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Documentation shortfall shields AIG in warehouse liability dispute

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An American International Group Inc. unit has prevailed in a warehouse liability dispute because of the policyholder’s failure to provide appropriate documentation, says a federal appeals court in affirming a lower court ruling.

Peru, Illinois-based Double D Warehouse L.L.C., which operates a warehouse facility there, maintained liability insurance coverage with Lexington Insurance Co., a unit of AIG, according to Tuesday’s ruling by the 7th U.S. Circuit Court of Appeals in Chicago in PQ Corp. v. Lexington Insurance Co.

For about 10 years, Malvern, Pennsylvania-based PQ had stored two chemical products at Double D’s warehouse — a magnesium sulfate compound commonly known as Epsom salts, and a sodium meta-silicate sold under the Metso Beads trademark — according to the ruling.

In 2011, PQ began receiving complaints from its own customers about product discoloration, and upon investigation concluded the likely culprit was vapors from phenol formaldehyde resin Double D also stores in its warehouse, said the ruling. It said the vapors apparently reacted with PQ’s highly alkaline products.

Double D had two annual warehouse legal lability insurance policies effective from June 2010 to June 2012 that provided Lexington would pay all sums for which Double D became legally obligated “for direct physical ‘loss’ or damage to personal property of others because of (its) liability as a warehouse operator.”

This was subject, though, to three terms and conditions: Lexington would pay for damages only to the extent Double D produced a warehouse receipt or storage agreement signed by its customer, or a rate quotation that it had presented to its customer before storing the property; that it was forbidden from assuming any obligation or admitting any liability without Lexington’s consent; and that coverage was barred for any loss caused by the release of pollution, which was broadly defined as irritants or contaminants that caused or threatened property damage.

In 2012, Lexington denied coverage based on these provisions, stating it had not been provided with proof of a signed warehouse receipt, storage agreement or rate quotation.

PQ eventually became the assignee of Double D’s policy rights after it settled its own case against Double D by stepping into Double D’s shoes to try to collect on Lexington’s insurance policies, according to the ruling.

The U.S. District Court in Chicago ruled in Lexington’s favor, which was unanimously affirmed on appeal by a three-judge appeals panel.

“PQ has a point when it says that the documentation Double D actually had (bills of lading and an online tracking system) should serve much the same purpose as the documentation required by the policies (especially warehouse receipts),” said the ruling.

“Yet commercially sophisticated parties agreed to unambiguous terms and conditions of insurance. We hold them to those terms. To do otherwise would disrupt the risk allocations that are part and parcel of any contract, but particularly a commercial liability insurance contact,” said the ruling.

 “PQ has no persuasive reason to depart from the plain langue of the policies,” said the ruling, in affirming the lower court’s decision.