294 Ga. 805
FINAL COPY


S13G0582. LLOYD’S SYNDICATE NO. 5820 v. AGCO CORPORATION.


     NAHMIAS, Justice.

     Appellee AGCO Corporation (AGCO) manufactured and sold a self-

propelled, agricultural spray applicator called the RoGator. In 2005, AGCO

began offering an Extended Protection Plan (EPP) to its RoGator customers.

Appellant Lloyd’s Syndicate No. 5820 d/b/a Cassidy Davis (Cassidy Davis)

provided the master policy of insurance for the EPP program, which covered

AGCO for certain liability to customers who purchased the RoGator EPP.

Glynn General Corporation administered the plans. Between 2005 and 2008,

AGCO enrolled about 2,050 RoGator machines in the EPP program. Beginning

in 2008, a number of customers presented claims under the EPP based on the

failure of wheel motors on the RoGator. In September 2008, after it had paid

about 25 claims related to this failure, Cassidy Davis invoked the Epidemic

Failure Clause of the master insurance policy and refused to pay for any more
claims.1

       On June 26, 2009, AGCO sued Cassidy Davis and others asserting various

claims, including claims against Cassidy Davis for breach of contract and bad

faith denial of insurance coverage. The trial court granted partial summary

judgment to AGCO and denied partial summary judgment to Cassidy Davis on

a breach of contract issue, holding that the EPP covered failures caused by

design and engineering defects in the RoGators. The trial court also denied

Cassidy Davis’s motion for summary judgment on the bad faith claim, rejecting

the insurer’s argument that it was not obligated to indemnify AGCO until a

court entered a judgment establishing AGCO’s legal liability to its customers.

The Court of Appeals affirmed the trial court on both issues. See Lloyd’s

Syndicate No. 5820 v. AGCO Corp., 319 Ga. App. 260, 262-263, 265 (734

SE2d 899) (2012).2

       Cassidy Davis petitioned for a writ of certiorari, which we granted to


       1
          The Epidemic Failure Clause says, in relevant part: “In the event that the total number of
claims from a common cause for a particular component or components, . . . amounts to more than
10% of the earned units, this shall be considered an ‘Epidemic Failure,’ and will be the sole
responsibility of [AGCO].”
       2
        The facts and procedural history of this case are discussed in greater detail in the Court of
Appeals opinion. See Lloyd’s, 319 Ga. App. at 260-262.

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consider two issues: (1) whether the Court of Appeals erred in its interpretation

of the coverage provision of the EPP; and (2) whether the Court of Appeals

erred in its interpretation of the indemnity provision of the master policy of

liability insurance. As explained below, we conclude that the Court of Appeals

misinterpreted the relevant language of both contracts, and we therefore reverse

its rulings on both issues.3

       1.      The RoGator EPP provides that AGCO will repair or replace

covered parts “if required due to a MECHANICAL BREAKDOWN or

FAILURE that is the result of a true defect in material or workmanship.” The

EPP defines a covered “mechanical breakdown or failure” as

       the actual breaking or electronic failure of any covered part of the
       covered MACHINE while in ordinary use arising from faults
       attributable to manufacturing defects in workmanship or materials
       in such MACHINE causing sudden stoppage of the functions
       thereof and necessitating repair before it can resume work.

It has not yet been established whether the RoGator wheel motor failures were

       3
           AGCO filed a cross-appeal to the Court of Appeals, contending that because Cassidy Davis
initially denied claims based only on the Epidemic Failure Clause, the insurer was estopped from
asserting different grounds for denial and that the Epidemic Failure Clause was not enforceable as
a matter of law because it was not given to AGCO at the time the policy was issued. The Court of
Appeals rejected both arguments. See Lloyd’s, 319 Ga. App. at 265-266. In its brief to this Court,
AGCO again mentions those arguments, but because AGCO did not seek certiorari itself on those
issues and they are not within the scope of the issues on which we granted certiorari, we do not
consider them.

                                                3
caused by defects in the manufacture of particular machines or rather from the

machine’s design. To determine whether the cause needs to be identified, both

parties moved for partial summary judgment, asking the trial court to decide

whether defects in the RoGator’s design or engineering are covered by the EPP.4

The trial court and the Court of Appeals concluded that the EPP does cover

design defects, but that conclusion is not supported by the language of the

contract.

