. When Liberty Mutual Insurance Co., Gioia's insurance carrier, disclaimed coverage, Lipton brought a declaratory judgment action seeking a specific declaration that coverage existed under Liberty's policies for the losses alleged.
Former Justice Marshall E. Livingston, in an opinion reported at 71 Misc.2d 199, 335 N.Y.S.2d 853 (1972), held that, except for the cost of inspecting and withdrawing the contaminated products, which cost, he concluded, was specifically excluded from coverage, "[t]he other items of damage, both direct and consequential, . . . are all within the coverage afforded by Liberty's policies." Id. at 207. The Appellate Division affirmed without opinion. 41 A.D.2d 1029 (1973). The Court of Appeals modified the orders of the Appellate Division "to declare that all claims for damage asserted by Lipton against Gioia in the damages action fall within the coverage of both the multi-peril and the umbrella policies" and affirmed. 34 N.Y.2d at 361. See also International Hormones, Inc. v. ...