Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-12-1994

Lucker Manufacturing v. The Home Insurance
Corp, Inc.
Precedential or Non-Precedential:

Docket 94-1347




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            UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT

                  __________________

                     No. 93-1414
                  __________________


            LUCKER MANUFACTURING, A UNIT OF
           AMCLYDE ENGINEERED PRODUCTS, INC.,

                               Appellant
                          v.

              THE HOME INSURANCE COMPANY

                               Appellee

___________________________________________________

   On Appeal From the United States District Court
      for the Eastern District of Pennsylvania
              (D.C. Civil No. 92-04271)
____________________________________________________


                Argued: October 26, 1993

 Before:    BECKER, ROTH, and LEWIS, Circuit Judges

                 (Filed May 12, 1994)


                    ROBERT E. COUHIG, JR. (Argued)
                    Adams & Reese
                    4500 One Shell Square
                    New Orleans, LA 70139

                    THOMAS J. ELLIOTT
                    Elliott, Vanaskie & Riley
                    925 Harvest Drive
                    Union Meeting Corporation Center
   #5
                    Third Floor
                    Blue Bell, PA   19422

                                    Attorneys for Appellant




                           1
                         WILLIAM T. SALZER (Argued)
                         CURTIS P. CHEYNEY, III
                         Swartz, Campbell & Detweiler
                         100 S. Broad Street
                         16 Land Title Building
                         Philadelphia, PA 19110

                                  Attorneys for Appellee


                    ________________________

                      OPINION OF THE COURT
                    ________________________


BECKER, Circuit Judge.

          This is an appeal from summary judgment granted by the

district court in favor of the defendant, The Home Insurance

Company ("The Home") and against the plaintiff, Lucker

Manufacturing, a Unit of Amclyde Engineered Products, Inc.

("Lucker"), in an insurance coverage dispute arising under the

diversity jurisdiction, 28 U.S.C. § 1332.      The appeal raises a

question of interpretation of language that appears in the

industry-wide, standard-form liability insurance policy known as

Comprehensive General Liability Insurance ("CGL"):      does the

clause "loss of use of tangible property that has not been

physically injured" cover costs of preventing a defective

component from becoming incorporated into a product that has been

designed but has not yet been manufactured?

          The product at issue here is an anchoring system made

by Lucker for the off-shore oil drilling industry and called a

Lateral Mooring System ("LMS").       Because of a defect that Lucker

discovered in a component of the LMS -- castings manufactured by


                                  2
Milwaukee Steel Foundry, a division of Grede Foundries, Inc.

("Grede") -- Lucker was forced to increase the number of safety

precautions in the manufacturing process for the LMS.      The

increased precautions ensured that the castings incorporated into

the LMS would not be defective.       When Lucker sued Grede for these

costs, The Home, Grede's insurer, asserted that these costs were

not covered by the policy, and refused to defend or indemnify

Grede.

          As part of a settlement agreement between Lucker and

Grede, Grede assigned to Lucker any rights that it had against

The Home for its failure to defend or indemnify.      Lucker then

sued The Home.   The district court granted summary judgment for

The Home because it believed that the additional safety

precautions Lucker had to add to its manufacturing process did

not represent a "loss of use" to Lucker of the LMS or LMS design,

but rather represented a change in its customers' acceptance of

the original LMS and LMS design.      Since this injury to Lucker did

not constitute loss of use, the court held that The Home had not

breached its duty to defend or indemnify Grede.

          In our view, however, loss of use can and should cover

the added costs of preventing a defective component from being

incorporated into a product, even if those added costs were

incurred because of a change in customer preferences.      As we

discuss below, the distinction that the court drew between "loss

of customer acceptance" and loss of use is arbitrary.      Liability

for costs incurred because of a change in demand for a product in

the marketplace brought about by the insured's wrongful act seems


                                  3
to be precisely the type of liability that loss of use coverage

was designed to protect against.

           But the fact that the Lucker complaint adequately

alleged a loss of use (and gets by summary judgment on that

issue) does not end the inquiry because, under the CGL policy,

the loss of use must have been to "tangible property."      When The

Home withdrew coverage, it knew that the LMS itself had not

physically existed at the time Grede's casting failed but was

only in the design stage.    Lucker contends, however, that its LMS

design, which did exist, was tangible property within the meaning

of the policy.    We disagree because under current Wisconsin and

Pennsylvania law, a system design like that of the LMS is not

tangible property as that term is used in the standard form CGL

policy.   Since an insurer has no duty to defend or indemnify

claims that fall outside the coverage of the policy, The Home had

no duty to defend or indemnify Grede.      Consequently, we will

affirm the judgment of the district court.



                        I.   FACTS AND PROCEDURAL HISTORY

           In 1989, Lucker contracted with Shell Oil Company to

design and manufacture the LMS.       An LMS is, in essence, a huge

permanent anchor.   It is fixed to the ocean floor and holds in

place ships, oil platforms, and other large structures floating

on the surface.   Among its components are "castings," large metal

objects that attach to the ocean floor and hold the cables

connected to the ship or platform.      Lucker purchased a number of

these castings from a foundry in Milwaukee owned by Grede. Before

                                  4
putting these castings into the LMS, Lucker decided to test their

strength, and it arranged an "equipment load test" at Lehigh

University.   Confident that the test would impress its customer,

Lucker invited a Shell representative to watch.    The test,

however, was a disaster.    To everyone's horror, a casting

involved in the test suffered a catastrophic failure.     Had it

been incorporated into the LMS and put into operation, Shell's

ships and platforms would have floated off to sea.     So Shell told

Lucker that, although it still wanted the LMS, Lucker had to

maintain tighter control over the production and testing of the

steel for the castings.    Lucker complied at a cost of $600,000.