               (a)     In advocating coverage of design defects, AGCO argues first

that the phrase “manufacturing defects” as used in the EPP covers both

manufacturing and design defects. For this argument, AGCO relies solely on

United States v. Western Electric Co., 894 F2d 1387 (D.C. Cir. 1990). That

reliance is misplaced. Western Electric involved a consent decree in an antitrust

case, and the D.C. Circuit looked primarily to antitrust and patent cases and to

the antimonopoly purpose and intent of the decree in reaching its decision; the

court did not consider cases dealing with defective products. See id. at 1391-



       4
          The parties and the courts below have sometimes used the phrase “design or engineering
defects,” but they have not differentiated between a “design defect” and an “engineering defect” and
the terms appear to be synonymous, at least as used in this case. We will therefore simply use the
term “design defect” to encompass defects in design and engineering.

                                                 4
1392.5 This case involves a defective product, and in such cases here in Georgia

and nationwide, courts have routinely found a significant distinction between

“manufacturing defects” and “design defects.”

       For example, in Rose v. Figgie International, 229 Ga. App. 848 (495 SE2d

77) (1997), our Court of Appeals explained that “[a] design defect necessarily

results in all products having the defect, whereas a manufacturing defect will

only occur in those products which were improperly manufactured following

design.” Id. at 853. Similarly, a federal district court applying Georgia law has

explained that “[a] manufacturing defect is a defect that is ‘measurable against

a built-in objective standard or norm of proper manufacture,’” making it “a

fairly straightforward concept,” while a design defect is a “more diffuse

proposition” because it “calls for the finder of fact to employ a loose balancing



       5
          The issue in Western Electric was whether, in the consent decree that ended the massive
AT&T antitrust litigation, the prohibition on the spinoff regional telephone companies engaging in
“manufacture [of] . . . telecommunications equipment” applied only to the fabrication of such
products or also to their design and development. See 894 F2d at 1388-1389. The court said that
dictionary “[d]efinitions of manufacturing typically include activities equivalent to design and
development.” Id. at 1391. The court noted, however, that the Oxford English Dictionary’s
definition of “manufacture” – “‘[t]o make or fabricate from material; to produce by labour’” – does
not include design, but explained that definition away by saying, “[t]he most that this shows . . . is
that ‘manufacture’ is an inherently ambiguous term.” Id. The court then looked to the intent of the
parties and the statements of the consent decree’s objectives, which left “no question that the parties
expected [the decree] to prohibit the design and development of telecommunications products” to
advance the decree’s antimonopoly purpose. Id.

                                                  5
test to determine whether the manufacturer properly designed the product.”

Jones v. Amazing Products, Inc., 231 FSupp.2d 1228, 1236 (N.D. Ga. 2002)

(citation omitted). This view is shared by courts across the country. See, e.g.,

Jekowsky v. BMW of North Am., LLC, No. C 13-02158 JSW, 2013 WL

6577293, at *4 (N.D. Cal., Dec. 13, 2013) (“‘California recognizes two distinct

categories of product defects: manufacturing defects and design defects.’”

(citation omitted)); Linden v. CNH Am., LLC, 673 F3d 829, 834 (8th Cir. 2012)

(“‘Courts and the Restatement of Torts distinguish between design defects and

manufacturing defects.’” (citation omitted)). See also Restatement (Third) of

Torts: Products Liability § 2 (1998) (distinguishing between manufacturing and

design defects as two categories of product defects). In light of these many

persuasive precedents, we reject AGCO’s argument that the phrase

“manufacturing defects” ordinarily encompasses defects in product design.6

               (b)     AGCO next argues that the EPP’s reference to “workmanship

or materials” in the definition of a covered “mechanical breakdown or failure”


       6
          AGCO argues that the many product warranty cases cited by Cassidy Davis are inapplicable
here because none of those warranties used language identical to the EPP and none of those cases
dealt with extended protection plans that were issued on an individual product basis. Those
distinctions seem immaterial, however, and in any event, these many similar cases are certainly more
persuasive than AGCO’s one case interpreting an antitrust consent decree.

