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SPRINKLER MAKER SUING INSURERS FOR RECALL COVER

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LANSDALE, Pa. -- Central Sprinkler Corp. is suing its product liability insurers, attempting to gain coverage for the recall announced last week of 8.4 million Omega fire suppression sprinklers, a Central official confirmed.

The recall came in a settlement with the U.S. Consumer Product Safety Commission, which had sued Central to force it to comply with its demand for the recall.

Also last week, a Los Angeles Superior Court delayed ruling on a bid by the Lansdale, Pa.-based sprinkler manufacturer to settle a pending class-action lawsuit related to its Omega sprinklers.

The recall will go forward. But the court ruling leaves unresolved whether Central's settlement attempts will relieve it of potential liabilities and whether the $38 million it has set aside for the recall and settlement is adequate for the task, observers said.

"The question as to whether or not our members will be made whole is still an open question," said Gerry Lederer, vp-government and industry affairs for the Building Owners & Managers Assn. in Washington. BOMA, which represents 16,000 members managing 7 billion square feet of commercial property in North America, is party to one of several lawsuits filed nationwide against Central in connection with its Omega sprinklers.

The Los Angeles court is scheduled to hear the issue again Oct. 27.

Central does not have product recall insurance, but it is seeking coverage from its product liability insurers for the recall, as well as for defense costs, Al Sabol, Central's chief financial officer, confirmed. Central filed its suit in California last month against product liability insurers.

Mr. Sabol could not say in which California jurisdiction the suit was filed, nor who the insurers are. But he did confirm plaintiff attorneys' assertion that Central has about $200 million in liability coverage.

Apart from its settlement with the CPSC, Central had sought to have a Los Angeles Superior Court certify a class-action lawsuit filed there. Central has worked out a potential settlement in that lawsuit.

But the court on Thursday postponed ruling on Central's attempt for several reasons, including skepticism that the offer amount is adequate, said Jeffrey B. Cereghino, a partner at the Alamo, Calif., firm of Berding & Weil, which represents BOMA. Additionally, the court ruled that Central had not adequately notified all potential plaintiffs of its settlement conditions, Mr. Cereghino said.

BOMA is a party to such a lawsuit filed in federal court in Philadelphia and last week argued against Central's offer to settle the Los Angeles suit, Mr. Lederer said. Certification of a class and a class settlement in Los Angeles would pre-empt plaintiffs in other suits, such as the one in Philadelphia, from gaining similar status.

BOMA wants Central to acknowledge that its product is defective, Mr. Lederer said. It also wants to assure that all its members are treated equally regardless of their company size, and it wants Central to pay all member out-of-pocket expenses for replacing Omega Sprinklers, an amount BOMA believes will exceed the $38 million Central has set aside.

Several lawsuits filed nationwide have sought to force Central to pay for replacing its Omega sprinklers without requiring that plaintiffs first submit samples for testing to see whether their installed Omegas fail to operate.

Central's settlement agreement with the CPSC addresses BOMA's first two concerns -- an admission that the product is defective and equal treatment regardless of size -- but the third concern, the amount needed for the replacements, remains in question, Mr. Lederer said.

As part of Central's settlement with the CPSC, Central agreed to provide free replacement Quick Response Glass Bulb Sprinklers for every existing Omega head. For commercial buildings, the replacement sprinklers must be approved by Factory Mutual Research Corp., according to the agreement. Omegas were not Factory mutual-approved.

Central is taking a $38 million charge against third-quarter earnings to cover the cost of the recall, the company has announced.

But that amount is less than $5 a sprinkler head, and according to the CPSC settlement, that money must cover labor costs and also go toward paying for a nationwide advertising campaign to find building owners with installed Omega sprinklers, Mr. Lederer said.

Additionally, the $38 million is not totally a cash contribution available to plaintiffs because it includes the value of Central-manufactured replacement sprinklers, critics contend.

According to Central's offer to settle the Los Angeles lawsuit, its contribution to a sprinkler replacement fund could be reduced if notifications fail to turn up fewer than the 8.4 million sprinkler heads, said Mr. Sabol.

Central is actually putting up $8.8 million in "real dollars," and then in 2001 it will add additional funds depending on the number of claims submitted, said Mr. Cereghino, BOMA's attorney.

BOMA is also unhappy that the first dollars of any recovery from Central's liability insurers would reimburse the sprinkler company for defense costs rather than increasing the sprinkler replacement fund, Mr. Cereghino said.

"If there is going to be a settlement with the carriers and you know the class is underfunded, basic math tells you that it is, the first dollars should go to the class," Mr. Cereghino said.

Central had been paying voluntarily for building owners with installed Omegas to submit samples of sprinkler heads for testing. (BI, Aug. 18, 1997). If the heads were found defective, the company had been paying replacement costs.

Through July 31, the company had spent $12 million for testing and replacing Omega sprinklers, Mr. Sabol said.

Rubber O-rings in Omega sprinklers have swelled under pressure and failed to release water during fires. Problems also surfaced with the sprinklers after the company announced it would switch to manufacturing them with silicone O-rings (BI, Nov. 17, 1998).

The CPSC alleges that 30% to 40% of Omega sprinklers removed from various locations nationwide have failed to activate, and the agency has received reports of Omegas not functioning in 17 fires that resulted in injuries and $4.3 million in property damage.

Only one lawsuit has been filed against Central alleging that one of its Omega sprinklers failed and contributed to fire damage, Mr. Sabol said. The number of such suits probably has been limited because such allegations would be tough to prove, given that Omega's sprinkler failure rate is low, he said, and that if one fails, other Omega sprinklers in the room or building are to likely operate.

Replacing the sprinkler heads is not complex, said Joe Hankins, engineering specialist for Norwood, Mass.-based Factory Mutual. There are established procedures for minimizing potential hazards resulting from the temporary shutdown of sprinkler systems, and the replacement procedure should be similar to performing a typical system upgrade, he said.

"You would typically want to schedule it when the building isn't occupied and have extra security on to watch for fires and have the fire department notified that the protection is going to be out of service," Mr. Hankins said.

Experts also recommend that only professionals replace the sprinklers because improper installation can damage them.