Transportes Ferreos v. NKK Co. (3d Cir. 2001)

Filed February 8, 2001

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-5697

TRANSPORTES FERREOS DE VENEZUELA II CA,

Appellant

NKK CORPORATION; EDC, INC.;
THE SHEFFER CORPORATION

THE SHEFFER CORPORATION,

Third-Party Plaintiff

JORGENSEN STEEL & ALUMINUM, a division of
EARLE M. JORGENSEN COMPANY; ARTCO, INC.,

Third-Party Defendants

EDC, INC.,

Third-Party Plaintiff

HARTFORD FIRE INSURANCE COMPANY,

Third-Party Defendant

Appeal from the United States District Court
for the District of New Jersey
D.C. No. 96-cv-04016
District Judge: Dickinson R. Debevoise

Argued: December 4, 2000

Before: McKEE, ROSENN, and CUDAHY,*
Circuit Judges.

(Filed: February 8, 2001)

Robert G. Clyne (argued)
Hill Rivkins & Hayden LLP
1 Exchange Place, Suite 1000
Jersey City, NJ 07302-3911
Counsel for Appellant

Michael J. Breslin, Jr., Esq. (ar gued)
Breslin & McNerney
14 Washington Place
Hackensack, New Jersey 07601
Counsel for Appellee

OPINION OF THE COURT

CUDAHY, Circuit Judge.

In April 1995, the ship boom on a vessel owned by
Transportes Ferreos de Venezuela II CA (TFV) collapsed.
TFV sued EDC, Inc., the boom's designer and supplier , and
in August 1998, the parties settled. As part of the
settlement, EDC agreed to the entry of a $1 million
judgment against it, in favor of TFV. TFV agr eed not to
execute this judgment, and in exchange, EDC assigned its
rights under an insurance contract it held with Hartford
Fire Insurance Company (Hartford) to TFV . TFV then
attempted to recover the amount of EDC's $1 million
settlement from Hartford. The district court found for
Hartford, holding that Hartford was substantially
prejudiced by the fact that it was not notified of the
accident until three years after it happened. W e reverse and
remand.
_________________________________________________________________

* Honorable Richard D. Cudahy, Circuit Judge, U.S. Court of Appeals for
the Seventh Circuit, sitting by designation.

I. BACKGROUND

A. Facts

TFV owned two vessels that it used to transport ir on ore:
the M/V Rio Caroni (a bulk carrier) and the F/T Boca
Grande (a floating terminal and transfer station). The Rio
Caroni carried iron ore down the Orinoco River in
Venezuela from various inland points and, on arrival at the
mouth of the river, unloaded the ore onto the Boca Grande.
The Boca Grande then placed the ore on ocean-going
vessels.

In August 1992, TFV's predecessor, Deltamar S.A.,
entered into a contract with the NKK Corporation for the
conversion of the Rio Caroni from bulk carrier to self-
unloading shuttle vessel. As part of the conversion, NKK
was required to build a materials handling system--
consisting essentially of a series of conveyor belts and a
boom--that would be placed on the Rio Caroni to facilitate
the movement of iron ore onto the vessel and its discharge
from the vessel. NKK subcontracted the design and
furnishing of the materials handling system to EDC, Inc.,
which was to provide NKK with engineering expertise,
drawings and parts. In turn, NKK would then assemble the
provided parts to complete the conversion of the Rio Caroni.
See Appx. 119.

One of the parts EDC contracted to supply was a boom
cylinder, which formed part of the boom's hoisting
mechanism. Because EDC was itself unable to build the
boom cylinder, EDC subcontracted the manufacture of this
part to the Sheffer Corporation. Exactly which party
designed the boom cylinder is unclear from the record on
appeal. The purchase order for the boom cylinder, which
refers to a "Sheffer Hydraulic Boom Hoist Cylinder,"
indicates that Sheffer regularly of fered several standard
boom cylinder models for sale to the public. See Appx. 142.
However, the numerous specifications in the purchase
order--for example, the purchase or der stated that "blind
or piston end of the cylinder to have pivot mount . . .
suitable for 350 mm pin"--indicate that EDC pr ovided at
least some special parameters with which Shef fer's cylinder
was required to comply. See id. As such, the boom cylinder

appears to be a modified Sheffer cylinder , custom-built to
EDC's specifications.

