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Vol. 8 - Issue 1
January 3, 2019


Berry Plastics Corp. v. Illinois National Ins. Co., 903 F.3d 630 (7th Cir. 2018)

Court Opens The CGL Door To Coverage For Lost Future Profit

It is not usual to see a case that addresses whether a commercial general liability policy provides coverage for economic losses, such as lost profits, when an insured’s product causes “property damage.”  Here, consider an insured’s component product that causes a customer’s product to fail, leading the customer to sustain economic losses tied to its actual lost products. 

In Berry Plastics Corp. v. Illinois National Ins. Co., the Seventh Circuit addressed coverage for economic losses tied to an insured’s defective product.  But, here, the court examined whether “property damage” includes lost profits associated with the insured’s customers products that were not damaged – or not even in existence.  In other words, on account of the insured’s defective product, its customer sustained lost future profits. 

Early on the decision, the appeals court has this to say about the potential, in general, for lost profits: “To make an obvious point first, lost profits are a form of business loss and as such are not the type of injury that the ordinary commercial general liability policy insures against. What an insurer like Illinois National undertakes to insure against in such a policy is property damage or bodily injury that results from the manufacturer’s product after it leaves the manufacturer’s hands, which represents a distinctly different form of risk from the disappointed commercial expectations of the manufacturer's customer.”

But, despite such pronouncement, the Seventh Circuit held that coverage for lost future profits have the potential to be covered – and in scenarios that are far from far-fetched.  The insured in Berry Plastics lost -- but for a reason tied to the specifics of the case.  The decision, more generally, is a win for policyholders.  And coming from the Seventh Circuit, addressing an issue without an abundance of case law (on the future profits issue), the decision warranted inclusion here as one of the year’s ten most significant

The facts giving rise to the coverage issue are complex.  In very simple terms, Berry makes plastic packaging products.  It produced a foil laminate product for Packgen.  Packgen was developing, for one of its customers, CRI Catalyst Company, a container that could be used to store and ship a chemical catalyst that CRI produced for use in the refining of crude oil.  The foil layer of the container’s exterior surface failed.  CRI cancelled all pending orders of containers.  At the time of the failure, Packgen was selling over 1,200 containers per month to CRI.  Packgen anticipated that that would continue for the foreseeable future.  Packgen was also making overtures to 37 petroleum refiners.  They had expressed interest in the containers for use in disposing of spent catalyst.  Word of the product’s failure reached the oil refineries.  They made no purchases from Packgen.

Packgen sued Berry.  The jury awarded Packgen $7.2 million, which represented approximately $640,000 for unpaid invoices for containers that had already been shipped to CRI and future lost profits of $6,560,000.  

Berry sought coverage from its primary commercial general liability insurer, which paid its $1,000,000 limit.  However, Berry’s excess insurer, Illinois National, refused.  Berry filed suit.

The district court, with no Indiana case law on point, and, therefore, required to predict how the Indiana Supreme Court would resolve the issue, surveyed case law from other jurisdictions and held that “damages for lost profits are not covered as ‘damages because of ... Property Damage’ unless they are a measure of the actual physical injury to tangible property or for the loss of use of that property.  The profits that Packgen lost on future sales of its [containers] did not constitute such a measure of physical injury or loss of property. Accordingly, the court was convinced that the Indiana Supreme Court would conclude that Illinois National had no duty to indemnify Berry for those lost profits.”

The Seventh Circuit affirmed, but for a reason tied to the specific facts before it.  However, on the overarching issue, the court concluded that coverage could be owed, to an insured, for its liability for its customer’s lost future profits. 

The court’s conclusion was tied to the policy’s insuring agreement: The insurer was obligated to “pay on behalf of [Berry] those sums in excess of the Retained Limit [i.e., the $1 million covered by the (primary) policy] that [Berry] becomes legally obligated to pay as damages by reason of liability imposed by law because of ... Property Damage ... to which this Insurance applies.” 

In particular, the decision was tied to the phrase “because of ‘property damage.’”  Focusing on that phrase, the court’s conclusion was as follows:

“An ordinary understanding of the phrase ‘because of’ would include a broad array of consequential damages, not simply those that constitute a measure of the injury to the property itself. . . . And to the extent that a causal connection can be shown between property damage and lost profits, nothing in the term ‘because of property damage’ suggests that such lost profits necessarily should be excluded. If the delamination of Berry’s defective product and the disintegration of a Packgen [container] had resulted in a fire that shut down CRI’s catalyst-manufacturing facility for a substantial period of time, for example, why should the profits and market share lost to CRI as a result of this incident not be considered a measure of the injury to CRI’s property, in the sense that it addresses the entirety of a loss CRI would not have suffered but for the concrete property damage that occurred?

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 goodwill, so long as the insured can establish a causal relationship between the property damage and those losses.”

But the Seventh Circuit was not willing to conclude, as Berry argued, that all of Packgen’s lost profits, on future sales of containers, are automatically because of the damage Berry’s defective foil caused to the completed containers sold to CRI.  The court drew a distinction: “Assuming that Indiana law would permit the recovery of lost future profits, Wausau [Wausau Underwriters Ins. Co. v. United Plastics Group, Inc., 512 F.3d 953 (7th Cir. 2008)] makes clear that whether the Illinois National policy covers an award of such business losses depends on whether those losses were specifically due to property damage or instead to the failure of Berry’s foil laminate product to function as expected and warranted.”

The court went on to provide examples of this distinction between potentially covered versus uncovered lost future profits.  In general, did Berry’s component, sold to Packgen, cause property damage, such as a fire to CRI’s facility – for which lost future profits could then be covered?  Or was the problem with the component discovered by CRI in testing, before property damage could take place?  In that case, the lost future profits would not be covered, as they would be because of the failure of the product to perform as warranted.     

Berry lost, because it failed to make any effort to draw this distinction – which is likely to be complex and subject to disputes in future cases.  But despite Berry’s fate, the decision is one that policyholders can be expected to turn to when their products or actions cause another to sustain lost future profits.



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