Sokol and Company , an Illinois Corporation v. Atlantic Mutual Insurance Company

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-3624
S OKOL AND C OMPANY , an Illinois
Corporation,
Plaintiff-Appellant,
v.
A TLANTIC M UTUAL I NSURANCE C OMPANY ,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 03 C 2095—Joan Humphrey Lefkow, Judge.
____________
A RGUED M AY 3, 2005—D ECIDED N OVEMBER 29, 2005
____________
Before F LAUM , Chief Judge, and K ANNE and S YKES,
Circuit Judges.
S YKES , Circuit Judge. This is an insurance coverage
dispute involving spoiled peanut butter. The peanut but-
ter in question was contained in sealed packets supplied
by plaintiff Sokol and Company (“Sokol”) to its customer
Continental Mills (“Continental”) for inclusion in boxes of
Continental’s cookie mix. When Continental discovered that
the peanut butter had gone bad, it retrieved the cookie mix,
substituted fresh peanut butter packets, and sought
reimbursement from Sokol for the costs associated with the
replacement. Sokol filed notice of Continental’s claim with
Atlantic Mutual Insurance Company (“Atlantic”), its

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2 No. 04-3624
Comprehensive General Liability (“CGL”) insurer. Atlantic
denied coverage, citing a number of the policy’s “business
risk” exclusions. Sokol then paid Continental’s claim itself
and sought indemnification from Atlantic under the policy.
Atlantic again denied coverage and this litigation ensued.
The district court granted summary judgment for Atlan-
tic, holding that the insurer had no duty to defend under
the policy and this automatically meant there was no duty
to indemnify. For this mode of analysis the court relied on
language in Crum & Forster Managers Corp. v. Resolution
Trust Corp., 620 N.E.2d 1073, 1081 (Ill. 1993), suggesting
a general rule that where there is no duty to defend under
an insurance policy, there can never be a duty to indemnify.
We think this was an overreading of the Illinois Supreme
Court’s decision. The language in question, though broad on
its face, must be read in context, and this case arises in a
different one. We affirm on other grounds, however. The
claim at issue here does not involve “property damage”
within the meaning of the policy, and even if it did, cover-
age is excluded under certain of the policy’s “business risk”
exclusions. Summary judgment in favor of the insurer was
therefore appropriate.
I. Background
Sokol is an Illinois food products manufacturer that
supplied sealed packets of peanut butter paste to Continen-
tal for inclusion in boxes of Continental’s cookie mix. In late
August 2001 Sokol sent a shipment of peanut butter paste
to Continental. In October 2001, after the paste packets
were incorporated into the cookie mix boxes and shipped to
customers—but before, it seems, any cookie mix was sold to
the consuming public—Continental discovered that the
peanut butter was rancid. (Sokol denied the peanut butter
was rancid, asserting it was simply “off taste,” but this
disagreement is irrelevant to the present appeal.) Continen-

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No. 04-3624 3
tal retrieved all of the affected boxes, removed the packets
of spoiled peanut butter, and substituted new paste that it
acquired from a different vendor. In November 2001
Continental demanded payment from Sokol for these costs.
Sokol notified Atlantic, its CGL insurer, of Continental’s
claim, requesting a defense and indemnification. Sokol sent
Atlantic a preliminary claim summary indicating that
Continental’s loss was $61,910 but that additional expenses
would likely accrue. Indeed, Continental eventually sought
payment from Sokol in the amount of $75,441.20.
In letters to Sokol dated April 5, 2002, and June 10, 2002,
Atlantic took the position that while Continental’s claim
amounted to “property damage” caused by “an occurrence”
under the policy’s main Insuring Agreement, coverage was
excluded by certain of the “business risk” exclusions in the
policy. Atlantic reserved its right to rely on other policy
provisions or exclusions and expressly stated it was not
waiving its rights or obligations under the policy. Sokol
then paid Continental’s demand in full and filed a claim for
indemnification with Atlantic. Atlantic again declined
coverage.
Sokol then sued Atlantic in Cook County Circuit Court.
Atlantic, a New York corporation, removed the case to
district court; shortly thereafter the parties filed cross-
motions for summary judgment. The district court granted
summary judgment for Atlantic, concluding that because
Continental had not filed an action in court against
Sokol—a “suit” in the duty-to-defend terminology of the
policy’s Insuring Agreement—Atlantic’s duty to defend was
not triggered. The court then summarily concluded Atlantic
had no duty to indemnify, relying on the Illinois Supreme
Court’s statement in Crum & Forster that “where there is
no duty to defend, there will be no duty to indemnify.”
Crum & Forster, 620 N.E.2d at 1081. Sokol appealed.

