Hennepin County District Court File No. CT-012583
Considered and decided by Hudson, Presiding Judge, Kalitowski, Judge,
and Forsberg, Judge.
1. Under these standard commercial general liability policies, coverage is excluded for damage to the insured's product arising out of the product and for damage to other property incurred while repairing or replacing the insured's product.
2. Under these standard commercial general liability policies, coverage is excluded for the repair or withdrawal of the insured's product or other property impaired because it contains the insured's property, because of a known or suspected defect; this exclusion extends to property damaged because of the repair or withdrawal of the defective product.
3. Tangible property fully integrated into an insured's product so as to be inseparable from the product is not "other property."
The opinion of the court was delivered by: Forsberg, Judge*fn1
In this declaratory judgment action, appellant insured, Bright Wood Corporation, challenges the grant of summary judgment to respondent insurers, Bankers Standard Insurance Company and California Insurance Company. Respondents denied coverage for damages incurred when wood window sash components supplied by appellant Bright Wood failed to meet contract specifications, forcing its customer, Scherer Brothers Lumber Company, to remove and replace all window sashes suspected of containing the defective components. Bright Wood contends that summary judgment was inappropriately granted because genuine issues of material fact remain concerning whether property other than its product was damaged or rendered useless. We disagree and affirm.
Bright Wood Corporation manufactures wood sash components for windows. Scherer Brothers Lumber Company manufactures windows using components provided from various suppliers. In 1996, Scherer entered into a contract with Bright Wood through JJJ Specialty Company, a building materials representative, to supply the wood components that surround the glass in a window sash. In its contract with Bright Wood, Scherer specified that the wood sash components had to be treated with a wood preservative to prevent rot. From October 1996 to November 1997, Bright Wood failed to treat the sash components sold to Scherer. While reviewing milling records in late 1997, a Bright Wood employee discovered that the components had not been treated; Bright Wood did not inform either Scherer or its insurers about the problem, but began to treat the components with a preservative. Unaware of the problem, Scherer continued to use both treated and untreated components, installing them in between 50,000 and 90,000 sash units.
In late 1997, Scherer received at least two service requests for windows with problems with discoloration and stripped hardware. In 1998, while inspecting for hail damage after a bad storm, Scherer noticed a number of windows with discolored sash components and began to receive numerous complaints about discolored or deteriorating windows. Scherer notified Bright Wood that there appeared to be a problem with Bright Wood's preservative process. On December 1, 1999, Bright Wood's CEO, Dallas Stovall, met with representatives of Scherer and JJJ, the building materials representatives, to discuss the increasing problem of rotting windows. Stovall did not disclose the failure to treat the wood, but on December 3 notified Bright Wood's insurance agent of a potential liability. On January 14, 2000, Stovall wrote to JJJ stating that a review of Bright Wood's records indicated that from October 1996 through November 1997, it failed to treat the wood sash components supplied to Scherer with preservatives.
Scherer embarked on a repair program. Initially, Scherer responded to complaints and replaced visibly defective parts during field visits. It found that it could not reliably determine which sash units would rot and began on-site replacement of all wood sash components manufactured in 1996 and 1997. During these repairs, the windows showed no other damage or deterioration except to the Bright Wood components. However, in order to replace the wood sash components, Scherer technicians necessarily had to remove weather stripping, hardware, and aluminum cladding. The windows also had to be refinished.
As the scope of the problem grew, Scherer decided it was more efficient to replace the entire window with a newly manufactured window; although material costs were somewhat higher, labor costs were lower. This again meant that window finishes had to be redone to match. In all the inspections and replacements, no defect or damage was noted in any part of the windows except to the wood sash components provided by Bright Wood. The only damage to non-Bright Wood components occurred during the repair process.
Scherer sued Bright Wood for breach of contract and warranties. The two companies settled for $8.2 million in December 2001. In February 2001, Bright Wood brought this declaratory judgment action, after respondents Bankers Standard Insurance Company and California Insurance Company both denied coverage. California provided comprehensive general liability coverage for Bright Wood from January 1, 1995 to January 1, 1998. Bankers provided comprehensive general liability coverage beginning January 1, 1998. California moved for summary judgment, asserting that because Scherer did not start receiving complaints until 1998, any occurrence, as defined in its policy, happened after its policy period ended on January 1, 1998. On August ...