Does a contractor’s comprehensive general liability insurance policy cover defectively manufactured pipe? The Ohio Fifth District Court of Appeals says no.
In this case, Water Management Services (WMS) is a privately owned water utility in Florida. In 2002, WMS purchased pipe from Clow Water Systems Company (Clow) for one of its projects in Florida. Clow then entered into a subcontract with Dorsey Reconditioning, Inc. (Dorsey) for Dorsey to provide surface preparation and primer for the pipe being supplied to WMS by Clow. Dorsey had a commercial general liability insurance policy issued by The Cincinnati Insurance Co. (CIC).
In 2005, after the pipe had been delivered and installed, WMS discovered that the primer, intermediate and finish coats were flaking off of some of the sections of the pipe, exposing the pipe to corrosion. WMS demanded that Clow fix the problem, but Clow refused.
In 2006, WMS filed suit against Clow and others. The parties settled the matter for $800,000, of which Clow was responsible for $407,500. Clow demanded that Dorsey reimburse Clow for its portion of the settlement amount plus all litigation costs. Dorsey made a demand from CIC for coverage under Dorsey’s general liability insurance policy, which was denied by CIC. After the denial by CIC, litigation was initiated between CIC, Clow and Dorsey. CIC sought declaratory judgment on whether coverage existed. Clow and Dorsey sought claims against CIC and each other. During the litigation, Clow and Dorsey entered into an agreement whereby Dorsey’s insurance claim against CIC was assigned to Clow. CIC and Clow proceeded with their claims against each other at the trial court.
Both Clow and CIC filed motions for summary judgment with the trial court. The trial court denied CIC’s motion and granted Clow’s motion, finding that CIC was required to provide insurance coverage in this matter. Following the decision by the trial court on the motions for summary judgment, CIC filed an appeal with the Fifth District Court of Appeals arguing that the trial court committed a reversible error by declaring that CIC “must provide insurance coverage for breach of contract claims in a construction defect case.”
Clow’s claim at the trial court level was not that the CIC insurance policy should cover the cost to remediate the defective surface preparation and defective installation of the primer installed by Dorsey. Rather, Clow’s claim was for the damage to the pipe itself and the damage to the outer coatings that were installed on top of the primer installed by Dorsey. Moreover, Clow alleged that the damages were a result of the negligence of Dorsey during the preparation and installation of the primer to the pipe.
CIC’s position on appeal was that there has been no property damage caused by an occurrence under the insurance policy and therefore they properly denied coverage. In support of this position, CIC argued that claims arising out of a failure of an insured to perform its contractual obligations is excluded under the CIC policy and does not constitute an occurrence.
In reviewing the appeal of CIC, the Court of Appeals analyzed the terms of the CIC insurance policy, which included the following exclusions:
Contractual Liability: “Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.
Damages to Your Product: “Property damage” to “your product” arising out of it or any part of it. Damage to Your Work: “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”
Damage to Impaired Property or Property Not Physically Injured: “Property damage” to “impaired property” or property that has not been physically injured, arising out of:
- A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work”
- A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
In addition to reviewing these insurance provisions, the Court of Appeals also reviewed the conduct of Dorsey that actually led to the failure of the pipe. Specifically, the Court of Appeals considered the allegations made by Clow in its complaint and an expert report from the case. In Clow’s complaint, Clow alleged that Dorsey improperly applied the primer to the pipe and failed to allow the primer to cure properly. Further, the expert report stated that “Dorsey’s own misapplication of the primer that resulted in a lateral cohesive splitting and adhesive failure between the different layers of the coatings and between the primer of the pipe” caused the failure.
Although Clow had claims for negligence and breach of contract in its complaint, the Court of Appeals determined that both claims arose out of the same set of facts; that Dorsey improperly performed its work under its subcontract agreement. Based on this determination, the Court of Appeals agreed with CIC and ultimately found that Clow’s negligent claim was really a breach of contract claim and stated that “[Clow] believes if you call a claim negligence and use the appropriate words, it is negligence, thereby adopting the old adage ‘if it looks like a duck and quacks like a duck, then it probably is a duck’.”
After determining that Clow’s negligence claim was really a breach of contract claim, the Court of Appeals then determined that Clow’s claims were excluded under the CIC insurance policy and reversed the trial court’s decision.