On April 15, 1995, the Rio Caroni's new boom suddenly
collapsed while the vessel was unloading ore onto the Boca
Grande, damaging both vessels. An investigation by W alter
Herbst, president of EDC, revealed that the boom's collapse
was due to a sudden fracture of the steel r od-eye, a
component of the boom cylinder that had been built for
EDC by Sheffer. See Appx. 151. However, Herbst's report
was not able to pinpoint the exact cause of the r od-eye's
failure, giving ten possible reasons for it--including possible
design and manufacturing defects. At the request of TFV,
EDC arranged for metallurgical testing of the rod-eye by
Professional Services Industries, Inc. (PSI) to determine the
precise cause of the rod-eye's failur e. PSI determined that
the rod-eye failed in a brittle manner, possibly due to its
fabrication from an inferior grade of steel. See Appx. 161-
62. Following PSI's analysis of the rod-eye, EDC refused to
pay a monthly storage fee for the rod-eye. Consequently,
the rod-eye was discarded by PSI prior to the
commencement of this suit, and it cannot now be
recovered.

B. District Court Proceedings

On August 21, 1996, TFV filed suit in the United States
District Court for the District of New Jersey against NKK,
EDC and Sheffer, seeking an awar d of $3.6 million for the
physical damage to its vessels, as well as compensation for
economic losses attributed to the vessels' being out of
operation. In its answer to TFV's complaint, EDC asserted
a cross-claim against Sheffer, alleging that Sheffer should
pay any judgment entered against EDC because it had
improperly manufactured the rod-eye. The district court
had subject matter jurisdiction over this cause pursuant to
28 U.S.C. S 1332.

Through discovery, TFV learned that EDC was insured
under a policy with Hartford. This Compr ehensive General
Liability and Business Liability Policy provided a $2 million
aggregate limit for business liability claims. On March 6,
1998, TFV notified Hartford of the accident and pending
litigation. (Thus, Hartford became awar e of the accident

approximately three years after the accident occurred and
not until after this litigation was instituted.) On May 15,
1998, EDC brought suit in New Jersey state court, seeking
from Hartford coverage and/or a defense of TFV's suit.
Hartford denied both coverage and a defense; thereafter, for
reasons not reflected in the recor d on appeal, the state
court action was dismissed. Hartford was then brought into
the instant action as a third-party defendant by way of
EDC's third-party complaint. In its thir d-party answer to
this complaint, dated July 8, 1998, Hartford denied that its
policy covered EDC for the losses sustained on TFV's
vessels and refused to defend EDC in the pr esent action.
See Appx. 46-53.

On August 10, 1998, approximately one month after
being joined in the present lawsuit, Hartfor d, along with the
other parties to this suit, attended an all-day settlement
conference before the magistrate judge assigned to this
case. At the conference, TFV agreed to settle its claims
against all parties for $1.85 million. During the settlement
conference, the magistrate judge informed Hartford that it
could settle on behalf of EDC for $750,000. If Hartford
chose not to settle, the magistrate advised the participants
that EDC was going to consent to judgment in the amount
of $1 million and assign its rights under the insurance
contract to TFV. At Hartford's r equest, the magistrate judge
allowed it two weeks to consider which of the two options
it would accept.

