## Facts

- Sokol, an Illinois food-products manufacturer, supplied sealed packets of peanut-butter paste to Continental for inclusion in boxed cookie mixes.
- After incorporation into cookie-mix boxes and shipment to Continental’s customers, Continental discovered the peanut butter in a shipped lot was rancid.
- Continental retrieved the affected boxes, removed and discarded the rancid packets, substituted fresh packets, and incurred costs associated with the retrieval and rework.
- Continental sought reimbursement from Sokol; Sokol tendered the claim to its commercial general liability insurer, Atlantic.
- Atlantic denied coverage, citing “business risk” exclusions, including impaired-property and product-recall exclusions.
- Sokol paid Continental and sued Atlantic seeking indemnification under the policy.

## Issues

1. Under Illinois law, does a finding of no duty to defend categorically preclude any duty to indemnify?
2. Do recall and replacement costs for rancid peanut-butter packets constitute covered “property damage” caused by an “occurrence” under the CGL policy?
3. If the claim could be characterized as involving “property damage,” do the impaired-property and product-recall exclusions bar coverage?

## Decision

- The court rejected the district court’s categorical view that no duty to defend necessarily eliminates any possible duty to indemnify under Illinois law.
- The court nevertheless affirmed summary judgment for Atlantic because Continental’s claim did not involve covered “property damage” under the policy.
- The court also held that, even assuming arguable property damage, the impaired-property and product-recall exclusions independently barred coverage.
- Atlantic owed no duty to indemnify Sokol for amounts paid to Continental for retrieval, replacement, and rework.

## Legal Principles

- Under Illinois law, the duty to defend and the duty to indemnify are related but distinct; absence of a duty to defend is not a universal, automatic bar to indemnification in every context.
- CGL coverage for “property damage” requires physical injury to tangible property or qualifying loss of use; recall and rework costs stemming from the insured’s defective product, without physical injury to other property, are economic losses not covered as “property damage.”
- The impaired-property exclusion applies when third-party property is less useful because it incorporates the insured’s defective product but can be restored by removing or replacing that product.
- The product-recall exclusion bars coverage for costs incurred to withdraw, recall, replace, or remove the insured’s product (and related rework expenses), allocating those quality-control losses to the insured rather than the liability insurer.

## Conclusion

The Seventh Circuit affirmed judgment for the insurer, holding that costs to retrieve and rework cookie-mix boxes to replace rancid peanut-butter packets were not covered “property damage” under the CGL policy and were, in any event, excluded as impaired-property and product-recall business risks.


Sokol & Co. v. Atlantic Mut. Ins. Co., 430 F.3d 417 (7th Cir. 2005)