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Lumbermens Mutual Casualty Company v. Flow International Corporation; Flow Autoclave Systems

February 17, 2012

LUMBERMENS MUTUAL CASUALTY COMPANY, PLAINTIFF,
v.
FLOW INTERNATIONAL CORPORATION; FLOW AUTOCLAVE SYSTEMS, INC.; FLOW PRESSURE SYSTEMS; ABB PRESSURE SYSTEMS; AVURE TECHNOLOGIES AB; AND AVURE TECHNOLOGIES, INC., DEFENDANTS.
FLOW AUTOCLAVE SYSTEMS, INC.; FLOW PRESSURE SYSTEMS; ABB PRESSURE SYSTEMS; AVURE TECHNOLOGIES AB; AND AVURE TECHNOLOGIES, INC., PLAINTIFFS,
v.
LUMBERMENS MUTUAL CASUALTY COMPANY AND KEMPER INSURANCE COMPANIES, DEFENDANTS.



The opinion of the court was delivered by: David N. Hurd United States District Judge

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 5 -FACTUAL BACKGROUND.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -

Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -

Lumbermens and Kemper. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -Travelers, Zurich, and Crucible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -Flow International.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -ABB Pressure Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -Flow Pressure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -ABB Autoclave Systems, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -Flow Autoclave.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -Avure Technologies AB and Avure Technologies, Inc.. . . . . . . . . . . . . . - 11 -Quintus Holdings, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 11 -Relevant Insurance Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12 -

Zurich and Travelers Policies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12 -Federal Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12 -

Insureds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12 -Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12 -Exclusions. . . . . - 13 -Lumbermens Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 13 -

Insureds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 13 -Coverage Parts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 13 -Definitions. . . . . - 14 -Professional Liability Exclusion. . . . . . . . . . . . . . . . . . . . . . . . - 15 -"Your Product" and "Your Work" Exclusions. . . . . . . . . . . . . . - 16 -"Your Work" Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 16 -Cooperation Requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -Crucible Incident. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -Underlying Lawsuits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -Letters Concerning Lumbermens' Coverage Position. . . . . . . . . . . . . . . . . . . . - 18 -Quintus Purchase--Sale Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 21 -

Settlement of Underlying Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 21 -DISCUSSION. . . . . . . . . . . . . . . . . . . . . . . - 22 -

Legal Standard-Motion for Summary Judgment. . . . . . . . . . . . . . . . . . . . . . . - 22 -Choice of Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23 -

Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -Identifying a Conflict.. . . . . - 24 -Plaintiff's Motion for Summary Judgment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 27 -

First Cause of Action-Professional Liability Exclusion. . . . . . . . . . . . . . - 27 -Second Cause of Action-"Your Product" Exclusion. . . . . . . . . . . . . . . . - 31 -Equitable Estoppel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 32 -Defendants' Motion for Summary Judgment. . . . . . . . . . . . . . . . . . . . . . . . . . . - 36 -

Flow International's Involvement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 36 -First Cause of Action-Professional Liability Exclusion. . . . . . . . . . . . . . - 39 -Second, Third, and Fourth Causes of Action. . . . . . . . . . . . . . . . . . . . . . - 39 -Fifth Cause of Action-Failure to Cooperate Provision. . . . . . . . . . . . . . - 41 -Untimely Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 42 -CONCLUSION. . . . . . . . . . . . . . . . . . . . . . - 43 -

MEMORANDUM--DECISION and ORDER

I. INTRODUCTION

Plaintiff Lumbermens Mutual Casualty Company ("Lumbermens" or "plaintiff") brings this declaratory action against defendant Flow International Corporation ("Flow International"); and defendants Flow Autoclave Systems, Inc. ("Flow Autoclave"), Flow Pressure Systems ("Flow Pressure"), ABB Pressure Systems, Avure Technologies AB, and Avure Technologies, Inc. (collectively the "Flow entities")*fn1 (collectively with Flow International, "defendants").*fn2 Plaintiff filed the complaint in this case, Civil Action No. 5:08--CV--865 ("lead case") on August 13, 2008. See Compl., Dkt. No. 1.