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is broad enough to include design defects. The cases on the meaning of

“workmanship or materials” are more evenly divided.7 This case does not

require us to determine what that phrase would mean standing alone, however,

because the phrase as used in the EPP, like any words used in a contract, must

be read in context. See Fidelity Nat. Title Ins. Co. v. Keyingham Investments,

LLC, 288 Ga. 312, 314 (702 SE2d 851) (2010). In this contract, covered

“mechanical breakdown or failures” does not include failures caused by any

“defects in workmanship or materials,” only by “manufacturing defects in

workmanship or materials,” and as discussed in the previous subdivision,

manufacturing defects are distinct from design defects. Thus, even if the phrase

“workmanship or materials” might be read in isolation to include product


       7
          See Stearns v. Select Comfort Retail Corp., 763 FSupp.2d 1128, 1148 (N.D. Cal. 2010)
(collecting cases and recognizing the division of authority). Compare, e.g., id. (“The Ninth Circuit
has considered the meaning of ‘workmanship’ in the context of exclusions in insurance contracts and
has concluded that ‘workmanship’ includes defects in design.”); and In re Saturn L-Series Timing
Chain Products Liability Litigation, No. 8:07cv298, 2008 WL 4866604, at *15 (D. Neb., Nov. 7,
2008) (concluding that “a defect related to materials and workmanship” and a “design defect” are
“substantially the same,” reasoning that “design is integrated into each step of the manufacturing
process and affects both materials and workmanship”), with, e.g., Brothers v. Hewlett-Packard Co.,
No. C-06-02254, 2007 WL 485979, at *4 (N.D. Cal., Feb. 12, 2007) (“[T]he Limited Warranty does
not guarantee against design defects, it guarantees against defects in materials and workmanship. . . .
Unlike defects in materials or workmanship, a design defect is manufactured in accordance with the
product’s intended specifications.” (emphasis in original)); and Cali v. Chrysler Group LLC, No. 10
Civ. 7606, 2011 WL 383952, at *1 (S.D.N.Y., Jan. 18, 2011) (holding that a limited warranty that
covered only defects in “material, workmanship or factory preparation” did not cover “defects in
vehicle design”).

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design, the EPP expressly limits the covered defects in “workmanship or

materials” to manufacturing defects. See Cooper v. Samsung Electronics Am.,

Inc., 374 Fed. Appx. 250, 253 (3d Cir. 2010) (holding that a warranty covering

“manufacturing defects in materials and workmanship” did not cover design

defects).

            (c)   AGCO also argues that the EPP’s use of the phrase “arising

from” broadens the contract’s coverage to include design defects. The Court of

Appeals found this argument persuasive. Noting that “[w]here a contract

requires that conduct ‘arise out of’ an act, ‘it does not mean proximate cause in

the strict legal sense but instead encompasses almost any causal connection or

relationship,’” the court concluded that “[t]he phrase ‘arising from faults

attributable to manufacturing defects in workmanship or materials’ is broad

enough to include a breakdown or failure related to a manufacturing defect, even

where there was a design or engineering defect.” Lloyd’s, 319 Ga. App. at 263

(citation omitted). We disagree.

      We can assume, without deciding, that the use of the phrase “arising from”

means that the EPP provides coverage if there is “‘nothing more than a slight

causal connection,’” Lloyd’s, 319 Ga. App. at 263 (citation omitted), between

                                       8
a manufacturing defect and the failure of a RoGator. But there can be no causal

connection at all without such a manufacturing defect; the use of the phrase

“arising from” does not transform a product that was correctly manufactured in

accordance with a defective design into a defectively manufactured product.

See Jones, 231 FSupp.2d at 1236 (distinguishing between a manufacturing

defect, where the defect is revealed by comparing the manufactured product to

the product’s design, and a design defect, where the court must determine how

the product should have been designed).

            (d)   Finally, AGCO contends that, because design defects are not

listed in the section of the EPP entitled “What is Not Covered,” they are not

excluded from coverage. There was no reason to exclude such design defects,

however, because they plainly are not covered in the first place.

      Because the EPP does not cover design defects, Cassidy Davis was

entitled to partial summary judgment on that issue, and the trial court and Court

of Appeals erred in ruling otherwise.

