Berry Plastics Corporation v. Illinois National Insurance Co ( 2018 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 17-1815
BERRY PLASTICS CORPORATION, n/k/a
Berry Global, Inc.,
Plaintiff-Appellant,
v.
ILLINOIS NATIONAL INSURANCE
COMPANY,
Defendant-Appellee.
Appeal from the United States District Court for the
Southern District of Indiana, Evansville Division.
No. 3:15-cv-00170-RLY-MPB — Richard L. Young, Judge.
ARGUED JANUARY 9, 2018 — DECIDED SEPTEMBER 10, 2018
Before FLAUM, KANNE, and ROVNER, Circuit Judges.
ROVNER, Circuit Judge. Berry Plastics Corporation filed this
action seeking indemnity from its excess insurer, Illinois
National Insurance Company, for a multi-million dollar
damage award Berry was ordered to pay to a disappointed
2 No. 17-1815
former customer. The insurance policy covers damages that
Berry is required to pay “because of … Property Damage.”
R. 42-4 at 11. Berry had supplied defective laminate material to
the customer, which incorporated that material into containers
that subsequently failed. A jury ordered Berry to compensate
the customer for the profits it could have expected to earn on
future sales had the failure caused by Berry’s defective
material not caused buyers to turn away from the containers.
Berry contends that it has been held liable for its customer’s
lost profits because of the property damage its defective
component caused to the customer’s containers. Although we
agree with Berry that some portion of the lost profits theoreti-
cally might be attributable to property damage, Berry has
neither undertaken to make that showing nor demanded the
opportunity to do so. For that reason we affirm the district
court’s entry of summary judgment in favor of Illinois Na-
tional.
I.
Berry is a global manufacturer of (primarily plastic)
packaging products with headquarters in Evansville, Indiana.
Berry produced a foil laminate product for Packgen, a small
firm that manufactures specialized containers for bulk quanti-
ties of industrial chemicals, manufacturing byproducts, and
other materials. Over a period of two years, Packgen worked
with one of its customers, CRI Catalyst Company, to develop
a new type of intermediate bulk container (“IBC”)1 that could
be used to store and ship a chemical catalyst that CRI produced
1
Packgen has given its IBCs the trade name “Cougars.”
No. 17-1815 3
for use in the refining of crude oil into other petroleum
products. This IBC was innovative in that its outer surface was
comprised primarily of a polypropylene fabric rather than
metal, allowing the container to be collapsed for pre-use
storage and saving users space, several hundred pounds of
weight, and money. The catalyst that CRI produces is a self-
heating material that can ignite when exposed to oxygen, so it
poses hazards that require special care in handling. To enhance
the protective characteristics of the IBC’s outer surface,
Packgen engaged Berry to manufacture a laminated product
comprised of a woven polypropylene chemically bonded to a
layer of aluminum foil; the foil would strengthen the IBC’s
exterior and serve as a barrier to oxygen, ultraviolet light, and
infrared radiation. After extensive testing of the final product,
Packgen began to manufacture and ship the IBCs to CRI in
October 2007. By April 2008, Packgen was selling an average of
1,261 IBCs per month to CRI. Packgen anticipated that it would
continue to sell IBCs to CRI in comparable numbers for the
foreseeable future. Packgen was also making overtures to 37
petroleum refiners in North America with ties to CRI; these
refiners had expressed interest in the IBCs for use in disposing
of spent catalyst.
In April 2008, while CRI personnel were lifting an IBC full
of catalyst in order to re-position it on a pallet, the foil layer of
the container’s exterior surface separated from the polypropy-
lene, causing the outer portion of the container to come apart
and expose the interior lining. Several other failures of the foil
laminate followed in short order, some resulting in fires when
the catalyst within the containers was exposed to air. Packgen
was notified of the failures and determined through its own
4 No. 17-1815
testing that the large roll of foil laminate that Berry had
delivered to Packgen in January 2008, and which Packgen had
used to produce some 2,000 IBCs since that time, was defective.
Although Packgen believed it could correct the problem either
by eliminating the foil laminate as a component of the contain-
ers or turning to another vendor for the foil laminate, the
damage had already been done: CRI canceled all pending
orders for the IBCs, destroyed the IBCs that Packgen had
already shipped to it, and refused to pay Packgen for those
containers. Word of the product’s failure reached the oil
refineries that had expressed interest in purchasing IBCs, and
they made no purchases from Packgen.
Packgen sued Berry in Maine (where the suit was removed
from state to federal court) on theories of breach of contract,
breach of express warranty, breach of implied warranty for a
particular purpose, and breach of implied warranty of mer-
chantability,2 all based on the failure of Berry’s foil laminate
product. The jury found in Packgen’s favor on each of these
claims, and pursuant to instructions which directed it to
compensate Packgen for the foreseeable losses (actual, inciden-
tal, and consequential) stemming from Berry’s breaches of
contract and warranties (R. 55-4 at 10–11, 13–15) awarded
Packgen the full $7.2 million that it had sought in damages.
The jury did not itemize its damage award, but the award was
obviously based on the testimony of Mark Filler, Packgen’s
expert on damages, who put the company’s out-of-pocket costs
(including unpaid invoices for IBCs that had already been
2
A negligence claim was dropped before trial.
No. 17-1815 5
shipped to CRI3) at $643,039.30, and its future lost profits at
$6,563,607.00 (producing the total of approximately $7.2
million). To arrive at the latter figure, Filler assumed that, had
the foil laminate not caused the IBCs to fail, CRI would have
continued to sell the containers to CRI at the April 2008 level
for the full 10-year expanse of his projections, yielding profits
to Packgen of $4,606,405.00. Filler also assumed that Packgen
would have made more modest sales of the IBCs to some
petroleum refiners over the same 10-year period, yielding
profits of $1,957,202.00. The Court of Appeals for the First
Circuit subsequently affirmed the judgment in favor of
Packgen. Packgen v. Berry Plastics Corp., 847 F.3d 80 (1st Cir.
