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Insurance Law News - March 2016

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Insurer Has Duty to Defend Insured Bedding Manufacturer in Class Action Lawsuit Arising from Sale of Allegedly Defective Mattresses

A general liability insurer had a duty to defend its insured, a bedding manufacturer, against a consumer class action lawsuit arising from the insured's sale of allegedly defective mattresses. (Hartford Fire Ins. Co. v. Tempur-Sealy International, Inc. (2016) WL 232431)


Several individual plaintiffs filed a federal court class action lawsuit against Tempur-Sealy International, Inc. (Tempur-Sealy). In their complaint, the plaintiffs alleged that Tempur-Sealy failed to inform consumers that (1) Tempur-Sealy mattresses "emit a chemical odor caused by volatile organic compounds … off-gassing from" the mattresses; (2) the odor contains formaldehyde, a known human carcinogen; and (3) exposure to the odor causes consumers to suffer bodily injury (such as respiratory problems and allergic reactions) and property damage (such as contamination of pajamas and other items of clothing). The plaintiffs alleged that if they had known the true facts, they "would not have purchased [Tempur-Sealy] products for the retail price paid." The plaintiffs also specifically alleged that they "do not seek damages for physical injuries." The plaintiffs' complaint contained claims against Tempur-Sealy based on various state consumer protection statutes, including California's Unfair Competition Law, False Advertising Law, and Consumers Legal Remedies Act.

Tempur-Sealy tendered the defense of the class action lawsuit to its general liability insurer, Hartford Fire Insurance Company (Hartford), under consecutive policies which were in effect between 2004 and 2013. The policies provided that Hartford would defend Tempur-Sealy against suits seeking damages because of "bodily injury" or "property damage" caused by an "occurrence" and not otherwise excluded. Hartford agreed to defend Tempur-Sealy in the class action lawsuit, subject to a reservation of rights.

Hartford then filed a federal court declaratory relief action seeking a ruling that Hartford had no duty to defend Tempur-Sealy in the class action lawsuit. Hartford and Tempur-Sealy later filed cross-motions for summary judgment on the duty to defend issue.


The federal district court, applying California law, held that Hartford was obligated to defend Tempur-Sealy against the plaintiffs' claims in the underlying class action lawsuit.

According to the federal district court, the plaintiffs in the class action lawsuit were potentially seeking damages against Tempur-Sealy because of both "bodily injury" (which the policies defined as "bodily injury, sickness or disease sustained by a person") and "property damage" (which the policies defined as "physical injury to tangible property" and "loss of use of tangible property that is not physically injured"). The court reasoned that the complaint in the underlying class action lawsuit included detailed factual allegations describing the bodily injuries and property damage caused by Tempur-Sealy's products. According to the court, on their face, the "facts alleged" in the underlying complaint "clearly demonstrate the potential for liability" under the policies. It was irrelevant that the plaintiffs in the underlying suit expressly alleged that they were not seeking damages for bodily injury, because "the third-party plaintiff cannot be the arbiter of coverage." Moreover, while the policies' "product" exclusions would bar coverage for any property damage to Tempur-Sealy's own products (i.e., the mattresses themselves), the product exclusions would not bar coverage for property damage to other property (e.g., pajamas and other items of clothing).

The federal district court also concluded that the plaintiffs' claims against Tempur-Sealy in the underlying class action lawsuit were potentially caused by an "occurrence" (which the policies defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions"). According to the court, this was not a situation where Tempur-Sealy could only be held liable for purely economic damages caused by "misrepresentations" (which would not qualify as "occurrences"). Rather, the allegations in the underlying class action complaint suggested that Tempur-Sealy could also potentially be held liable for bodily injury or property damage directly caused by an allegedly "defective product" (which would qualify as an "occurrence").

Because the plaintiffs in the underlying class action lawsuit were "potentially" seeking covered damages from Tempur-Sealy, Hartford had a duty to defend.


The federal district court liberally construed California's already broad duty to defend standard. The court reasoned that although "product defect" causes of action were not explicitly pled in the underlying complaint, there was a "potential" that such causes of action could be added by future amendment. The court distinguished earlier cases such as Low v. Golden Eagle Ins. Co. (2002) 99 Cal.App.4th 109, The Upper Deck Co., LLC v. Fed. Ins. Co. (9th Cir.2004) 358 F.3d 608 and Sony Computer Entertainment America Inc. v. American Home Assurance Co. (9th Cir.2008) 532 F.3d 1007, all of which had held that insurers were not obligated to defend insureds in underlying consumer class action cases.  According to the federal district court, in the Low, Sony and Upper Deck cases, none of the underlying complaints actually contained factual allegations that would support covered claims for bodily injury or property damage. Here, by contrast, the federal district court characterized the underlying complaint as being replete with factual allegations that would support covered claims for bodily injury or property damage. As such, the insurer had a duty to defend.


