This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (1996).




Western National Mutual Insurance Company,



Frost Paint & Oil Corporation,


Spartan Products, Inc.,


Filed January 27, 1997


Short, Judge

Hennepin County District Court

File No. 9419541

James T. Martin, Dan T. Ryerson, Gislason, Martin & Varpness, P.A., 7600 Parklawn Avenue South, Suite 444, Edina, MN 55435 (for appellant)

Thomas H. Crouch, Gary W. Hoch, Meagher & Geer, P.L.L.P, 4200 Multifoods Tower, 33 South Sixth Street, Minneapolis, MN 55402 (for respondent)

Considered and decided by Peterson, Presiding Judge, Kalitowski, Judge, and Short, Judge.


SHORT, Judge

This declaratory judgment action involves insurance coverage issues relating to corrosion damage on boat trailers. Spartan Products, Inc. manufactures and sells boat trailers; Frost Paint & Oil Corporation manufactures and sells paint products. For many years, Frost supplied paint for use on Spartan trailers. Problems arose after Spartan switched to a new Frost paint system. Eventually, Spartan sued Frost for, among other claims, negligence, negligent misrepresentation, breach of contract, and breach of warranty. Before trial, Frost's insurer, Western National Mutual Insurance Company, filed this action to determine whether Spartan's damage is covered under either its general liability policy or commercial umbrella liability policy.

The trial court denied cross-motions for summary judgment because there was a fact issue as to whether there had been an "occurrence." After a bench trial, the court found there was physical injury to Spartan's trailers, the damage was not expected or intended, and Spartan lost profits because of the damage to the trailers. The trial court ordered judgment for Spartan in the amount of $590,000, plus costs, disbursements, and prejudgment interest. On appeal, the insurer argues the trial court erred in (1) finding coverage, and (2) awarding prejudgment interest. We affirm.


In a declaratory judgment action tried without a jury, the trial court's decision must be sustained unless its findings are clearly erroneous. Minn. R. Civ. P. 52.01; see also Ketterer v. Independent Sch. Dist. No. 1, 248 Minn. 212, 229, 79 N.W.2d 428, 440 (1956) (holding trial court's findings in declaratory judgment upheld unless palpably and manifestly against the evidence); Samuelson v. Farm Bureau Mut. Ins. Co., 446 N.W.2d 428, 430 (Minn. App. 1989) (same), review denied (Minn. Nov. 22, 1989). The construction of an insurance policy presents a question of law, which we review de novo. Iowa Kemper Ins. Co. v. Stone, 269 N.W.2d 885, 886-87 (Minn. 1978). An insurer bears the burden of proving a claim falls outside policy coverage, and we resolve any ambiguity or doubt in favor of the insured. See Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 165-66 (Minn. 1986) (insurer's burden); Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn. 1979) (resolution of ambiguity).


The insurer argues the trial court erred in finding coverage because: (a) there was no "occurrence" as required by the policy; (b) lost profits do not constitute "property damage" under the language of the policy; and (c) Spartan's damages are excludable under the "business risk" doctrine.

A. Occurrence

The comprehensive general liability policy provides coverage for "damages because of * * * property damage * * * caused by an occurrence." That policy defines an occurrence as "an accident, including continuous or repeated exposure to conditions that result in bodily injury or property damage neither expected nor intended from the standpoint of the insured." Similarly, the umbrella policy defines "occurrence" as "either an accident or happening or event or a continuous or repeated exposure to conditions that unexpectedly and unintentionally cause injury to or destruction of tangible property." Those definitions require an accident resulting in property damage that is neither expected nor intended by the insured. Bituminous Cas. Corp. v. Bartlett, 307 Minn. 72, 77, 240 N.W.2d 310, 313 (1976), overruled on other grounds by Prahm, 277 N.W.2d at 391. Although undefined in the policy, an "accident" has been interpreted through case law to mean "an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause." Hauenstein v. St. Paul Mercury Indem. Co., 242 Minn. 354, 358-59, 65 N.W.2d 122, 126 (1954); see also Sage Co. v. Insurance Co. N. Am., 480 N.W.2d 695, 698 (Minn. App. 1992) (defining accident as unexpected, unforeseen, or undesigned happening). Thus, there is an "occurrence" as long as the insured did not engage in conscious wrongdoing. See Ohio Cas. Ins. Co. v. Terrace Enters., Inc., 260 N.W.2d 450, 452-53 (Minn. 1977) (holding an "occurrence" exists where conduct was perhaps negligent, but not reckless or intentional); Bituminous, 307 Minn. at 77-80, 240 N.W.2d at 313-14 (concluding no "occurrence" where contractor knowingly violates contract specifications).

