IL App. (1st Dist.) / Products and Services Exclusion

Broad Exclusion Applies Even to Claims Regarding Sale Through Intermediary

The 1st District Appellate Court of Illinois, in an opinion by Justice Gordon, affirmed the trial court’s grant of summary judgement for The Hanover Insurance Company (“Hanover”) against its insureds, holding that Hanover did not have a duty to defend due to a broad “Products and Services Liability” exclusion in its insurance policy issued to MRC Polymers, Inc. (“MRC”).  The appellate court found the exclusion barred coverage not only in situations where the insured offered the product directly to the end user but was also broad enough to encompass claims related to sales through intermediaries.

MRC is a recycling company that used a proprietary “washline technology” in its business of recycling postindustrial and postconsumer plastic waste.  In 2012, MRC sold the intellectual property rights and physical assets related to this technology to different affiliated entities.  In 2013, MRC and its affiliates entered into a contract with PP V (AIV) MRH, LLC (“Pegasus”) in which Pegasus (through subsidiaries) purchased or leased a variety of MRC‘s assets, including the washline technology.  The sale was predicated on projections of the yield of the washline technology provided by MRC and its affiliates.  In 2016, Pegasus sued MRC in two separate suits seeking recission of the contract based on fraudulent inducement and fraudulent misrepresentation after the projections related to the washline technology were not realized.  MRC is the named insured on a private company management liability insurance policy issued by Hanover.  MRC tendered defense of both Pegasus suits to Hanover under the directors and officers and entity liability coverage of the insurance policy.  Hanover then brought a declaratory judgement action against MRC and affiliates, seeking a declaration that it did not owe a duty to defend or indemnify MRC pursuant to a “Products and Services Liability” exclusion in the policy.  The parties filed cross-motions for summary judgment.  The trial court granted summary judgment in favor of Hanover and against MRC.

Per the exclusion at issue, coverage under the policy did not apply to losses “arising out of or in any way related to any Claim for a Wrongful Act by reason of or in connection with the efficacy, performance, health or safety standards and/or proprietary licensing rights for any services, products or technologies offered, promised, delivered, produced, processed, packaged, sold, marketed, distributed, advertised and/or developed by the Insured Entity.”  MRC acknowledged that the exclusion did apply to allegations in the underlying complaint where MRC “offered, promised, delivered, produced, packaged, sold, marketed, distributed, advertised and/or developed” to Pegasus.  However, MRC argued that there were allegations that fell outside of the exclusion, such as those that alleged that MRC’s affiliates offered or develop the technology, not MRC itself, thus triggering Hanover’s duty to defend.

MRC also claimed that the underlying complaint included causes of action based on vicarious liability, which by their nature meant that the wrongful acts were committed by a party other than MRC, and therefore did not fall within the exclusion.

The appellate court rejected these arguments.  At the outset, the appellate court pointed out that it is possible for more than one entity to offer or develop a technology, so the allegation that an affiliate offered or developed the technology does not automatically bring the claims outside of the exclusion with regard to MRC.  Further, the appellate court found that the exclusion was extremely broad and applied even in circumstances where the insured did not offer the product directly to the end user.  The loss arose from a claim for a wrongful act in connection with the performance of technologies offered by MRC, which satisfied all of the requirements of the exclusion.  Thus, even though MRC had sold the rights to the technology to an affiliate who then sold the technology to Pegasus, the plain language of the exclusion applied.

MRC also tried to argue that allegations against MRC were based on the conduct of Dean Eberhardt, an executive for various MRC affiliates and a former MRC executive, and that it was “more reasonable” to infer that Eberhardt was acting on behalf of the affiliates, not MRC.  The appellate court rejected this argument because the underlying complaint expressly alleged that Eberhardt was acting on behalf of MRC, and the appellate court “cannot disregard these allegations simply because defendants disagree with them.”

Finally, MRC also argued that the trial court erred in refusing to consider extrinsic evidence that MRC did not own and did not develop the washline technology itself, but that it in fact licensed it from a third party.  The appellate court rejected this argument and agreed with the trial court, pointing out that even if the technology had been developed by a third party, the fact remained that the claim at issue was connected to MRC’s sale of its rights to that technology, which is sufficient to trigger the exclusion, and so that fact would not have changed the outcome. Hanover Ins. Co. v. MRC Polymers, Inc., 2020 IL App (1st) 192337 (September 10, 2020).