                                                                                                                           Opinions of the United
2009 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-14-2009

Nationwide Mutl Ins v. CPB Intl Inc
Precedential or Non-Precedential: Precedential

Docket No. 07-4772




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                                            PRECEDENTIAL

          UNITED STATES COURT OF APPEALS
               FOR THE THIRD CIRCUIT


                          No. 07-4772


    NATIONWIDE MUTUAL INSURANCE COMPANY

                                v.

             CPB INTERNATIONAL, INC.;
          NBTY, INC.; REXALL SUNDOWN, INC.

                      CPB International, Inc.,
                                      Appellant


APPEAL FROM THE UNITED STATES DISTRICT COURT
  FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
               (D.C. Civil No. 06-cv-00363)
      District Judge: Honorable A. Richard Caputo


          Submitted Under Third Circuit LAR 34.1(a)
                       March 3, 2009


      Before: BARRY, WEIS, and ROTH, Circuit Judges

                (Opinion Filed: April 14, 2009)



Kathryn A. Dux, Esq.
German, Gallagher & Murtagh
200 South Broad Street
5th Floor
Philadelphia, PA 19102-0000

Charles E. Haddick, Jr., Esq.
Dickie, McCamey & Chilcote
1200 Camp Hill Bypass
Suite 205
Camp Hill, PA 17011-0000

Counsel for Appellee


Michael D. Collins, Esq.
P.O. Box 588
Shawnee Square, Buttermilk Fall Road
Shawnee-on-Delaware, PA 19356-0000

Counsel for Appellant



                  OPINION OF THE COURT


BARRY, Circuit Judge

        CPB International (“CPB”) appeals the District Court’s
grant of Nationwide Mutual Insurance Company’s (“Nationwide”)
motion for summary judgment in this declaratory judgment action
that Nationwide filed to determine its obligations under a
commercial general liability (“CGL”) policy it had issued to CPB
(the “policy”). The central issue is whether the policy required
Nationwide to defend and indemnify CPB against an action
brought by Rexall Sundown, Inc. and a related corporation, NBTY,
Inc. (collectively “Rexall”). The action alleged that CPB breached
a contract for the delivery of goods by providing a defective
product and sought consequential damages for that breach. The
District Court held that because the underlying claim was
“contractual in nature,” it was not covered by the terms of the
policy. We will affirm, predicting, as we do so, that the Supreme
Court of Pennsylvania would hold that an action arising out of a
contract between the parties is not covered by a CGL policy in
Pennsylvania.
                                 I.


                              -2-
        CPB is an importer and wholesaler of chondroitin, a
nutritional supplement made from animal cartilage. CPB imports
chondroitin manufactured in China and sells it to companies in the
United States which combine chondroitin and glucosamine, a
nutritional supplement made from crab, lobster and shrimp shells,
with other ingredients to manufacture nutritional tablets. The
tablets are beneficial to people who suffer from osteoarthritis.
Nationwide issued a CGL policy to CPB, which the parties agree
was in effect at the time of the alleged breach. Under the policy,
Nationwide agreed to “pay those sums that [CPB] be[came] legally
obligated to pay as damages because of . . . ‘property damage’ to
which this insurance applies.” (Appendix at 134.)

        Although the present action is between Nationwide and
CPB, the underlying dispute is between Rexall and CPB. Our
focus is whether that dispute triggers Nationwide’s duties under the
policy.

          A. The Underlying State Court Litigation.

        CPB has been a Rexall vendor since at least 1997, and
agreed, as recently as June 11, 2003, to Rexall’s vendor compliance
regulations. Pursuant to that agreement, CPB promised to deliver
products of the highest industry standards, and Rexall was entitled
to reject imperfect goods and all goods not conforming to purchase
order requirements.

        On October 1, 2004, Rexall ordered 10,000 kilograms of
chondroitin at seventy-six dollars per kilogram from CPB. On
October 27, 2004, Rexall ordered an additional 10,000 kilograms
of chondroitin at the same price. In December 2004, CPB filled the
first order, and billed Rexall $760,000 by invoice. Rexall paid the
invoice in January 2005. Thereafter, CPB partially filled Rexall’s
second order by sending it 9,500 kilograms of chondroitin, and
billing it $722,000. Rexall did not pay for the second shipment.

