Seventh Circuit Finds No Coverage Without Proof Lost Profits Resulted From Property Damage
In
Berry Plastics Corporation v. Illinois National Insurance Company
, the Seventh Circuit predicted how the Indiana Supreme Court would decide the issue of whether future lost profits are covered as damages “because of” property damage.
Berry Plastics,
903 F.3d 630 (Sept. 10, 2018).
The insured, Berry, sold a foil laminate product that its customer,
Packgen, used in developing a specialized container impenetrable to oxygen. Packgen, in turn, sold and marketed the containers to the petroleum industry as having the capability of storing flammable materials. The foil laminate, however, failed and, in some instances, resulted in fires. Following expert testimony of Packgen’s lost profits from canceled orders and a ten-year projection of its anticipated profits had the containers proved successful, judgment was entered against Berry for breach of contract and breach of express and implied warranties in the amount of $7.2 million.
Consistent with its ruling in
Wausau Underwriters Insurance v. United Plastics Group, Inc.
512 F.3d 953 (7th Cir. 2008) (applying Illinois law), the Seventh Circuit predicted that the Indiana Supreme Court would permit recovery of future lost profits, but only under circumstances where the insured establishes that the lost profits resulted from property damage, as opposed to a product’s failure to meet consumer expectations.
Berry Plastics
, 903 F.3d 630, 644. Based on the record, however, the Seventh Circuit found that “Berry has made no effort, below or on appeal, to make such a case.”
Id.
at 643. The court rejected Berry’s argument that issue preclusion prevented its insurer from relitigating whether the damages were causally connected to property damage caused by the failure of Berry’s product. The court also rejected Berry’s assertion that, just because some of Packgen’s containers were damaged, all Packgen’s lost profits were nececessarily damages “because of property damage.” Because Berry chose not to introduce admissible proof that lost profits from canceled and unrealized orders were causally connected to property damage to Packgen’s containers, the Seventh Circuit held the insurer had no duty to indemnify Berry for the underlying judgment.
Berry Plastics
serves as a reminder that, although economic loss can be covered damages, a general liability policy does not cover purely economic loss resulting from the failure of an insured’s work or product to perform as warranted. Rather, to implicate coverage, in whole or in part, the insured must establish – either by facts in the underlying record or in the coverage case – that lost profits were caused by property damage.