The insurer argues "the peeling of paint and the ensuing gradual onset of rust through the natural action of the elements" does not constitute an accident. However, the trial court found: (1) while Frost was negligent, it did not engage in any consciously faulty workmanship; (2) Frost did not engage in any grossly negligent or reckless conduct; (3) the cracking and peeling of Frost's paint caused rust and corrosion on Spartan trailers; and (4) Frost neither expected nor intended the damage to the trailers. These findings are not manifestly contrary to the evidence. We agree with the insurer that faulty workmanship alone does not constitute an occurrence. However, Frost's paint caused unintended damage to Spartan's trailers. See Hamilton Die Cast, Inc. v. United States Fidelity & Guar. Co., 508 F.2d 417, 420 (7th Cir. 1975) (concluding component failure constitutes an occurrence if component causes completed product to fail and person or item of property is harmed). Under these circumstances, the trial court correctly concluded that Spartan and Frost met their burden of establishing an "occurrence" under the policies. See Aetna Cas. & Sur. Co. v. General Time Corp., 704 F.2d 80, 82-83 (2d Cir. 1983) (concluding trial court finding that insured neither expected nor intended malfunction was factual finding subject to clearly erroneous standard).

B. Property Damage

The comprehensive general liability policy defines "property damage" as "physical injury to or destruction of tangible property." Similarly, the umbrella policy covers "injury to or destruction of tangible property." The exact amount of damages is not before us because the parties, including the insurer, stipulated that $600,000 was a reasonable damage award.

The insurer argues `lost profits are not a form of `property damage' for insurance coverage purposes. See Tschimperle v. Aetna Cas. & Sur. Co., 529 N.W.2d 421, 425 (Minn. App. 1995) (concluding general rule is loss of investment not damage to tangible property), review denied (Minn. May 31, 1995). We agree Spartan's lost profits do not constitute "property damage" within the policy definition. See Magnetic Data, Inc. v. St. Paul Fire & Marine Ins. Co., 442 N.W.2d 153, 156 (Minn. 1989) (declining to extend policy to cover loss of use of intangible property); see also Federated Mut. Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751, 756 (Minn. 1985) (holding "diminution in value" does not constitute property damage). However, the policies at issue provide coverage for "damages because of * * * property damage." That express language permits coverage for Spartan's consequential losses, including lost profits flowing from physical injury to its trailers, which were caused by Frost's defective paint. See United Properties, Inc. v. Home Ins. Co., 311 N.W.2d 689, 692 (Iowa Ct. App. 1981) (concluding where policy covered "damages because of * * * property damage to which this policy applies including * * * damages for the loss of use of property resulting from property damages" insurer liable for damages for loss of use of property); see also American Home Assurance Co. v. Libbey-Owens-Ford Co., 786 F.2d 22, 26-27 (1st Cir. 1986) (concluding phrase "because of * * * property damage to which this insurance applies" covers only consequential damages resulting from property damage to which policy applies); Note, Liability Coverage for "Damages Because of Property Damage" Under the Comprehensive General Liability Policy, 68 Minn. L. Rev. 795, 813-14 (1984) (discussing interpretation of policies providing coverage for damages incurred "because of * * * property damage" and concluding "because of" should be read as "arising from" or "as a consequence of" because that is phrase's "common, popular, and ordinary meaning").

The insurer suggests the policy language "damages because of * * * property damage" really means property damage because of property damage. However, in the absence of specific language to exclude consequential damages, we decline to add additional qualifying language to benefit the insurer at the expense of its insured. See Bobich v. Oja, 258 Minn. 287, 294, 104 N.W.2d 19, 24 (1960) (holding extent of insurer's liability is governed by contract into which parties have entered); see also Henning Nelson Constr. Co. v. Fireman's Fund Am. Life Ins. Co., 383 N.W.2d 645, 652 (Minn. 1986) (concluding policy must be read as whole and unambiguous language must be given its plain and ordinary meaning); United Properties, Inc., 311 N.W.2d at 692 (concluding if insurer wanted to exclude consequential damages it should have said so with specific language to that effect).

