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Vicor Corporation v. Vigilant Insurance Company; Federal Insurance

March 16, 2012



The opinion of the court was delivered by: Howard, Circuit Judge.

Before Lipez, Circuit Judge, Souter,*fn1 Associate Justice, and Howard, Circuit Judge.

This insurance coverage dispute concerning the scope of a "loss of use" provision stems from wireless communication network outages in 2003. The outages were traced to the failure of a component part, known as a power converter, manufactured by appellee/cross-appellant Vicor Corporation and sold to Ericsson Wireless Communications, which incorporated the power converter into radio base stations ("RBS") critical to Ericsson's customers' wireless networks. In May 2004, as a result of the network failures, Ericsson sued Vicor in California state court. They settled this suit ("the Ericsson litigation") in 2007 for $50 million. Appellant/cross-appellees Vigilant Insurance Company and Federal Insurance Company, two of Vicor's liability insurers, paid $13 million of the settlement. Vicor contributed the remaining $37 million.

Vicor subsequently initiated this litigation, seeking indemnification from its insurers for the $37 million of its own funds that it paid to Ericsson. In addition to Federal and Vigilant, Vicor also sued an excess carrier, appellant/cross-appellee Continental Casualty Company (collectively "the insurers"). After eight days of trial, a jury awarded Vicor $17.3 million. The district court granted the insurers partial post-trial relief, reducing the verdict by $4 million and entering judgment for Vicor in the amount of $13.3 million plus interest. All parties filed timely appeals and cross-appeals raising multiple issues. For the reasons that follow, we believe that the judgment cannot withstand appellate scrutiny, and we remand the case.

I. Background Facts*fn2

A. Equipment and Failure

Vicor is a manufacturer of electronic equipment. The Vicor power converters at issue in this litigation break down input power supplies into power levels needed by various other component parts. Ericsson's business includes the design, manufacture and sale of electronic equipment, including radio base stations, which are used to set up and operate cellular telephone towers and networks. Ericsson purchased Vicor power converters for use in Ericsson RBSs, which Ericsson sold to wireless communication providers worldwide. These providers included Cricket Communications, which operated in North America, and China Unicom ("CU") which operated in several Chinese provinces.

Trial testimony suggested that power converters that Vicor had sold to Ericsson began failing in October 2002 and that Vicor became aware in May 2003 that some of these failures were related to a manufacturing change in a component computer chip. In October 2003, severe outages occurred in the Cricket network.*fn3 Later in 2003, similar problems arose in CU's network in China.

B. Ericsson's Payments

As a result of the network outages triggered by the RBS failures, Ericsson provided compensation to both Cricket and CU. The record reflects that Ericsson paid approximately $9.3 million to Cricket pursuant to a settlement agreement. Additionally, Ericsson spent $5 to $6 million to repair the Vicor products purchased by CU and provided CU with $3.3 million in free equipment.

C. The Ericsson Lawsuit

In May 2004, Ericsson sued Vicor on several theories of liability, including breach of contract, breach of warranty, negligence, unfair competition, misrepresentation and fraud. In a February 7, 2007 memo, Vicor's defense counsel summarized Ericsson's damage claim, as set forth in its interrogatory answers. The claim totaled approximately $1.1 billion, including the following: $1 billion in lost profits; $33 million to retrofit and replace Vicor power converters worldwide; $10 million of inventory provided to Cricket; $9.5 million settlement paid to Cricket; $7.5 million paid to CU; $3.3 million of inventory provided to CU; $5 million in costs for engineers and technicians to address failures and retrofit components; $2-3 million to diagnose defects and redesign RBS components to eliminate the Vicor product.

Vicor and Ericsson successfully resolved their differences through mediation, settling the Ericsson litigation for $50 million. Vigilant and Federal contributed almost $13 million towards the settlement under two different types of policies. Vicor supplied the remaining funds.

D. Vicor's Lawsuit

After settling with Ericsson, Vicor filed this action against the insurers in Massachusetts federal district court, seeking reimbursement of the $37 million it had paid to Ericsson. Vicor sought a declaratory judgment that its payments were covered losses under the policies, as well as seeking damages for breach of contract.

II. The Insurance Policies

A. Vigilant and Federal

As relevant to this litigation, Vigilant issued two primary general liability policies to Vicor, spanning the terms October 1, 2002 to October 1, 2003, and October 1, 2003 to October 1, 2004. Each policy was subject to general liability limits of $1 million per occurrence and $2 million aggregate. In addition to the general liability coverage, the Vigilant policies insured against Information and Network Technology Errors or Omissions ("E&O coverage"), providing liability coverage for "financial injury" caused by a "wrongful act," as defined by the policy. The E&O coverage was subject to a $10 million policy limit.

Federal issued two excess and umbrella general liability policies covering the same policy periods. The 2002-2003 policy contained a general liability limit of $20 million per occurrence and in the aggregate. The 2003-2004 policy contained a $12 million limit per occurrence and in the aggregate.

B. Continental

Continental issued an excess liability policy with an $8 million limit to Vicor covering October 1, 2003 to October 1, 2004. The Continental policy is excess to the $13 million dollars in coverage provided by the Vigilant and Federal policies covering the same time period. As an excess policy, the Continental policy only provides coverage if a covered loss during the policy period exceeds the combined Vigilant-Federal limit.

C. Policy Provisions

The Federal and Continental policies incorporate by reference many of the relevant policy provisions contained in the Vigilant policy, which provides, in relevant part:

Subject to all the terms and conditions of this insurance, we will pay damages that the insured becomes legally obligated to pay by reason of liability:

imposed by law . .

for bodily injury or property damage caused by an occurrence to which this coverage applies.

This coverage applies only to such bodily injury or property damage that occurs during the policy period . . . .

Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Property damage means:

physical injury to tangible property, including resulting loss of use of that property . . .

loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it.

III. Trial

The crux of the dispute in this case concerns the policy language addressing coverage for "loss of use of property that is not physically injured." Of the money contributed by Vigilant and Federal to the Ericsson settlement, $3.14 million was considered to be for "physical injury to tangible property."*fn4 Vicor claimed at trial that the insurers owed it the remaining $37 million because Vicor had paid that sum to Ericsson as a result of such "loss of use" damages. This total consisted of: 1)cash settlements of $7.5 million to CU; 2) free equipment to CU worth at least $6.6 million; 3) cash settlements to Cricket of $9.5 million; ...

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