          At the time of the failure of the castings, the LMS was

only in the design phase and had not yet been built.     After it

completed the LMS, Lucker sued Grede on both tort and contract

theories for the cost of compliance with Shell's instructions. It

is undisputed that the castings were defective and that the

defect was Grede's fault.    Grede had a CGL policy with The Home

which insured it against any "property damage" Grede would be

legally obligated to pay Lucker.     Although Lucker never claimed

that the LMS was physically injured, physical injury was not a

prerequisite of coverage.    According to the terms of the policy,

"property damage" included "[l]oss of use of tangible property

that is not physically injured."     Such a provision typically

covers an interruption of income that is caused by a wrongful act

not accompanied by physical injury.

          The Home conditionally defended Grede during the early

part of the lawsuit under a reservation of rights.     But when the


                                 5
district court held that the tort claims sought purely economic

losses which are not recoverable under Pennsylvania law and that

Lucker could pursue its contract but not its tort claims, the

Home withdrew its defense of Grede and disclaimed all liability

under the policy.   In a letter to Grede, The Home claimed that

contract-based economic damages were not loss of use of tangible

property and that there was no basis for coverage.   In addition,

The Home took the position that the losses were excluded by the

"business risk," "failure to perform," and "sistership"

exclusions in the policy.0

           The dispute between Lucker and Grede eventually went to

trial, and Lucker won a jury award of approximately $500,000.0 A

few months later, Lucker and Grede settled the lawsuit:   Grede

paid Lucker $600,000 and assigned to Lucker its rights against

The Home to recover for defense costs and indemnification under

the policy.   Standing in Grede's shoes, Lucker sued The Home

claiming that The Home was in breach of both its duty to defend

and to indemnify Grede, and that its breach was in bad faith.

Both The Home and Lucker moved for summary judgment, agreeing

that there were no factual disputes.

           The district court granted summary judgment for The

Home.   Lucker Mfg., Unit of Amclyde Engineered Prods., Inc. v.

0
 The business risk exclusion excludes from coverage damage to the
castings; the failure to perform exclusion excludes from coverage
non-physical injury to other property arising from a breach of
contract unless the damage comes from a sudden and accidental
injury; the sistership exclusion excludes from coverage the costs
of inspection, repair, or replacement of the castings.
0
 Whether the jury correctly found Grede liable for the costs
Lucker incurred due to Shell's demands is not before us.


                                6
Home Ins. Co., 

(E.D. Pa. 1993).    The court held

that The Home did not breach its duty to defend Grede because

Lucker's complaint against Grede did not allege damages for "loss

of use" of the LMS or LMS design, or for any other form of

property damage covered by the policy.    

   It also held

that The Home had no duty to indemnify Lucker because none of

Lucker's damages fell within the policy's coverage.      

held that The Home did not act in bad faith. 

           In deciding as it did, the court looked both to the

language of the CGL policy and the language of the complaint

Lucker had filed in its lawsuit against Grede.   The CGL policy in

this case provided that The Home:
          will pay those sums that the insured [Grede]
          becomes legally obligated to pay because of
          "bodily injury" or "property damage" to which
          the insurance applies.

The policy defined "property damage" as

           a. Physical injury to tangible property
           including all resulting loss of use of that
           property; or

           b. Loss of use of tangible property that is not
           physically injured.



Lucker conceded that there had been no claim in the underlying

action for actual physical injury to property other than the

castings, which (it also conceded) were not covered by the

policy.   Instead, it characterized its loss as one for damages




                                7
resulting from the loss of use of its own tangible property --the

LMS design.0

          In fending off the Home's claim that its pleadings were

inadequate, Lucker contended that paragraphs 14-17 of its

complaint potentially stated a claim for loss of use of the

design of the LMS.   Paragraph 14 alleged that Shell had imposed

stricter standards for the production and testing of the steel

for the LMS; paragraph 15 alleged that Lucker had lost a

competitive advantage in bidding on Shell projects and had

sustained damage to its reputation; paragraph 16 alleged that had

the castings not failed, the additional tests would not have been

necessary; and paragraph 17 alleged that Lucker had suffered

increased testing costs, increased costs in performing the Shell

contract, lost profits, and lost future profits.

          According to the district court, however, paragraphs

14-17 merely averred that "due to the failure of the castings,

[Lucker] could no longer sell the original LMS or LMS design to

Shell because Shell imposed additional requirements; and it was

the cost of complying with these additional requirements that

Lucker sought to 

(footnote
0
 Lucker actually argued to the district court that it had lost
the use of two things: 1) the LMS and 2) the design of the LMS.
Because the district court decided there was no loss of use, it
assumed that the LMS and LMS design both existed. It appears
from the record before us, however, that the LMS itself never
existed, but was still in the design stage at the time the
castings failed. While the complaint potentially pled that the
LMS itself existed, the record indicates that The Home knew these
facts when it disclaimed coverage. We believe that since the LMS
was no more than a design at the time, Lucker's claims that it
lost the use of the LMS and the LMS design actually claim the
same thing -- loss of use of the design.


                                8
omitted).   Nowhere did Lucker claim that the LMS as designed

could no longer perform its intended function because of the

defect discovered in the castings.   Rather, Lucker acknowledged

that the LMS as originally conceived could still hold floating

objects in place, but argued that its "use" of the LMS design and

the LMS was to sell the LMS to Shell and other customers, and

that when it was forced to change the manufacturing process and

the design, it lost the use of the LMS design.    