        In April 2005, CPB filed suit against Rexall for breach of
contract and demanded payment for the second shipment. Rexall
filed an answer and counterclaim (the “underlying claim”), alleging
that the chondroitin that was shipped to it was deficient, of
improper composition, and unusable for its intended purpose, and

                               -3-
that the delivery of the material constituted a material breach of
contract. Rexall thus sought return of its initial $760,000 payment
and consequential damages in an amount exceeding $1,195,465 for
the shipment of the allegedly defective chondroitin. Rexall did not
discover that the chondroitin was of improper composition until
after it had already combined it with glucosamine and other
ingredients to form the nutritional tablets. The tablets, which were
mixed with ingredients valued at more than $991,015, are now
allegedly useless and without value.

        CPB tendered the underlying claim to Nationwide pursuant
to the policy. Nationwide assumed defense of the action, but did so
under a reservation of rights.

                            B. The Policy.

        Nationwide is bound to pay damages that CPB “becomes
legally obligated to pay . . . because of . . . ‘property damage’ to
which [the policy] applies.” The policy applies “only if . . .
‘property damage’ is caused by an ‘occurrence’ that takes place in
the ‘coverage territory.’” (Appendix at 134.) Both “property
damage” and “occurrence” are defined terms. Property damage
means “[p]hysical injury to tangible property, including all
resulting loss of use of that property . . . or [l]oss of use of tangible
property that is not physically injured.” (Id. at 147.) “Occurrence”
is defined as “an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.”
(Id. at 146.)

       The policy also features express exclusions, including one
that is particularly relevant here. Exclusion “b” is entitled
“Contractual Liability,” and states that the “insurance does not
apply to . . . ‘property damage’ for which the insured is obligated
pay damages by reason of the assumption of liability in a contract
or agreement.” (Appendix at 135.)1


       1
           The contractual liability exclusion also has two carve outs:

       This exclusion does not apply to liability for damages:
              (1) That the insured would have in the absence of the
                                  -4-
                     C. The Present Action.

       On February 16, 2006, Nationwide filed this action seeking
a declaratory judgment that it owed no duty to defend or indemnify
CPB against Rexall’s claims. Nationwide asserted that the
underlying claim did not allege an “occurrence” covered under the
policy, and, alternatively, that the contractual liability exclusion
barred coverage. CPB, in turn, filed a counterclaim on May 8,
2006, seeking a judgment declaring precisely the opposite – that
Nationwide does owe CPB a duty to defend and indemnify it
against the claims asserted by Rexall.

        The parties filed cross-motions for summary judgment, and
the District Court granted Nationwide’s motion. It held that
“[b]oth the allegation that CPB did not provide the material it was
obligated to under the contract [with Rexall], and the allegation that
such breach caused consequential damage to [Rexall’s] property
are claims based on duties CPB owed [Rexall] only by virtue of
having entered into a contract with [it]. As such, the underlying
claims are based in contract, and do not arise from covered
‘occurrences.’” (Appendix at 18-19.) Alternatively, the Court held
that the contractual liability exclusion applied to Rexall’s claims.


                                 II.

       “Our standard of review of a grant of summary judgment is
plenary.” Gardner v. State Farm Fire & Cas. Co., 544 F.3d 553,




              contract or agreement; or
              (2) Assumed in a contract or agreement that is an
              ‘insured contract,’ provided the . . . ‘property
              damage’ occurs subsequent to the execution of the
              contract or agreement.

(Appendix at 135.) “Insured contract” is a defined term, and is not
relevant here. (See id. at 145 (term includes a lease, sidetrack
agreement, easement, license agreement, obligation to indemnify
a municipality, and elevator maintenance agreement).)
                                -5-
557 (3d Cir. 2008).2

       “Under Pennsylvania law, which the parties agree is
applicable here, the ‘interpretation of an insurance contract
regarding the existence or non-existence of coverage is generally
performed by the court.’” Id. at 558 (quoting Donegal Mut. Ins. Co.
v. Baumhammers, 938 A.2d 286, 290 (Pa. 2007)); see Kvaerner
Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co.,
908 A.2d 888, 897 (Pa. 2006) (“The interpretation of an insurance
contract is a question of law that we will review de novo”).

