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Pentair, Inc. v. Am. Guar. & Liab. Ins. Co.

United States Court of Appeals for the Eighth Circuit

June 16, 2004, Submitted ; March 11, 2005, Filed

No. 03-3236

Opinion

 [*614]  LOKEN, Chief Judge.

An earthquake struck Taiwan in September 1999, disabling a substation that provided electric power to two Taiwanese factories. Lacking power, the factories could not manufacture products they were supplying to a subsidiary of Pentair, Inc. When production resumed two weeks later, Pentair shipped orders from Taiwan via airfreight to meet its customers' needs for the Christmas season, resulting in additional costs of $ 634,731. Pentair filed a claim for this loss under the "Contingent Time Element" provision of the all-risk manuscript property insurance policy issued to Pentair by American Guarantee and Liability Insurance Company. American Guarantee denied coverage, and Pentair commenced [**2]  this diversity action. The district court 1 granted American Guarantee's motion for summary judgment. Pentair Inc. v. Am. Guar. & Liab. Ins. Co., 2003 U.S. Dist. LEXIS 13521, 2003 WL 21804874 (D. Minn. 2003). Pentair appeals. Applying Minnesota law, like the district court, and reviewing ] the grant of summary judgment de novo, we affirm.

Section 10(a)(1) of the American Guarantee policy provided that the policy insures "all real and personal property . . . owned, used, or intended for use by" Pentair. Section 11 provided that the policy covers "all risk of direct physical loss of or damage to property described herein." Section 10(d)(1) extended the policy's business interruption coverages 2 to extra expenses incurred by Pentair in order "to continue as nearly as practicable the normal operation of [Pentair's] business following loss . . . by the perils insured herein" to property described in Section 10(a). The Taiwanese [**3]  factories and their electric power supplier were not property described in Section 10(a). However, Pentair relies for coverage on Section 10(h)(2), the "Contingent Time Element" provision, which further extended the business interruption coverages to include losses incurred by Pentair as the result of "damage" to "property of a supplier of goods and/or services to the Insured" that is caused by a covered peril, here, an earthquake. [*615]  3 Though few reported cases have construed this type of extended business interruption coverage, it has doubtless become more common and significant as companies increasingly out-source component parts manufacturing and rely on so-called "just in time" inventory systems.

 [**4]  The parties agree that the Taiwanese factories were Pentair suppliers located within a covered territory for purposes of Section 10(h)(2). The district court concluded that the "direct physical loss or damage" limitation in Section 11 applies to the contingent time element coverage in Section 10(h)(2). On appeal, Pentair does not challenge this conclusion. The district court then held that Pentair's extra expense loss is not covered under Section 10(h)(2) because (1) the electric substation, though physically damaged by the earthquake, was not a Pentair supplier for purposes of Section 10(h)(2); and (2) the resulting power outages did not cause direct physical loss or damage to the Taiwanese factory suppliers. On appeal, Pentair challenges both conclusions, arguing that the Taiwanese substation was a Pentair supplier within the meaning of Section 10(h)(2) and, in any event, its Taiwanese factory suppliers suffered "direct physical loss" when power outages rendered them unable to perform their "intended function" of manufacturing products for Pentair.

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400 F.3d 613 *; 2005 U.S. App. LEXIS 4062 **

Pentair, Inc., Plaintiff - Appellant, v. American Guarantee and Liability Insurance Company, Defendant - Appellee.

Prior History:  [**1]  Appeal from the United States District Court for the District of Minnesota.

Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 2003 U.S. Dist. LEXIS 13521 (D. Minn., July 31, 2003)

Disposition: Affirmed.

CORE TERMS

coverage, power outage, suppliers, business interruption, physical loss, insured, losses, factories, district court, substation, electric, contingent, cases, off-premises, supplied, manufacturing, earthquake, Premises, all-risk, purposes, parties, perils, grain

Civil Procedure, Appeals, Standards of Review, De Novo Review, Summary Judgment Review, General Overview, Standards of Review, Insurance Law, Business Insurance, Business Interruption Insurance, Torts, Business Torts, Property Insurance, Coverage, All Risks