National Union Fire Insurance Company of Pittsburgh v. Terra Industries, Inc. Terra Nitrogen, (Uk) Limited, Terra Industries, Inc. Terra Nitrogen, (Uk) Limited, Counter Claimants-Appellees v. National Union Fire Insurance Company of Pittsburgh, Counter

Citation: 346 F.3d 1160Docket: 02-3280

Court: Court of Appeals for the Eighth Circuit; November 29, 2003; Federal Appellate Court

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National Union Fire Insurance Company of Pittsburgh filed a lawsuit against Terra Industries, Inc. and Terra Nitrogen (UK) Limited, seeking a declaratory judgment regarding its obligations to defend and indemnify Terra under a commercial umbrella insurance policy. The policy, effective from July 1, 1997, to July 1, 2000, covered liability for bodily injury, property damage, personal injury, or advertising injury caused by an occurrence during the policy period. Key definitions included 'property damage' as physical injury to tangible property or loss of use, and 'occurrence' as an unintended accident.

National Union had a duty to defend Terra against any claims covered by the policy, for which Terra paid premiums exceeding $3.2 million. The case arose after a benzene contamination was detected in carbonated beverages sold by beverage manufacturers, linked to a leak in Terra's Severnside plant. The leak allowed natural gas containing benzene to contaminate carbon dioxide sold to resellers, who then supplied it to beverage manufacturers. Terra's investigation revealed that significant amounts of contaminated carbon dioxide had been sold prior to the discovery of the leak. The Eighth Circuit affirmed the summary judgment in favor of Terra, upholding the lower court's decision.

Following a benzene leak and subsequent media attention, beverage manufacturers executed a trade recall targeting large wholesalers and supermarkets, citing negligible health risks for consumers as a reason against a wider consumer recall. Subsequently, several manufacturers filed suit against Messer and Terra in England's Commercial Court, alleging breach of contract and warranty due to the supply of unsuitable carbon dioxide, alongside tort claims against Terra. Messer initiated third-party claims against Terra, which then notified its insurer, National Union. The High Court issued two judgments against Messer and Terra, mandating Terra to indemnify resellers for liabilities to the manufacturers. National Union satisfied the first judgment related to Britvic but contested the second regarding Bicardi-Martini, arguing that only economic loss occurred without physical property damage. Appeals by Terra and Messer were dismissed, leading National Union to file for a declaratory judgment in federal court. 

In this court, both National Union and Terra sought summary judgment. The district court ruled that the contamination constituted an 'occurrence' under the insurance policy, resulting in 'property damage' as the beverages became unsalable. Consequently, the court denied National Union's summary judgment motion and granted Terra's, ordering National Union to indemnify Terra for the Bicardi-Martini judgment, cover all defense costs, and indemnify against future claims. 

On appeal, National Union contended that its indemnification duty was misinterpreted, asserting no property damage occurred and that any alleged damage was merely economic loss. In contrast, Terra argued that the English court ruling on the absence of 'direct physical damage' did not govern their policy rights, as the relevant policy did not necessitate direct property injury. Terra also maintained that the contamination altered third-party products, triggering coverage under the policy's definitions. The standard of review for the appeal involves de novo examination of legal rulings, including the interpretation of insurance contracts.

Collateral estoppel under Iowa law requires that four conditions be met: (1) identical issues in current and prior actions, (2) the issue was raised and litigated in the prior action, (3) the issue was material to the prior action's disposition, and (4) the determination was essential to the prior judgment. In this case, the district court concluded that the issues were not identical, as the English Commercial Court's interpretation of 'property damage' was distinct from that in National Union's policy. Thus, collateral estoppel does not apply.

State law governs insurance policy interpretation, with courts determining the legal effect and meaning of policy language. Iowa courts interpret such policies from the perspective of an ordinary person. The district court noted that no Iowa case addresses whether a contaminated product sold to third-party manufacturers constitutes an 'occurrence' resulting in 'property damage' when it renders the final product unsuitable for consumption. The court found that a previous case, Kartridg Pak Co. v. Travelers Indem. Co., was not relevant because it involved damage to the insured's product rather than damages to third-party products caused by contamination.

Reviewing the policy and relevant case law, the court noted that many American courts have found that similar scenarios involving the sale of contaminated products do result in 'occurrences' causing 'property damage'. Various cases were cited, including those where adulterated juices and contaminated food products were deemed to cause property damage under comprehensive general liability policies.

Coverage under products liability insurance policies was affirmed for an insured noodle manufacturer found liable to a soup manufacturer due to the incorporation of contaminated noodles into its products. This reasoning was applied to a case involving the incorporation of contaminated carbon dioxide into consumer beverages, which was deemed an 'occurrence' resulting in 'property damage' as defined by the policy. The district court was recognized for its thorough analysis and correct conclusions, leading to an affirmation of its opinion and judgment. The excerpt references additional cases for persuasive authority, including decisions from Iowa and British courts regarding contamination and property damage definitions under insurance policies.