EUGENE A. WRIGHT, Circuit Judge:
This declaratory judgment action, based on diversity of citizenship, was tried on stipulated facts. The plaintiff below, Goodyear, sought an interpretation of a policy of liability insurance issued to it by the defendant Great American and an adjudication that a damage claim made against Goodyear by a third party was within the coverage of the policy. Goodyear also sought a ruling that Great American had an obligation to defend a suit brought on that claim and that, because of its failure to do so, Great American was liable for the costs of the defense of the original suit. The district court entered judgment for the defendant, concluding that there was no obligation on the part of Great American to defend the original suit or to pay any portion of the settlement. Goodyear appeals and we reverse.
The parties have stipulated that Goodyear fabricated and sold hatch gasket
Northwest then sued Goodyear for the cost of new gasket material and also for the cost of removing the defective material and replacing it with the new material. Northwest recovered a judgment and the suit was then settled, pending appeal, for $20,000, of which $14,500 represented costs and labor involved in removing and replacing the defective material. The Northwest suit was tendered to Great American which declined to defend. Goodyear incurred attorneys' fees and costs of $6,924.96 in defending the Northwest suit. No question is raised concerning the reasonableness of this amount.
The policy of insurance provided in part:
In the suit by Northwest against Goodyear, the complaint alleged the breach by Goodyear of various express and implied warranties and consequent "damage to the S. S. Arizona." When the defense was tendered to Great American it refused, stating in part:
Great American's refusal of the tender was wrongful. It was not the allegation of a breach of warranty but the allegation of damages which raised the duty to defend. Northwest's complaint alleged that the S. S. Arizona had been damaged in the amount of $42,836. Of this, $37,336 represented the costs and labor involved in removing and replacing the defective material. Only $5,500 represented the cost of the new gasket.
Under well-settled principles, when one product is integrated into a larger entity and the product proves defective, the damage is considered as damage to the entity to the extent that the market value of the entity is reduced by an amount in excess of the value of the defective product.
Northwest's complaint alleges damage to the S. S. Arizona far in excess of the cost of new gaskets. The complaint thus alleged damage to property other than the product defectively manufactured by Goodyear and Great American should have accepted the tender of defense.
Hauenstein has been followed by numerous other courts. In Geddes & Smith, Inc. v. St. Paul-Mercury Indemnity Co.,
Great American's reliance on Liberty Building Co. v. Royal Indemnity Co., 177 Cal.App.2d 583, 2 Cal.Rptr. 329 (1961), is misplaced. In that case the insured was the builder of a house which later turned out to have a defective stucco covering. The owner's claim for the damage to the house was held to be within the policy exclusion. This holding is eminently logical in view of the fact that the entire house was a product supplied by the insured. But that case is not controlling here where only the gasket material and not the entire ship was a product supplied by Goodyear and thus subject to the exclusion.
It follows from what was said above that Great American is liable not only for the cost of the defense of the Northwest
Reversed and remanded for the entry of judgment in favor of Goodyear in the amount of $21,424.96, plus the expenses of this action and appeal, if Goodyear is entitled to these under Oregon law.