California “property damage” and “Your Product” and Sistership exclusions.

In Silgan Containers Corp. v. National Union Fire Ins. Co., No. 4:08-cv-02246-PJH  (N.D. Cal. March 29, 2010), insured Silgan contracted with Del Monte to supply pull-tab food containers to Del Monte which Del Monte then filled with fruit and sold to consumers.   After Del Monte began receiving consumer complaints of problems with the pull-tabs, Del Monte recalled and disposed of inventory packaged in Silgan’s containers.  Del Monte then withheld payment to Silgan in the amount of its claimed damages.  Silgan’s primary insurer, Zurich, paid its policy limits.  However, its umbrella insurer, National Union, denied coverage on the basis of no physical injury to the fruit and thus no “property damage.”   Silgan filed suit against National Union.  The federal district trial court entered summary judgment for National Union holding: (1) because the insured’s defective cans did not cause “an alteration in appearance, shape, color or in other material dimension” of the fruit, it was not physically injured; and (2) absent any proof that the fruit contained in the insured’s defective cans was completely unusable, there was no “loss of use” of the fruit.  The court notes that, although Del Monte disposed of the fruit, it appears to have done so for economic reasons rather than a complete inability to use the fruit.  The court goes on to address several exclusions, stating: (1) the exclusion for “property damage to your product arising out of it or any part of it” would apply to the cost of replacing the insured’s cans, (2) the exclusion for “withdrawal or recall of your product” would apply to the costs for segregating and disposing of the defective cans.