       Our inquiry is straightforward. We look first to the terms of
the policy which are a manifestation of the “intent of the parties.”
Baumhammers, 938 A.2d at 290. “When the language of the
policy is clear and unambiguous, we must give effect to that
language.” Id. (quoting Kvaerner, 908 A.2d at 897). “However,
‘when a provision in the policy is ambiguous, the policy is to be
construed in favor of the insured . . . .’” Id. (quoting Kvaerner, 908
A.2d at 897). Next, we compare the terms of the policy to the
allegations in the underlying claim. “It is well established that an
insurer’s duties under an insurance policy are triggered by the
language of the complaint against the insured.” Kvaerner, 908
A.2d at 896.3 “In determining the existence of a duty to defend, the
factual allegations of the underlying complaint against the insured


       2
         The District Court exercised diversity jurisdiction under 28
U.S.C. § 1332, and we have jurisdiction over the final order of the
District Court pursuant to 28 U.S.C. § 1291.
       3
         Although this action involves both the duty to defend and
the duty to indemnify, we are concerned primarily with the former
which is broader than the latter. Kvaerner, 908 A.2d at 896 n. 7;
see General Accident Ins. Co. of America v. Allen, 692 A.2d 1089,
1095 (Pa. 1997) (“duty to defend is separate from and broader than
the duty to indemnify, [though] both duties flow from a
determination that the complaint triggers coverage”). A finding
that the duty to defend is not present will preclude a duty to
indemnify. Kvaerner, 908 A.2d at 896 n. 7. “Thus, if
[Nationwide] does not have a duty to defend [CPB] in this suit,
neither does it have the duty to indemnify.” Id.
                                -6-
are to be taken as true and liberally construed in favor of the
insured.” Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193
F.3d 742, 746 (3d Cir. 1999).

       Thus, we look to the language of the policy “to determine in
which instances [it] will provide coverage, and then examine
[Rexall’s counterclaim] to determine whether the allegations set
forth therein constitute the type of instances that will trigger
coverage.” Kvaerner, 908 A.2d at 897. If we conclude that a
“single claim in a multi-claim lawsuit is potentially covered, the
insurer must defend all claims until there is no possibility that the
underlying plaintiff could recover on a covered claim.” Frog, 193
F.3d at 746. Because it is clear that the underlying complaint
alleges property damage as that term is used in the policy, this
appeal turns on whether the alleged breach is an occurrence.

          A. Claims Based on Faulty Workmanship.

        In Kvaerner, the Supreme Court of Pennsylvania interpreted
policy language identical to that at issue here. See 908 A.2d at 897
(policy defined “occurrence” as “an accident, including continuous
or repeated exposure to substantially the same or general harmful
conditions”). The court noted that the “key term in the ordinary
definition of ‘accident’ is ‘unexpected.’” Id. at 898. There, the
underlying claim, filed by Bethlehem Steel Corporation, alleged
that the insured failed to construct a coke oven battery that met the
agreed-upon contract specifications. Id. at 891. Bethelehem
sought damages for breach of contract and breach of warranty. Id.
The court characterized the claim as one for “faulty workmanship,”
and held that “the definition of ‘accident’ required to establish an
‘occurrence’ under the polic[y] cannot be satisfied by claims based
upon faulty workmanship.” Id. at 899. Perhaps recognizing the
Kvaerner court’s logic, CPB concedes that Rexall’s claim that it
provided defective chondroitin, without more, would not trigger
coverage. See Appellant’s Br. at 12, 24. CPB is correct – Rexall’s
claim that CPB delivered chondroitin of defective quality is an
allegation of faulty workmanship that is not covered by the policy,
although the workmanship involved here is a failure to perform
quality control as to the product to be delivered rather than a failure
to build a coke oven to the proper specifications. See Kvaerner,
908 A.2d at 899.

                                 -7-
         CPB argues, however, that because Rexall’s action alleges
consequential damages, it comes within the ambit of the policy.
That argument is unpersuasive. The precise holding of Kvaerner
is limited to claims that “aver[] only property damage from poor
workmanship to the work product itself,” 908 A.2d at 900, but the
foundation of that holding is that claims for faulty workmanship
“simply do not present the degree of fortuity contemplated by the
ordinary definition of ‘accident’ or its common judicial
construction in this context.” Id. at 899. In other words, it is
largely within the insured’s control whether it supplies the agreed-
upon product, and the fact that contractual liability flows from the
failure to provide that product is too foreseeable to be considered
an accident. See id. Here, although the delivery of defective
chondroitin is not considered an accident, see id., CPB argues that
Rexall’s use of that product should be considered one. That
distinction is inapposite. It is certainly foreseeable that the product
CPB sold would be used for the purpose for which it was sold.
Otherwise, Rexall would lack a claim for consequential damages.
See Ferrer v. Trustees of Univ. of Pennsylvania, 825 A.2d 591, 610
(Pa. 2002) (To prove consequential damages from breach of
contract, plaintiff must establish that “(1) they were such as would
naturally and ordinarily result from the breach, or (2) they were
reasonably foreseeable and within the contemplation of the parties
at the time they made the contract, and (3) they can be proved with
reasonable certainty”).4 Thus, “the degree of fortuity” here is no


       4
         Pennsylvania adheres to the Uniform Commercial Code.
See 13 Pa.C.S.A. § 1101, et seq., which likely applies to the
transaction that gave rise to the underlying claim. See id. at §§
2102, 2104. The U.C.C. has similar requirements for consequential
damages.

