The United States Court of Appeals for the Fourth Circuit recently affirmed that a commercial general liability policy does not afford coverage for losses incurred to correct the installation of a defective product supplied by the insured because the losses do not stem from an “occurrence” under a general liability policy. OneBeacon Ins. Co., et al. v. Metro-Ready Mix, Inc., No. 06-1563, 2007 U.S. App. LEXIS 16792 (4th Cir. July 13, 2007).

Facts and Procedural Background

Concrete manufacturer Metro-Ready Mix Inc. (“Metro”) prepared and supplied Berkel & Co. Contractors Inc. (“Berkel”) with defective concrete-grout mixture used to construct a parking garage. Metro inadvertently used the wrong ratio of water to cement, thereby making this batch of concrete-grout defective because it was weaker than normal. Metro, however, was not aware of the defect until after it had delivered the concrete-grout and Berkel used it to stabilize and erect the garagepier pilings. As a result, the erected pilings could not be salvaged and Berkel was forced to demolish the concrete pilings and reconstruct new ones. Berkel claimed that Metro breached its contract and warranty associated with the project. Metro and Berkel reached a settlement, and Metro sought coverage for its losses under its commercial general liability policy.

Metro’s carriers, OneBeacon Insurance Co. and Pennsylvania General Insurance Co., initially defended Metro under a reservation of rights. Thereafter, the insurers filed a declaratory judgment action, asserting that because Metro had breached its contractual obligations, it was expected that Berkel would request corrective action and, therefore, there was no “occurrence” under the general liability insurance contract. The insurers also argued that Berkel’s demolition of the pilings was not “property damage” under the insurance contract, but rather merely the cost to repair and replace a defective product. Metro countered with two points. First, that there was an “occurrence” as set forth in the general liability policy because its negligent preparation of the grout was “accidental” and “unforeseen.” Second, that the demolition of the pilings and “loss of use” of the pilings constituted “property damage” under the liability policy.

The district court agreed with the insurers and concluded that providing a defective product in breach of contract was not an “occurrence” and that the defective grout did not cause damage to anything other than the grout itself.

Holding

The Fourth Circuit began its analysis by observing that under Maryland law, “an act of negligence constitutes an ‘accident’ under a liability insurance policy when the resulting damage takes place without the insured’s actual foresight or expectation.” The Fourth Circuit then noted that Maryland courts have generally held in the construction context that “coverage exists only ‘to remedy unexpected and unintended property damage to the contractor’s otherwise nondefective work-product caused by the . . . defective workmanship.’”

On appeal, the insurers maintained there was no “property damage” because there was no damage to the pier-pilings caused by the installation of the concrete-grout. The policyholder, by contrast, maintained that the pier columns were damaged because each had to be dismantled in order to repair or remove the defective grout, but offered no proof that the grout itself caused damage to the pilings. The policyholder also contended that this “loss of use” of the original pilings constituted “property damage” under the policy. In rejecting these arguments, the Fourth Circuit explained that the policyholder failed to demonstrate that the pier columns themselves were damaged by the defective grout. Rather, what the policyholder demonstrated was that the pier columns had to be removed and replaced because the column rested on the defective product the policyholder manufactured and installed. The opinion makes no mention of cracking or other damage to the pier columns caused by the grout. On these facts, the Fourth Circuit held that any harm to the columns resulted from the process of replacing the defective concrete-grout, which, by necessity, required removal of the columns. Accordingly, because there was nothing “unforeseen or accidental” about dismantling and removing the columns due to the defective grout, the Fourth Circuit ruled that Metro’s breach was not an “occurrence” under the general liability policy.

The Fourth Circuit then addressed the policyholder’s contention that a successor- in-interest carrier was estopped from denying coverage because the predecessor-in-interest carrier agreed to afford coverage for an earlier, similar loss. The policyholder maintained that it renewed its policy with the successorin- interest carrier in reliance upon the predecessor-in-interest carrier’s decision to afford coverage for the similar loss.

Therefore, the policyholder maintained, the successor-in-interest carrier should be estopped from denying coverage.

The Fourth Circuit first stated that as a general rule, Maryland law does not recognize estoppel as a means of creating a new contract and bringing within coverage an otherwise uncovered claim. It then noted that there were a few exceptions. For example, an estoppel may arise when the carrier’s agent tells the insured that the submitted claim is covered and, in reliance on that statement, the insured then makes the necessary repairs to the damage. Therefore, the court ruled that the exception to the general rule was not applicable and the successor-in-interest carrier was not estopped from denying coverage.

In the Metro-Ready Mix case, however, there was no evidence (or even an allegation) that the carrier or its agent had made any statement with respect to the claim at issue or done anything to prejudicially change Metro’s conduct with respect to this claim.

Implications

Carriers analyzing contractor claims for alleged property damage caused by an allegedly defective product should carefully examine not only whether there is actual or alleged ancillary damage to property surrounding the contractor’s product, but also whether the claimed damage is the result of removing materials in order to access and replace the defective product. As the Metro-Ready Mix case illustrates, at least under Maryland law, there is no coverage for the replacement costs of property that is not damaged by a contractor’s defective product.

In addition, this case illustrates that the conduct of a predecessor carrier in providing coverage for a claim should not by itself estop a successor carrier from validly denying coverage for a subsequent similar claim.