2017).
Berry demanded that Illinois National indemnify it for all
but the first $1 million of the award—which Berry’s primary
liability insurer, Federal Insurance Company, has agreed to
cover—but Illinois National refused, prompting Berry to file
suit. The $25 million liability policy issued to Berry obliged
Illinois National to “pay on behalf of [Berry] those sums in
excess of the Retained Limit [i.e., the $1 million covered by the
Federal 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 … .”
R. 42-4 at 11. The policy in turn defines “property damage” to
include both “physical injury to tangible property, including
all resulting loss of use of that property” and “loss of use of
3
Packgen would have earned profits of $130,629.93 on these invoices.
6 No. 17-1815
tangible property that is not physically injured.” R. 42-4 at 33.4
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 and manufactured, there was
no property damage for which it had the duty under the policy
to indemnify Berry. Berry, on the other hand, contended that
the entirety of the damages it had been ordered to pay
Packgen, including future lost profits, were “because of” the
property damage Berry’s defective foil laminate product had
caused to Packgen’s failed IBCs. Berry sought a declaration of
Illinois National’s obligation to indemnify it; it also asserted
claims for breach of contract and bad faith based on Illinois
National’s refusal to do so.
On the parties’ cross-motions for summary judgment, the
district court entered judgment in favor of Illinois National.
Berry Plastics Corp. v. Ill. Nat’l Ins. Co., 244 F. Supp. 3d 839 (S.D.
Ind. 2017). The court in the first instance rejected Berry’s
contention that collateral estoppel barred Illinois National,
which had declined to participate in Berry’s defense at the
Packgen trial, from re-litigating the nature and extent of the
damages resulting from the failure of Berry’s product. The
court noted, inter alia, that the jury in the Packgen suit had not
been called upon to determine whether and to what extent
Packgen’s future lost profits were “because of” property
4
The policy excludes any damage to Berry’s own work and product (R. 42-
4 at 16, 34), but it is undisputed that the injury Berry’s defective laminate
caused to Packgen’s containers constitutes “property damage” within the
meaning of the policy.
No. 17-1815 7
damage, which is the question determinative of Illinois Na-
tional’s duty to indemnify Berry. Id. at 846–47.
As to that issue, there was no Indiana case law on point,
and so the court was required to predict how the Indiana
Supreme Court would resolve the question. Upon surveying
the case law from other jurisdictions, the district court con-
cluded 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.” Id. at 849. The profits that
Packgen lost on future sales of its IBCs 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 indem-
nify Berry for those lost profits. Id. at 849–50. The court went
on to reject Berry’s contention that the policy language was
ambiguous in this respect and as such should be construed in
its favor. “[T]he court finds the language of the Policy to
unambiguously provide for damages arising from the physical
damage to tangible property. Lost future profits arising from
sales not yet made are not causally related to physical property
damage.” Id. at 850. Given that conclusion, the court also
determined that Illinois National had not breached a contrac-
tual obligation to indemnify Berry. Id. at 851.
Finally, as to the bad faith claim, the court concluded that
because Illinois National was correct in its assessment that it
had no duty to indemnify Berry for Packgen’s lost profits on
future sales, the insurance company had been within its rights
to decline to participate in (i.e. contribute money to) pre-trial
8 No. 17-1815
settlement negotiations; there was otherwise no evidence of “ill
motive” on the part of Illinois National. Id. at 852.
II.
Berry contends that the district court erred in construing
the language of the Illinois National insurance policy to
exclude coverage for lost future profits. Looking to a line of
case law that attributes a broad causal meaning to “because of”
and treats all consequential damages resulting from property
damage to be liability incurred because of property damage,
Berry argues that Packgen’s lost profits on future sales of its
IBCs necessarily are because of the damage Berry’s defective
foil caused to the completed IBCs sold to CRI. Berry therefore
insists that the policy requires Illinois National to indemnify it
for the entirety of the judgment against it over and above the
$1 million covered by Federal. Berry also argues briefly that the
district court was premature in granting summary judgment
to Illinois National on the bad faith claim, as the parties had
not yet completed discovery that, in Berry’s view, was relevant
to that claim.
A.
Indiana law guides our analysis of Berry’s claims in this
diversity suit. Indiana courts construe the terms of insurance
policies employing the same rules they apply to other con-
tracts. E.g., Erie Indem. Co. v. Estate of Harris by Harris, 99 N.E.3d
625, 630 (Ind. 2018). The language is interpreted from the
perspective of an ordinary policyholder of average intelligence.
E.g., Bradshaw v. Chandler, 916 N.E.2d 163, 166 (Ind. 2009). If
No. 17-1815 9
reasonably intelligent persons could differ as to the meaning of
a policy term, then it will be deemed ambiguous, id., and
construed against the insurer, Wagner v. Yates, 912 N.E.2d 805,
811 (Ind. 2009). If, on the other hand, the terms are clear, a
court will give them their plain and ordinary meaning. Id. at
810–11.
An insured has the burden of demonstrating that its claim
is covered under the policy terms, whereas the insurer has the
burden of showing that an otherwise-covered claim is barred
by an exclusion in the policy. Telamon Corp. v. Charter Oak Fire
Ins. Co., 850 F.3d 866, 869 (7th Cir. 2017) (Indiana law) (collect-
ing cases). By the terms of its policy, Illinois National agreed to
indemnify Berry for damages it is required to pay “because of”
property damage. There is no dispute that property damage
occurred: when Berry’s laminate product failed, a number of
IBCs came apart and any other IBCs assembled with the same
defective laminate were rendered useless. 244 F. Supp. 3d at
845. Berry thus bears the burden of showing that Packgen’s lost
profits—for which the jury required Berry to reimburse
Packgen—occurred “because of” that property damage. The
Indiana Supreme Court has not yet decided under what
circumstances, if any, future lost profits may be said to have
occurred “because of” property damage caused by a manufac-
turer’s defective product, for purposes of liability coverage.
