Coverage for an underlying suit involving an alleged defective product was the issue in the detailed, narrative findings of fact and conclusions of law issued by the district court in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., No. B-05-050, 2009 U.S. Dist. LEXIS 70723 (S.D. Tex. Aug. 12, 2009).
Arctic Slope Regional Corporation held a Commercial Umbrella Policy with National Union. Arctic Slope had a self-insured retention of $1 million per occurrence. Arctic Slope's subsidiary, Puget Plastics Corporation, was an additional insured under the policy. Puget also had an underlying primary policy from Wausau with limits of $1 million.
In January 2000, Arctic Slope and Puget agreed with Microtherm, Inc. to mold chambers that would be incorporated into electronically controlled tankless water heaters manufactured and sold by Microtherm. After Puget's repeated delays in production and concerns over the processing parameters used by Puget to mold the chambers, Microtherm terminated the agreement in late 2000.
Thereafter, the chambers began to malfunction. In 2002, Microtherm sued Puget, Arctic Slope and others involved in the manufacture of the water heaters. In December 2004, the jury reached a verdict in favor of Microtherm against Puget, but found that Arctic Slope was not responsible for the acts of Puget. A final judgment of $36,081,807 was entered against Puget.
Wausau defended Puget under a reservation of rights. National Union never defended either Puget or Arctic Slope. Four days after entry of judgment in the underlying case, National Union filed a declaratory judgment action against Puget and Arctic Slope. Meanwhile, the trial court in the underlying case ordered mediation between all parties and their insurers. National Union refused to attend. Puget and Arctic Slope reached an agreement with Microtherm under which Wausau would tender its $1 million limit to Microtherm and Arctic Slope would pay an additional $2 million to Microtherm. In return, Microtherm agreed to release claims and issue a covenant not to execute against the assets of Puget and Arctic Slope. Finally, Puget and Arctic Slope assigned their rights under the National Union policy to Microtherm.
In the declaratory relief action, National Union argued the settlement was contrary to the insurance policy and to public policy, and it was therefore entitled to declaratory relief against Puget and Arctic Slope. The district court went through a meticulous analysis of the facts and policy provisions to eventually decide National Union had no obligations under the policy.
First, the district court found that by denying coverage prior to the mediation, National Union freed Puget and Arctic Slope from their duties under the policy, allowing them to take compromising actions during the negotiations with Microtherm that otherwise would have been barred by the policy. Moreover, there was no collusion between Microtherm and Puget/Arctic Slope in settling the case. However, the policy had an anti-assignment provision, yet neither Puget nor Arctic Slope ever obtained National Union's written consent before assigning policy rights to Microtherm. Such provisions were routinely enforced by Texas courts. Therefore, unless National Union erroneously denied coverage, the assignment to Microtherm would be void.
Next, the district court determined there was only one possible occurrence, meaning only one payment of the self-insured retention would be necessary prior to activating coverage obligations. The single occurrence was Puget's improper molding of the chambers, which constituted a single occurrence under the policy.
Nevertheless, after a detailed analysis of the manufacturing process used by Puget, the district court determined there was no occurrence under the policy. Puget deliberately used substandard processing and work conditions in molding the chambers, and it should have known its process in molding the chambers would make the chambers weak and likely to fail. Consequently, National Union had no duty to defend or to indemnify either Puget or Arctic Slope.
