Insurance doesn't cover replacing nonconforming product

June 30, 2005
Die-Cutting Diversified Inc. v. United National Insurance Co., 353 F.Supp. 1053 (E.D.Mo. 2004), U.S. District Court, Eastern District of Missouri, Nov. 9, 2004.

On Feb. 23, 2003, Die-Cutting Diversified Inc., a Missouri corporation with a die-cutting plant in St. Louis, made a retail display for Color Art Inc. However, the product produced did not conform to Color Art's instructions. So Die-Cutting immediately cut and delivered a new product, which did conform in time to meet the original deadline. In doing so, the company incurred substantial expenses.

Die-Cutting had a professional liability policy issued by United National Insurance Co. On April 22, 2003, Die-Cutting reported its loss to United National and claimed damages. When United National denied the claim, Die-Cutting sued, asserting the company wrongfully denied its claim for benefits.

The policy issued by United National covered "those sums that the insured becomes legally obligated to pay as damages because of the rendering of, or failure to provide, 'professional services' to which this insurance applies." The policy also stated: "This insurance applies to professional services only if: . . . (3) A claim for damages because of the rendering of, or failure to render, professional services is first made against any insured."

United National argued its policy did not cover Die-Cutting's claim because there was no claim for damages made against it. The U.S. District Court for the Eastern District of Missouri agreed with the insurer, stating: "The record does not indicate that Color Art made a demand for the payment of money or compensation for a loss or injury it sustained; it asked for a product that conformed with the contract it had with Die-Cutting. Nothing in the record suggests that Color Art sustained any monetary loss for which it claimed damages from Die-Cutting, as the ordinary meaning of 'damages' is understood. Any monetary loss was sustained by Die-Cutting and, as the policy clearly provides, a claim for damages must be made against Die Cutting, not by Die-Cutting to trigger policy coverage."

Termination a 'procedural,' not 'substantive,' contract violation

Botterbusch v. Preussag International Steel Corp., 609 S.E.2d 141 (Ga.App. 2004), Court of Appeals of Georgia, Dec. 31, 2004.

Preussag International Steel Corp. (PISC), an American subsidiary of a German conglomerate, hired Reiner Botterbusch in 1981 as its president and CEO. A written employment contract with the company dated Jan. 1, 1986, designated Botterbusch as such and established a 36-month employment term to be renewed automatically for successive 36-month periods.

The contact was amended on Feb. 15, 1994, establishing an employment term of five years from Jan. 1, 1995, to Jan. 1, 2000. The amendment stated that if the term was not otherwise terminated, it would automatically extend for an additional period. The agreement would expire when Botterbusch turned 65.

On Aug 25, 1998, PISC informed Botterbusch by letter that it had terminated his employment without cause, effective immediately. Botterbusch's employment contract required his employer to give him 270 days written notice of termination. Preussag paid him at full salary for the next 270 days.

Botterbusch sued PISC for breach of contract, arguing that his termination was ineffective because the company did not give him the 270 days notice required by his contract. He argued that his employment automatically renewed on Jan. 1, 2000, for another period that extended through his 65th birthday on July 22, 2003, so he was owed $1 million in compensation.

The Georgia trial court ruled against Botterbusch, concluding that PISC terminated his contract before it automatically renewed on Jan. 1, 2000. Although the company did not give Botterbusch the required notice, the ex-CEO's damages were limited to the compensation he would have received during the notice period, which PISC had already paid him.

Botterbusch appealed to the Georgia Court of Appeals. That court concluded: "PISC's failure to comply with the notice requirement constituted a procedural, rather than a substantive flaw in the termination . . .. A procedural breach does not void the termination or entitle the employee to recover the full value of his employment contract. On the contrary, in cases where an employer terminates an employee in violation of a contractual notice provision, recovery is limited to the actual contractual loss during the notice period." However, the court ruled that Botterbusch was entitled to recover nominal damages because of PISC's procedural breach of contract.

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