Our role, then, is to decide that question in the manner that we
predict the Indiana Supreme Court would do so. E.g., Sutula-
Johnson v. Office Depot, Inc., 893 F.3d 967, 971 (7th Cir. 2018).
10 No. 17-1815
B.
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. See T.R. Bulger, Inc. v. Ind. Ins.
Co., 901 N.E.2d 1110, 1115 (Ind. App. 2009); Weedo v. Stone-E-
Brick, Inc., 405 A.2d 788, 791-92 (N.J. 1979). A manufacturer’s
liability insurer is not insuring against the risk that a particular
product may not perform as promised or may not meet the
commercial expectations of the manufacturer’s customers.
Especially when a manufacturer has designed a product to
meet the particular needs of one customer, the specifications
the manufacturer has undertaken to meet, and the purposes its
product are intended to serve, are matters of negotiation
between the manufacturer and its customer; and the manufac-
turer’s liability insurer stands at a remove from that relation-
ship. See Wausau Underwriters Ins. v. United Plastics Grp., Inc.,
512 F.3d 953, 957–58 (7th Cir. 2008) (Illinois law) (citing Robins
Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 308–10, 48 S. Ct.
134, 135–36 (1927) (Holmes, J.)); T.R. Bulger, 901 N.E.2d at 1115;
Roger C. Henderson, Insurance Protection for Products Liability
& Completed Operations—What Every Lawyer Should Know, 50
NEB. L. REV. 415, 441 (1971). An insurance policy intended to
backstop a manufacturer’s warranties and contractual agree-
ments would look quite different from a commercial general
No. 17-1815 11
liability policy. See Am. Home Assur. Co. v. Libbey-Owens Ford
Co., 786 F.2d 22, 27–28 (1st Cir. 1986). To the extent such
undertakings are insurable at all, see Wilder Corp. of Del. v.
Thompson Drainage & Levee Dist., 658 F.3d 802, 805 (7th Cir.
2011) (“[o]ne generally can't insure against a breach of contract,
because of moral hazard (the tendency of an insured to be less
careful about preventing the harm insured against than if it
were not insured)”), one might expect to see temporal limits on
the insurer’s liability for business losses resulting from product
failures, not to mention the types of warranties or agreements
(and whose commercial expectations) that are covered.5 Those
sorts of terms are obviously missing from the standard
commercial general liability policy, which speaks in terms of
property damage and bodily injury. Indeed, we note that
Illinois National’s policy expressly excludes from the scope of
covered property damage “Property Damage to Your Product
arising out of it or any part of it” and defines “Your Product”
to include products manufactured or sold by Berry, as well as
“warranties or representations made at any time with respect
to the fitness, quality, durability, performance or use of Your
Product.” R. 42-4 at 16, 33–34. Those are classic business risk
exclusions that would appear to exclude losses for which Berry
is deemed liable because its product has not functioned as
Berry assured its customer that it would perform. See generally
1 Peter J. Kalis, et al., POLICYHOLDERS’ GUIDE TO THE LAW OF
INSURANCE COVERAGE (Walters Kluwer), § 10.02 (updated
through 2018). Thus, a customer’s business losses, if they are
5
It strikes us as quite unlikely that warranties on a new product lacking
a history of success in the field would be insured at all.
12 No. 17-1815
recoverable at all under the manufacturer’s liability policy,
may be recovered only if they occur as a consequence of the
property damage that the policy expressly covers. See Wausau,
512 F.3d at 956–57.
This principle has a familiar parallel in tort law, which in
the ordinary case deems economic losses flowing from torts
such as negligence to be unrecoverable, because the tortfeasor
cannot be charged with notice of the consequences his tortious
acts might have on his victim’s commercial arrangements and
expectations. JMB Mfg., Inc. v. Child Craft, LLC, 799 F.3d 780,
785 (7th Cir. 2015) (Indiana law); Wausau, 512 F.3d at 957–58;
see also Indianapolis-Marion Cnty. Pub. Library v. Charlier Clark &
Linard, P.C., 929 N.E.2d 722, 729–30 (Ind. 2010); Gunkel v.
Renovations, Inc., 822 N.E.2d 150, 152–56 (Ind. 2005); Progressive
Ins. Co. v. Gen. Motors Corp., 749 N.E.2d 484, 487–90 (Ind. 2001);
Reed v. Cent. Soya Co., 621 N.E.2d 1069, 1074–75 (Ind. 1993),
modified in other respects on reh’g, 644 N.E.2d 84 (1994). A
disappointed customer instead must resort to a claim for
breach of warranty or breach of contract to recover for injuries
to his goodwill or profit expectations—just as Packgen did in
this case. See Gunkel, 822 N.E.2d at 153; Progressive, 749 N.E.2d
at 489; Reed, 621 N.E.2d at 1075; Thalheimer v. Halum, 973
N.E.2d 1145, 1151–52 (Ind. App. 2012). The exception to this
rule is when the economic losses occur in conjunction with
property damage or bodily injury. Wausau, 512 F.3d at 956–57;
Reed, 621 N.E.2d at 1075.
That said, we have in mind the central lesson of the Indiana
Supreme Court’s decision in Sheehan Const. Co. v. Cont’l Cas.
Co., 935 N.E.2d 160, adhered to in relevant part as modified on
reh’g, 938 N.E.2d 685 (Ind. 2010), which is that coverage under
No. 17-1815 13
a commercial general liability policy depends on the terms of
the policy rather than any distinctions that legal theory draws
between business risk on the one hand and property damage
on the other. The court in Sheehan looked to specific policy
terms in deciding that the costs of repairing and replacing the
damage caused by faulty construction work completed by the
insured’s subcontractor potentially were covered by the policy
at issue, notwithstanding a judicial tradition of characterizing
such costs as a business risk beyond the scope of a typical
liability policy. See id. at 167–72; see also Ind. Ins. Co. v. Kopetsky,
11 N.E.3d 508, 521 (“the Sheehan court soundly rejected the
notion of a general ‘economic loss’ doctrine in the CGL
context”), op. corrected in other respects, clarified & reaff’d on reh’g,
14 N.E.3d 850, 853 (Ind. App. 2014), transfer vacated, 28 N.E.3d
245 (Ind. 2015). Sheehan did not address the possibility that
future lost profits might be covered by such a policy, but the
court’s emphasis on what the policy terms cover, as opposed
to what judicial and public policy doctrines suggest should or
should not be covered, informs our own analysis of what losses
the Illinois National policy might reach.