Hartford chose not to settle on behalf of EDC. Instead, in
a letter dated August 18, 1998, Hartford infor med EDC that
it would now agree to provide EDC with a defense, subject
to a reservation of rights as to coverage of the claim. See
Appx. 377. On August 26, counsel for all parties
participated in a telephone conference with the magistrate
judge, during which the judge informed Hartfor d that, in
spite of Hartford's offer to defend EDC, the parties had
signed a settlement agreement. Under the final terms of the
settlement, TFV received $500,000 from Sheffer and
$350,000 from various parties, including NKK and the
supplier of the steel used in the rod-eye's manufacture. The
settlement also made EDC liable to TFV for $1 million.
However, because EDC could not affor d to pay the $1

million settlement amount, it consented instead to a
judgment against it in favor of TFV. TFV agr eed not to
execute this judgment, and in exchange EDC assigned all of
its claims against Hartford to TFV.

Thus, following the settlement, TFV and Hartfor d were
the only two parties remaining in this suit. TFV moved, and
Hartford cross-moved, for summary judgment. The district
court granted Hartford's motion for summary judgment,
finding that the late notice of the accident voided coverage.
The district court also found that Hartford suf fered
substantial prejudice due to the late notice because EDC's
consent to disposal of the rod-eye prevented Hartford from
examining the rod-eye itself. The district court believed that
Hartford was further prejudiced because the late notice
prevented it from filing a cross-claim for indemnification
against Sheffer.

TFV appeals. We have appellate jurisdiction over both the
grant of Hartford's summary judgment motion and the
denial of TFV's motion. See 28 U.S.C. S 1291.

II. DISCUSSION

The decision below arises out of cross-motions for
summary judgment. Such motions:

are no more than a claim by each side that it alone is
entitled to summary judgment, and the making of such
inherently contradictory claims does not constitute an
agreement that if one is rejected the other is
necessarily justified or that the losing party waives
judicial consideration and determination whether
genuine issues of material fact exist.

Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir.
1968). In addition, "when an appeal from a denial of
summary judgment is raised in tandem with an appeal of
an order granting a cross-motion for summary judgment,
we have jurisdiction to review the propriety of the denial of
summary judgment by the district court." Nazay v. Miller,
949 F.2d 1323, 1328 (3d Cir. 1991). Our review of the
district court's decision on the motions for summary
judgment is plenary. See International Union, United Mine

Workers of America v. Racho Trucking Co., 897 F.2d 1248,
1252 (3d Cir. 1990). We will uphold a grant (or reverse a
denial) of summary judgment only when there is no
genuine issue of material fact and a party is entitled to
judgment as a matter of law. See Fed. R. Civ. P. 56(c).

Because there is no dispute that New Jersey law governs
in this case, we do not question its application. See
Newport Assocs. Development Co. v. The Travelers
Indemnity Co. of Ill., 162 F.3d 789, 791 (3d Cir. 1998).
Under New Jersey law, the words of an insurance contract
are given their ordinary meaning, unless they are
ambiguous. See 495 Corp. v. N.J. Ins. Underwriting Ass'n.,
430 A.2d 203, 206 (N.J. 1981). We test for ambiguity by
asking whether the policy's phrasing is "so confusing that
the average policyholder cannot make out the boundaries of
coverage." Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 795
(N.J. 1979).

TFV presents two issues on appeal: (1) whether Hartford
was appreciably prejudiced because it r eceived late
notification of the accident and because the r od-eye was
lost or destroyed and (2) whether the insurance contract
between EDC and Hartford covered EDC's liability to TFV.
We address these issues in turn.

A. Late Notice

The insurance contract between EDC and Hartfor d
required that EDC notify Hartford pr omptly of any accident
that might result in a claim:

E. LIABILITY AND MEDICAL EXPENSES GENERAL
CONDITIONS

2. Duties in the Event of Occurrence, Claim or Suit.

a. You must see to it that we are notified promptly
of an "occurrence" or an offense which may
result in a claim.

***

b. If a claim is made or "suit" is br ought against
any insured, you must:

(1) Immediately record the specifics of the claim

or "suit" and the date received; and

(2) Notify us as soon as practicable.

You must see to it that we receive a written notice of
the claim or "suit" as soon as practicable.

