Claims Adjuster
Best In The World Insurance Company
Anywhere, USA

Dear Sir/Madam:

Thank you for forwarding this case to our office. I have reviewed the materials provided with respect to the above captioned matter, including the General Liability Notice of Occurrence/Claim, Commercial General Liability Coverage Form 00 01 01 96, Printers Errors and Omissions Liability Coverage Form L-3203 5.96 and Declarations and Endorsements, and various other claim file materials.

ABC Corporation ("the insured") prints coupon books for government and financial institutions. The insured contracted with the State of BCA ("claimant") to print family support coupon books. Due to an error in the entry into the computer of the year of payment, the coupons were printed with the year 1900 as the payment due date, rather than the year 2000. The insured denies that the error was Y2K related, asserting that it was simply a data entry error. The programmer entered "00" for the last two digits of the year, but forgot to change the "19" to "20". Other errors may also have been made, such as a payment due date of January 34. Claimant demands that the insured reprint the coupons to reflect the correct date. The insured estimates that the cost of reprinting the coupon books will be between $20,000 and $30,000. No other damages are known to exist.

The Worldly Insurance Company of America ("Worldly") issued to ABC Corporation , 2222 Product Drive, Indianapolis, Indiana, Policy No. PLP 0434777-06 including Commercial General Liability Coverage Form CG 00 01 01 96, with effective dates of May 1, 1999 to May 1, 2000. The policy affords limits of $1,000,000 per occurrence for bodily injury and property damage claims and an aggregate limit of $2,000,000 for other than products and completed operations claims. The products-completed operations aggregate limit and the personal injury and advertising injury limit are each $1,000,000. The policy is endorsed with Printers Errors and Omissions Liability Coverage Form L-3203 5.96 which provides a wrongful act limit and aggregate limit of $1,000,000.

The relevant portions of the policy are as follows:

In your transmittal dated January 5, 2000, you request a coverage opinion and a letter to the insured concerning the above referenced matter.

A choice of law analysis must be performed as the insured, insurer and claimant are all based in different states. Claimant is the State of BCA. Although claimant has not yet filed suit against the insured, any such suit will probably be filed against the insured in BCA. The insured is based in Indiana, although it is not known if the insured is an Indiana corporation. The policy was issued to the insured at its Indiana address, but the policy reflects that the insured also has premises in New York. Worldly is based in Pennsylvania, although it does have an office in Indiana. No suit has been filed by the insured against Worldly to determine Worldly 's duties to its insured. However, if such suit is filed, it would probably be filed in the insured's home state of Indiana. If the parties have not identified the jurisdiction whose law is to be applied in the policy of insurance, Indiana courts hold that the question is decided by the courts of the state in which the lawsuit is pending. Schaffert by Schaffert v. Jackson National Life Insurance Company, 687 N.E.2d 230, 232 (Ind. Ct. App. 1997) trans. denied. Indiana's choice of law rule for contract actions requires the application of the law of the state with the most intimate contact with the facts. Employers Insurance of Wausau v. Recticel Foam Corporation, 716 N.E.2d 1015 (Ind. Ct. App. 1999), rehearing denied; Hartford Accident & Indemnity Company v. Dana Corporation, 690 N.E.2d 285, 291 (Ind. Ct. App. 1997), trans. denied. The factors the courts consider include the place of contracting, the place of contract negotiation, the place of performance, the location of the subject matter of the contract, and the domicile, residence, nationality, place of incorporation, and place of business of the parties. Eby v. York-Division, Borg Warner, 455 N.E.2d 623, 626 (Ind. Ct. App. 1983). To the extent that this information is known, it favors Indiana. Indiana law will thus be applied to this analysis.

In Indiana, an insurer's duty to defend is broader than the duty to indemnify. Indiana Farmers Mutual Insurance Company v. Ellison, 679 N.E.2d 1378 (Ind. Ct. App. 1997), cert. denied 690 N.E.2d 1186; Transamerica Insurance Services v. Kopko, 579 N.E.2d 1283 (Ind. Ct. App. 1991). The obligation to defend is determined from the allegations contained in the complaint in conjunction with the facts known or ascertainable by the insurer after reasonable investigation. Triser v. Indiana Insurance Company, 575 N.E.2d 1021 (Ind. Ct. App. 1991). See also Ellison, 679 N.E.2d 1378. The duty of an insurer to defend is not coextensive with liability, and the insurer must undertake a reasonable investigation to determine whether a factual basis exists to bring the claim within the scope of coverage. Triser, 575 N.E.2d 1021.

