Central Mutual Insurance Company is asking a federal court to decide if it must cover Padnos Retail, Inc. in a $2.4 million lawsuit over allegedly stolen scrap metal – a case that tests the limits of commercial insurance for the recycling industry.
In a complaint filed Oct. 2 in the United States District Court for the Western District of Michigan, Central Mutual Insurance Company seeks a declaratory judgment against Conical Cutting Tools, Inc. and Padnos Retail, Inc. The insurer wants clarity on whether it must defend and indemnify Padnos under its commercial general liability (CGL) and commercial liability umbrella policies after Padnos was sued for buying materials that Conical claims were stolen by its own employee.
According to the court filing, the dispute began when Conical Cutting Tools, a Michigan-based manufacturer of steel and carbide cutting tools, discovered that one of its employees, Corey Avery, had been stealing company materials since June 2023. Avery allegedly sold these materials as scrap to Padnos, a recycling business operating in Michigan and Indiana. The transactions took place at the Padnos Burton Recycling Center, with Padnos paying Avery a total of $7,178 for the goods. Conical, however, is seeking $2.4 million in damages from Padnos, citing the Michigan Scrap Metal Regulatory Act and common-law conversion.
Padnos, for its part, denies any wrongdoing, insisting it had no knowledge the materials were stolen. The company maintains that Avery represented himself as the rightful owner or as having authority to sell the items each time he made a sale.
Central Mutual, an Ohio-based insurer, is currently providing Padnos with a legal defense in the underlying lawsuit, but only under a full reservation of rights. The insurer’s complaint lays out the crux of the coverage dispute: whether the insurance policies it issued to Padnos apply to the claims raised in the Conical lawsuit.
At the heart of the matter are the terms and exclusions of the CGL policy. The policy states that Central Mutual will defend and indemnify Padnos for “property damage” it is legally obligated to pay as damages, but only if the damage is caused by an “occurrence” – defined in the policy as an accident. The complaint argues that acts performed knowingly and intentionally, such as the alleged purchase of stolen goods, do not qualify as accidents and therefore fall outside the scope of coverage.
The policy further excludes coverage for “expected or intended injury,” “damage to property,” “damage to your product,” and “damage to your work.” Of particular note is the Scrap Metal Dealers Amendatory Endorsement, a specialized provision that offers limited coverage for “conversion” - specifically, the unknowing acquisition of stock in trade from a seller without legal title. This endorsement caps coverage at $100,000 and explicitly excludes any damages resulting from dishonest, fraudulent, criminal, or malicious acts by the insured.
Central Mutual’s position is clear: because the allegations in the Conical lawsuit center on intentional conduct, the policies do not provide coverage. The insurer also points to policy requirements for timely notice and accurate record-keeping as conditions precedent to coverage, suggesting that any failure by Padnos to meet these requirements could further bar coverage.
The Commercial Liability Umbrella Policy, which sits above the CGL policy, is also at issue. This policy provides excess coverage for property damage, but only for losses that exceed the limits of the underlying CGL policy and only for accidental occurrences. Like the CGL policy, the umbrella policy excludes coverage for expected or intended property damage.
Central Mutual is asking the court to declare that it has no duty to defend or indemnify Padnos in the underlying action brought by Conical. The insurer also seeks to recover attorney fees and costs incurred in pursuing the declaratory judgment.
The outcome of this case could have significant implications for insurers and policyholders in the recycling and scrap metal industries, particularly regarding the interpretation of specialized endorsements and the boundaries of coverage for alleged intentional acts.
