The Seventh Circuit, applying Indiana law, upheld the lower court’s opinion that an excess insurer had no duty to indemnify its insured for the insured’s customer’s lost profits that the insured became liable due to the failure of the insured’s product.  In making its ruling, the court noted it was possible that the lost profits were covered under the general liability excess policy, but the insured had not presented any evidence that the lost profits were due to property damage as compared to business loss.

Berry Plastics Corporation (“Berry”), a global manufacturer of primarily plastic packaging products, produced a foil laminate product for Packgen, a small firm that manufactures specialized containers for bulk quantities of industrial chemicals. The Berry foil laminate product was to be used on a new type of intermediate bulk container (“IBC”) that could store and ship a chemical catalyst used in the refining of crude oil into other petroleum products.  The foil laminate manufactured by Berry was incorporated into about 2,000 of Packgen’s IBCs and subsequently failed.  Packgen’s client then canceled all pending orders, destroyed the IBCs that Packgen had already shipped and refused to pay Packgen for those containers.  Word of the product’s failure spread, and no additional IBCs were purchased from Packgen.  Packgen sued Barry for breach of contract, breach of express warranty, breach of implied warranty for a particular purpose, and breach of implied warranty for merchantability.  The jury found in favor of Packgen and awarded Packgen $7.2 million, which included lost profits.

Berry demanded that its excess commercial general liability insurer, Illinois National Insurance Company (“Illinois National”), indemnify it for the $6.2 million Berry was liable for after coverage from its primary insurer.  Illinois National denied coverage.  Berry sought a declaration that Illinois National had a duty to indemnify.  On the parties’ cross-motions for summary judgment, the district court entered judgment in favor of Illinois National.

The Illinois National policy covered damages that Berry was required to pay “because of … Property Damage.”  The policy defined “property damage” as both “physical injury to tangible property, including all resulting loss of use of that property” and “loss of use of tangible property that is not physical injury.”   Illinois National took the position that because the entirety of the $6.2 million for which Berry was seeking indemnification from Illinois National represented Packgen’s lost profits on IBCs that had yet to be ordered or manufactured, there was no property damage, and thus, no coverage.  Berry, on the other hand, argued that the entirety of the damages it had been ordered to pay, including the lost profits, were “because of” the property damage Berry’s defective foil laminate had caused to Packgen’s failed IBCs.

On appeal, the issue before the court was whether the damages for Packgen’s lost profits on prospective sales of its IBCs were “because of property damage.”  The court noted that lost profits are a form of business loss and as such are not the type of injury that the ordinary commercial general liability policy insurers against.  Moreover, the Illinois National policy contained classic business risk exclusions that would appear to exclude the losses for which Berry was deemed liable because its product did not function as Berry assured its customer that it would perform.  Based on its interpretation of Indiana law, the court focused its analysis on what the policy terms covered, as opposed to what judicial and public policy doctrines suggest should or should not be covered.

“Given that there is no language in Illinois National’s policy that on its face excludes any category of losses that are incurred ‘because of’ property damage, we are willing to assume, consistent with Berry’s argument, that the Indiana Supreme Court might well leave the door open to coverage of future losses, including lost profits and loss of good will, so long as  the insured can establish a causal relationship between the property damage and those losses.”  Thus, the question became whether the losses were specifically due to property damage or instead due to the failure of Berry’s foil laminate product to function as expected and warranted.  The court found that Berry made no effort, either below or on appeal, to outline a case for the notion that some or all of the lost profits awarded by the jury were the result of property damage.  Instead, Berry “implicitly presumes that because its product failed in such a way as to cause property damage, all damages resulting from the failure of its component were necessarily ‘because’ of property damage.”  Thus, because Berry failed to make a case on point, summary judgment in favor of Illinois National was upheld.  Berry Plastics Corp. v. Illinois National Ins. Co., No. 17-1815 (7th Cir. Sept. 10, 2018).