Lumbermens seeks a determination that there is no coverage for damages resulting from an allegedly negligently designed Pressurized Containment System ("PCS") based on the terms of a professional liability exclusion ("PLE"). Alternatively, it seeks a declaration that the "your product" exclusion applies to bar damages relating to the loss of the PCS itself. Specifically, the complaint's five causes of action seek a declaration that no coverage exists: (1) due to the PLE; (2) for claims arising out of the loss of the PCS; (3) for property damage caused by the Flow entities' work; (4) for claims arising out of the loss of intangible property, business interruption, or lost profits; and (5) due to defendants' failure to cooperate.

On or about May 12, 2008 (prior to the filing of the instant action), the Flow entities-Flow Autoclave, Flow Pressure, ABB Pressure Systems, Avure Technologies AB, and Avure Technologies, Inc.-filed a summons and complaint in Supreme Court, County of Onondaga, against Lumbermens, Kemper Insurance Companies*fn3 ("Kemper"), Crucible, Travelers, and Zurich. That complaint: (1) alleges breach of contract based on Lumbermens and Kemper's duty to defend the underlying actions; (2) seeks a declaration as to the rights and obligations of the parties and a declaration that Lumbermens has an indemnification obligation in the underlying lawsuits; and (3) seeks attorneys' fees and disbursements resulting from the alleged breach of contract. See Havkins Aff., Ex. 2, ¶ 1 ("member complaint"). On August 25, 2008, then-defendants Lumbermens and Kemper removed the member complaint to federal court. That case, Civil Action No. 5:08--CV--915 ("member case") was assigned to the undersigned. Lumbermens and Kemper answered the complaint in the member case.

A comparison of the two cases revealed they involve common questions of law and fact. On June 1, 2009, the two cases were consolidated and Lumbermens v. Flow International, Civil Action No. 5:08--CV--865 was designated as the lead case. See Order of Consolidation, Dkt. No. 13.*fn4

On June 17, 2009, following consolidation, Flow International answered Lumbermens' complaint in the lead case. See Dkt. No. 15. On February 11, 2010, Lumbermens and Kemper filed an amended answer to the complaint in the member case and asserted counterclaims against the Flow entities.*fn5 The counterclaims seek a declaration that no coverage exists: (1) due to the PLE; (2) for claims arising out of the loss of the PCS; (3) for property damage caused by the Flow entities' work; and (4) for claims arising out of the loss of intangible property, business interruption or lost profits.*fn6

On March 25, 2011, plaintiff moved for summary judgment in the lead case pursuant to Federal Rule of Civil Procedure 56. See Dkt. No. 34. Defendants opposed and also moved for summary judgment in the lead case pursuant to Rule 56. See Dkt. No. 37. Plaintiff opposed and both parties replied. The motions for summary judgment were filed on the same day and thus will be treated as separate motions. Oral argument was heard on June 24, 2011, in Utica, New York. Decision was reserved. There were no motions filed in the member case.

II. FACTUAL BACKGROUND

A. Parties

1. Lumbermens and Kemper

Lumbermens is an insurance company incorporated under the laws of the State of Illinois with its principle place of business in Illinois.*fn7 Kemper is also incorporated under the laws of the State of Illinois. Kemper is Lumbermens' parent corporation.*fn8

2. Travelers, Zurich, and Crucible

Dismissed defendants Travelers and Zurich are both insurance companies. Also previously dismissed, defendant Crucible is a corporation engaged in the specialty metals industry. It owned and operated a steel manufacturing plant in Syracuse, New York.

3. Flow International

According to plaintiff, Flow International is a Washington corporation with its principle place of business in that state. Defendants admit Flow International is a corporation existing in the State of Washington, see Answer, Dkt. No. 15, ¶ 3, but assert it is a Delaware corporation, see Defs.' Resp. Statement of Material Facts, Dkt. No. 45--1, ¶ 1. It should be noted that the Quintus Purchase--Sale Agreement describes Flow International as a Washington corporation. See Havkins Aff., Ex. 19, Dkt. No. 35--20 ("Quintus Purchase--Sale Agreement"). Flow International is in the business of developing and manufacturing ultrahigh-pressure waterjet technology and provides robotics and assembly equipment.