C.
This brings us to the question whether the damages Berry
was ordered to pay for Packgen’s lost profits on prospective
sales of its IBCs constitute damages imposed “because of
property damage.” Berry contends “because of” should be
taken to connote the same sort of causal, “but for” meaning it
carries in tort law, so as to include all damages that occur as a
foreseeable consequence of the injury to property. Giving it
that reading, Berry reasons that because its defective foil
laminate failed in such a way as to cause property dam-
14 No. 17-1815
age—the IBCs came apart when CRI put them into use—the
lost profits awarded by the jury in Packgen’s breach of contract
suit all occurred “because of” property damage and are
therefore recoverable under the policy. Illinois National, on the
other hand, argues that “because of” should be read more
narrowly in view of the presumption against recovery of
purely economic losses. It, like the district court, reasons that
any category of damages is compensable under the policy only
to the extent it constitutes a measure of the property damage
caused by the defective product. On this view, the profits lost
on the canceled invoices to CRI for IBCs which had already
been manufactured (and were useless because they incorpo-
rated Berry’s defective foil laminate) would constitute damages
incurred because of property damage, but the profits lost on
anticipated sales of containers that had not yet been manufac-
tured (and not yet ordered) would not. In our view, the correct
answer (and the one we believe the Indiana Supreme Court
likely would adopt) lies somewhere between these positions
and depends on a fact-sensitive inquiry with which Berry has
not engaged. See Wausau, 512 F.3d at 959.
The district court relied on a series of cases reflecting the
more restrictive understanding advocated by Illinois National
as to what types of damages may be attributed to property
damage. The approach is exemplified by our decision in
Travelers Ins. Cos. v. Penda Corp., 974 F.2d 823, 829–30 (7th Cir.
1992). In that case Penda, the insured, had manufactured
defective polystyrene sheets that its customer, U.S. Sample,
incorporated into sample books that, in turn, it had sold to its
own customer. The styrene yellowed, rendering the assembled
books useless and forcing U.S. Sample to replace them. Penda
No. 17-1815 15
was sued by U.S. Sample for breach of contract and warranty,
seeking recompense not only for the profits lost on the assem-
bled (defective) books, but the profits lost on future sales of
sample books it would have made but for the mishap with
Penda’s defective polystyrene, and additionally damage to its
reputation. Penda tendered defense of the suit to its liability
insurer, Travelers, which took the position that the suit did not
allege any form of covered property damage and that conse-
quently it had no obligation to defend its insured. We dis-
agreed, in part. We concluded that the allegations of lost
profits on the assembled sample books themselves potentially
did fall within the coverage of the policy: Penda’s defective
product had rendered those sample books useless and to that
extent had caused property damage. The profits U.S. Sample
had lost on those books thus could be characterized as a
consequence of that property damage. Id. at 829. By contrast,
“[w]e ha[d] little difficulty in concluding that U.S. Sample’s
broad allegations of future profit and reputational damage are
purely economic losses and beyond the coverage of the
policy.” Id.
In a like vein, the district court in Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Ready Pac Foods, Inc., 782 F. Supp. 2d 1047
(C.D. Cal. 2011), applying California law, concluded that a lost
patronage claim was not covered under an insured’s commer-
cial and excess liability policies. Ready Pac, the insured,
produced pre-shredded and pre-washed lettuce for Taco Bell
restaurants; and contamination of that lettuce caused food-
borne illnesses among Taco Bell customers in the northeastern
United States. Some 500 Taco Bell franchisees from around the
country filed suit against Ready Pac for a nationwide drop-off
16 No. 17-1815
in patronage after the outbreak. There was no dispute that
Ready Pac’s contaminated lettuce had caused property damage
to the extent it tainted the meal items into which it was
incorporated as well as restaurant surfaces and equipment. See
id. at 1050 & n.1, 1056. In Taco Bell’s view, that property
damage was a but-for cause of the lost profits to its franchisees,
such that Ready Pac’s commercial and excess liability carriers
were obliged to cover those losses. The court was not con-
vinced on that point:
Taco Bell’s claim for lost profits is not a measure
of the damage to meals served at Taco Bell
restaurants nor the cost of the destroyed con-
taminated food items. Taco Bell’s alleged lost
profits as a result of customers deciding not to
eat at Taco Bell restaurants nationwide is not a
measure of the value of the meals and goods
that were destroyed at Taco Bell restaurants not
affected by the Outbreak. Furthermore, Taco
Bell’s claim for lost profits from the decline in
patronage is also not a measure of the costs
incurred to clean up the Taco Bell restaurants
affected by the Outbreak.
Id. at 1055. Accordingly, the court concluded that the claim “for
lost profits at the Taco Bell restaurants that were never shut-
down during the E. coli investigation [i]s a claim for purely
economic loss, and not a measure of property damage or
personal injury suffered by Taco Bell and its customers.” Id.
Given what it saw as the strength of California law limiting the
recovery of consequential damages to losses constituting the
measure of damage to tangible property (and the remediation
No. 17-1815 17
thereof), the court rejected as “unpersuasive” Taco Bell’s
reliance on the broader standard articulated in cases such as
our own decision in Wausau, which we discuss momentarily.
Id. at 1056 n.4.