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4 No. 04-3624
II. Discussion
Under Illinois law, the construction of an insurance policy
is a question of law, and the court’s goal is to determine the
intent of the contracting parties. Outboard Marine Corp. v.
Liberty Mut. Ins. Corp., 607 N.E.2d 1204, 1212 (Ill. 1992).
We look to the policy as a whole “with due regard to the risk
undertaken, the subject matter that is insured, and the
purposes of the entire contract.” Id. Unambiguous policy
language is given its “plain, ordinary, and popular mean-
ing.” Id. Our review is de novo.
A. Duty to Defend/Duty to Indemnify
The CGL’s basic coverage grant is contained in Section
1(a) of the Insuring Agreement, which states in relevant
part:
We will pay those sums that the insured becomes
legally obligated to pay as damages because of “bodily
injury” or “property damage” to which this insurance
applies. We will have the right and duty to defend the
insured against any “suit” seeking those damages.
However, we will have no duty to defend the insured
against any “suit” seeking damages for “bodily injury”
or “property damage” to which this insurance does
not apply.
By this policy language, Atlantic assumed a duty to de-
fend Sokol against any “suit” seeking damages for sums
that Sokol became legally obligated to pay as a result of
“bodily injury” or “property damage.” The policy defines
“suit” as “a civil proceeding in which damages because of
‘bodily injury’, ‘property damage’, ‘personal injury’, or
‘advertising injury’ to which this insurance applies are
alleged.” Atlantic argues, and the district court held, that
Atlantic had no duty to defend Sokol against Continental’s
claim because Continental had not filed a “suit” for dam-

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No. 04-3624 5
ages within the meaning of the policy’s coverage grant;
rather, Sokol’s $75,441.20 payment was a voluntary
payment in response to Continental’s demand. See Lapham-
Hickey Steel Corp. v. Prot. Mut. Ins. Co., 655 N.E.2d 842,
846-47 (Ill. 1995) (construing an “all risks” insurance policy
providing a duty to defend against “suits” but leaving the
term undefined, court holds that “suits” unambiguously
refer to proceedings in a court of law).
The present dispute, however, is not about the insurer’s
duty to defend. This is a claim for indemnification coverage,
and the coverage grant pertaining to indemnification does
not contain the same limiting language requiring the
existence of a “suit.” The district court, however, viewed the
absence of a duty to defend (because there was no “suit”) as
automatically precluding indemnification coverage. For this
proposition the court cited a passage from the Illinois
Supreme Court’s decision in Crum & Forster, which appears
to state a general rule that “where there is no duty to
defend, there will be no duty to indemnify.” Crum &
Forster, 620 N.E.2d at 1081. Invoking this language, the
court summarily held that Atlantic had no duty to indem-
nify Sokol for its payment to Continental.
The district court’s reliance on Crum & Forster was
misplaced. In Crum & Forster, the insurers filed an action
seeking a determination of their duty to defend and indem-
nify a group of insureds in an underlying lawsuit. Id. at
1076. The Illinois Supreme Court first noted that the duty
to defend is broader than the duty to indemnify. The former
arises “even if the facts alleged in the underlying complaint
fall potentially within the policy’s coverage,” whereas the
latter only arises “if the facts alleged actually fall within
coverage.” Id. at 1081 (emphasis added). The court con-
cluded that since the facts of the complaint filed against the
insureds did not “potentially” fall within the coverages of
the policies at issue, no duty to defend arose under the
terms of those policies.

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6 No. 04-3624
1 The Crum & Forster “no duty to defend means no duty to
indemnify” formula was repeated in Zurich Ins. Co. v. Carus
Corp., 689 N.E.2d 130, 133 (Ill. App. Ct. 1997) (holding that
since obligation to pay environmental cleanup investigation
costs did not arise from a “suit” as defined in the policy, insurer
had no duty to defend and, under Crum & Forster, no duty to
(continued...)
Having determined that the insurers had no duty to
defend their insureds in the underlying action, the Illinois
Supreme Court went on to explain that “in cases such as the
instant case where no duty to defend exists and the facts
alleged do not even fall potentially within the insurance
coverage, such facts alleged could obviously never actually
fall within the scope of coverage.” Id. In the next line the
language at issue here appears: “[c]learly, where there is no
duty to defend, there will be no duty to indemnify.” Id.
In the circumstances of this case, the district court’s
reliance on this last-quoted statement in Crum & Forster
was a mistake. Both the duty to defend and the duty to
indemnify were at issue in Crum & Forster; there was
an underlying suit, and the existence of both duties
turned on an examination of the facts alleged in that suit.
Since the claim at issue in Crum & Forster did not even
potentially fall within the scope of coverage for purposes
of the duty to defend, it logically followed that the claim
would not actually fall within the scope of coverage for
purposes of the duty to indemnify.
Here, on the other hand, there is no underlying suit, the
duty to defend is not at issue, and we have before us
only a payment made by the insured for which it now seeks
indemnification coverage. Crum & Forster’s holding there-
fore does not apply. The two duties of the insurer— defense
and indemnification—are distinct; while the duty to
indemnify may sometimes nest inside the duty to defend,
that will not always be the case.1

