Key Tronic Corp., the Spokane Valley-based contract manufacturer, isnt entitled to insurance coverage for costs related to damaged pallets of Clorox ReadyMops it shipped from its Juarez, Mexico, plant, a Washington state appellate court has ruled.


In a recent opinion, a Court of Appeals Division III panel upheld Spokane County Superior Court Judge Sam Cozzas denial of coverage for the losses. It agreed with Cozzas finding that Key Tronic violated the terms of its general commercial liability policy with St. Paul Fire & Marine Insurance Co. by not notifying St. Paul of the matter until months after it had paid the Clorox Co. for the damage and had repackaged the products at its own expense.


The court held that Key Tronic breached its responsibility under the policy to notify St. Paul as soon as possible after the loss, and that the failure impaired the insurance companys ability to investigate and decide the validity of the claim.


Ron Klawitter, Key Tronics chief financial officer, says the company still is reviewing the opinion and hasnt decided whether to pursue the matter further. He adds, though, that Weve already expensed it all, and anything we got out of it would be an upside for us. He says the dollar amount of the disputed claim was around $1 million.


The 4-year-old litigation involved household mop products that Key Tronic made and packaged for Clorox, which is based in Oakland, Calif., and continues to be one of Key Tronics clients. Clorox provided Key Tronic with bottles of cleaning fluid, replacement cleaning packs, and flattened cardboard ReadyMop retail packaging. Key Tronic then molded 23 plastic parts for the ReadyMop, and obtained the remaining parts from various vendors.


After that, it assembled the mops, constructed the retail boxes and displays from materials supplied by Clorox, boxed the mops, and placed them in the retail displays. It placed the displays in large shipping containers provided by Clorox, and placed those containers on pallets it supplied. Key Tronic shrink-wrapped the shipping containers and the pallets, placed them on trucks, and shipped them to a transfer facility. From there, the pallets went to Clorox distribution centers.


On Dec. 26, 2001, court documents say, Clorox informed Key Tronic that mold was growing on some of the pallets and packaging material. Also, some of the pallets were infested with beetles. In January 2002, Clorox directed Key Tronic to shut down its ReadyMop assembly line until the mold problem could be solved.


Cloroxs contract required Key Tronic to use kiln-dried pallets, but Key Tronic had not done so, and that failure caused the loss, the court documents say. Key Tronic and Clorox inspected each pallet, replaced any damaged packaging, then placed the reworked shipments on kiln-dried pallets.


The documents say Clorox demanded that Key Tronic assume all responsibility for the costs Clorox incurred in repackaging the shipments, and Key Tronic agreed to do so. Concerned about possible litigation, Key Tronic decided that resolving the expense claim with Clorox immediately would minimize the overall financial impact it faced.


It notified St. Paul of the loss on June 6, 2001, after it had settled with Clorox. St. Paul denied coverage, and Key Tronic then sued for a declaration of insurance coverage. The trial court and appellate court both rejected arguments by Key Tronic that St. Pauls decision to deny the claim would have been the same whether or not Key Tronic provided earlier notice, and that its settlement was reasonable, making any need for giving notice to Clorox superfluous.


Contact Kim Crompton at (509) 344-1263 or via e-mail at [email protected].