VICOR CORPORATION v. VIGILANT INSURANCE COMPANY (1st Cir. (Mass.) March 16, 2012).
By a panel including retired U.S. Supreme Court Justice David Souter, the First Circuit rejected a broad application of the word “for” in the definition of damages, and concluded that emergency response costs did not constitute damages relating to “loss of use of property not physically injured.”
The insured manufactured power converters for use in radio base stations. Radio base stations are used to set up and operate cellular telephone towers and networks. A manufacturer of radio base stations used the insured’s power converters in its design and manufacture. It then sold those radio base stations to cellular providers worldwide. The insured power converters began failing, causing severe outages in the cellular networks. The insured was sued, among other things, for replacement of defective equipment, loss of use of the equipment, and cost to repair and restore the loss cellular service (including emergency response costs). The trial court instructed the jury that repair costs were not covered, except for “emergency repairs” to “get the system up and running.” The insurer and insured both appealed that holding.
The insured contended that the emergency response costs constituted “loss of use,” focusing on the word “for” in the phrase “pay damages…for…property damage caused by an occurrence.” The insured basically sought a but-for causation between the loss and the claimed damages for coverage to apply. The insurers’ disputed that, and argued that “loss of use” damages are subject to a temporal limitation that confines coverage to damages incurred due to the inability to use the failed equipment until it is repaired or replaced. In other words, repair costs end the loss of use, but the costs themselves are not damages.
Recognizing the classic “loss of use” damage as a replacement automobile rented while one’s care is in the shop, the First Circuit expanded its analysis to include cases involving more similar fact patterns to the case before it: electronic items in which a defective component or components required replacement. Distinguishing between damages directly attributable to the loss of use and those with a more indirect connection, the court noted that loss of use damages were those accrued pending the repair of the out-of-service items, not for the repair of the items themselves.
Remanding the matter to the trial court for clarification of the jury instructions, the First Department held that the costs of repair, even emergency repair, were not covered. However, to the extent that “classic” loss of use damages were incurred during the repair period, those damages might be included. The court also held the trial court should instruct the jury on the failure to mitigate.
A copy of the decision is located here