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National Union Fire Insurance Company of Pittsburgh, PA v. Donaldson Company, Inc.

United States Court of Appeals, Eighth Circuit

June 14, 2019

National Union Fire Insurance Company of Pittsburgh, PA; American Home Assurance Company Plaintiffs - Appellees
Donaldson Company, Inc. Defendant-Appellee
Federal Insurance Company Defendant-Appellant

          Submitted: March 13, 2019

          Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before SHEPHERD, ARNOLD, and ERICKSON, Circuit Judges.


         This case involves an insurance coverage dispute over the allocation of a $6 million settlement in an underlying product liability lawsuit. Defendant-Appellee Donaldson Company, Inc. ("Donaldson"), a designer and manufacturer of defective air ducts, was insured under consecutive commercial general liability ("CGL") policies from two subsidiaries of AIG Property Casualty U.S., Inc., specifically Plaintiffs-Appellees National Union Fire Insurance Company of Pittsburgh, PA and American Home Assurance Company (individually "National Union" and "American Home," and collectively "AIG"). Donaldson was also insured under consecutive umbrella policies issued by Defendant-Appellant Federal Insurance Company ("Federal").

         In a series of orders, the district court[1] construed the terms of the insurance policies; determined the parties' obligations under the policies; and ruled that AIG be paid $500, 000 by Donaldson and be reimbursed over $2.76 million by Federal. Federal appeals, asserting the district court erred in its interpretation of the Batch Clause Endorsement and its construction of the term "lot." We affirm.

         I. Background

         A. Underlying Product Liability Suit

         During the 1990s, Donaldson designed and manufactured two types of plastic ducts exclusively for the air-intake system of trucks manufactured by Western Star Trucks ("Western Star"): a "crossover" duct (product number 317) and an "elbow" duct (product number 319). These trucks were used in the logging and construction industries. When functioning properly, the air-intake system delivered clean air into the internal parts of Western Star diesel truck engines.

         In January 2000, a Western Star representative informed Donaldson that three trucks had experienced engine dusting because of a defect in both types of ducts. In 2001, purchasers of Western Star trucks began filing lawsuits alleging a design defect. More specifically, the claims alleged the ducts' walls were too thin, which caused the ducts to soften and melt and eventually cause engine dusting and engine failure. In a lawsuit filed in Mississippi state court, Arender v. Burroughs Diesel, Inc., fifteen purchasers of Western Star trucks sued Donaldson, Western Star, and a commercial dealer of the trucks, Burroughs Diesel, Inc. ("Burroughs"), alleging the Western Star trucks they purchased were inoperable due to the air-intake system. Burroughs filed a cross-claim against Donaldson. In 2010, the Burroughs cross-claim settled for $6 million (the "Burroughs settlement"), in which AIG contributed $3, 548, 387.10 and Federal contributed $2, 451, 612.90. Both insurers reserved their rights to challenge the apportionment of the settlement.

         Donaldson notified AIG-or at least American Home-of the complaints regarding the air-intake ducts shortly after they were filed. On March 11, 2002, a claims management analyst for AIG Vendor Services sent a letter to Donaldson's third-party claims administrator, stating:

. . . We recently learned that the insured carried a Batch Clause Endorsement on their policy, therefore, all claims related to alleged faulty air intake systems on Western Star trucks would fall under one occurrence. All of the claims are subject to one deductible, and the limits of insurance for this occurrence are $1, 000, 000.

We have reopened our file. Per the Batch Clause Endorsement, we have created a date of loss of November 14, 2001, the date on the first summons received by the insured. We have also combined the Arender and Bonner lawsuits under one claim number, []. We suggest that you take similar steps regarding the date of loss and combination of all claims into one.

This matter has the potential to exceed the policy limit of $1, 000, 000, therefore, the umbrella and excess carriers have been placed on notice.

         In May 2002, the claims management analyst for AIG Vendor Services, on behalf of American Home, informed Donaldson that it had analyzed the 2001-2002 policy and it would defend Donaldson "subject to a full reservation of all of its rights under the policy, and to decline coverage to [Donaldson] should there be a future determination that there is no potential for coverage." American Home also noted that providing a defense "shall not act as an estoppel or waiver of any of the rights arising out of the policy or law." Finally, American Home informed Donaldson that it should submit claims for coverage under different policies separately.

         In June 2003, National Union's claims administrator sent Donaldson a letter reserving its rights to deny coverage for the damages alleged in the Arender Complaint (the Burroughs action) and Bonner Complaint on the ground that the damages manifested prior to the inception of the umbrella liability policy insuring Donaldson.

         B. Insurance Policies

         1. AIG Commercial General Liability Policies

         Donaldson was insured under AIG policies for six consecutive policy periods. National Union issued four CGL policies to Donaldson effective for the consecutive annual policy periods from July 31, 1996, to July 31, 2000. American Home issued two consecutive CGL policies to Donaldson for the annual policy periods from July 31, 2000, to July 31, 2002. The relevant terms at issue in each CGL policy are identical.

         Each policy contains a $1 million per-occurrence limit and a $500, 000 per-occurrence deductible for "property damage." The policies require AIG to pay for "property damage" under the following terms:

1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. . . .
b. This insurance applies to "bodily injury" and "property damage" only if:
(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; and

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