        Consequential damages resulting from the breach of the
seller include:
               (1) any loss resulting from general or
               particular requirements and needs of
               which the seller at the time of
               contracting had reason to know and
               which could not reasonably be
               prevented by cover or otherwise; and
                                 -8-
different than that involved in Kvaerner, 908 A.2d at 898.

       The Superior Court of Pennsylvania, when confronted with
an argument similar to the one that CPB makes here, reached the
same conclusion. See Millers Capital Ins. Co. v. Gambone Bros.
Dev. Co., 941 A.2d 706 (Pa. Super. Ct. 2008); see also Nationwide
Mut. Ins. Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir. 2000)
(“opinions of intermediate appellate state courts are not to be
disregarded by a federal court unless it is convinced by other
persuasive data that the highest court of the state would decide
otherwise” (quotations and citations omitted)). In Millers Capital,
the insured was a housing developer, and the plaintiffs in the
underlying action alleged that faulty construction resulted in severe
leaking which damaged the interior of their homes. 941 A.2d at
713. The insured conceded that “Kvaerner stands for the broad
principle that an insurance claim under an occurrence based GCL
policy that defines the ‘occurrence’ as an accident cannot be
premised on a claim of faulty workmanship,” id. at 713, but
contended that the underlying action “involve[d] claims for
ancillary and accidental damages caused by the resulting water
leaks to . . . the home interiors,” and that those claims alleged “an
‘occurrence’ even though the damage to the” home exterior did not.
Id. The Superior Court did “not see any merit in the distinction
[the insured] attempt[ed] to create.” Id. Instead, the Superior
Court interpreted the Kvaerner decision as stating that “natural and
foreseeable acts . . . which tend to exacerbate the damage, effect,
or consequences caused ab initio by faulty workmanship also
cannot be considered sufficiently fortuitous to constitute an
‘occurrence’ or ‘accident’ for the purposes of an occurrence based
CGL policy.” Id. That reasoning applies equally here.


               (2) injury to person or property
               proximately resulting from any breach
               of warranty.

13 Pa. C.S.A. § 2715(b); see id. at § 2313(a)(2) (“Express
warranties by the seller are created as follows . . . [a]ny description
of the goods which is made part of the basis of the bargain creates
an express warranty that the goods shall conform to the
description”).
                                 -9-
         B. Breach of Contract is Not an Occurrence.

       In any event, “Pennsylvania law does not recognize the
applicability of a general liability policy to breach of contract and
breach of warranty claims.” Pennsylvania Mfrs.’ Ass’n Ins. Co. v.
L.B. Smith, Inc., 831 A.2d 1178, 1181 (Pa. Super. Ct. 2003); see
Freestone v. New England Log Homes, Inc., 819 A.2d 550, 553
(Pa. Super. Ct. 2003); Snyder Heating Co. v. Pennsylvania Mfrs.’
Assoc. Ins. Co., 715 A.2d 483, 487 (Pa. Super. Ct. 1998). “The
purpose and intent of a general liability insurance policy is to
protect the insured from essentially accidental injury to the person
or property of another rather than coverage for disputes between
parties to a contractual undertaking.” L.B. Smith, 831 A.2d at
1181.

       CPB argues that because the Supreme Court of
Pennsylvania has not specifically held that actions for breach of
contract are not covered by CGL policies in Pennsylvania, the issue
remains open and coverage should not be denied on that basis. “In
predicting how the highest court of the state would resolve the
issue, we must consider ‘relevant state precedents, analogous
decisions, considered dicta, [and] scholarly works . . . .’” Buffetta,
230 F.3d at 637 (quoting McKenna v. Ortho Pharm. Corp., 622
F.2d 657, 663 (3d Cir. 1980)).