Because the file materials do not indicate that the claimant has filed a lawsuit, there are no complaint allegations on which to base a duty to defend. Under COVERAGE A paragraph 1.a. of the Insuring Agreement of the COMMERCIAL GENERAL LIABILITY COVERAGE FORM, Worldly only has a duty to defend a suit seeking damages for bodily injury or property damage to which the insurance applies. "Suit" is defined in SECTION V--DEFINITIONS as a civil proceeding in which damages because of bodily injury, property damage, or other damage or injury to which this insurance applies are alleged. Similarly, under paragraph 1.a. of the Insuring Agreement of the PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM, Worldly only has a duty to defend a "suit" seeking "damages" because of a "wrongful act". "Suit" is defined in SECTION V--DEFINITIONS as a civil proceeding in which damages because of "wrongful acts" to which this insurance applies are alleged. Presently there is no suit against the insured in the matter captioned above. Therefore, there is no duty to defend the insured at this time. The following analysis addresses the issues that appear to be involved in this claim based on the information available to date. If and when a complaint is filed in this matter, a coverage opinion responding to the complaint's specific allegations is recommended.

The provisions of the COMMERCIAL GENERAL LIABILITY COVERAGE FORM will be addressed first. Under SECTION II--WHO IS AN INSURED, an entity that is designated in the Declarations as other than a limited liability corporation is an insured. ABC Corporation is listed on the Declarations as a corporation and is an insured under the instant policy.

COVERAGE A--BODILY INJURY AND PROPERTY DAMAGE LIABILITY affords coverage for bodily injury arising out of an "occurrence" defined as an "accident". Indiana courts have found these terms to be clear and unambiguous. Stevenson v. Hamilton Mutual Insurance Company, 672 N.E.2d 467 (Ind. Ct. App.1996), cert. denied 683 N.E.2d 594. In an insurance context, the term "accident" means "an unexpected happening without an intention or design." Terre Haute First National Bank v. Pacific Employers Insurance Company, 634 N.E.2d 1336, 1338 (Ind. Ct. App. 1993), citing National Mutual Insurance Company v. Eward, 517 N.E.2d 95, 100 (Ind. Ct. App. 1987). See, also R.N. Thompson & Associates v. Monroe Guaranty Insurance Company, 686 N.E.2d 160 (Ind. Ct. App. 1997). The file materials indicate that the printing error occurred when an employee of the insured entered "00" into the computer instead of "2000". The computer mistook the entry for the year 1900. The file materials do not reflect why some of the coupons bore the date of January 34. However, there is nothing to suggest that the error was in any way intentional. Thus, claimant has alleged an "occurrence."

However, COVERAGE A is only available for certain "bodily injury" and "property damage." "Bodily injury" is defined in SECTION V--DEFINITIONS as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time." The file materials plainly do not suggest that any "bodily injury" has occurred. The file materials indicate that the coupons bearing the incorrect dates were sent to claimant by the insured and distributed to BCA residents for use in making alimony and child support payments. Claimant demands that the insured reprint the coupon books with the correct dates. Claimant may have sustained some economic loss as a result of payments not being made pursuant to the incorrectly printed coupons. If the insured does not reprint the coupon books at no charge, claimant will sustain the cost of having the coupon books printed a second time by another company. The file materials do not suggest that claimant has sustained any other damages. These allegations and potential allegations constitute intangible economic loss. Property damage is defined in SECTION V--DEFINITIONS as physical injury to tangible property and loss of use of tangible property. Indiana courts have held that intangible economic damages, such as diminution in value is not within the scope of property damage coverage. Aetna Life & Casualty v. Patrick Industries, Inc., 645 N.E.2d 656 (Ind. App. Ct. 1995). Thus, claimant has failed to allege "bodily injury" or "property damage" to tangible property sufficient to trigger COVERAGE A. Therefore, Worldly should decline to provide a defense or indemnification as the damage sustained by claimant does not constitute "bodily injury" or "property damage" under COVERAGE A.