Appx. 256. The insurance contract defines an "occurrence"
as "an accident" and a "suit" as "a civil proceeding in which
damages because of . . . `property damage' .. . to which
this insurance applies are alleged." See Appx. 260. Thus,
the rod-eye failure qualifies as an"occurrence," and this
cause qualifies as a "suit," as those ter ms are defined in the
contract. Consequently, EDC was, upon learning of the
accident, obligated to notify Hartford.

Hartford argues--and the district court agreed--that
Hartford cannot be liable to EDC because EDC did not
provide Hartford with prompt notice of the accident, as
required under the insurance contract. However, for an
insurer to assert the defense of late notice under New
Jersey law, the insurer must prove not only that it was
given late notice of the accident (here, TFV does not dispute
that its notice was late), but also that it suf fered
appreciable prejudice as a result of the late notice. See
Chemical Leaman Tank Lines v. Aetna Casualty & Surety
Co., 89 F.3d 976, 996 (3d Cir. 1996) (noting that New
Jersey law requires showing of appr eciable prejudice);
Solvents Recovery Service of New England v. Midland Ins.
Co., 526 A.2d 1112, 1114 (N.J. App. Div. 1987) (noting that
insurer bears burden of proving appr eciable prejudice). New
Jersey courts look to two factors in analyzing whether a
party has suffered appreciable pr ejudice: (1) whether
substantial rights have been irretrievably lost by virtue of
the insured's failure to give timely notice; and (2) whether
the likelihood of success of the insurer in defending against
the underlying claim has been adversely affected. See
Chemical Leaman Tank Lines, 89 F.3d at 996-97.

Under New Jersey Law, mere conjecture or suspicions
may not form the basis for establishing appr eciable
prejudice. See Molyneaux v. Molyneaux, 553 A.2d 49, 54
(N.J. App. Div. 1989). Indeed, "the insur er [must] establish
more than the mere fact that it cannot employ its normal
procedures in investigating and evaluating the claim,

[r]ather it must show that substantial rights have been
irretrievably lost." Kitchnefsky v. National Rent-A-Fence of
America, Inc., 88 F.Supp.2d 360, 368 (D.N.J. 2000)
(internal citations and quotation marks omitted). These
rights "include . . . `the preparation and preservation of
demonstrative and illustrative evidence such as vehicles or
photographs, and the ability of experts to r econstruct the
scene.' " J.T. Baker v. Aetna Casualty & Surety Co., 1996
WL 451316 (D.N.J. 1996) (quoting Morales v. National
Grange Mutual Ins. Co., 176 N.J. Super. 347, 355 (Law Div.
1980)).

Hartford believes that the above standar ds are satisfied
by two actions it was unable to take as a result of the late
notice: (1) it was denied an opportunity to inspect the failed
rod-eye assembly on its own and (2) it was denied an
opportunity to assert a cross-claim against Sheffer, the
manufacturer of the rod-eye. We address in turn, and
reject, both of Hartford's prof fered grounds for finding
substantial prejudice.

Hartford first alleges that, if it only had r eceived prompt
notice of the accident, it would have taken custody of the
failed rod-eye assembly and undertaken its own full
analysis of it. While it is true that the failed r od-eye has
been irretrievably lost, it has been replaced by an
independent professional metallurgist's comprehensive
laboratory report that seemingly details all r elevant
characteristics of the rod-eye at the time of failure. The rod-
eye was fully tested by PSI, and Hartford has not stated any
additional or different testing it would have pursued on its
own had it had possession of the rod-eye. Instead, Hartford
appears to argue that it need not show how it was
prejudiced by loss of the rod-eye because, to its way of
thinking, the loss of a piece of physical evidence will per se
establish substantial prejudice. However , New Jersey law is
not so generous; as noted, more than speculation and
conjecture is required to establish substantial prejudice.
Because Hartford has provided nothing beyond mere
speculation, it has failed to show how it might have been
appreciably prejudiced by its failur e to run its own tests on
the rod-eye assembly.