Other courts have employed substantially similar reasoning
in rejecting coverage for intangible economic losses. See St. Paul
Fire & Marine Ins. Co. v. Amsoil, Inc., 51 F. App’x 602, 605 (8th
Cir. 2002) (unpublished) (2–1 decision) (Wisconsin law) (lost
profits and market share resulting from damage insured’s
synthetic oil caused to customer’s gear boxes “are economic
losses and business risks not insured under [insured’s] CGL
policies”); Essex Ins. Co. v. Chem. Formula LLP, 2006 WL
5720284, at * 5–*6 (M.D. Pa. April 7, 2006) (injuries to commer-
cial reputation and goodwill of janitorial cleaning supply firm
after distributing insured’s defective floor care product to
customers whose floors were damaged were not losses because
of property damage; reading liability policy to reach such
intangible losses because they flowed from physical damage to
property would “thwart the reasonable expectations of the
parties” and “open[ ] the door too wide to be considered
reasonable”); Geddes & Smith, Inc. v. St. Paul-Mercury Indemn.
Co., 51 Cal. 2d 558, 566 (1959) (Traynor, J.) (allowing recovery
for damage insured’s defective doors caused to houses but
disallowing homebuilder’s lost profits and goodwill because
“such damages …. are not commonly thought of as injuries to
or destruction of property within the meaning of a public
liability insurance policy”).
These cases represent a narrow understanding of the losses
that can be said to occur “because of” property damage to the
extent they exclude any anticipated losses on products not yet
18 No. 17-1815
sold and produced. To be sure, there is a certain logic to this
line of cases. Damaged or impaired property usually can be
replaced; so in the ordinary case, the intangible consequences
of an injury to property will be limited, in contrast to bodily
injuries, which may have more long-lasting consequences. See
Westric Battery Co. v. Std. Elec. Co., 482 F.2d 1307, 1317 (10th Cir.
1973) (Colorado law). Once the assessment of consequential
losses extends beyond the profits lost on existing goods and
sales already made to an estimate of the profits lost on future
anticipated sales, it is arguably enforcing the commercial
expectations of the injured party more so than remediating
property damage. On the other hand, the policy language itself
draws no such distinctions explicitly. The policy indicates that
any damages the insured must pay “because of” property
damage are covered. The Indiana Supreme Court’s Sheehan
decision reminds us to focus on the meaning of such policy
terms as opposed to the rationale of the economic loss doctrine.
935 N.E.2d at 169.
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. See Cincinnati Ins. Co. v. H.D. Smith, LLC, 829
F.3d 771, 774 (7th Cir. 2016) (liability policy covering damages
“because of” bodily injury provides broader coverage than
policy that only covers damages “for” bodily injury). 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 IBC had resulted
No. 17-1815 19
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 in-
curred “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. We summarized this
broader understanding of the “because of” language in
Wausau: “As in tort law, so in liability-insurance law[:] once
there is damage to property[,] the victim can recover the
nonproperty, including business, losses resulting from that
damage and not just the diminution in the value of the prop-
erty.” 512 F.3d at 956–57 (citations omitted). See 3 Allan D.
Windt, INSURANCE CLAIMS AND DISPUTES, § 11.1 at 11–19 (6th
ed. 2013) (“Liability policies cover not only damages for
property damage, but damages because of, on account of, or by
reason of property damage. Accordingly, once covered property
damage exists, all consequential damages are covered.”)
(emphasis in original) (collecting cases); 1 Barry R. Ostrager &
Thomas R. Newman, HANDBOOK ON INSURANCE COVERAGE
DISPUTES, § 7.03[b][2][D] (2011) (“[T]he most sensible reading
of the … phrase, ‘damages because of … property damage,’
20 No. 17-1815
requires the insurer to pay all damages which are causally
related to an item of ‘property damage’ which satisfies either
of the policy’s definitions.”) (quoting Federated Mut. Ins. Co. v.
Concrete Units, Inc., 363 N.W.2d 751, 757 (Minn. 1985)); 12
COUCH ON INSURANCE 3D, § 172:32 at 172–76 through 172–77
(updated through 2018) (“absent an express provision
excluding coverage for consequential damages, a liability
policy insuring against all sums which insured became legally
obligated to pay because of bodily injury or property damage
includes a claim for loss of business and profits arising from
property damage”) (citing Great Am. Ins. Co. v. Lerman Motors,
Inc., 491 A.2d 729 (N.J. App. Div. 1984)); Laurie Vasichek, Note,
Liability Coverage for “Damages Because of Property Damage”
Under the Comprehensive General Liability Policy, 68 Minn. L.
Rev. 795, 818 (1984) (“[t]his reading of the phrase ‘because of’
limits coverage of consequential and tangible losses to situa-
tions where the insured can show a causal connection linking
the losses to covered property damage and, concurrently,
renders coverage highly elastic, with its scope adjusting to the
causal connection with the ‘property damage’ and other
injuries”); Am. Home Assur. Co. v. Libbey-Owens Ford Co., supra,
786 F.2d at 26 (“the term ‘because of property damage’ can
reasonably be interpreted to mean all liability arising from
such damage”); see also, e.g., Nat’l Union Fire Ins. Co. of Pitts-
burgh, Pa. v. Puget Plastics Corp., 532 F.3d 398, 403 (5th Cir.
2008) (Texas law) (excess liability policy covers consequential
damages, including lost profits and diminution in value of
company, which were result of property damage); Ferrell v.
West Bend Mut. Ins. Co., 393 F.3d 786, 795 (8th Cir. 2005)
(Wisconsin law) (“That the damages at trial [for breach of
No. 17-1815 21
warranty] were measured in terms of lost profits or diminished
gross receipts does not change the fact that property was
damaged. The measure of damages is distinct from the
question whether there was ‘property damage’ under the
policy.”); Aetna Cas. & Sur. Co. v. Gen. Time Corp., 704 F.2d 80,
83–84 (2d Cir. 1983) (New York law) (lost profits resulting from
physical injury insured’s motors caused to customer’s zone
valves were among the consequential damages covered by
liability policy); Todd Shipyards Corp. v. Turbine Serv., Inc., 674
F.2d 401, 418, 423 (5th Cir. 1982) (La. law) (loss of use of ship
due to damage inflicted by insured’s faulty repair work to
turbine covered), called into doubt in other respects by Nathaniel
Shipping, Inc. v. Gen. Elec. Co., 932 F.3d 366, 367–68 (5th Cir.