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No. 04-3624 7
1 (...continued)
indemnify). This appears to be an anomaly. In any case, the Carus
court also held that the facts of the claim did not trigger the
separate duty to indemnify because the insured’s contamination
investigation expenses were incurred voluntarily; no entity ever
made a claim against Carus that it was legally obligated to pay.
Id. See also Cent. Ill. Light Co. v. Home Ins. Co., 821 N.E.2d 206,
212-18 (Ill. 2004) (in case construing an excess insurance policy in
which no duty to defend was included, court holds that the duty
to indemnify costs for which the insured becomes “liable to pay .
. . as damages” can be triggered in absence of lawsuit or other
legal action).
B. Indemnification Coverage Under Insuring Agree-
ment
As we have noted, under the terms of the Insuring
Agreement, Atlantic’s duty to indemnify is not limited to
“suits.” The policy provides that Atlantic “will pay those
sums that the insured becomes legally obligated to pay
as damages because of ‘bodily injury’ or ‘property damage’ to
which this insurance applies.” The question of indemnifica-
tion coverage thus turns on whether the payment Sokol
made to Continental qualifies as a sum that Sokol became
“legally obligated to pay as damages because of ‘bodily
injury’ or ‘property damage.’ ”
The spoiled peanut butter did not cause “bodily injury” to
anyone; only “property damage” is potentially impli-
cated here. The policy defines “property damage” as:
a. Physical injury to tangible property, including all
resulting loss of use of that property. All such loss of
use shall be deemed to occur at the time of the physical
injury that caused it; or
b. Loss of use of tangible property that is not physically
injured. All such loss of use shall be deemed to occur at
the time of the “occurrence” that caused it.

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8 No. 04-3624
Sokol’s peanut butter paste, whether rancid or merely “off
taste,” did not cause “physical injury to tangible property.”
The paste was sealed in individual packets, and those
packets were simply removed from the boxes of cookie mix.
There has been no allegation that the spoilage of the peanut
butter affected the other food products contained within the
boxes. Sokol suggests weakly that when Continental opened
the boxes to remove and replace the spoiled paste, the
opening itself constituted “property damage” within the
meaning of the policy. The act of opening and resealing
cookie mix boxes can scarcely be characterized as an “in-
jury” to the boxes.
At oral argument Sokol also suggested that Continen-
tal’s claim represents a “loss of use” of the cookie mix boxes.
The policy defines “property damage” to include the loss of
use of tangible property, even if the property is not physi-
cally injured. The delay in getting the cookie mix to market,
Sokol argues, constitutes a “loss of use” under the policy
definition and is therefore within the scope of the coverage
grant. But nothing in the record bears this out. The item-
ized list of expenses that Continental sent to Sokol includes
costs for the peanut butter packets, as well as shipping,
storage, and handling, and “third-party reconditioning fees.”
These are not “loss of use” costs; they are costs incurred in
swapping Sokol’s spoiled peanut butter for fresh substitute.
Because Sokol’s payment to Continental was not a sum
Sokol was legally obligated to pay for “property damage” as
that term is defined in policy, Atlantic had no duty to
indemnify Sokol.
C. Exclusions to Coverage
Even if Sokol’s payment to Continental could be charac-
terized as one for “property damage,” two of the policy’s

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No. 04-3624 9
exclusions would operate to preclude coverage. Atlantic
bears the burden of establishing that Sokol’s claim falls
within a provision that limits or excludes coverage. Conn.
Specialty Ins. Co. v. Loop Paper Recycling, Inc., 824 N.E.2d
1125, 1130 (Ill. App. Ct. 2005).
1. Exclusion m: Damage to Impaired Property
In its letters denying coverage, Atlantic invoked the
exclusion for damage to “impaired property,” one of the so-
called “business risk” exclusions that are standard fare
in contemporary CGL policies. Exclusion m states in full:
This insurance does not apply to:
“Property damage” to “impaired property” or property
that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous
condition in “your product” or “your work”; or
(2) A delay or failure by you or anyone acting on your
behalf to perform a contract or agreement in accor-
dance with its terms.
This exclusion does not apply to the loss of use of other
property arising out of sudden and accidental physical
injury to “your product” or “your work” after it has been
put to its intended use.
The term “impaired property” is defined in the policy as:
[T]angible property, other than “your product” or “your
work”, that cannot be used or is less useful because:
a. It incorporates “your product” or “your work” that is
known or thought to be defective, deficient, inadequate
or dangerous; or
b. You have failed to fulfill the terms of a contract or
agreement;