            The court rejected this argument:
                 There is no indication in the underlying
            complaint, either by inference or otherwise,
            that Lucker was ever unable, due to the
            failure of the castings or otherwise, to
            offer the original LMS for sale to Shell or
            to offer use of the original LMS design to
            other customers. Lucker simply complained
            that when offered, Shell and perhaps other
            customers wanted something different because
            of the failure of the castings. Thus Lucker
            did not allege a loss of an intended use of
            the original LMS as merchandise for sale or
            the original LMS design as a means of
            producing such merchandise; Lucker alleged a
            loss of expected customer acceptance of its
            product and design.
                 And loss of customer acceptance of a
            product or design is in no way the equivalent
            of "loss of use" of a product or design under
            the policy. To equate the two would be to
            link CGL coverage to the vagaries of customer
            desire and make insurers of liabilities into
            guarantors of markets for goods and services.
            The CGL policy at issue here committed The
            Home to no such undertaking. The Home
            contracted to defend and indemnify Grede for
            damages resulting from the loss of use of
            tangible property only.

(footnote omitted).




                                 9
           On this basis, the district court granted summary

judgment for The Home on the duty to defend issue.     Once it

determined that The Home was not in breach of its duty to defend,

its conclusions on the duty to indemnify and bad faith claims

followed almost as a matter of course, and it granted The Home

summary judgment on both of those issues.     

  This

appeal followed.   Because the material facts are not disputed, we

have plenary review of the district court's decision.       Pacific

Indemnity Co. v. Linn, 

, 760 (3d Cir. 1985).



                        II.   CHOICE OF LAW

           Faced with the possibility that either Pennsylvania or

Wisconsin law apply to this diversity case, a choice of law

question looms on the horizon.   Before a choice of law question

arises, however, there must actually be a conflict between the

potentially applicable bodies of law.   See Oil Shipping B.V. v.

Sonmez Denizcilik Ve Ticaret A.S., 

, 1018 (3d Cir.

1993).   Where there is no difference between the laws of the

forum state and those of the foreign jurisdiction, there is a

"false conflict" and the court need not decide the choice of law

issue.   In re Complaint of Bankers Trust Co., 

, 882
(3d Cir. 1984) ("If the foreign law to which the forum's choice-

of-law rule refers does not differ from that of the forum on the

issue, the issue presents a 'false conflict.'"); Lambert v.

Kysar, 

, 1114-15 (1st Cir. 1993) ("We need not

resolve the [conflict of law] issue . . . as the outcome is the

same under the substantive law of either jurisdiction.").

                                 10
          Neither party has pressed a choice of law question on

this appeal because neither has been able to identify any

differences between Wisconsin and Pennsylvania law on the

questions of an insurer's duty to defend and indemnify.      Our own

research has not identified any relevant differences either.       As

far as we can tell, the outcome of this lawsuit should be the

same under either Wisconsin or Pennsylvania law.    Since there is

no conflict of law under such circumstances, we will avoid the

choice of law question.     Cf. Melville v. American Home Assur.

Co., 

, 1311 (3d Cir. 1978) (warning courts to avoid

dicta on conflicts questions when not put in issue).    We

therefore will interchangeably refer to the laws of Wisconsin and

Pennsylvania in discussing the law governing The Home's duty to

defend and indemnify.0



                     III.    THE DUTY TO DEFEND

         A. General Principles and The Pleading Question

          Under the governing law, an insurance company is

obligated to defend an insured whenever the allegations in a

complaint filed against the insured potentially fall within the

policy's coverage.   This duty to defend remains with the insurer

until facts sufficient to confine the claims to liability not

within the scope of the policy become known to the insurer.     See
Imperial Casualty & Indem. Co. v. High Concrete Structures, Inc.,

0
 The only real choice of law issue in this case involves the
applicability of Pennsylvania's insurer bad faith statute, 42 Pa.
C.S. § 8371. We need not reach this issue given our resolution
of the duty to defend and duty to indemnify questions.


                                  11


, 131-32 (3d Cir. 1988); Sola Basic Indus., Inc. v.

United States Fidelity & Guar. Co., 

, 213 (Wis.

1979) ("[I]t is necessary to determine whether the complaint

alleges facts which, if proven, would give rise to liability

covered under the terms and conditions of the policy."); Stidham

v. Millvale Sportsmen's Club, 

, 953-54 (Pa. Super.

1992) (if indemnification depends upon the existence or

nonexistence of disputed facts, the insurer has a duty to defend

until the claim is narrowed to one patently outside the policy

coverage).

             Before considering whether a complaint is potentially

covered by a policy, it is necessary to determine the coverage of

the policy in the first instance.      In both Pennsylvania and

Wisconsin (as in the majority of jurisdictions), the inquiry into

coverage is independent of and antecedent to the question of duty

to defend.0    See Erie Ins. Exch. v. Transamerica Ins. Co, 

, 1368 (Pa. 1987) (first construing the terms of the

policy, and then determining whether the complaint alleged facts

which, if proven, would come within the scope of the policy as


0
 A minority of courts have held that where the question of
coverage is an open question the insurer has a duty to defend.
See St. Paul Fire & Marine Ins. Co. v. National Computer Sys.,
Inc., 

, 632 (Minn Ct. App. 1992) (where the
question whether binders with confidential information in them
were covered was an open one, the insurer had a duty to defend);
see also Centennial Ins. Co. v. Applied Health Care Sys., Inc.,

, 1291 (7th Cir. 1983) (applying California law, the
court determined that the question whether information stored in
a data processing system could be tangible property was
irrelevant for purposes of determining the duty to defend because
it was an unresolved question).

