E&O doesn't cover insured's expenses for defective product

Spencer Press was a commercial printer. For the year running from January 14, 1980, to January 14, 1981, it secured a commercial umbrella liability policy issued by Utica Mutual Insurance Company and Graphic Arts Mutual Insurance Company. The policy included errors and omissions coverage with a limit of $25 million. In September 1980, Spencer printed a sales catalog for Deerskin Trading Post (a mail order leather goods business), as it had regularly done since the early 1970s. On a run of four million fall sales catalogs for 1980, Spencer failed to trim excess spots of glue from order form inserts, causing pages to stick together and, as a result, hiding not only some of the copy and art work but, in most of the catalogs, also the mail order forms. That mishap resulted in considerable litigation and became known as "the glue problem."

Deerskin claimed $891,612 in damages, based on estimated profits lost from customers who did not place orders because they could not find the order blanks, among other things. That claim was not successful; but Deerskin did succeed, after a jury trial, in recovering a refund of $175,000 which Deerskin had paid on account. Spencer sought indemnity under its policy for that amount.

The policy issued to Spencer covered liability "arising out of any negligent act, error, or omission... which happens in the course of providing printing services during the policy period." The policy, however, excluded damages or expenses claimed by the named insured "with respect to work performed by or on behalf of the insured and with respect to damages or expenses claimed by the named insured for (1) any property damage to such work which arises out of any part or portion thereof or out of any materials, parts or equipment furnished in connection therewith..."

Spencer contended that it was entitled to indemnity since the catalogs emerged from the printing run apparently in good condition. The flaw (the excess glue causing the pages to stick together) was not discovered by the customer until after delivery. Spencer argued that it was obligated to pay a refund to its customer, and this was why it had purchased the insurance.

The trial court ruled against Spencer, and it appealed.

The higher court concluded that a reasonably informed manufacturer would not expect, or from the language of the policy expect, that its policy insured against repair, replacement or refund as to the product itself.

The judgment entered in the trial court against Spencer and in favor of Utica Mutual was affirmed.

Spencer Press, Inc. v. Utica Mutual Insurance Company et al.--No. 95-P-23017--Appeals Court of Massa-chusetts, Middlesex--May 16, 1997­ 679 North Eastern Reporter 2d 236.

Conflicting "other insurance" clauses must be disregarded

Gary Gibler and his wife, Velene, were injured when their car collided with two horses standing on a state highway. The horses were owned by Robert Kurtz and were being boarded on property owned by the parents of Robert Kurtz. The Giblers filed suit against the parents and later amended the complaint to include Robert.

Mr. and Mrs. Kurtz had a policy issued by Farm Bureau which named their son as an additional insured. Kurtz also had an HO policy issued by Nationwide. Both policies covered personal liability, and both contained "other insurance" clauses. The policy issued by Farm Bureau provided: "If an insured has other insurance for a loss covered by this policy we pay under this policy only a share of the loss. The share is computed by adding up the limits of this policy and all other valid and collectible insurance and finding the percentage of the total limits this policy represents."

Nationwide's policy provided that "this insurance is excess over other valid and collectible insurance. This does not apply to insurance written as excess over the limits of liability that apply in this policy." Farm Bureau's policy limit for liability was $500,000, and Nationwide's limit was $300,000.

Nationwide denied coverage. Farm Bureau filed for a declaratory judgment that Nationwide's policy covered the Giblers' claim, and that Nationwide's liability was on a pro rata basis with Farm Bureau. The case was referred to mediation, but Nationwide did not authorize its counsel to contribute to any settlement. Farm Bureau and the Giblers agreed upon a settlement of $437,000 which Farm Bureau paid in full. Farm Bureau then attempted to recover part of that amount from Nationwide, but the trial court ruled in favor of Nationwide, holding that the "other insurance" clauses were not in conflict. That court pointed out that Farm Bureau had not exhausted the limits of its policy, and the HO policy did not cover. Farm Bureau appealed.