Whether Hartford was prejudiced by its inability to fully
pursue a cross-claim against Sheffer is a more difficult
issue, but one that Hartford emphasized at oral argument.
Hartford maintains that "EDC's breach of the notice
provision of the Hartford policy also pr ejudiced Hartford by
reason of EDC's failure to aggressively pursue a cross-claim
for contractual indemnification from co-defendant Sheffer."
Appellee's Br. at 20. There are several problems with this
argument, not the least of which is the fact that an insurer
who has not paid its insured's claim or pr ovided the
insured with a defense has no right to obtain the benefit of
the insured's claims against third parties. See Fireman's
Fund Ins. Co. v. Security Ins. Co. of Hartfor d, 367 A.2d 864,
868 (N.J. 1976); see also In re Joint Eastern & Southern
Dist. Asbestos Lit., 78 F.3d 764, 779 (2d Cir. 1996). Here,
Hartford received notice of the accident in March 1998 and
was first sued under its policy with EDC in May 1998.
Nonetheless, Hartford steadfastly refused coverage, or even
a defense, to EDC until one week after a settlement was
agreed to in August 1998. During the months following
Hartford's initial notification of the accident, Hartford had
ample opportunity to assist EDC, but turned down the
chance to do so. Therefore, Hartfor d lost the right to pursue
a cross-claim against Sheffer as a r esult of its own inaction,
not by virtue of EDC's action.

Hartford's real problem appears to lie with EDC's
decision to settle this case, thereby extinguishing its cross-
claim against Sheffer. However, under New Jersey law,
when an insurer refuses to defend its insured, the insured
is free to settle with third parties, and the settlement may
be enforced against the insurer. See Griggs v. Bertram, 443
A.2d 163, 171-72 (N.J. 1982).1 Thus, EDC was free to
_________________________________________________________________

1. We recognize that Hartford of fered to defend EDC one week after the
settlement was agreed to. However, this fact is irrelevant to our
discussion. Even if Hartford had been allowed to defend EDC, subject to
a reservation of rights, EDC would have been able to enter the same
settlement, for the attorney hired by an insurance company represents
the insured, not the insurer. See Petty v. General Accident Fire & Life
Assurance Corp., 365 F.2d 419, 421 (3d Cir. 1966). And "[w]hile the
insurer is not compelled to disregard its own interests in representing or
defending an insured, the insured's inter ests must necessarily come
first." Lieberman v. Employers Insurance of Wausau, 419 A.2d 417, 422-
23 (N.J. 1980). Accordingly, if an insur ed wants to settle (as did EDC),
the attorney provided by the insur er must do so, even if the insurer
objects.

settle, subject to limited oversight by Hartfor d. Of course, a
settlement that is unreasonable in amount or entered into
in bad faith is not enforceable against Hartfor d, but
Hartford bears the ultimate burden of showing such
frailties in the settlement. Griggs v. Bertram , 443 A.2d at
174. Hartford has not met that burden.

Here, EDC was justified, and perhaps even wise, to settle
in the manner that it did. Under its contract with NKK,
EDC warranted that it would provide equipment (including
the rod-eye) that is "of merchantable quality, free from all
defects in design, material and workmanship . . . ." Appx.
125. EDC was apparently liable, therefor e, to NKK for
supplying a defective product, even if the defect was due
perhaps to Sheffer's manufacturing err or. Hartford believes,
however, that the indemnification clause in the boom
cylinder purchase order clearly pr ovided that Sheffer would
fully indemnify EDC for any damages arising out of the
defectiveness of the product. The clause r eads: "[i]f this
Purchase Order involves work to be per formed by you at a
job site, you, by the acceptance of this Pur chase Order . . .
agree to indemnify and save EDC incorporated against all
claims for damages to persons or property arising out of the
execution of the work." Appx. 140. The indemnification
clause is not as broad as Hartford claims, for it only
provides for indemnification when damages arise "out of the
execution of . . . work" done at a job site. The damage
caused by the failed rod-eye does not seem to meet these
conditions. Thus, the purchase order's indemnification
clause does not appear to provide EDC with any
contractual indemnification. This being the case, Hartford
has not shown that settlement was unreasonable because
of the indemnification clause in the contract between EDC
and Sheffer.