The trial court found: (1) the Spartan trailers sustained substantial physical injury in the form of rust and corrosion due to Frost's paint; and (2) Spartan incurred costs for removing and replacing the paint, costs for repairing the rust and corrosion on the trailers, and significant lost profits because of the rust and corrosion on its trailers. These findings are supported by substantial evidence, including the testimony of several witnesses that the rust and corrosion were "bleeding" through the paint job on the trailers. Under these circumstances, the trial court's findings that there was "property damage" and that Spartan's lost profits had a causal connection to the "property damage" are not clearly erroneous. See Oliver B. Cannon & Son, Inc. v. Fidelity & Cas. Co., 484 F. Supp. 1375, 1383 (D. Del. 1980) (finding coverage where insured's paint caused tanks to sustain damage in form of rust); Pittsburgh Plate Glass Co. v. Fidelity & Cas. Co., 281 F.2d 538, 541 (3rd Cir. 1960) (finding coverage where insured's paint was defective and rust formed on materials to which paint was applied). Compare Federated Mut. Ins. Co., 363 N.W.2d at 757 (concluding insurer may be required to indemnify insured for consequential damages if they are causally related to an item of "property damage") with Aetna Life & Cas. v. Patrick Indus., Inc., 645 N.E.2d 656, 661-62 (Ind. Ct. App. 1995) (holding no coverage for diminished value under policy where defective component incorporated into finished product because policy not intended to cover that type of intangible economic loss).

C. "Business Risk" Doctrine

The risk that an insured's product will not meet contractual standards is a business risk not covered by a general liability policy. Bor-Son Bldg. Corp. v. Employers Commercial Union Ins. Co., 323 N.W.2d 58, 63 (Minn. 1982). An insurer's assumption of risk is usually limited to those beyond the "effective control" of the insured. See Knutson Constr. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d 229, 234-35 (Minn. 1986) (concluding underlying philosophy of "business risk" doctrine is to have predictable and affordable insurance rates); George H. Tinker, Comprehensive General Liability Insurance - Perspective and Overview, 25 Fed'n Ins. Coun. Q. 217, 224 (1975) (providing definition of "business risks").

The insurer argues the policy's business risk exclusions (m), (n), and (o) apply because the risk that Frost's paint would fail was an uninsurable "business risk." However, the record demonstrates: (1) the insured did not use substandard materials; (2) the insured did not consciously deviate from industry standards or written specifications; (3) the insurer's expert testified, although he believed the insured did not conduct a sufficient number of tests on the paint, he could not establish any causal connection between his criticisms of the insured's procedures and the failure of the paint to adhere to the trailers; and (4) Spartan sought recovery for damages to the trailers themselves, and not just for replacing the paint. The exclusions cited by the insurer do not preclude coverage for property damage to Spartan's trailers or for the consequential lost profit damages. Under these circumstances, the risk is not a business risk and is not within exclusion (m), (n), or (o). See Caledonia Community Hosp. v. St. Paul Fire & Marine Ins. Co., 307 Minn. 352, 354, 239 N.W.2d 768, 770 (1976) (holding insurer bears burden of proving exclusion applies); Hennings v. State Farm Fire & Cas. Co., 438 N.W.2d 680, 683 (Minn. App. 1989) (holding exclusions strictly construed against insurer), review denied (Minn. June 9, 1989); see also Sphere Drake Ins. Co. v. Tremco, Inc., 513 N.W.2d 473, 479 (Minn. App. 1994) (holding when insured's faulty workmanship results in damage to property of third party such third-party property damage is not excluded from coverage by business risk doctrine), review denied (Minn. Apr. 28, 1994).


Prejudgment interest is an element of compensatory damages that provides a party with full compensation by converting time-of-demand damages into time-of-verdict damages. Lessard v. Milwaukee Ins. Co., 514 N.W.2d 556, 558 (Minn. 1994). It is computed from the time of commencement of the action or written notice of the claim, whichever event occurs first. Minn. Stat. § 549.09, subd. 1(b) (1996).

The insurer argues the trial court erred in awarding prejudgment interest from commencement of the underlying action. We disagree. The trial court's calculation is statutorily permitted and the parties' settlement agreement does not contain a waiver of statutory interest. Cf. Loo v. Loo, 520 N.W.2d 740, 745-46 (Minn. 1994) (outlining requirements of statutory waiver in family law context). Under these circumstances, the trial court properly found coverage and awarded prejudgment interest.