                                  12
construed); U.S. Fire Ins. Co. v. Good Humor Corp., 

(Wis. Ct. App. 1993) (same).

            Traditional principles of insurance policy

interpretation control the inquiry into coverage.    The policy

language must be tested by what a reasonable person in the

position of the insured would have understood the words to mean.

See 

.   We must construe ambiguous

language to provide coverage.    

is ambiguous if

reasonable persons considering the relevant language in the

context of the entire policy could honestly differ as to its

meaning.    Id.; see also Harford Mutual Ins. Co. v. Moorhead, 

, 503 (Pa. Super. 1990) (the policy must unequivocally

indicate coverage or non-coverage), appeal denied, 

(Pa. 1991).    Nevertheless, a court should be careful not to

create an ambiguity and, likewise, it should avoid rewriting the

policy language in such a way that it conflicts with the plain

meaning of the language.   

.

            Once coverage of the policy is determined, the court

then looks to the underlying complaint to see if it triggers

coverage.   The underlying complaint need not track the policy

language for there to be coverage:     under the liberal rules of

notice pleading, Lucker's complaint needed only to indicate the

type of litigation involved so that the defendant would have a

fair notice of the claim and its defenses.     See First State
Underwriters Agency of New England Reinsurance Corp. v. Travelers
Ins. Co., 

, 1315 (3d Cir. 1986); Ollerman v.

O'Rourke Co., 

, 98 (Wis. 1980); see also Western


                                 13
Casualty & Sur. Co. v. Budrus, 

, 839-40 (Wis. Ct.

App. 1983) (liberally construing a complaint to include a claim

for loss of use of tangible property).

            Thus, the fact that Lucker did not include the magic

words "loss of use" or "tangible property" in its complaint does

not relieve The Home of its duty to defend.    As the district

court recognized, the complaint, reduced to its relevant

essentials, averred that the failure of the Grede castings

prevented Lucker from being able to sell the LMS design to Shell.

.    The main question in this appeal,

then, is not whether there was adequate notice of such a claim,

but rather whether, given traditional principles of insurance

policy interpretation, such a claim is properly considered a

claim for loss of use of tangible property.    With these general

principles in mind, we discuss first the question whether

Lucker's damages represented a loss of use of the LMS design.       We

then turn to the question of whether the LMS design was tangible

property.



                           B.   Loss of Use
            One of the two principal issues in this appeal --

whether the damages Lucker suffered because Shell wanted Lucker

to beef up its quality control of the steel in the LMS are

potentially "loss of use" damages as that term is used in the CGL

-- turns on a conflict between the connotations of the term "use"

on the one hand and the objectives of insurance on the other.       As

has been mentioned, the district court agreed with The Home that

                                  14
a "loss of use" within the meaning of the CGL form contract does

not occur when a customer demands from the injured party added

safeguards in the manufacturing process after a defect in the

insured's product is discovered.

             Critical to the district court's decision that Lucker's

damages were not from a "loss of use" was the fact that Lucker

never claimed that the LMS design could not work after the

castings had failed at the Lehigh test.      In the court's view, the

failure of the castings merely had the undesirable consequence of

"reducing the acceptability of the LMS and LMS design to Shell."

n.12.      Apparently, the district court

saw a distinction between the loss of the ability to physically

use the LMS design and the loss of the ability to sell the LMS

design.   One was use and the other was non-use.     Cf. Eljer Mfg.

v. Liberty Mut. Ins. Co., 

, 810 (7th Cir. 1992),

cert. denied, 

, 

(1993)

(discussing physical injury in the context of CGL standard

policies).

             In everyday English, the district court's distinction

makes sense.    The term "use" conjures the idea of some kind of

physical application of property, as when a carpenter uses a

hammer.   If someone does not want to buy the hammer but it can

still pound nails into wood, the hammer can still be "used." That

a customer does not want to buy it has no effect on its

usefulness.    But such a distinction has little to do with the

objectives of parties to insurance contracts.     See Eljer 

.     As we see it, the focus of the insurance


                                  15
coverage determination should be on whether a customer's

unwillingness to use a hammer, regardless of whether it is

physically possible to use the hammer, is a type of lost use for

which a risk-averse business pays its premium.     "Ordinary

language" interpretations of phrases are not the only plausible

interpretations of insurance contracts, especially when the

contract is between sophisticated business entities.    It is

important to ask what function "loss of use" was intended to

perform in a CGL policy before relying on a common sense or lay

distinction between physical use and other uses.    See Erie Ins.

(stating that the term "use" must be

considered with regard to the setting in which it is employed).

          The 1966 version of the CGL defined "property damage"

as "injury to or destruction of tangible property."    Yet cases

interpreting that policy often afforded coverage for non-physical

injuries, like diminution in value.    On the other hand, a number

of cases excluded injuries where there was no physical contact

between the injurer and the property injured.    See Sola 

(citing cases).    In 1973, the CGL policy was

revised to clear up these internal tensions.    The new CGL policy

replaced the old definition of property damage with the two-part

definition contained in the policy involved in this case.      The

first part repeats the old definition, except that the word

"physical" is put before "injury."    The second part is the "loss

of use" definition, which covers injury which is not physical

because the insured's property does not physically contact that



                               16
of the injured party.   The revised language, then, allows

coverage for both physical and non-physical injuries.0

           Of course, Lucker did not suffer physical injury to the

LMS (since it did not exist) or the LMS design.     Nor did it lose

the physical use of the LMS or LMS design.     Indeed, Lucker could

still have manufactured it and offered it for sale, and, even

according to Lucker, the original LMS design would still have

worked properly.   Nevertheless, Lucker did lose the economic use

of the original LMS design:   because of the defective castings,

Shell was no longer willing to buy the product, and Lucker could

no longer use the LMS design as a source of income.