Of course, Sheffer might nonetheless have emer ged from
a trial with a substantial obligation of its own, arising out
of a legal duty distinct from the above indemnification
clause. For example, EDC's cross-claim against Sheffer
contains the allegation that Sheffer failed to exercise due
care in manufacturing the rod-eye. EDC might also have
pursued an express or implied warranty claim against
Sheffer. If ultimately proven at trial, these allegations might

have led to a significant amount of contribution from
Sheffer. However, there is no guarantee that EDC could
successfully prove these allegations at trial. Such
uncertainty is a classic reason for settling, and here the
settlement amounts paid by each party appear to
reasonably reflect the parties' various responsibilities for
designing, manufacturing and installing the r od-eye: TFV
agreed to settle a $3.6 million claim for only $1.85 million,
and of that amount, EDC was responsible for $1 million,
Sheffer for $500,000 and other parties for the remaining
$350,000.

Hartford has shown no evidence that the above amounts
were somehow the result of collusive conduct or bad faith
dealings between the parties. Indeed, the best ar gument
Hartford could muster at oral argument was an appeal to
equity, claiming that it only had two weeks to consider a
settlement that arose out of a complex case involving
thousands of pages of documents. Hartford's ar gument
fails, however, because Hartford certainly had more than
two weeks to familiarize itself with this case. EDCfirst sued
Hartford over the insurance policy in May 1998. At that
time, Hartford learned the facts of this case and formulated
a litigation strategy based upon them, for Hartfor d denied
that its policy obligated it to defend or cover EDC--a
determination that required a familiarity with the facts and
insurance policy. Consequently, Hartford had ample time to
learn the facts and legal issues in this case and cannot now
claim that the settlement is unfair because it was only
allowed two weeks to make a settlement decision that all
other parties were apparently able to make in one day. For
these reasons, we find that the settlement is reasonable
and the result of good faith dealings between the parties.
Thus, Hartford has failed to show appreciable prejudice
arising from the late notice of EDC's claim that it received.

B. Contract Coverage

Having found that Hartford was not appr eciably
prejudiced by the late notice, we turn now to the question
whether the insurance contract provides coverage of the
rod-eye failure. The contract between EDC and Hartford
provides up to $2 million of business liability coverage.2
_________________________________________________________________

2. The relevant provision of the contract states that "[Hartford] will pay
those sums that [EDC] becomes legally obligated to pay as damages

However, the contract also contains several standard
exclusions.

The first relevant exclusion addresses the "products-
completed operations hazard."3 Under this exclusion, the
contract exempts from coverage any damage arising after
the product or work leaves the insured's hands. Here, for
example, the "products-completed operations hazard"
exclusion would act to prevent coverage of damage arising
from the rod-eye once the rod-eye has left EDC's control.
However, under the EDC policy, the "pr oducts-completed
operations hazard" exclusion does not apply when the work
out of which the damage arises was perfor med by a
subcontractor.

The second relevant exclusion, entitled "Exclusion--
Engineers and Architect Professional Liability," generally
provides that insurance coverage will not extend to damage
arising out of various professional services, such as product
design.4 However, as noted by TFV, "[t]he exclusion for
_________________________________________________________________

because of `bodily injury,' `property damage,' `personal injury' or
`advertising injury' to which this insurance applies." Appx. 247 (Business
Liability Coverage Form A.1.a). The $2 million limit is provided on page
5 of the Spectrum Policy Declarations in EDC's insurance contract with
Hartford. See Appx. 213.

3. The "products-completed operations hazard" coverage exclusion states
that the insurance contract does not extend coverage to " `Property
damage' to `your work' arising out of it or any part of it and included in
the `products-completed operations hazar d.' " However, this coverage
exclusion does not apply "if the damaged work or the work out of which
the damage arises was performed on your behalf by a subcontractor."
Appx. at 252. (Bus. Liab. Coverage Form. B.1.m.)