4. ABB Pressure Systems

According to defendants, ABB Pressure Systems was the previous name of the Swedish company Flow Pressure. ABB Pressure Systems was a supplier to ABB Autoclave Systems.

5. Flow Pressure

According to plaintiff, Flow Pressure was incorporated in the State of Washington and had its principal place of business in that state. According to defendants, Flow Pressure was the name of the Swedish company that manufactured accumulator vessels and frames.

6. ABB Autoclave Systems, Inc.

The record reflects that on September 30, 1986, ABB Industrial Systems, Inc. and Snap-Tite, Inc. formed a joint venture called ABB Autoclave Systems, Inc. See Havkins Aff., Ex. 21, Dkt. No. 35--43 ("Joint Venture Agreement"). According to that agreement, ABB Industrial Systems, Inc. owned 51% of ABB Autoclave Systems, Inc. and Snap-Tite, Inc. owned the remaining 49%.

On November 1, 1998, Crucible entered into a Purchase--Sale Agreement with ABB Autoclave Systems, Inc. See Havkins Aff., Ex. 18, Dkt. No. 35--19 ("Purchase--Sale Agreement"). Under the terms of that contract, ABB Autoclave Systems, Inc. agreed to design, manufacture, distribute, sell, install, and test a PCS (also referred to as a warm isostatic press) and related equipment at the cost of $3,654,000 to Crucible. A portion of the work under the contract was subcontracted to Flow Pressure (formerly ABB Pressure Systems). Flow Pressure manufactured some of the parts that were assembled into the PCS but ABB Autoclave Systems, Inc. was the end assembler of the PCS under the Purchase--Sale Agreement.

7. Flow Autoclave

On March 31, 1999, several months after the execution of the Purchase--Sale Agreement, Flow International purchased ABB Industrial System, Inc.'s 51% interest in ABB Autoclave Systems, Inc.. Following that purchase, ABB Autoclave Systems, Inc. became known as Flow Autoclave. As a result of the sale, Flow Autoclave became the entity responsible for the contractual relationship with Crucible under the Purchase--Sale Agreement.

At all relevant times, defendant Flow Autoclave's principle place of business was Colombus, Ohio. See Toops Decl., Dkt. No. 45--2, ¶ 11. The complaint indicates Flow Autoclave is incorporated in the State of Washington. Compl., ¶ 4. The Leness Declaration however asserts Flow Autoclave is a Delaware corporation, see Leness Decl., ¶ 9, yet the defendants' complaint in the member case indicates Flow Autoclave was incorporated in Ohio, see Member Compl., ¶ 1. Flow Autoclave was in the business of manufacturing and distributing hot and cold isostatic presses for the uniform densification of advanced ceramics and alloy steel materials.

Plaintiff contends Flow International owned the Flow entities-Flow Autoclave, Flow Pressure, ABB Pressure Systems, Avure Technologies AB, and Avure Technologies, Inc.. However, according to defendants, "Flow International Corporation was a part minority owner of some of the [Flow] entities." Defs.' Resp. Statement of Material Facts, ¶ 2. Specifically, defendants contend Flow International was one of the owners of Flow Autoclave and owned 50% of its shares. See Leness Decl., Dkt. No. 50--2, ¶ 9.

According to Jerry Toops ("Toops"), former President of Flow Autoclave, Flow Autoclave was a separate and distinct legal entity from Flow International. It had its own Board of Directors and its financials were exclusive to it, with the owners each receiving 50% of the dividends paid. See Toops Decl., ¶¶ 1--4. According to Toops, Flow Autoclave paid an administrative fee to Flow International to obtain services such as insurance coverage and general legal services. Id. ¶ 5. He explained the services were not provided because Flow International controlled the day-to-day activities of Flow Autoclave but rather were a paid service. Id.

Finally, after the explosion giving rise to this litigation, Flow Autoclave became Avure Autoclave Systems, Inc..

8. Avure Technologies AB and Avure Technologies, Inc.

The complaint in the lead case indicates Avure Technologies AB is a Swedish corporation doing business in Washington. The complaint in the member case asserts Avure Technologies AB exists under the laws of Sweden but does not indicate its place of business. The member complaint indicates Flow Pressure and ABB Pressure Systems were both predecessors to Avure Technologies AB.

Lumbermens contends Avure Technologies, Inc. is a Delaware corporation doing business in Washington.The Quintus Purchase--Sale Agreement states that Avure Technologies Inc. is a Washington corporation. According to themember complaint, Avure Technologies, Inc. is the parent company to Flow Autoclave (which eventually became Avure Autoclave Systems, Inc.).

9. Quintus Holdings, LLC

Quintus Holdings, LLC ("Quintus") is an affiliate of Gores Technology Group, LLC, a Los Angeles, California based private equity firm. On September 30, 2005, Flow International sold its interests in Flow Autoclave, Avure Technologies, Inc., and Avure Technologies, AB to Quintus.*fn9

B. Relevant Insurance Policies

1. Zurich and Travelers Policies

At the time of the events giving rise to this lawsuit, Crucible was insured under two insurance policies that provided coverage for first-party property loss. Zurich issued a Boiler and Machinery policy, number BM3734494--00, which provided coverage for the period December 1, 2001, through December 1, 2002 ("Zurich policy"). Travelers issued a standard property policy, number KTJ--CMB296T966--5--01, which provided coverage for the period December 1, 2001, through December 1, 2002 ("Travelers policy").

2. Federal Policy

Flow International purchased a primary commercial general liability policy from Federal Insurance Company ("Federal"), with a $1,000,000 limit. See Havkins Aff., Ex. 15, Dkt. No. 35--16 ("Federal policy"). The Federal policy, number 3579--41--30 SEA, provided coverage for the period April 1, 2002, through April 1, 2003. It provided primary coverage for bodily injury or property damage caused by an occurrence up to a maximum of $1,000,000.

a. Insureds

"Flow International Corporation, Inc." is the named insured on the Federal policy. A named insured endorsement includes, among others, Flow International, Flow Pressure Systems FPS AB, Flow Autoclave, and Avure Technologies Inc..

b. Definitions

The Federal policy includes almost identical definitionsas those contained in the Lumbermens policy, described below.Particularly relevant are the policy definitions for "Property Damage," "Your product," and "Your work."

c. Exclusions

The Federal policy provided general liability insurance coverage subject to exclusions. The Federal policy excluded coverage for "property damage to your product arising out of it or any part of it" (the "your product" exclusion) and "property damage to your work arising out of it or any part of it and included in the products-completed operations hazard" (the "your work" exclusion).Federal policy, 16.

3. Lumbermens Policy

Defendants also purchased an excess liability insurance policy from Lumbermens. See Havkins Aff., Ex. 14, Dkt. No. 35--15 ("Lumbermens policy"). The Lumbermens policy, number 9SX 123028--03, provided coverage for the period April 1, 2002, through April 1, 2003. The Lumbermens policy provided $25,000,000 per occurrence in liability coverage, in excess of the Federal policy's $1,000,000 limit of insurance.

a. Insureds

The declarations page of the Lumbermens policy lists "Flow International Corporation, et al" as the named insured, but Flow Autoclave, Flow Pressure, and Avure Technologies, Inc., among others, are also listed as named insureds. Defendants ABB Pressure Systems, Avure Technologies AB, and ABB Autoclave Systems are not named insureds.

b. Coverage Parts

The coverage provided by the Lumbermens policy is divided into two parts: Coverage Part A, "Excess Liability Over Underlying Insurance" and Coverage Part B, "Excess Liability Over Retained Limit." Under Coverage Part A, coverage obligations arose only when and if the limits of the underlying insurance (the Federal policy) were exhausted. Under that part, Lumbermens would pay only damages in excess of the sum of damages that would have been payable under the terms of the Federal policy. Coverage Part A follows-form to the terms and conditions of the Federal policy. Under Coverage Part B, Lumbermens would only pay damages covered under the terms of Lumbermens policy, but only if the Federal policy did not apply.

Both Coverage Parts A and B contained exclusionary language. Specifically, four exclusions are at issue: (1) a PLE*fn10 ; (2) a "your product" exclusion; (3) a "your work" exclusion; and (4) a provision requiring the insured to cooperate.

c. Definitions

Also of significance is Section VI, containing the policy definitions. According to that section:

13. "Property damage" means:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time ...


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