The higher court noted that Indiana has ruled that when a policy clause conflicts with the "other insurance" clause of another company, regardless of the nature of the clause, they are, in fact, repugnant and each should be rejected.

Nationwide contended that the two clauses did not conflict; that Farm Bureau's policy was primary; and Nationwide's coverage only became effective after Farm Bureau's limits were exhausted.

The court, on appeal, concluded that there was no basis for concluding that either policy was primary; therefore, the two clauses were in conflict and should be disregarded.

The judgment entered in the lower court in favor of Nationwide was reversed, and the action was remanded for further proceedings. One justice filed a dissenting opinion.

United Farm Bureau Mutual Insurance Company and Robert H. Kurtz, Appellants v. Nationwide Mutual Fire Insurance Company, Gary Gibler and Velene Gibler--No. 02A04-9607-CV-267--Court of Appeals of Indiana--April 22, 1997--678 North Eastern Reporter 2d 1165.

Business auto policy covers only autos owned by insured

Home Indemnity had issued a business auto policy to Crown Glass Corporation, and Berle Blitzstein was included as an insured under the policy. His stepson, Jason Karlov, claimed UIM benefits under the policy for injuries he sustained as a result of a motor vehicle collision with David Gardner. The record showed that Jason was riding a motorcycle which he owned. Following the accident, he was paid the $100,000 limits under Gardner's policy. Jason's own policy limit was $15,000.

While it was conceded that Jason was a member of Berle Blitzstein's household, Blitzstein did not own the motorcycle and that the business auto policy, while it covered him, stipulated that the policy covered only "those autos you own."

The trial court entered summary judgment in favor of Home Indemnity. Jason appealed.

The higher court ruled that Jason was not entitled to the UIM benefits under the business policy since he owned the motorcycle he was driving at the time he was injured, and the business auto policy clearly excluded coverage for such a vehicle even when the owner was a member of the insured's family.

The judgment rendered in the trial court in favor of the insurance company was affirmed.

Jason Karlov, Appellant, v. The Home Indemnity Company and Home Insurance Companies--No. 1-95-1754--Appellate Court of Illinois, First District, Third Division--October 30, 1996--672 North Eastern Reporter 2d 904.

HO insured doesn't report extensive remodeling

In 1975, Ronald Furtak and his wife Bernice purchased a home in Highland Park for $94,000. Two years later they consulted with Robert Moffett about a homeowners policy. They later stated that they had requested him to secure insurance that would fully cover the home against all loss, and the agent offered them a policy that would fully cover their home even in the worst case scenario. They claimed that the agent was told that he could inspect their home and that he was told of ongoing construction and improvements.

Through him, they purchased an HO policy from Illinois Farmers which provided $100,000 in coverage for the house, plus $50,000 for the contents. The policy also provided for automatic changes of the policy limits to reflect economic changes. They said that the agent told them that the coverage would increase every year and would cover any loss which they might have. The policy was renewed annually for the next 15 years.

During that period, the insureds converted the interior from five apart-ments to a single-family home and completely renovated and decorated the home. They never informed the agent of the changes and improve-ments or the increased value of the home, and the agent never inquired.

The structure was destroyed by fire on May 21, 1992, at which time the policy had been increased to $198,000 and personal property to $108,000. Following the fire, the home was appraised at $1.3 million and the contents were valued at $858,000.

The insureds filed suit against the company and the agent, charging breach of oral contract, negligent misrepresentations, breach of fiduciary duty, and negligent perfor-mance of a voluntary undertaking to advise the insureds that their house might be inadequately insured.

The insureds produced evidence of the company's "Friendly Review Marketing program" which encouraged agents to see the insureds regularly to make sure that they had adequate coverage, along with various bulletins distributed by the company asking agents to review the coverage without waiting for calls or renewal dates. The insureds said this constituted negligence since the insureds were never consulted about their coverage.