COVERAGE A. is subject to Exclusion k. which excludes property damage to the insured's product arising out of the product or any part of the product. The insured's product is defined in SECTION V. as "any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of" by the insured, and also includes any warranties or representations made regarding the fitness, quality and performance of such product. The insured printed the coupon books for claimant. As such, the coupon books are the insured's products. The Supreme Court of Indiana has upheld a similar exclusion in Indiana Insurance Company v. DeZutti, 408 N.E.2d 1275 (Ind. 1980). The Court explained that in the context of the exclusion, the term "product" refers to the item made or sold which is somehow defective or deficient in itself. Id. at 1280. Other jurisdictions have also upheld similar "work product" exclusion as clear and unambiguous. See Flint v. Universal Machine Company, 238 Conn. 637 (1996); Blackhawk Corporation v. Gotham Insurance Company, 63 Cal. Rptr. 2d 413 (Cal. App. 1997); George A. Fuller Company v. United States Fidelity and Guaranty Company, 613 N.Y.S.2d 152, 155 (1994), appeal denied 84 N.Y.2d 806 (1994); J.Z.G. Resources, Inc. v. King, 987 F.2d 98 (2d Cir. 1993), cert. denied 510 U.S. 993 (1993). Claimant alleges the coupons books were printed with the incorrect date, rendering them useless. Although this harm does not rise to the level of "property damage" as discussed above, Worldly should decline to provide a defense or indemnification for any property damage to the insured's product arising out of the product pursuant to Exclusion k.

In addition, COVERAGE A. is subject to Exclusion l. which excludes property damage to the insured's work arising out of the work or any part of it if the damage is included in the "products-completed operations hazard." The insured's work is defined to include work and operations completed by the insured. A "products-completed operations hazard" is defined to include all property damage that occurs away from premises the insured owns or rents and that arises out of the insured's product or work, except (1) products that are still in the insured's physical possession and (2) work that has not yet been completed or abandoned. The insured's work is deemed completed at the earliest of the following times: (1) when all of the work called for in the insured's contract has been completed; (2) when all of the work to be done at the site has been completed if the contract calls for work at more than one site; or (3) when that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project. The Indiana Supreme Court examined and upheld the application of a similar exclusion in Indiana Insurance Company v. DeZutti, 408 N.E.2d 1275 (Ind. 1980). The Court explained that in the context of the exclusion, the term "work" refers to the negligent or incorrect manner in which the job was done. Id. at 1280.

The purpose of products-completed operations coverage is to insure against loss to property other than the insured's work which is harmed by the insured's work or operations. The Court in Indiana Insurance Company v. DeZutti, 408 N.E.2d 1275, 1279 (Ind. 1980) quoted Henderson, Insurance Protection for Products Liability and Completed Operations--What Every Lawyer Should Know, 50 NEB. L. REV. 415, 441 (1971)):

The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than the product or completed work itself, and for which the insured may be found liable. . . The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.

Here, the insured produced coupon books which bore the incorrect date. The coupon books had been printed and were apparently in claimant's possession by the time the defects were discovered. Therefore, although claimant has not alleged "property damage" as discussed above, Worldly should decline to provide a defense or indemnification pursuant to Exclusion l. for any property damage to the insured's work falling within the products-completed operations hazard.

COVERAGE A. is also subject to Exclusion m. which excludes "property damage" to "impaired property" or property that has not been physically injured, arising out of a defect, deficiency or inadequacy in the insured's product or work, or a failure by the insured to perform a contract or agreement in accordance with its terms. Claimant alleges that the coupon books were defective and deficient and failed to comply with the specifications. Therefore, although claimant has not alleged "property damage" as discussed above, Worldly should decline to provide a defense or indemnification pursuant to Exclusion m. for any property damage arising out of a defect, deficiency or inadequacy in the insured's product or work, or the failure by the insured to perform a contract or agreement in accordance with its terms.

Endorsement CG 04 31 09 98 adds an exclusion to the property damage liability insurance and the personal and advertising injury insurance for Year 2000 computer-related and other electronic problems. The exclusion does not apply to the bodily injury liability insurance. The file materials reflect that the insured had the option to purchase insurance for property damage arising out of Year 2000 computer-related and other electronic problems, and opted not to do so. The exclusion applies to property damage, personal injury and advertising injury arising directly or indirectly out of any actual or alleged failure, malfunction or inadequacy of computer hardware, application software, operating systems, networks, microprocessors, and any other computerized or electronic equipment or components, due to the inability to correctly recognize, process, distinguish, interpret or accept the year 2000 and beyond. The exclusion also applies to damage arising from any services, data or functions that directly or indirectly use or rely upon any of the foregoing. As this exclusion is new, it has not yet been interpreted by the courts of Indiana or of any other jurisdiction. The insured has stated in an published newspaper article that the error was not Year 2000 related. The insured has stated that an employee entered into the computer the two digits "00" for the year, but did not change the "19" to "20". Despite the insured's statements to the contrary, it does appear that the erroneous printing of 1900 on the coupon booklets was Year 2000 computer-related. However, as was discussed above, the error has not resulted in "property damage" to claimant. Additionally, it must be noted that there is reference to a second error in which the date January 34 was used, which is not necessarily Year 2000 computer-related. Nonetheless, Worldly should decline to defend and indemnify any claims for "property damage" arising out of Year 2000 computer-related and other electronic problems.