1991); Cent. Armature Works, Inc. v. Am. Motorists Ins. Co., 520
F. Supp. 283, 289 (D. D.C. 1980) (lost profits stemming from
loss of use of scrap metal shredder damaged by insured’s
negligent repair efforts covered); Fitness Equip. Co. v. Pa. Gen.
Ins. Co., 493 So. 2d 1337, 1343 (Ala. 1985) (treadmill manufac-
turer’s lost profits and lost contracts resulting from treadmill
damage caused by insured’s faulty motors were damages
“because of” property damage).
Our decision in Wausau illustrates the application of this
broader rule. The insured in that case, United Plastics Group
(UPG), had manufactured defective water heating chambers
that were incorporated into tankless water heaters produced
by another company, Microtherm. Roughly 600 of the UPG
chambers ruptured, in some cases leaking onto the heater’s
control board and causing it to short out, in other instances
causing water to leak out of the heater and damage the consum-
ers’ carpets and floors, and in a minority of cases simply
22 No. 17-1815
causing the heater not to work. Customer dissatisfaction
ensued, and sales of the Microtherm heaters suffered signifi-
cantly. Microtherm sued UPG, alleging that UPG had misrep-
resented the quality of its heating chambers. A Texas jury
agreed and awarded Microtherm $25 million in lost profits,
among other losses. UPG in turn sued its excess liability
insurer, Ohio Casualty, seeking indemnity on the ground that
the lost profits were due to property damage. The district court
held Ohio Casualty liable for the full amount, but we re-
manded for a trial to determine (a) the extent to which the 65
to 75 heater failures that occurred during the time period
during which the Ohio Casualty policy was in force contrib-
uted to Microtherm’s lost profits; and (b) the extent to which
those lost profits were due to the property damage caused by
UPG’s defective heating chambers, as opposed to their failure
to perform up to warranted specifications. We agreed that
property damage had occurred in at least some instances,
specifically when leaking water from the defective heating
chambers either shorted out heaters’ circuit boards or spoiled
consumers’ floors. But we also pointed out that the defective
heating chambers could cause the heaters to fail without
causing property damage in these ways: “only about 80
percent of the water-chamber ruptures shorted the circuit
board; the other 20 percent just caused the water heater to stop
working, and that we know is not property loss.” Id. at 958.
The deeper problem is that the business losses
for which Microtherm sued might well have
occurred even if no [heating chamber] had
ruptured. From the consumer’s standpoint, the
precise mechanism that causes his hot-water
No. 17-1815 23
heater to stop working is irrelevant; all he cares
about is that he has no hot water. No doubt if
the broken heater leaks and ruins its owner’s
carpet, there is added fury against Microtherm;
but we do not even know how many of the
broken heaters caused such damage. The ques-
tion how much of Microtherm’s business losses
were due to the rupture of some 52 to 60 failed
water chambers that damaged a circuit board
(80 percent of the 65 to 7[5] total failures) was
not presented to the jury in Texas because it is
an issue related only to insurance coverage,
which was not the subject of the Texas case. But
not all the business-loss damages awarded in
that case could have been due to the 10 percent
or fewer ruptures (52–60 out of 600) that both
caused damage to property (either to the circuit
board or the owner’s other property, but as we
do not know how many of the ruptures caused
damage to the owners’ other property we are
stuck with our 52–60 estimate) and occurred
during the coverage period. That incremental
damage may have been less than 10 percent of
the total damages. …
Id. at 958–59. We left it to the district court to sort out these
questions on remand.
D.
Assuming that Indiana law would permit the recovery of
lost future profits, Wausau makes clear that whether the Illinois
24 No. 17-1815
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
verdict against Berry in the Packgen litigation does not answer
this question, as the contract and warranty theories on which
Packgen prevailed turned on the failure of Berry’s product to
satisfy agreed-upon or implied criteria rather than the occur-
rence and consequences of any property damage. Berry’s briefs
elide the distinction between the two possible causes of
Packgen’s losses,6 but the distinction is critical to Berry’s case
for indemnification. Berry’s own argument is that the “because
of” language in the policy requires that Berry be indemnified
for Packgen’s business losses so long as they were caused by
property damage. Certainly it is possible to imagine a set of
facts in which this causal nexus could be established, but it is
equally possible to imagine scenarios in which none or only a
portion of Packgen’s profits were due to property damage as
opposed to the failure of Berry’s product to function as
warranted, just as we explained in Wausau.
To begin with the latter possibility: Imagine that CRI, when
it received its very first shipment of IBCs from Packgen, had
performed its own precautionary inspection and testing of one
or more containers (not yet filled with catalyst) and discerned
6
See, e.g., Berry Br. 14 (treating damages caused by insured’s failed product
and damages caused by covered property damage as identical); Berry Reply
Br. 30 (treating Packgen jury’s findings as to damages resulting from
“Berry’s alleged failure to supply [a] compliant product” as dispositive of
Illinois National’s duty to indemnify Berry).
No. 17-1815 25
that the foil laminate was not up to the task for which it was
designed. Perhaps CRI would only be able to reach this
conclusion if the foil product actually delaminated and
“damaged” the container by causing it to begin coming apart,
just as we know it did come apart in multiple instances when
CRI put the containers into use. But in the testing/inspection
scenario we are hypothesizing, any actual property damage
would necessarily be limited. What would matter, from CRI’s
perspective, is that the container (and, in particular, Berry’s
foil/polypropylene laminate) failed to perform as expected.