The contract defines "products-completed operations hazard" to
"include[ ] all `bodily injury' and`property damage' arising out of `your
product' or `your work' except: (1) Pr oducts that are still in your physical
possession; or (2) Work that has not yet been completed or abandoned."
Appx. 260. B.10.a.

4. In full, the exclusion states that:

This insurance does not apply to `bodily injury,'`property damage,'
`personal injury' or `advertising injury' arising out of the rendering or
failure to render any professional services by or for you, including:

professional services is . . . appropriately associated with a
specialized knowledge and a mental or intellectual
endeavor, not production, manufactur e or supply of goods
and manufacturing." Appellant's Br. at 28 (citing Ostrager
& Newman, Handbook on Insurance Coverage Disputes,
S 7.02(b)(6) (10th Ed. 1999)). As such, the exclusion for
professional services precludes coverage only if the damage
arises out of a faulty design (either by EDC or Shef fer), as
opposed to faulty manufacture.

We are thus left with the following after reading the
relevant provisions of the insurance contract. The general
liability provisions of the contract clearly cover the damage
arising from the defective rod-eye: EDC has become legally
obligated to pay damages because of property damage
arising out of a product that it supplied and at least
partially designed. However, two contract exclusions in the
policy must also be considered. Under one exclusion (for
"products-completed operations hazar d"), the contract
provides coverage if the accident arose fr om a defect caused
by Sheffer's manufacture of the rod-eye. Under the other
exclusion (for "engineers and architects pr ofessional
liability"), the contract provides coverage only if the
accident is not attributable to a defect in EDC's or Sheffer's
design of the rod-eye. Thus, Hartfor d's liability under the
insurance contract turns on whether the accident was
caused by a design defect, which would preclude coverage,
or a manufacturing defect, which would not pr eclude
coverage.

All of this leaves us with the task of trying to identify the
defect in the rod-eye that caused it to fail and the party
responsible for this defect. Perhaps because they both
believed that this case would be decided on the issue
whether there was appreciable prejudice, as it was in the
district court, neither party has developed the r ecord or
_________________________________________________________________

(1) The preparing, approving, or failing to prepare or approve maps,
drawings, opinions, reports, surveys, change or ders, designs or
specifications; and (2) Supervisory, inspection or engineering
services.

Appx. 269.

presented arguments sufficiently for us to determine fully
the cause of the rod-eye's failure. Indeed, EDC's own initial
report of the accident, dated April 1995, lists ten possible
causes of failure, including both design and manufacturing
defects. See Appx. 151. The laboratory r eport from PSI
indicates that the rod-eye's failure may be due to the use of
an inferior grade of steel in the manufactur e of the rod-eye,
but the report is not entirely clear on its face and requires
expert testimony to explicate it. See Appx. 159-62. As such,
the precise reason for the rod-eye's failure is not apparent
from the record on appeal.

Further, from the record, it is not even clear who
specified how, and from what materials, the r od-eye should
be built. For example, from the purchase order, which
refers to a "Sheffer Hydraulic Boom Hoist Cylinder" and
then provides detailed specifications, it appears that Sheffer
built a custom version of a conventional hydraulic cylinder
to EDC's specifications. In addition, the r ecord does not
reveal whether EDC specified the particular type of steel
which failed (in which case the type of steel might be
considered a design defect) and, if it did, whether Sheffer
manufactured the rod-eye using the steel specified or,
alternatively, a steel of lower quality (in which case the type
of steel might be considered a manufacturing defect).

Accordingly, because the record is inadequately
developed, we remand for trial (or possibly a showing on
summary judgment) on the issue whether the r od-eye
failure was caused by EDC's or Sheffer's design, which
would presumably preclude coverage under the insurance
contract, or Sheffer's manufacturing, which would allow
coverage under the insurance contract.

III. CONCLUSION

For the foregoing reasons, we VACATE the judgment of the
district court and REMAND for further proceedings consistent
with this opinion.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit