Lucker Manufacturing v. The Home Insurance Corp, Inc. ( 1994 )


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  •                                                                                                                            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    Precedential or Non-Precedential: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
    Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994
    Recommended Citation
    "Lucker Manufacturing v. The Home Insurance Corp, Inc." (1994). 1994 Decisions. Paper 14.
    http://digitalcommons.law.villanova.edu/thirdcircuit_1994/14
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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., 
    818 F. Supp. 821
    (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.    
    Id. at 828.
       It also held
    that The Home had no duty to indemnify Lucker because none of
    Lucker's damages fell within the policy's coverage.      
    Id. Additionally, it
    held that The Home did not act in bad faith. 
    Id. at 830.
    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 
    recover." 818 F. Supp. at 825
    (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.    
    Id. at 827.
    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.
    
    Id. at 828
    (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.     
    Id. at 830.
      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, 
    766 F.2d 754
    , 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., 
    10 F.3d 1015
    , 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., 
    752 F.2d 874
    , 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, 
    983 F.2d 1110
    , 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., 
    584 F.2d 1306
    , 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
    
    858 F.2d 128
    , 131-32 (3d Cir. 1988); Sola Basic Indus., Inc. v.
    United States Fidelity & Guar. Co., 
    280 N.W.2d 211
    , 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, 
    618 A.2d 945
    , 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, 
    533 A.2d 1363
    , 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., 
    490 N.W.2d 626
    , 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.,
    
    710 F.2d 1288
    , 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., 
    496 N.W.2d 730
    (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 
    Imperial, 858 F.2d at 131
    .   We must construe ambiguous
    language to provide coverage.    
    Id. A provision
    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, 
    578 A.2d 492
    , 503 (Pa. Super. 1990) (the policy must unequivocally
    indicate coverage or non-coverage), appeal denied, 
    590 A.2d 757
    (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.   
    Imperial, 858 F.2d at 131
    .
    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., 
    803 F.2d 1308
    , 1315 (3d Cir. 1986); Ollerman v.
    O'Rourke Co., 
    288 N.W.2d 95
    , 98 (Wis. 1980); see also Western
    13
    Casualty & Sur. Co. v. Budrus, 
    332 N.W.2d 837
    , 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.
    
    Lucker, 818 F. Supp. at 825
    .    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."
    
    Lucker, 818 F. Supp. at 826
    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., 
    972 F.2d 805
    , 810 (7th Cir. 1992),
    cert. denied, 
    113 S. Ct. 1646
    , 
    123 L. Ed. 2d 267
    (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 
    Mfg., 972 F.2d at 809
    .     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.
    
    Exch., 533 A.2d at 1367
    (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 
    Basic, 280 N.W.2d at 214-15
    (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."     
    Lucker, 818 F. Supp. at 828
    .   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 
    Eljer, 972 F.2d at 810
    ; 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 
    Basic, 280 N.W.2d at 211
    , 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.   
    Id. at 212-13.
         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.     
    Id. at 217.
    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 
    Casualty, 858 F.2d at 128
    .    In Imperial Casualty,
    Keystone, a manufacturer of washers, had a contract with Nice
    Bearing Company to supply it with a special kind of washer.       
    Id. at 130-31.
       Keystone bought special steel from High Concrete to
    20
    make the washers.    
    Id. Nice discovered
    that Keystone's washers
    were defective and rejected them.       
    Id. Apparently the
    steel High
    Concrete had supplied was defective.          
    Id. Keystone then
    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.       
    Id. at 135.
        This court held
    that these damages were potentially recoverable under High
    Concrete's CGL policy as "loss of use."         
    Id. at 135-36.
    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., 
    711 F.2d 521
    (3d Cir. 1983), and Trio's, Inc. v.
    21
    Jones Sign Co., 
    444 N.W.2d 443
    (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.   
    McDowell-Wellman, 711 F.2d at 526-27
    ;
    
    Trio's, 444 N.W.2d at 444-45
    .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-
    
    Wellman, 711 F.2d at 523
    .
    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."    
    Lucker, 818 F. Supp. at 828
    .   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., 
    870 F.2d 1504
    , 1509 (9th Cir. 1989); Giddings v.
    Industrial Indem. Co., 
    112 Cal. App. 3d 213
    , 219, 
    169 Cal. Rptr. 278
    , 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, 
    459 A.2d 1289
    , 1291-92 (Pa. Super. 1983); see also United States
    Fidelity & Guar. Co. v. Barron Indus., Inc., 
    809 F. Supp. 355
    ,
    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., 
    469 N.W.2d 918
    , 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.
    
    MacFarlane, 459 A.2d at 1292
    ; Barron 
    Indus., 809 F. Supp. at 360
    (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, 
    339 A.2d 912
    ,
    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, 
    350 A.2d 193
    (Pa. Commw. Ct. 1975), rev'd on other
    grounds, 
    360 A.2d 592
    (Pa. 1976); Palmolive Co. v. Conway, 
    43 F.2d 226
    , 227 (D. Wis. 1930) (trademarks, trade secrets, and good
    will not tangible property), aff'd, 
    56 F.2d 83
    (7th Cir. 1932),
    cert. denied, 
    287 U.S. 601
    , 
    53 S. Ct. 8
    , 
    77 L. Ed. 524
    (1932);
    American Tel. & Telegraph Co. v. Department of Revenue, 
    422 N.W.2d 629
    , 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, 
    375 A.2d 832
    , 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, 
    267 N.W.2d 656
    , 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.     
    Id. Therefore, the
    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., 
    469 N.W.2d 735
    (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., 
    827 F.2d 574
    (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. 
    Id. at 577-578.
    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, 
    777 F. Supp. 952
    (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 
    embodied. 777 F. Supp. at 954-55
    .   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, 
    1980 WL 4637
    (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., 
    766 F. Supp. 324
    ,
    334 (E.D. Pa. 1991), aff'd in part, rev'd in part without
    opinion, 
    961 F.2d 209
    (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