Aрpellee AGCO Corporation (AGCO) manufactured and sold a self-propelled, agricultural spray applicator called the RoGator. In 2005, AGCO began offering an Extended Protection Plan (EPP) to its RoGator customers. Appellant Lloyd’s Syndicate No. 5820 d/b/a Cassidy Davis (Cassidy Davis) provided the master policy of insurance for the EPP program, which covered AGCO for certain liability to customers who purсhased the RoGator EPP. Glynn General Corporation administered the plans. Between 2005 and 2008, AGCO enrolled about 2,050 RoGator machines in the EPP program. Beginning in 2008, a number of customers presented claims under the EPP based on the failure of wheel motors on the RoGator. In September 2008, after it had paid about 25 claims related to this failure, Cassidy Davis invoked the Epidemic Failure Clause of the master insurancе policy and refused to pay for any more claims.
On June 26, 2009, AGCO sued Cassidy Davis and others asserting various claims, including claims against Cassidy Davis for breach of contract and bad faith denial of insurance coverage. The trial court granted partial summary judgment to AGCO and denied partial summary judgment to Cassidy Davis on a breach of contract issue, holding that the EPP covered failures caused by design and engineering defects in the RoGators. The trial court also denied Cassidy Davis’s motion for summary judgment on the bad faith claim, rejecting the insurer’s argument that it was not obligated to indemnify AGCO until a court entered a judgment establishing AGCO’s legal liability to its customers. The Court of Appeals affirmed the trial court on both issues. See Lloyd’s Syndicate No. 5820 v. AGCO Corp.,
1. The RoGаtor EPP provides that AGCO will repair or replace covered parts “if required due to a MECHANICAL BREAKDOWN or FAILURE that is the result of a true defect in material or workmanship.” The EPP defines a covered “mechanical breakdown or failure” as
the actual breaking or electronic failure of any covered part of the covered MACHINE while in ordinary use arising from faults attributable to manufacturing defects in workmanship or materials in such MACHINE causing sudden stoppage of the functions thereof and necessitating repair before it can resume work.
It has not yet been established whether the RoGator wheel motor failures were caused by defects in the manufacture of particular machines or rather from the machine’s design. To determine whether the cause needs to be identified, both parties moved for partial summary judgment, asking the trial court to decide whether defects in the RoGator’s design or engineering are covered by the EPP.
(a) In advocating coverage of design defects, AGCO argues first that the phrase “manufacturing defects” as used in the EPP covers both manufacturing and design defects. For this argument, AGCO relies solely on United States v. Western Electric Co., 894 F2d 1387 (D.C. Cir. 1990). That reliance is misplaced. Western Electric involved a consent decree in an antitrust case, and the D.C. Circuit looked primarily to antitrust and patent cases and to the antimonopoly purpose and intent of the decree in reaching its decision; the court did not consider cases dealing with defective products. See id. at 1391-1392.
For example, in Rose v. Figgie International,
(b) AGCO next argues that the EPP’s reference to “workmanship or materials” in the definition of a covered “mechanical breakdown or failure” is broad enough to include design defects. The cases on the meaning of “workmanship or materials” are more evenly divided.
(c) AGCO also argues that the EPP’s use of the phrase “arising from” broadens the contract’s coverage to include design defects.
We can assume, without deciding, that the use of the phrase “arising from” means that the EPP provides coverage if there is “ ‘nothing more than a slight causal connection,’ ” Lloyd’s,
(d) Finally, AGCO contends that, because design defects are not listed in the section of the EPP entitled “What is Not Covered,” they are not excluded from coverage. There was no reason to exclude such design defects, however, because they plainly are not covered in the first place.
Because the EPP does not cover design defeсts, Cassidy Davis was entitled to partial summary judgment on that issue, and the trial court and Court of Appeals erred in ruling otherwise.
2. The second contract at issue in this case is the master policy of insurance between Cassidy Davis and AGCO, in which Cassidy Davis promised “to indemnify [AGCO] for all sums which [AGCO] shall be held legally liable to pay in respect of [AGCO’s] contractual liability” to its customers under the EPP. After paying for approximatеly 25 EPP claims based on RoGator wheel motor failures, Cassidy Davis notified AGCO in September 2008 that it would pay no more. In April 2009, AGCO sent the insurer a letter demanding payment of $410,000 in unreimbursed wheel motor claims and invoking OCGA § 33-4-6.
Cassidy Davis moved for summary judgment on this claim, arguing, among other things, that AGCO’s demand letter wаs premature because no payment to AGCO was due under the policy at the time the demand was made and “ ‘[i]t has long been the law that in order to serve as a bad faith demand, the demand must be made at a time when immediate payment is due.’ ” Stedman v. Cotton States Ins.,
The Court of Appeals correctly noted that “ ‘indemnify’ has been defined as ‘to reimburse another for a loss suffered because of a third party’s or one’s own act or default.’ ” Lloyd’s,
Instead, the contract requires Cassidy Davis to indemnify AGCO only for sums that AGCO has been “held legally liable” to pay. Cassidy Davis contends that the contract therefore requires a court to have determined that AGCO was actually liable for the EPP claims it paid before being entitled to reimbursement. See Permasteelisa CS Corp. v. Columbia Cas. Co.,
Once again, we need not decide what “legally liable” would mean standing alone, because AGCO’s argument again ignores the context in which that phrase is used, namely, the word in this contract right before “legally liable.” The policy does not provide indemnification for EPP claims for which AGCO is “legally liable,” only claims for which AGCO has been “held legally liable.” Thus, Cassidy Davis is required to indemnify AGCO only when there has been an аctual holding of legal liability by a court, not merely the possibility of such a holding or the prediction of such a holding by the insured.
