may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (1998).
STATE OF MINNESOTA
IN COURT OF APPEALS
Western National Mutual Insurance Co.,
I.F.P., et al.,
Filed May 18, 1999
Rice County District Court
File No. C097815
John M. Sheran, Steven P. Zabel, Leonard, Street & Deinard, 150 South Fifth Street, Suite 2300, Minneapolis, MN 55402 (for respondents)
Considered and decided by Peterson, Presiding Judge, Davies Judge, and Huspeni, Judge.[*]
Naturlac sued respondent I.F.P., Inc., and its CEO, respondent Eugene Sander, alleging that infant formula I.F.P. manufactured for Naturlac did not meet required specifications. Respondents' insurer, appellant Western National Mutual Insurance Company, brought this action against respondents, seeking a declaratory judgment that it owed no duty to indemnify I.F.P. or defend it against the Naturlac action. The district court concluded that Western National was obligated to defend and indemnify I.F.P. and granted summary judgment in favor of respondents. We reverse.
When the clinical trials were suspended, Naturlac and I.F.P. began to investigate the potential causes of the infants' intolerance of the formula. During the investigation, Naturlac needed to verify the lot numbers for soybean oil used in the formula. Due to I.F.P.'s failure to record the lot numbers properly on its internal documentation, I.F.P. was initially unable to identify the correct lot numbers for the soybean oil used. By the time I.F.P. was able to determine the correct lot numbers, the clinical trials had been terminated. Sander stated in an affidavit that he believed that I.F.P. manufactured the formula according to Naturlac's specifications and that the clinical trials were terminated because I.F.P. was unable to immediately and positively verify each component used in the formula. As a result of the termination of the clinical trials, the formula's release date was delayed, and Naturlac sued respondents to recover lost profits.
I.F.P. was covered under a general liability policy issued by Western National. The policy provided:
The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of
A. bodily injury
B. property damage
to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements.
The policy defined property damage as follows:
"property damage" means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided that such loss of use is caused by an occurrence during the policy period[.]
The policy did not apply:
(n) to property damage to the named insured's products arising out of such products or any part of such products[.]
The policy defined the named insured's product as "goods or products manufactured, sold, handled or distributed by the named insured."
An insurer's duty to defend its insured is broader in scope than he insurer's duty to indemnify. Auto-Owners Ins. Co. v. Todd, 547 N.W.2d 696, 698 (Minn. 1996). But when it can be concluded as a matter of law that there is no basis on which the insurer may be obligated to indemnify the insured, the insurer has no duty to defend. Meadowbrook, Inc. v. Tower Ins. Co., Inc., 559 N.W.2d 411, 416 (Minn. 1997).
Naturlac's lawsuit against respondents arose out of the loss of use of the infant formula manufactured by I.F.P. for the clinical trials. The definition of property damage in I.F.P.'s policy included loss of use of tangible property under specified circumstances. But the policy expressly excluded from coverage "property damage to the named insured's products arising out of such products or any part of such products[.]" The infant formula was I.F.P.'s product. I.F.P. argues that the loss of use of the formula resulted from the error in recording the lot numbers for the soybean oil, not from the formula itself. However, the facts in the record do not support this argument. The clinical trials were suspended because numerous infants were unable to tolerate the formula. The documentation error only became an issue during the investigation to determine why the infants were unable to tolerate the formula. Moreover, the erroneous documentation was I.F.P.'s internal documentation, its work product, maintained as part of the manufacturing process for the formula. Under the plain language of exclusion (n), loss of use of the infant formula was excluded from coverage.
Naturlac sought recovery not for loss of use of the formula, but for lost profits resulting from the loss of use. In T.E. Ibberson Co. v. American & Foreign Ins. Co., 346 N.W.2d 659, 661-63 (Minn. App. 1984), this court construed work-product exclusions in a general liability policy, one of which was identical to exclusion (n) in I.F.P.'s policy with Western National. In Ibberson, the insured had constructed a grain elevator for a client. Id. at 660. When grain dryers were installed in the elevator, defects were discovered in the elevator walls, and the client had to close the elevator for an extended period to repair the walls and reinstall the dryers. Id. The client sued the insured seeking to recover damages for repair costs, lost profits, and loss of use of the elevator. Id. This court held that the work-product exclusions applied to preclude coverage and, therefore, the insurer had no duty to defend its insured. Id. at 663.
The court explained the purpose of a general liability policy as follows:
The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damage to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.
Id. at 662 (quoting Bor-Son Bldg. Corp. v. Employers Commercial Union Ins. Co., 323 N.W.2d 58, 63 (Minn. 1982)). Under Ibberson, the lost profits sought by Naturlac were an element of the loss of use of the infant formula and, thus, not covered under I.F.P.'s general liability policy.
The district court erred in concluding that Western National was obligated to indemnify I.F.P. and defend it against Naturlac's lawsuit. Because Western National had no duty to defend, the district court erred in awarding respondents attorney fees incurred in defending against this declaratory judgment action.
[*] Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.
 The insured conceded on appeal that the claims for repair costs and lost profits were excluded from coverage, and this court agreed. Ibberson, 346 N.W.2d at 660, 662.