Given the nature of CRI’s business and the purposes for which
it intended to use the IBCs—carrying a flammable mate-
rial—the reliability of the containers would be of the utmost
concern to CRI. Once inspection and testing revealed that the
containers might fail, expose the catalyst, and thereby present
the risk of fire or explosion, CRI might well decide to cancel its
orders for the IBCs, just as it did after multiple failures oc-
curred in practice. In our scenario, it would be easy to see why
Packgen’s ensuing commercial losses would be due largely, if
not exclusively, to the failure of the product to perform as
warranted rather than any limited property damage that
occurred in testing. A jury might very well still hold Berry
liable for breach of contract and warranty in that scenario, but
Illinois National would not be required to indemnify Berry for
an award of Packgen’s lost profits, as those losses would not be
attributable to property damage.
On the other hand, it is possible to imagine scenarios in
which Berry’s component (and the IBCs into which it was
incorporated) does not simply fail to perform, but fails in a
disastrous way resulting in grievous injury to Packgen’s
26 No. 17-1815
customer. We know from the Packgen trial record, for example,
that some of the IBC failures resulted in fires when the catalyst
within those containers was exposed to air. Suppose as we
hypothesized earlier that such a fire spread and burned out of
control, causing extensive damage to CRI’s facility and existing
stock of catalyst—all of that constituting “property damage”
within the meaning of the Illinois National policy. (A similar
fire occurring at a petroleum refinery upon receipt of an IBC
containing fresh catalyst from CRI might produce even more
devastating results.) CRI, naturally, would tell Packgen to drop
dead in the wake of such a disaster. In such a scenario it would
not be difficult to make the case that Packgen’s lost future sales
to CRI were due to the property damage that CRI experienced
as opposed to the simple failure of product to perform as
expected. And if the fire and damage achieved notoriety within
the petroleum refining industry, one might say the same as to
lost sales to other prospective customers.
But Berry has made no effort, below or on appeal, to make
such a case. Its primary contention in that regard is that
collateral estoppel, or issue preclusion, bars Illinois National
from attempting to contest the proposition that the losses
awarded in the Packgen suit were “because of” property
damage.7 That contention is a non-starter, because the Packgen
7
Below, in opposing Illinois National’s motion for summary judgment, and
in support of its own cross-motion for summary judgment, Berry asserted
that the underlying Packgen litigation had already resolved the question
whether the losses for which Berry was ordered to compensate Packgen
were “because of” property damage and that Illinois National was thus
barred from re-litigating that question in this suit. See R. 55 at 22.
No. 17-1815 27
jury was not presented with the questions that are dispositive
of Illinois National’s duty to indemnify Berry.
A fundamental prerequisite for treating a prior adjudication
as conclusive in subsequent litigation is that the former
necessarily resolved the same issue presented in the latter. Earl
v. State Farm Mut. Auto. Ins. Co., 91 N.E.3d 1066, 1074 n.5 (Ind.
App. 2018) (quoting Afolabi v. Atl. Mortg. & Inv. Corp., 849
N.E.2d 1170, 1175 (Ind. App. 2006)); see, e.g., Frankenmuth Mut.
Ins. Co. v. Williams by Stevens, 690 N.E.2d 675, 678–79 (Ind.
1997) (where insured babysitter had consented to judgment on
claim that her negligent supervision of child was cause of
injuries child suffered when molested by babysitter’s husband,
insurer, having declined to defend insured in underlying
action, was estopped from denying coverage on ground
injuries to victim were result of intentional act; consent
judgment embodied legal conclusion that injuries were result
of insured’s negligence).
The Packgen jury decided that Berry breached its agreement
with Packgen as well as the implicit and explicit warranties it
made to Packgen regarding its foil laminate and determined
the losses that resulted from these breaches; the jury was not
called upon to decide whether Berry’s defective product
resulted in property damage, let alone whether the losses that
Packgen suffered were “because of” such damage. See Nat’l
Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., supra,
532 F.3d at 404 (jury in underlying action had no reason to
consider whether damages constituted property damage
within meaning of liability policy); Wausau Underwriters Ins.
Co. v. United Plastics Grp., Inc., 2010 WL 538544, at *3 (N.D. Ill.
Feb. 10, 2010) (on remand from this court’s decision in Wausau,
28 No. 17-1815
supra) (“While an underlying trial and verdict may certainly
bear upon an insurer’s duty to indemnify, issues exclusively
relevant to coverage, as opposed to liability, are typically not
litigated in an underlying case. As a result, courts may con-
sider additional evidence when deciding later indemnification
actions.”) (citations omitted); Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Reichhold, 2009 WL 3125483, at *5 (M.D.N.C.
Sep. 30, 2009) (“while neither party may ‘relitigate’ issues that
have been determined in the underlying cases, the Court
concludes that the underlying cases did not resolve whether
the damages were for ‘property damage’ and it will be for the
jury in this present case to determine what proportion of
Reichhold’s liability in the underlying claims was because of
‘property damage’ under the terms of the policies”).
Whether and to what extent Packgen’s losses were due to
property damage, as opposed to the failure of Berry’s product
to perform as promised, are the questions dispositive of Illinois
National’s duty to indemnify Berry, and our decision in
Wausau leaves no doubt that these are issues which must be
independently resolved here: Wausau expressly held that the
incremental harm attributable to property damage “was a key
issue that the district judge should have tried” in the indem-
nity action “rather than supposing it to have been resolved by
the Texas jury” in the underlying liability action. 512 F.3d at
959.
Apart from its meritless invocation of issue preclusion,
Berry has not outlined a case for the notion that some or all of
the lost profits awarded by the Packgen jury were the result of
property damage, nor has it asked for the opportunity to
present such a case to the factfinder as our decision in Wausau
No. 17-1815 29
envisions. Berry implicitly presumes that because its product
failed in such a way as to cause property damage (i.e., the
foil/polypropylene product delaminated and rendered the
IBCs useless), all damages resulting from the failure of its
component were necessarily “because” of property damage.