           The question in this case, therefore, reduces to

whether the lost "use" has to have been a lost physical use of

the property, or whether it can also include a lost non-physical

or economic use of the property.     The district court thought that

loss of use should cover only lost physical use, and that

customer acceptance simply was not a "use."     

.   We believe, however, that both the purposes behind

liability insurance and the case law interpreting liability

insurance suggest that the loss of a non-physical use of a

product, such as offering it for sale, should be considered a


0
 The classic example of a loss of use injury is a case in which a
manufacturer of construction cranes sells a defective crane which
collapses in front of a restaurant, thereby impairing the
restaurant's income. If the restaurant sues the manufacturer and
recovers the lost income, the manufacturer would be covered by
the "loss of use" component of the CGL policy. See 

; George H. Tinker, "Comprehensive General Liability
Insurance -- Perspective and Overview," 25 Federation of Ins.
Counsel Q., 217, 232 (1975).


                                17
"loss of use"; and that the decreased value of a product because

of loss of customer acceptance of the product is a "loss of use"

within the meaning of the standard CGL policy.

           We test our understanding against the baseline case for

both parties, Sola Basic.   In Sola 

, the

insured was sued when a transformer it had manufactured for use

in an electrical steel furnace owned by Thunder Bay Manufacturing

was damaged by the insured's employee who had been sent to repair

the transformer.   

     Because of the damage to the

transformer, Thunder Bay could not operate the furnace.       The

Supreme Court of Wisconsin held that Thunder Bay's loss of use of

the furnace was a covered loss.     

           Sola Basic suggests that the use of a product as

merchandise for sale or as a means of production is a "use"

within the meaning of a CGL form policy.      In real terms, such a

loss of use affects the injured party's ability to supply a

product.   In Sola Basic, demand for Thunder Bay's product

remained the same, but its ability to supply its product -- that

is, to supply the product at a competitive price -- was impaired

because the furnace could not work.      It is as if the supply curve

was suddenly shifted to the left due to the negligence of the

insured, and the liability insurance loss of use concept made up

the difference.0


0
 Another way to think of Sola Basic is by viewing the furnace as
an income stream. When the furnace was shut down, Thunder Bay
was deprived of the income stream from the furnace for the period
it was inoperative. That loss was lost use and was within the
scope of the coverage.


                                  18
            The district court accepted the Sola Basic decision as

authority but distinguished it from this case because the change

in customer acceptance did not affect the ability of Lucker to

supply the product.    A change in customer acceptance is a change

in the demand curve, not the supply curve.    Apparently, the court

believed that the change in demand should be analyzed differently

from a change in supply.    But it is not clear to us why this

should be the case.

            When a manufacturer supplies a defective product that

injures a third party, the injury from that particular defect

may, depending on the reaction of the injured third party, affect

either the demand for the third party's goods or the supply of

those goods.    Differing factors may influence whether the effect

is on supply or demand.    For example the time of discovery of the

defect is important.    If a manufacturer of enamel finishes

produces a defective batch and sells it to a manufacturer of

widgets, the discovery of the defect before the enamel is applied

to the widgets will affect the supply of widgets the manufacturer

has available to sell because production must be halted while new

enamel finish is obtained.    If the discovery is made after the

enamel is applied, the demand for widgets will be affected

because customers won't want to buy widgets with blotchy

finishes.    Another factor that may influence whether supply or

demand is affected is the need of the widget producer to move

merchandise.    He may decide he would rather sell blotchy widgets

at a lower price in order to keep up cash flow.   The type of

injury, whether caused by the widget producer's loss through

                                 19
reduction in supply or in demand, may thus be beyond the control

of the enamel finish manufacturer.     However, in purchasing CGL

coverage, the manufacturer will want protection from liability

for the widget producer's loss in either event.     For the same

reason, if Grede were supplying steel to the widget producer,

Grede would want CGL coverage whether the defective steel caused

a reduction in supply because the production of widgets was

halted or a reduction in demand because customers doubted the

durability of widgets.

             Consequently, a manufacturer worried about liability

has no reason to see a difference in the type of coverage he has

bought unless the insurance contract says otherwise, and the

standard CGL insurance contract does not say otherwise.     CGL

insurance appears to protect the insured from making up the

difference in the injured party's revenue, regardless of whether

the liability is for shifting supply or demand.     Therefore,

coverage for both sorts of injuries appears to be within the

reasonable expectations of the insured.

             The relevant case law supports our view that no

difference exists between coverage for wrongful acts that affect

supply, and those that affect demand.    One case from this Court

interpreting Pennsylvania law apparently held that a change in

demand for a product may be considered a "loss of use."    See

Imperial 

.    In Imperial Casualty,

Keystone, a manufacturer of washers, had a contract with Nice

Bearing Company to supply it with a special kind of washer.       

   Keystone bought special steel from High Concrete to


                                  20
make the washers.    

that Keystone's washers

were defective and rejected them.       

steel High

Concrete had supplied was defective.          

sued

High Concrete for breach of warranty, seeking "loss of use"

damages in the form of lost profits and other incidental charges,

including added freight charges.       

    This court held

that these damages were potentially recoverable under High

Concrete's CGL policy as "loss of use."         

            In Imperial, we allowed recovery for loss of use

despite the fact that Keystone could have produced all of the

washers made from the defective High Concrete steel that it

wanted.    Nothing stopped Keystone from supplying washers made

from the High Concrete steel except for the fact that its

customer refused to accept them.       As in this case, a change in

customer acceptance of the product caused the loss of use to

Keystone, which had no use for the product other than selling it.