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10 No. 04-3624
if such property can be restored to use by:
a. The repair, replacement, adjustment or removal of
“your product” or “your work”; or
b. Your fulfilling the terms of the contract or agree-
ment.
Sokol’s peanut butter paste is “your product” under the
terms of the policy, and this product was incorporated
into property “other than your product,” that is, Continen-
tal’s cookie mix. It is undisputed that the paste became
defective, deficient, or inadequate. Sokol’s payment of
Continental’s claim thus falls within the “impaired prop-
erty” exclusion under the terms of the policy.
Sokol argues that if Exclusion m applies to this claim,
coverage is restored by an exception to the exclusion for
“loss of use of other property arising out of sudden and
accidental physical injury to ‘your product’ or ‘your work’
after it has been put to its intended use.” We do not
agree. First, as we have noted, Continental’s claim was
not one for “loss of use” of impaired property. In addi-
tion, the exception to Exclusion m applies only to “sudden
and accidental” injuries to property. From the record it
is not clear exactly when or how the peanut butter paste
went bad. Sokol insists it was good when it left the plant in
late August 2001; Continental discovered the problem in
October 2001. These facts are consistent with the gradual
deterioration of a food product. Whether or not the rancidity
or bad taste was “accidental” (we express no opinion on
that), the situation appears anything but sudden. Sokol
cannot survive summary judgment merely by averring that
the paste went bad suddenly and accidentally. And that is
all Sokol does. The exception to the “impaired property”
exclusion does not apply here.

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No. 04-3624 11
2. Exclusion n: Recall of Products, Work or Im-
paired Property
Atlantic also invoked Exclusion n, which states in full:
This insurance does not apply to:
Damages claimed for any loss, cost or expense
incurred by you or others for the loss of use, with-
drawal, recall, inspection, repair, replacement,
adjustment, removal or disposal of:
(1) “Your product”;
(2) “Your work”; or
(3) “Impaired property”;
if such product, work, or property is withdrawn or
recalled from the market or from use by any person
or organization because of a known or suspected
defect, deficiency, inadequacy or dangerous condi-
tion in it.
Exclusion n applies straightforwardly to the facts of this
case. As we have noted, Sokol’s peanut butter paste quali-
fies as “your product” under the policy. The peanut butter
was withdrawn from the market, replaced, and disposed of
after Continental discovered it was rancid or “off taste,” an
obvious “inadequacy” (if not worse). Even if the Insuring
Agreement provided coverage here, Exclusion n applies to
knock it out.
D. Other Coverage Issues
1. Products-Completed Operations Hazard
Sokol argues that its payment to Continental was covered
under the policy’s Products-Completed Operations Hazard.
This provision is one of the policy’s defined terms rather
than a separate grant of coverage. It does not operate to

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12 No. 04-3624
provide coverage that is not otherwise extended by the
policy. By virtue of references to the Products-Completed
Operations Hazard definition, the policy’s underlying
coverage for “bodily injury” and “property damage” is
extended to include occurrences that take place off the
premises of the insured. Although Sokol’s peanut butter
paste may have gone bad after it left Sokol’s premises, the
absence of “property damage” within the meaning of the
policy precludes coverage here.
2. Product Recall Expense Endorsement
Sokol contends that its payment is covered under the
Product Recall Expense Endorsement, a separate rider that
operates to modify Exclusion n (Recall of Products, Work or
Impaired Property). The Endorsement extends coverage to
“Covered Recalls,” which are defined as “recall[s] made
necessary because the insured or a government body has
determined that a known or suspected defect, deficiency,
inadequacy or dangerous condition in ‘your product’ has
resulted in or will result in ‘bodily injury’ or ‘property
damage.’ ”
By its terms, this endorsement is limited to recalls
initiated by “the insured or a government body.” Here,
Continental—not Sokol or the government—initiated the
removal and replacement of the peanut butter paste.
Accordingly, the Product Recall Expense Endorsement does
not supply coverage.
For the foregoing reasons, the decision of the district
court is A FFIRMED .

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No. 04-3624 13
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—11-29-05

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