AGCO finally asserts that “the intent of the policy” is to establish a system whereby Glynn General Corporation, the administrator of the EPP program, would pay customer claims from funds provided by Cassidy Davis. There is evidence that Cassidy Davis followed this arrangement by providing funds to pay for the initial 25 or so RoGаtor wheel motor claims, although no court judgment requiring payment of those claims had been entered. AGCO contends that this conduct proves that the parties intended that Cassidy Davis’s obligation to indemnify AGCO would be triggered as soon as a customer made a claim in accordance with the EPP. See Scruggs v. Purvis,
Cassidy Davis’s voluntary reimbursement for the initial RoGator EPP claims does not prove, however, that the contract requires those payments before the entry of a judgment establishing AGCO’s legal liability under the EPP—just as AGCO’s payment of some EPP claims in order to generate customer goodwill does not make AGCO legally liable for all claims presented under the EPP.
Thus, AGCO’s claim for indemnification from Cassidy Davis did not — and will not — accrue until AGCO’s legal liаbility for EPP claims has been established by a court holding. Because Cassidy Davis was therefore entitled to summary judgment on the bad faith claim, the trial court and Court of Appeals erred in ruling to the contrary.
3. We close by noting that neither of our rulings ends this case. On remand, AGCO could still prevail by showing that the RoGator wheel motor failures were in fact caused by a manufacturing defect, bringing those claims under the EPP’s cоverage. And if the court so holds, then Cassidy Davis’s duty to indemnify AGCO for all sums paid on such claims for which AGCO had been held legally liable to its customers would be triggered.
Judgment reversed and case remanded.
Notes
The Epidemic Failure Clause says, in relevant part: “In the event that the total number of claims from a common cause for a particular component or components,... amounts to more than 10% of the earned units, this shall be considered an ‘Epidemic Failure,’ and will be the sole responsibility of [AGCO].”
The facts and procedural history of this case are discussed in greater detail in the Court of Appeals opinion. See Lloyd’s,
AGCO filed a cross-appeal to the Court of Appeals, contending that because Cassidy Davis initially denied claims based only on the Epidemic Failure Clause, the insurer was estopped from asserting different grounds for dеnial and that the Epidemic Failure Clause was not enforceable as a matter of law because it was not given to AGCO at the time the policy was issued. The Court of Appeals rejected both arguments. See Lloyd’s,
The parties and the courts below have sometimes used the phrase “design or engineering defects,” but they have not differentiated between a “design defect” and an “engineering defect” and the terms appear to be synonymous, at least as used in this case. We will therefore simply use the term “design defect” to encompass defects in design and engineering.
The issue in Western Electric was whether, in the consent decree that ended the massive AT&T antitrust litigation, the prohibition on the spinoff regional telephone companies engaging in “manufacture [of] ... telecommunications equipment” applied only to the fabrication of such products or also to their design and development. See 894 F2d at 1388-1389. The court said that dictionary “[definitions of manufacturing typically include activitiеs equivalent to design and development.” Id. at 1391. The court noted, however, that the Oxford English Dictionary’s definition of “manufacture” — “ ‘[t]o make or fabricate from material; to produce by labour’ ” - does not include design, but explained that definition away by saying, “[t]he most that this shows ... is that ‘manufacture’ is an inherently ambiguous term.” Id. The court then looked to the intent of the parties and the statements of the consent decree’s objectives, which left “no question that the parties expected [the decree] to prohibit the design and development of telecommunications products” to advance the decree’s antimonopoly purpose. Id.
AGCO argues that the many product warranty cases cited by Cassidy Davis are inapplicable here because none of those warrantiеs used language identical to the EPP and none of those cases dealt with extended protection plans that were issued on an individual product basis. Those distinctions seem immaterial, however, and in any event, these many similar cases are certainly more persuasive than AGCO’s one case interpreting an antitrust consent decree.
See Stearns v. Select Comfort Retail Corp., 763 FSupp.2d 1128, 1148 (N.D. Cal. 2010) (collecting cases and recognizing the division of authority). Compare, e.g., id. (“The Ninth Circuit has considered the meaning of ‘workmanship’ in the context of exclusions in insurance contracts and has concluded that ‘workmanship’ includes defects in design.”); and In re Saturn L-Series Timing Chain Products Liability Litigation, No. 8:07cv298,
OCGA § 33-4-6 (a) says:
In the event of a loss which is covered by a policy of insurance and the refusal of the insurer to pay the same within 60 days after a demand has been made by the holder of the policy and a finding has been made that such refusal was in bad faith, the insurer shall be liаble to pay such holder, in addition to the loss, not more than 50 percent of the liability of the insurer for the loss or $5,000.00, whichever is greater, and all reasonable attorney’s fees for the prosecution of the action against the insurer. . . .
Cassidy Davis disputes this allegation, asserting that AGCO had not yet paid the full $410,000 to its customers at the time of the demand letter. We need not resolve that factual dispute, but we note that it is clear that until AGCO actually paid an EPP claim, it had not suffered a loss, so Cassidy Davis was not yet obligated to reimburse AGCO for such a claim.
An AGCO employee admitted in his deposition that AGCO had made some “goodwill” payments to customers, meaning that it paid some claims for RoGator wheel motor failures that AGCO did not believe it was legally obligated to pay. Likewise, the master insurance poliсy does not preclude Cassidy Davis from reimbursing AGCO for EPP claims until there has been a court holding as to AGCO’s liability for the claims, and indeed Cassidy Davis could do so to maintain goodwill or to avoid an obvious litigation result where it believes the claims were in fact covered. Cassidy Davis explains that it takes a number of claims to suspect that a defect occurred in design rather than in manufacturing, which is a plausible explanation for why the insurer cut off the reimbursements after paying around 25 of them.