      2.    The second contract at issue in this case is the master policy of

insurance between Cassidy Davis and AGCO, in which Cassidy Davis promised

“to indemnify [AGCO] for all sums which [AGCO] shall be held legally liable

                                        9
to pay in respect of [AGCO’s] contractual liability” to its customers under the

EPP. After paying for approximately 25 EPP claims based on RoGator wheel

motor failures, Cassidy Davis notified AGCO in September 2008 that it would

pay no more. In April 2009, AGCO sent the insurer a letter demanding payment

of $410,000 in unreimbursed wheel motor claims and invoking OCGA § 33-4-

6.8 Cassidy Davis refused to pay, and when AGCO filed this lawsuit seeking

damages for breach of contract, it also included a bad faith claim under OCGA

§ 33-4-6.

      Cassidy Davis moved for summary judgment on this claim, arguing,

among other things, that AGCO’s demand letter was premature because no

payment to AGCO was due under the policy at the time the demand was made

and “‘[i]t has long been the law that in order to serve as a bad faith demand, the

demand must be made at a time when immediate payment is due.’” Stedman v.

Cotton States Ins., 254 Ga. App. 325, 327 (362 SE2d 256) (2002) (citation


      8
        OCGA § 33-4-6 (a) says:
              In the event of a loss which is covered by a policy of insurance and the refusal
      of the insurer to pay the same within 60 days after a demand has been made by the
      holder of the policy and a finding has been made that such refusal was in bad faith,
      the insurer shall be liable to pay such holder, in addition to the loss, not more than
      50 percent of the liability of the insurer for the loss or $5,000.00, whichever is
      greater, and all reasonable attorney’s fees for the prosecution of the action against the
      insurer. . . .

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omitted). The trial court denied this summary judgment motion, and the Court

of Appeals affirmed that ruling. It held that AGCO was liable to pay claims

under the EPP “when customers filed claims in accordance with the EPP,” and

that the term “‘indemnify’ is broad enough to include any liability, not just

liability resulting from a judgment.” Lloyd’s, 319 Ga. App. at 265. The Court

of Appeals failed, however, to read the word “indemnify” in its contractual

context.

       The Court of Appeals correctly noted that “‘indemnify’ has been defined

as ‘to reimburse another for a loss suffered because of a third party’s or one’s

own act or default.’” Lloyd’s, 319 Ga. App. at 265 (quoting Certain

Underwriters at Lloyd’s, London v. DTI Logistics, Inc., 300 Ga. App. 715, 718

(686 SE2d 333) (2009)). AGCO alleged that, at the time it sent the demand

letter to Cassidy Davis, it had paid $410,000 in RoGator EPP claims that

Cassidy Davis had not reimbursed.9 If the master policy of insurance said only

that Cassidy Davis had to “indemnify” AGCO for payments that AGCO made

under the EPP, then the Court of Appeals would be correct that the duty to

       9
         Cassidy Davis disputes this allegation, asserting that AGCO had not yet paid the full
$410,000 to its customers at the time of the demand letter. We need not resolve that factual dispute,
but we note that it is clear that until AGCO actually paid an EPP claim, it had not suffered a loss,
so Cassidy Davis was not yet obligated to reimburse AGCO for such a claim.

                                                 11
indemnify arose at that time. However, that is not how this insurance contract

was written.

      Instead, the contract requires Cassidy Davis to indemnify AGCO only for

sums that AGCO has been “held legally liable” to pay. Cassidy Davis contends

that the contract therefore requires a court to have determined that AGCO was

actually liable for the EPP claims it paid before being entitled to reimbursement.

See Permasteelisa CS Corp. v. Columbia Cas. Co., 377 Fed. Appx. 260, 263,

267 (3d Cir. 2010) (holding that a commercial insurance policy that provided

coverage of amounts for which the insured became “legally obligated to pay”

required “the presentation of proofs in a court of competent jurisdiction and a

finding by the court or jury of [such] liability”); Builders Mut. Ins. Co. v.