       Sitting en banc in Redevelopment Authority of Cambria
County v. International Insurance Company, 685 A.2d 581 (Pa.
Super. Ct. 1996), the Superior Court of Pennsylvania held that a
CGL policy “do[es] not provide coverage for claims in [an]
underlying action [that] arise out of and relate to the contract
between the parties.” Id. at 592. That language has since become
a well-established principle of insurance interpretation in
Pennsylvania. See L.B. Smith, 831 A.2d at 1181.

         Although the Kvaerner decision did not expressly adopt the
Redevelopment Authority holding, it did offer several indications
that, if presented with the question of whether breach of contract
claims are covered by a CGL policy, the Supreme Court of
Pennsylvania would reach the same conclusion. First, Kvaerner
cites Snyder Heating and approvingly describes the decision as
follows: “The [Snyder Heating] court held that there was no

                               -10-
coverage under the language of the CGL policy because the
complaint set forth solely claims for breach of contract.” 908 A.2d
at 898. Second, Kvaerner states that “[t]he application and
limitations of CGL policies were aptly explained in a seminal law
review article,” and then quotes the article which states, in relevant
part, that: CGL “coverage is for tort liability for physical damages
to others and not for contractual liability of the insured for
economic loss because the product or completed work is not that
for which the damaged person bargained.” Id. (quoting Roger C.
Henderson, [Insurance Protection for Products Liability and
Completed Operations; What Every Lawyer Should Know], 50
Neb. L. Rev. 415, 441 (1971)); see 9A Lee R. Russ & Thomas F.
Segalla, Couch on Insurance § 129:16 (2008) (using same
language). Finally, the Court expressed reluctance to convert a
CGL “policy for insurance into a performance bond,” Kvaerner,
908 A.2d at 899, which echoes the Superior Court’s reticence to
“convert a [CGL] policy into a professional liability policy or a
performance bond” by recognizing coverage for breach of contract.
Redevelopment Authority, 685 A.2d at 592.

        We are, therefore, confident that the Supreme Court of
Pennsylvania would conclude that an underlying claim alleging
breach of contract would not trigger coverage under a CGL policy.
See Snyder Heating, 715 A.2d at 487. The District Court properly
concluded that Rexall’s allegations against CPB “are based in
contract and do not arise from covered ‘occurrences.’” (Appendix
at 19.) See Snyder Heating, 715 A.2d at 487 (citing Phico Ins. Co.
v. Presbyterian Med. Servs. Group, 663 A.3d 753, 757 (Pa. Super.
1995) (“important difference between contract and tort actions is
that the latter lie from a breach of duties imposed by law as a
matter of social policy while the former lie from the breach of the
duties imposed by mutual consensus agreements between particular
individuals”).5


       5
         In Keystone Filler & Mfg. Co., Inc. v. American Mining
Ins. Co., 179 F. Supp. 2d 432 (M.D. Pa.), aff’d mem. 55 Fed Appx.
600 (3d Cir. 2002), a district court applying Pennsylvania law to
very similar facts reached the same conclusion in a persuasive
decision. There, the insured made a carbon-based product from
finely-ground coal, and sold it to a company that used the product
                               -11-
              C. Contractual Liability Exclusion.

          Finally, even if the underlying claim alleged an occurrence
covered by the policy, it fits within the contractual liability
exclusion. That exclusion states that the “insurance does not apply
to . . . ‘property damage’ for which the insured is obligated to pay
damages by reason of the assumption of liability in a contract or
agreement.” (Appendix at 135). The Snyder Heating court
interpreted the same contract language, 715 A.2d at 485, and
concluded that “the CGL policy clearly excludes from coverage
breaches of contract; the policy language provides that the
insurance contract will not apply to [the insured’s] failure to
perform a contract or agreement in accordance with its terms.” 715
A.2d at 487.

                                III.

      For the foregoing reasons, we will affirm the District
Court’s grant of summary judgment in favor of Nationwide.




as a component of plastisol (a material used in automobile filters).
179 F. Supp. 2d at 436. The insured’s product contained oversized
particles and damaged a certain amount of plastisol, rendering it
useless. Id.
        The court noted that the “rule . . . that there is no
‘occurrence’ if the underlying claim is one merely for breach-of-
contract[] has been followed by numerous state and federal courts
sitting in Pennsylvania.” Id. at 440; see id. (cataloguing cases). It
went on to state that the insured’s product “was manufactured in a
way that did not conform to [the purchaser’s] requirements for the
manufacture of plastisol” and that the underlying claim stemmed
from a “breach[] [of] duty imposed by mutual consensus with” the
purchaser. Id. at 442-43. Therefore, it did not trigger coverage.
Id.
                               -12-