The trial court granted summary judgment in favor of the agent and the company. On appeal, the court noted that the insureds never informed the agent or the company of the extensive improvements or the substantial increase in the value of the property. In fact, they did not know of the actual value of their home until after the loss. Neither the agent nor the company undertook a duty to inform the insureds about the possibility of inadequate coverage. Furthermore, none of the programs instituted by the company would have revealed that possibility, and such programs were not required by the company but were only suggestions made to its agents.

Regarding the insureds' charge of breach of contract based on failure to review the adequacy of the coverage, the court said that such an oral agreement was incapable of being performed within a one-year statute, and was unenforceable under the Illinois statute of frauds. Even if this were not the case, the insureds' contention that the policy would "fully cover" the home was too vague to be enforced.

The summary judgment entered in the lower court in favor of the agent and the company was affirmed.

Ronald and Bernice Furtak, Appellants v. Robert Moffett, individually, and Illinois Farmers Insurance Company--No. 1-95-3151--Appellate Court of Illinois, First District, Fifth Division--October 4, 1996--671 North Eastern Reporter 2d 827.

Company pays for death, damages caused by youths

Charles Anspaugh, who had secured a HO policy from Michigan Millers Mutual, had requested the company to defend and indemnify him in an action brought by Judith Simpson for damages which resulted from a burglary and fire. Her home had been broken into by a group of juveniles, including the insured's minor son, Chris Anspaugh, and his brother, Scot. Chris was tried in juvenile court and found delinquent by reason of having committed involuntary manslaughter. The others, including Scot Anspaugh, admitted to having committed the same crime.

The evidence showed that the juveniles, consisting of David Clark, Robert Brigeman, Jestin Thomason, the Anspaugh brothers, Cynthia Huffman and Elizabeth Burns, were at Brigeman's home. Clark and Brigeman planned to burglarize Judith Simpson's home and conceal the crime by setting fire to the house, which they believed would be unoccupied that night since Simpson had told Brigeman she was going fishing. However, Simpson did not go and Judith and her daughter, Amanda, were asleep in the house. Judith was injured in the fire, and Amanda died from her injuries a short time later.

Clark and Spicer had entered the home while the others stayed outside to act as lookouts. The boys removed a microwave from the kitchen, took it outside, and then went back inside. It was then that Spicer noticed that Judith was asleep on the couch. At the trial, Spicer said that he told Clark that Judith was sleeping on the couch; but Clark poured gasoline in the kitchen. Spicer and Thomason testified that Clark lit the fire, and all of them then ran from the scene.

Simpson filed a complaint for injuries and wrongful death against all the juveniles and their parents. Michigan Millers then filed an action for declaratory judgment as to its duty and liability to its insured.

The trial court found that Scot and Chris Anspaugh "were part of a course of criminal conduct which was to culminate in the theft of property." The judge said that all of them knew that a can of gasoline was to be used to start a fire to conceal the burglary. The court also found that at least one of them, Spicer, knew that one person was present in the house. Consequently, the trial court held that the policy exclusion based on intentional conduct precluded coverage. The lower court also found that the parents were not liable. Michigan Millers appealed.

The higher court found that Michigan Millers had not met its burden of proof to show that bodily injury or death would have been reasonably expected given the actual conduct of the Anspaugh brothers, and did not show that they actually intended the resulting injuries. The court said that in order for the exclusion to apply, Michigan Millers had to show that bodily injury could reasonably have been expected from the actual conduct of the Anspaugh brothers. While they knew of the plan to set the fire, there was no evidence that either of them knew that anyone was in the house, and their actions were confined to acting as lookouts.

The judgment entered in the trial court in favor of Michigan Millers was reversed, and judgment entered in favor of the insured and Simpson.

Michigan Millers Insurance Com-pany v. Anspaugh et al., Appellants (Discretionary appeal to the Supreme Court of Ohio was not allowed)--No. 15211--Court of Appeals of Ohio, Second District, Montgomery County--March 1, 1996--672 North Eastern Reporter 2d 1042. *

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