In a sensitive opinion incorporating several redactions, apparently due to national security issues, the court found that the business risk exclusions raised by the insurer did not apply in determining whether there was a duty to defend. Innovative Mold Solutions v. All Am. Ins. Co., 2016 U.S. Dist. LEXIS 91671 (D. Mass. July 12, 2016).
Innovative Mold Solutions (IMS) was a subcontractor of ITT Power Solutions, which was awarded a contract by the United States Army to develop the product. IMS was to manufacture the molded components of the power supply assembly of the product. At some point, ITT Power Solutions employees began to notice that defective power supply cases were being shipped from IMS. The defects included bubbling, flaking, and burn marks on the plating of the cases. ITT Power Solutions refused to disclose the defects. Michael Ladas, the director of quality at ITT Power Solutions, was terminated after he attempted to disclose the defects.
IMS was sued in a qui tam False Claims Act (FCA) suit brought by Ladas. The complaint alleged that IMS had violated the FCA by manufacturing contractually noncompliant and defective components of an undisclosed product, which were provided to the United States. IMS tendered its defense to All America, but the defense was denied based on the allegations in the Ladas complaint.
Ladas eventually settled with IMS for $25,000. But IMS spent more than $400,000 in defending the allegations in the Ladas complaint. IMS sued All American, seeking a declaratory judgment that All American had a duty to defend.
The court first determined that the Ladas complaint alleged "property damage." IMS allegedly used faulty epoxy which potentially caused damage to components that were supplied by other entities. The court also found the Ladas complaint alleged an "occurrence." The Ladas complaint did not conclusively establish that the results of changing the epoxy process were not accidental.
Turning the business risk exclusions, All American relied upon Exclusions J (6) which applied to the costs of repairing damage to other aspects of an overall project, if the costs were directly caused by a subcontractor's faulty work. The exclusion did not apply to "property damage" included in the "products-completed operations hazard," however. The products-completed operations hazard included "all . . 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work.'"
Here, IMS's work was itself a component part of a larger product. The complaint did not allege that IMS's faulty work caused damage to any third-party. This was distinguishable from a scenario in which the insured's negligent work on a project caused damage to third-party property that was not part of the overall project, in which case the faulty-workmanship exclusion would not apply.
Nevertheless, the J (6) exclusion did not apply to property damage included in the products-completed operations hazard. According to the Ladas complaint, the weak adhesion could appear satisfactory at first but then would develop damage as the product was exposed to various temperatures, moisture, and electrical power. Thus, the latent nature of the alleged damaged suggested that much of it did not occur until the products had left IMS's facilities.
Therefore, the Ladas complaint alleged that property damage may have occurred away from IMS's premises, arising out of IMS's product or work. This damage would be covered by the products-completed operations hazard, which meant that it would not be subject to the J (6) exclusion.
Accordingly, All America had a duty to defend.