COVERAGE B. affords coverage for "personal injury" or "advertising injury" offenses committed during the policy period. "Personal injury" includes only offenses arising out of the conduct of the insured's business. "Advertising injury" includes only offenses occurring in the course of advertising the insured's goods, products or services. Coverage only attaches for the offenses listed in the "personal injury" or "advertising injury" definitions. As the file materials do not allege any of the listed offenses, COVERAGE B is not implicated in this matter.

The instant policy is endorsed with the PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM which provides coverage for "damages" because of a "wrongful act", defined in SECTION V-DEFINITIONS as any negligent act, error or omission, committed in the course of providing or arising out of "printing services." The act of printing the coupon booklets with an incorrect date qualifies as a "wrongful act". The term "damages" is defined to include economic loss. Thus, to the extent that claimant maintains that it sustained economic loss as a result of the improperly printed coupon books, claimant has asserted damages because of a wrongful act. However, as will be discussed below, the PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM is subject to various exclusions.

Exclusion a. excludes "damages" because of "bodily injury" or "property damage" from the coverage afforded by the PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM. The definition of "bodily injury" contained in this form are the same as were discussed above relative to the COMMERCIAL GENERAL LIABILITY COVERAGE FORM. The definition of "property damage" utilized is the same, with the addition of the phrase "Not including 'Your Product' as defined." As was discussed above, the damages sustained by claimant do not qualify as "bodily injury" or "property damage". Exclusion a. has therefore not been triggered.

The PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM is also subject to Exclusion j., which excludes "damage" or costs incurred for the correction, repair or replacement of the insured's work or product. This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on the insured's behalf by a sub-contractor. The definitions of work and product utilized in this coverage form are the same as were discussed above with regard to the COMMERCIAL GENERAL LIABILITY COVERAGE FORM. Indiana courts have not examined this exclusion in the context of printers errors and omissions coverage. However, as was discussed above, similar exclusions have been upheld in Indiana in the context of a CGL policy. A similar work product exclusion was applied in the context of a printers errors and omissions coverage form in Spencer Press, Inc. v. Utica Mutual Insurance Company, 42 Mass. App. Ct. 631 (1997). The exclusion was found to exclude from the policy sums the insured printer was obligated to reimburse its customer when the printer produced defective catalogs for the insured. In the present case, the coupon books are clearly the insured's product, and may also qualify as the insured's work. Thus, Worldly should decline to provide a defense and indemnification under the PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM, pursuant to Exclusion j., as the incorrectly printed coupon books are excluded as the insured's product or work.

The PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM is also subject to Exclusion l. for any damages for which indemnity is provided under any other Coverage Part of this policy. As discussed above, claimant's allegations do not appear to trigger any obligation on the part of Worldly to provide a defense or indemnification under the COMMERCIAL GENERAL LIABILITY COVERAGE FORM. Therefore, Exclusion l. of the PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM does not impact Worldly 's obligations in this matter.

In summary, in the event suit is filed in this matter and the allegations contained in the complaint do not differ from the facts available to date, Worldly should decline to provide the insured with a defense and indemnification as the claimant has failed to allege "property damage" caused by an "occurrence" so as to trigger COVERAGE A of the COMMERCIAL GENERAL LIABILITY COVERAGE FORM. Worldly should decline to provide a defense or indemnification for any property damage to the insured's product arising out of the product pursuant to Exclusion k., and for any property damage to the insured's work falling within the products-completed operations hazard pursuant to Exclusion l. Additionally, Worldly should decline to provide a defense or indemnification pursuant to Exclusion m. for any property damage arising out of a defect, deficiency or inadequacy in the insured's product or work, or the failure by the insured to perform a contract or agreement in accordance with its terms. Worldly should also decline to defend and indemnify any claims for property damage arising out of Year 2000 computer-related and other electronic problems. With respect to the PRINTERS ERRORS AND OMISSIONS LIABILITY COVERAGE FORM, Worldly should decline to provide a defense and indemnification pursuant to Exclusion j., as the incorrectly printed coupon books are excluded as the insured's product or work. A proposed letter to the insured is enclosed.

Very truly yours,

SHAPIRO & ASSOCIATES