Equating the failure of its product to perform as expected
(and warranted) with property damage is both wrong, for the
reasons we have already discussed, and inconsistent with our
reasoning in Wausau. For purposes of establishing its right to
indemnity, Berry may well have a case to make for the notion
that the property damage its product caused incrementally
increased Packgen’s losses. In contrast to the defective water-
heating chamber at issue in Wausau, for example, Berry’s foil
laminate was an integral part of the IBC and it is difficult to
imagine ways in which it could fail without damaging the
overall container. Cf. Konrad Marine, Inc. v. Marine Assocs., Inc.,
831 N.W.2d 825 (table), 2013 WL 1580354, at *5 (Wis. Ct. App.
April 16, 2013) (non-precedential decision) (declining to parse
source of consequential lost profits) (“Here, there was physical
injury to some or all of the stern drives when the teeth sheared
off the gears. One can reasonably infer that the additional
harm, above and beyond the gear failure, contributed to
customers’ perceptions regarding the stern drives.”). But Berry
does not endeavor to make such a case. We point out in this
regard that the fires which accompanied some of the IBC
failures lend additional plausibility to the notion that it may
have been the property damage, and not the simple failure of
Berry’s foil laminate to perform as expected, that frightened
CRI and petroleum refiners away from Packgen’s containers;
but Berry’s briefs barely mention these incidents. As we have
30 No. 17-1815
said, Berry equates the failure of its product to perform with
property damage, and presumes that all of the six-plus million
dollars in lost profits the Packgen jury awarded for the former
are damages “because of” the latter. That premise is incorrect,
and because Berry’s appeal is founded on that premise alone,
it has waived any contention that we should, as in Wausau,
remand for further proceedings.
There is another point to be made before we conclude with
this subject. The Packgen jury award was based on the expert
Filler’s 10-year projection. Apparently Filler, in consultation
with Packgen’s president, estimated that it would take five
years for the petroleum industry to forget about the failure of
Packgen’s IBCs and another five years beyond that for Packgen
to attain the same level of IBC sales it was making in April
2008. Part of Berry’s burden in establishing that the monetary
damages the Packgen verdict required it to pay were “because
of”property damage is to show that the full 10 years of
projected losses were attributable to such damage. That task
becomes more difficult the further one projects out from the
April 2008 failure of Berry’s product. It might be reasonable to
attribute a shorter period of Packgen’s business losses to the
property damage inflicted by Berry’s bad run of laminate. But
to retroactively guarantee Packgen’s profits for such a lengthy
period of time—particularly for a new product without a
record of reliable service and sales—looks much more like the
policy is being used to insure the commercial expectations
Packgen harbored based on Berry’s representations and
warranties as to how its laminate product would perform.
Absent proof that the property damage itself was so egregious
as to ruin Packgen’s reputation in the industry, such a result
No. 17-1815 31
would be inconsistent with the scope, terms, and purpose of
the policy.
These are the sorts of considerations that would have to be
sorted out in a trial on the question of coverage. But as we have
said, Berry has not asked for such a trial, nor has it laid out
what case it would make at such a trial to warrant indemnity,
in whole or in part, for the Packgen jury’s award of lost profits.
E.
We need finally say only a relative few words about Berry’s
bad faith claim. The Indiana Supreme Court recognized in Erie
Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993), that an insurer
may be held liable in tort for a failure to deal with its insured
in good faith. Berry’s claim that Illinois National breached its
duty of good faith is premised on Illinois National’s refusal to
participate in (and pledge money toward) pre-trial discussions
of a possible settlement of the Packgen suit, notwithstanding
Federal’s own tender of its $1 million policy limit toward such
a settlement. That refusal, Berry contends, nixed the prospects
for settlement and instead left Berry on the hook for the
substantial award of damages later imposed by the Packgen
jury. Berry adds that the district court’s rejection of this claim
was premature, as Berry had not yet had the opportunity to
engage in discovery as to what Illinois National knew about
the meaning of the policy’s “because of” language and its
(private) reasons for refusing to contribute funds toward a
possible settlement of the Packgen litigation.
Like the district court, however, we are not convinced that
Berry has a plausible claim of bad faith to pursue. From the
start, Illinois National’s position has been that Packgen’s loss
32 No. 17-1815
of future business was not the sort of loss that could be
attributed to property damage. Given precedents such as Penda
and Ready Pac, and the unsettled nature of Indiana law on this
point, this was not an objectively unreasonable position for
Illinois National to take. Morever, even under the more liberal
approach to commercial losses reflected in cases like Wausau,
Berry would still have to demonstrate a causal link between
any such losses and the property damage that its defective
component caused.
The Hickman decision indicates that a genuine dispute as to
whether an insured has a valid claim under the policy or as to
the amount of such a claim will not establish breach of the
insurer’s duty of good faith; such a breach occurs when the
insurer “denies liability knowing that there is no rational,
principled basis for doing so.” 622 N.E.2d at 520; see also
Freidline v. Shelby Ins. Co., 774 N.E.2d 37, 40 (Ind. 2002). Our
decision here leaves open the possibility that the Indiana
Supreme Court might treat an award of lost profits or injury to
goodwill as compensable under a liability policy when those
losses are indeed caused by property damage as opposed to
the simple failure of the insured’s product to perform as
expected. Whether Berry could make that showing (and as to
what portion of Packgen’s losses) was never a foregone
conclusion and even now remains open to reasonable debate
given Berry’s failure to make a case on this point. See id. at
42–43. Remanding for discovery, as Berry insists we should do
in the hope that it might discover evidence that Illinois
National privately believed something contrary to its public
position as to its liability for lost profits, cf. Monroe Guar. Ins.
Co. v. Magwerks Corp., 829 N.E.2d 968, 976–77 (Ind. 2005)
No. 17-1815 33
(insurer had essentially acknowledged prior to insured’s suit
that roof collapse met criteria for coverage), would be a license
for a pointless fishing expedition. The district court did not
resolve this claim prematurely.
III.
For all of the foregoing reasons, the district court properly
entered summary judgment in favor of Illinois National.
AFFIRMED