“Loss of Use” Damages Do Not Include Emergency Response Costs
The United States Court of Appeals for the First Circuit recently held that emergency response costs are not damages relating to “loss of use of property not physically injured.” Vicor Corporation v. Vigilant Insurance Company, et. al., Docket Nos. 09-1470, 09-1494, 09-1589. Vicor Corporation is a manufacturer of electronic equipment, including certain power converters purchased by Ericsson Wireless Communications. Ericsson in turn incorporated the converters into radio base stations critical to its customers’ wireless networks. Wireless communication network outages in 2003 were traced back to failures of Vicor’s converters and Ericsson sued Vicor, in California state court for, among other things, repair costs including emergency response costs to restore the lost cellular service. That action settled for $50 million, to which Vicor’s liability insurers contributed $13 million. Vicor funded the remaining $37 million.
A coverage dispute followed in the United States District Court for the District of Massachusetts, wherein Vicor sought indemnification from its liability insurers for the $37 million. The District Court instructed the jury that no repair costs were covered, except emergency repairs to get the system back online. The jury awarded $17.3 million in favor of Vicor, of which $6 million was for emergency response costs to restore customer networks. All parties appealed. The First Circuit determined that “loss of use” damages are those that accumulate in the time before the out-of-service item is repaired, not the repair of the item itself. As such, the First Circuit found the District Court’s instruction was erroneous, vacated the judgment and remanded the matter to the District Court.