To the extent there was a loss of use, it had to have been that

Keystone's lost ability to sell the product was due to decreased

demand.    The Home's attempt to distinguish Imperial on the ground

that in Imperial there was physical injury to the washers does
not change the fact that this Court found a loss of use that was

attributable solely to a change in customer acceptance of the

product.

            The cases upon which The Home relies do not

specifically address the contours of the loss of use provision.

The Home relies on McDowell-Wellman Eng'g Co. v. Hartford Acci. &
Indem. Co., 

(3d Cir. 1983), and Trio's, Inc. v.


                                  21
Jones Sign Co., 

(Wis. Ct. App. 1989), for the

proposition that loss of use does not include the type of loss

Lucker suffered.   In each case, the insured's product failed

(McDowell-Wellman involved an ore bridge0 and Trio's involved a

restaurant sign) and the insured incurred liability for a number

of costs associated with the product's failure.      In McDowell-

Wellman the costs included the expenses incurred to keep the

steel plant operational without a functional ore bridge, and in

Trio's the costs included lost revenues for the time the

restaurant went without a sign.    Although the courts denied

recovery for those costs in both cases, neither court did so

because there was no loss of use.      Rather, in both cases the

courts thought that the costs recovered represented loss of use

of the insured's product, costs which the policies specifically

excluded from coverage.   

;

.0    Because both cases were decided

on the basis of policy exclusions, and not on the basis of loss

of use, they are inapposite.

0
 An ore bridge is part of a system in a steel plant that carries
raw materials to a blast furnace for processing. McDowell-

.
0
  Both McDowell-Wellman and Trio's are essentially cases about
allocating damages between the loss of use of the malfunctioning
component and loss of use of the other property. Both employ a
sort of "but for" causation approach to deny coverage: "but for"
the malfunctioning ore bridge, the steel company would not have
incurred the additional costs; and "but for" the malfunctioning
sign, the restaurant would have lost no revenues. Such an
approach essentially reads the term "loss of use" right out of
the policy. Whenever there is a malfunctioning component, all
loss of use of other property is caused at some level by the
malfunctioning product or else there would simply be no injury
due to the insured's product to which liability may attach.

                                  22
             Apparently at the heart of the district court's opinion

in this case was a fear that allowing coverage for Lucker would

link insurance coverage to the "vagaries of customer desire" and

turn liability insurers into "guarantors of markets for goods and

services."    

.   That fear in the

context of this case is exaggerated:    the loss of use provision

is triggered only when the change in preference is due to the

insured's wrongful act, and obviously not all changes in customer

preferences are due to an insured's wrongful act.    To be sure,

identifying the cause or magnitude of damages due to changes in

customer preference might prove difficult in some cases, but

substantive principles of tort and contract law account for such

difficult inquiries with doctrines that shield defendants (the

insureds) from liability where appropriate.    For example, the

economic loss doctrine, by denying recovery under the rubrics of

duty and probable cause, protects defendants from unanticipated

plaintiffs and disproportionate liability.0

          Even though reasonable minds may disagree with our

construction of the language, the language is, at the very least,

reasonably susceptible to more than one construction from the

viewpoint of the insured and is therefore ambiguous.    Since under

Pennsylvania and Wisconsin law we must resolve any ambiguity in


0
 Concerns about vastly increased liability are not at all
implicated in this case. Quite to the contrary, when Lucker
replaced the castings and added safeguards so that faulty
castings would not be installed in the LMS, it was mitigating the
consequences of Grede having supplied it with a defective
product. It was thus curtailing rather than expanding potential
liability.


                                  23
favor of coverage, we hold that loss of use includes the loss of

customer acceptance that Lucker suffered in this case.



                      C.    Tangible Property

          We need not reverse, however, if the LMS was not

tangible property within the meaning of the insurance contract.

Although the underlying complaint may have potentially alleged

that the LMS existed as a tangible entity, at the time The Home

disclaimed coverage for Lucker's complaint against Grede it was

apparent that the LMS itself was not tangible at the time the

castings failed.

          The LMS design did exist, however, and the complaint

potentially pled that Lucker had lost the use of its design after

the castings had failed.0   Thus, we must determine whether a

design is tangible property as that term is used in a CGL.0     We

0
 The LMS designs and plans existed prior to the catastrophic
failure of Grede's product. They were used previously in
AmClyde's Placid Oil Project, the Conoco Project, and the Akashi
Bridge Project in Japan. The existence of the design was also
apparent from the complaint.
0
 The Home has argued vigorously that since the underlying
complaint sought only loss of profits and other economic losses,
Lucker was not seeking damages for loss of use of tangible
property. Economic harms, The Home argues, are simply not
tangible. While such an observation may be correct, it
misunderstands the nature of the losses Lucker was seeking from
Grede. Lucker was not seeking compensation for economic losses
qua economic losses; rather, Lucker was pointing to its economic
losses as a proxy for the value of the lost use of its LMS
design. Even the cases on which The Home relies recognize that
an intangible economic loss, such as the diminution of value of a
fixed asset, is recoverable if it provides a measure of damage to
the tangible property. See Liberty Bank of Montana v. Travelers
Indem. Co., 

, 1509 (9th Cir. 1989); Giddings v.
Industrial Indem. Co., 

, 219, 

, 281 (1980) (a complaint seeking to recover for economic


                                 24
conclude that the language of the policy, analogous case law from

Pennsylvania and Wisconsin, and case law from other jurisdictions

compel the conclusion that the term tangible property does not

include non-tangible property like system designs.

          Under Pennsylvania and Wisconsin law, tangible property

is property that can be felt or touched, or property capable of

being possessed or realized.   In re Estate of MacFarlane, 

, 1291-92 (Pa. Super. 1983); see also United States

Fidelity & Guar. Co. v. Barron Indus., Inc., 

,

360 (M.D. Pa. 1992) (the term tangible in a CGL covers things

which are physical -- capable of being touched and objectively

perceivable); Holsum Foods, Div. of Harvest States Coop. v. Home

Ins. Co., 

, 921 (Wis. Ct. App. 1991) (similar

approach).

          In contrast, intangible property is defined as property

that does not have intrinsic value but which is merely

representative or evidence of value, like stock certificates.

; Barron 

(under Pennsylvania law CGL policy does not cover intangible

property, such as property that represents value but has no

intrinsic marketable value of its own (e.g., stock, investments,


losses "falls within the scope of the insurance coverage only
where these intangible economic losses provide a measure of
damages to physical property which is within the policy's
coverage") (internal quotation omitted). In this case, Lucker
lost the use of its LMS design. The absorbed costs of beefing up
its specifications for the steel in the LMS and the other costs
it recovered from Grede are a proxy for the value of the lost use
of the original LMS design. As such, they are recoverable under
the policy if the LMS design was tangible property.


                                25
copyrights, promissory notes); property regarded as intangible

rights (e.g., goodwill and reputation); or economic interests

(e.g., overhead, profits, investment value, and productivity));

Columbia Gas Transmission Corp. v. Commonwealth, 

,

918 (Pa. Commw. Ct. 1975) (natural gas is tangible property for

tax purposes even though it cannot be felt because it is capable

of being perceived as materially existent; "[i]ntangible

properties in the law are such incorporeal rights as shares of

capital stock, choses in action, copyrights and the like"), error

dismissed, 

(Pa. Commw. Ct. 1975), rev'd on other

grounds, 

(Pa. 1976); Palmolive Co. v. Conway, 

, 227 (D. Wis. 1930) (trademarks, trade secrets, and good

will not tangible property), aff'd, 

(7th Cir. 1932),

cert. denied, 

, 

, 

(1932);

American Tel. & Telegraph Co. v. Department of Revenue, 

, 631 (Wis. Ct. App. 1988) (cash, shares of stock,

notes, bonds, etc., not tangible as defined in tax statute).     But

see Man, Levy & Nogi, Inc. v. School Dist. of Scranton, 

, 834 (Pa. Commw. 1977) (insurance premiums are tangible

property for tax purposes).0
0
          The distinction between tangible and intangible
property made by these cases tracks the definitions found in
Black's Law Dictionary. Black's defines tangible property as
"property that has physical form and substance and is not
intangible" and intangible property as "such property as has no
intrinsic and marketable value, but is merely the representative
or evidence of value, such as certificates of stock, bonds,
promissory notes, copyrights, and franchises." Black's Law
Dictionary (6th ed. 1990).
          Insurance companies reasonably might want to exclude
coverage for damage to such intangible interests because
estimating the potential liability for purposes of setting the


                               26
            Because these principles are so well settled, Lucker

does not argue that the concept of the LMS is tangible property,

for such an idea cannot be touched and is not materially

existent.   Rather, Lucker contends that a design which is reduced

to a tangible medium, like a blueprint or a computer disk, should

be considered tangible property.      The Home, on the other hand,

argues that where the real value of a design is in the idea, not

in the physical plans that memorialize it, any loss in value of

the design represents a loss in the value of the idea, which is

not a loss of use of tangible property.      We believe that The



premium might be very difficult, or even if the premium could be
calculated, insuring against such liability might expose the
company to such increased costs because of a great variance in
liability that a CGL policy might become prohibitively expensive.
It may also be that insurance companies are in no better position
to insure against such losses than the insured. For example,
assuming that the stock is publicly traded, one can insure
against changes in market price by purchasing options.
          We note, however, that it is difficult to explain why
liability for copyright or patent infringement would be included
among the interests not covered by a CGL policy. There is no
obviously increased moral hazard problem (an insufficient
incentive to be careful) with respect to copyright or patent
infringement as compared to other types of injuries. Nor does it
appear to raise the possibility of huge liability, or liability
that is difficult to calculate. And it does not appear that the
marketplace provides an efficient alternative to an insurance
policy as it does with things like stocks.
          Perhaps exclusion of coverage for copyright or patent
violations can be explained by the fact that the CGL policy is a
standard form and most customers of such policies are not as risk
averse with respect to copyright and patent violations as they
are with other types of tort damages and so they do not demand
coverage for such injuries. At all events, it appears sensible
to presume that purchasers of liability insurance, who are
principally concerned with more conventional forms of tort damage
that their product may cause a third party, reasonably would be
willing to bear the risk of loss to traditionally intangible
interests in exchange for lower premiums.


                                 27
Home's position is the one best supported by the relevant case

law.

             The Home principally relies on a taxation case from

Wisconsin which held that the sale of computer keypunch cards was

not a sale of tangible property for purposes of the Wisconsin

sales tax.    See Janesville Data Center, Inc. v. Wisconsin Dep't

of Revenue, 

, 658-59 (Wis. 1978).     In Janesville,

the Wisconsin Supreme Court reasoned that the information on the

card, rather than the card itself, was the object of the

transaction, and that, the tangible medium keeping the

information was merely incidental to the transaction.     

court held, the sale of the keypunch cards was not

a sale of tangible property.     Id.0
             Lucker has cited no authority from the relevant

jurisdictions.     Instead it has countered with a Minnesota case,

Retail Sys., Inc. v. CNA Ins. Cos., 

(Minn. Ct.

App. 1991), which held that a computer tape that stored

information was tangible property covered under a liability

policy, and a case from the United States District Court for the

Northern District of Georgia, State Farm Fire & Casualty Ins. Co.

0
 The other case on which The Home places principle reliance, Gulf
Insurance Co. v. L.A. Effects Group, Inc., 

(9th Cir.
1987), does not really advance The Home's position. In that case,
L.A. Effects was sued by Twentieth Century Fox for failing to
perform adequately in designing the special effects for the film
Aliens. Although L.A. Effects' argument that Fox's damages
amounted to a loss of use of Aliens was rejected, Fox did not
allege as damage any diminution in value to the film. 

Thus the issue presented here was not before that court
and consequently that court did not hold that the loss of value
of the film could not be loss of use of tangible property.


                                  28
v. White, 

(N.D. Ga. 1991), which held that

architectural plans in blueprint form were tangible property

covered under a CGL policy.

           Neither Retail Systems nor White extended the concept

of tangible property as far as Lucker would have us do here,

however.   In Retail Systems the court limited the coverage to the

considerable value of the computer tape as a storage medium,

disallowing recovery for the value of the data it stored.

Similarly, in White, a case in which developers sought coverage

for costs they incurred in converting architectural drawings, the

district court recognized that the only recovery due the

developers under the policy was for the value of the paper and

ink, and not the value of the ideas the paper and ink 

.   Both cases drew a sharp distinction

between recovery for the value of a tangible medium storing

ideas, and recovery for the ideas themselves.0   To the extent

that the damage had been merely to the value of the idea, it was

not damage to "tangible" property.

           In this case, none of the losses Lucker sought from

Grede represented a loss in value of the storage medium in which

the design for the LMS was embodied or in the costs in reducing

the design to blueprints or computer tape (e.g. the costs of

0
 Other courts have also seen such a distinction. See, e.g.,
Commonwealth of Massachusetts v. Rizzuto, 

(Mass.
Super. 1980) (Commonwealth could not prosecute for theft a
defendant that copied someone else's idea for a film because the
idea, although reproduced in tangible form and capable of being
reproduced into tangible form, was not itself tangible;
distinction must be drawn between cause of value and thing of
value).

                                29
having engineers draw up the plans for the system).    The recovery

Lucker sought was for the loss of use of the design itself -- for

the loss in usefulness of the original concept of the LMS.      The

loss of use of this concept, however, was not loss of use of

something which could be touched or felt.    For this reason, we

hold that Lucker's loss of use of the LMS design was not loss of

use of tangible property.

          We note, however, that the "tangibility" limitation in

the standard form CGL seems to be in tension with what we believe

is its underlying rationale.    As far as we can tell, the CGL

limits coverage to "tangible property" to avoid indemnifying the

insured for any liability the insured faces for damage caused to

stocks, bonds, copyrights and the like, items for which either

the insurer is arguably in no better position to spread risk than

the insured, or which would dramatically increase the premiums.0

But by making "tangibility" the touchstone of coverage, the CGL

excludes a significant class of property for which liability

insurance reasonably could be provided --property like system

designs or computer software.

          The "tangibility" limitation was probably a reasonable

way to separate insurable from non-insurable property interests

in 1973 when the CGL standard policy was drafted.     But the

tremendous increase in automation, and the concomitant increase

in demand for intangible products like computer software and

system designs during the past twenty years, has made such a


0
See note 13 above.

                                 30
limitation of questionable value.     As a matter of risk spreading,

we see no qualitative difference between the need for insurance

to protect a manufacturer from liability incurred because its

product shuts down a furnace, damages a computerized billing

system, or, as in this case, devalues a system design.0

           Nevertheless, we are bound by the language of the

policy, and we cannot stretch it to include non-tangible property

like the LMS design.   Unlike "loss of use," which can plausibly

be construed to include loss of customer acceptance, it would

require too great a departure from the meaning of "tangible" to

hold that a system design is tangible property covered under the

policy.   Therefore, because the LMS design was not tangible

property, there was no "property damage" and thus no coverage

under the policy for Lucker's loss.    As a result, we agree with

the district court that The Home did not breach its duty to

defend Grede when it disclaimed coverage.0



                    IV.   THE DUTY TO INDEMNIFY

           In light of our holding on the duty to defend, we may

dispose of the duty to indemnify summarily.    An insurer has a

duty to indemnify its insured only if it is established that the

insured's damages are actually within the policy coverage.


0
 A preferable way to approach the problem might be for the
insurer to eliminate the overbroad "tangibility" requirement from
the definition of property damage and instead specifically
exclude traditional intangible property interests, like stocks,
copyrights, or goodwill.
0
 Because we hold that there was no "property damage," we need not
construe the policy's exclusions.


                                 31
Safeguard Scientifics v. Liberty Mut. Ins. Co., 

,

334 (E.D. Pa. 1991), aff'd in part, rev'd in part without

opinion, 

(3d Cir. 1992).    Lucker recovered from

Grede as a result of the jury verdict:    1) $32,934 for the actual

cost of the castings; 2) $200,007 in "Test Project Costs"; and 3)

$251,337 for "Costs Absorbed to reproduce Shell's casting to a

higher specification."   Lucker cannot recover any of these costs

because neither the LMS nor the LMS design was tangible property,

and hence there was no property damage covered by the policy.0

          The judgment of the district court will be affirmed.




0
 Because we find that The Home was in breach of neither its duty
to defend nor its duty to indemnify, it did not act in bad faith
and did not violate 42 Pa. C.S. § 8371.


                                32