Dragas Mgmt. Corp., 793 FSupp.2d 785, 794-797 (E.D. Va. 2011) (collecting

cases and concluding that “the majority of courts to have considered the

question have held that in order for an insured to be ‘legally obligated,’ there

must have been either a final judgment or a settlement as the result of a suit”),

vacated on other grounds, 497 Fed. Appx. 313 (4th Cir. 2012). In response,

AGCO argues that the phrase “legally liable” does not necessarily require that

a legal judgment of liability actually be rendered, only that such liability would

                                       12
be recognized if the issue was brought to a court. See Steven Plitt et al., Couch

on Insurance § 103:14 (3d ed. 2013) (“The term ‘legal liability,’ as used in a

policy of insurance, means a liability such as a court of competent jurisdiction

will recognize and enforce between parties litigant.”).

      Once again, we need not decide what “legally liable” would mean

standing alone, because AGCO’s argument again ignores the context in which

that phrase is used, namely, the word in this contract right before “legally

liable.” The policy does not provide indemnification for EPP claims for which

AGCO is “legally liable,” only claims for which AGCO has been “held legally

liable.” Thus, Cassidy Davis is required to indemnify AGCO only when there

has been an actual holding of legal liability by a court, not merely the possibility

of such a holding or the prediction of such a holding by the insured.

      AGCO finally asserts that “the intent of the policy” is to establish a system

whereby Glynn General Corporation, the administrator of the EPP program,

would pay customer claims from funds provided by Cassidy Davis. There is

evidence that Cassidy Davis followed this arrangement by providing funds to

pay for the initial 25 or so RoGator wheel motor claims, although no court

judgment requiring payment of those claims had been entered. AGCO contends

                                        13
that this conduct proves that the parties intended that Cassidy Davis’s obligation

to indemnify AGCO would be triggered as soon as a customer made a claim in

accordance with the EPP. See Scruggs v. Purvis, 218 Ga. 40, 42 (126 SE2d

208) (1962) (“The construction placed upon a contract by the parties thereto, as

shown by their acts and conduct, is entitled to much weight and may be

conclusive upon them.”).

       Cassidy Davis’s voluntary reimbursement for the initial RoGator EPP

claims does not prove, however, that the contract requires those payments before

the entry of a judgment establishing AGCO’s legal liability under the EPP —

just as AGCO’s payment of some EPP claims in order to generate customer

goodwill does not make AGCO legally liable for all claims presented under the

EPP.10 More fundamentally, the phrase “held legally liable” in the master policy

of insurance is not ambiguous, and we therefore need not look beyond the

contract’s language to understand its intent. See Hartley-Selvey v. Harley, 261

       10
          An AGCO employee admitted in his deposition that AGCO had made some “goodwill”
payments to customers, meaning that it paid some claims for RoGator wheel motor failures that
AGCO did not believe it was legally obligated to pay. Likewise, the master insurance policy does
not preclude Cassidy Davis from reimbursing AGCO for EPP claims until there has been a court
holding as to AGCO’s liability for the claims, and indeed Cassidy Davis could do so to maintain
goodwill or to avoid an obvious litigation result where it believes the claims were in fact covered.
Cassidy Davis explains that it takes a number of claims to suspect that a defect occurred in design
rather than in manufacturing, which is a plausible explanation for why the insurer cut off the
reimbursements after paying around 25 of them.

                                                14
Ga. 700, 701 (410 SE2d 118) (1991) (“[W]here the terms of a contract are clear

and unambiguous, the court must look to those terms alone to determine the

intent of the parties.”).

      Thus, AGCO’s claim for indemnification from Cassidy Davis did not —

and will not — accrue until AGCO’s legal liability for EPP claims has been

established by a court holding. Because Cassidy Davis was therefore entitled

to summary judgment on the bad faith claim, the trial court and Court of

Appeals erred in ruling to the contrary.

      3.     We close by noting that neither of our rulings ends this case. On

remand, AGCO could still prevail by showing that the RoGator wheel motor

failures were in fact caused by a manufacturing defect, bringing those claims

under the EPP’s coverage. And if the court so holds, then Cassidy Davis’s duty

to indemnify AGCO for all sums paid on such claims for which AGCO had been

held legally liable to its customers would be triggered.

      Judgment reversed and case remanded. All the Justices concur.



                            Decided March 17, 2014.

      Certiorari to the Court of Appeals of Georgia – 319 Ga. App. 260.


                                       15
      McMickle, Kurey & Branch, Scott W. McMickle, Michael P. Johnson,

for appellant.

      Freeman, Mathis & Gary, T. Bart Gary, Seth F. Kirby, for appellee.




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