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Business Interruption and Extra Expense Coverage for Off Premises Damage to Property of "Direct Supplier" Did Not Apply Where Manufacturer Did Not Have Contractual Relationship with Supplier's Subcontractor

An insured's business interruption and extra expense coverage for off premises damage to property of a "direct supplier" did not apply where the insured did not have a contractual relationship with the supplier's subcontractor, did not pay the subcontractor and did not receive goods directly from the subcontractor. (DIRECTV v. Factory Mutual Ins. Co. (2016) WL 386021)


DIRECTV distributes digital entertainment programming, primarily via satellite, to residential and commercial subscribers. DIRECTV satellite dishes pick up signals from satellites and transmit those signals to a set-top box, which in turn transmits the signals to the subscriber's television.

DIRECTV contracted with four companies to manufacture and supply set-top boxes. Some set-top boxes included, as a component part, hard disk drives. All four of the set-top box manufacturers used hard disk drives made by two companies, one of which was Western Digital Technologies, Inc.

DIRECTV categorized its four set-top box manufacturers as its "Tier 1" suppliers and characterized Western Digital as a "Tier 2" supplier. DIRECTV shared pricing and technical specification requirements with Western Digital, and DIRECTV instructed its set-top box manufacturers to use only certain Western Digital products. However, DIRECTV did not contract directly with Western Digital, purchase any hard disk drives directly from Western Digital or receive any hard disk drives directly from Western Digital.

Factory Mutual Insurance Company issued a property insurance policy to DIRECTV. The policy provided coverage for both property damage and time element (business interruption) losses. A "contingent time element" provision of the policy extended coverage, including business interruption and extra expense coverage, beyond DIRECTV's own property to certain "contingent time element locations." The policy's definition of such locations included any location "of a direct supplier, contract manufacturer or contract service provider."

Flooding damaged two of Western Digital's hard drive manufacturing facilities. Although the flooding did not affect any of the four set-top box manufacturers' facilities, DIRECTV alleged that the damage to the Western Digital facilities reduced the supply of hard disk drives available for incorporation into DIRECTV's set-top boxes. DIRECTV further claimed that the resulting price increase in Western Digital hard disk drives, as well as the expense of obtaining substitute hard disk drives from another manufacturer, caused DIRECTV approximately $22 million in losses and extra expenses.

DIRECTV made a claim under the Factory Mutual policy for contingent time element losses. Factory Mutual denied the claim on the basis that Western Digital was not DIRECTV's "direct supplier," and therefore did not fall within the ambit of the contingent time element location provision. DIRECTV then sued Factory Mutual in federal court, asserting that, despite the lack of any contractual relationship between Western Digital and DIRECTV, Western Digital was nevertheless a "direct supplier" because of the direct working relationship between the two. Factory Mutual moved for summary judgment against DIRECTV.


The federal district court granted Factory Mutual's motion.

The only question before the court was whether the terms "direct supplier, contract manufacturer or contract service provider," as found in the policy, were applicable to the relationship between DIRECTV and Western Digital. The court concluded that DIRECTV's relationship with Western Digital did not fall within the meaning of these terms, because DIRECTV did not have a contract with Western Digital, never paid Western Digital anything, and never received any hard disk drives directly from Western Digital. Instead, Western Digital hard drives only flowed to DIRECTV as a component part of set-top boxes manufactured by third parties with whom DIRECTV did have a contractual relationship. Because Western Digital was not a "direct supplier, contract manufacturer or contract service provider" of DIRECTV, DIRECTV could not recover under the Factory Mutual policy.


The interpretation of a policy provision presents an issue of law, not an issue of fact. Hence, a dispute that turns on the interpretation of a policy provision is ripe for resolution by motion for summary judgment.

Here, DIRECTV argued that the phrase "direct supplier" should be defined according to its usage in the "electronics supply chain industry." However, DIRECTV was unable to point to any evidence that the parties intended the term "direct supplier" to have some technical or industry-specific definition, nor any usage of that phrase either within or outside the policy itself in a manner that would suggest a definition other than the ordinary and popular one.

The court noted that policy did include specialized definitions of otherwise ordinary terms, including "location," "occurrence," "wind," "earth movement," "flood," "terrorism," "contamination" and "normal." The court concluded that the fact that "direct supplier" was not defined anywhere in the policy suggests that the parties did not intend the term to carry any technical or specialized meaning. Thus, the court interpreted the term "direct supplier" according to its "ordinary and popular" meaning.


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