Unironically, Ohio Supreme Court Looks to Language of Umbrella Policy to Find Coverage

In Motorist Mutual Insurance Company v. Ironics Inc., 2022 WL 852346 (Ohio Mar. 23, 2022), the defendant was in the business of buying and selling metal products, including waste generated by steel mills and similar facilities. This specific case involved a material originally generated as waste by a steel mill in Youngstown, Ohio, that makes tubular products. Ironics obtained the waste product—“tube-scale”—in raw form and, after having it processed, resold it to a number of customers.

Another defendant/appellee, Owens-Brockway Glass Container, Inc., manufactured glass containers. In October and November of 2016, Owens purchased tube-scale from Ironics as a coloring agent. After using Ironics’s tube-scale in the manufacturing process, however, Owens discovered that chrome stones were embedded in the containers, a flaw that increased the likelihood of breakage. The chrome stones could not be removed from the glass, nor could the containers be otherwise used. Owens, therefore, had to scrap more than 1,850 tons of glass containers.

Upon investigation, Ironics discovered that the tube-scale had been contaminated by improper screening by a subcontractor. According to Ironics, raw tube-scale fell on the ground while it was being screened, became contaminated and put back into the screening process. Owens asserted claims against Ironics in breach of contract, breach of warranties, violations of the UCC, negligence and product liability. Ironics demanded that Motorist Mutual Insurance Company, as its insurer, defend and indemnify it against Owens’ claims. Motorists had issued general liability and commercial umbrella policies and sought a declaratory judgment that it had no obligation to defend and indemnify Ironics against Owens’ claims. The trial court held that neither policy covered Owens’ claims and granted summary judgment in favor of Motorist because Ownes’ claims were outside the scope of the policies and therefore its liability and defense obligations were not triggered.

The Sixth District Court of Appeals affirmed the decision, in part, and reversed, in part. The Sixth District held that Ironics was not entitled to coverage under its commercial policy but that it was entitled to coverage under its umbrella policy. The court reasoned that there was coverage under the umbrella policy because the parties had stipulated that Ironics was not aware that the tube-scale was contaminated at the time it was used by Owens to make its glass containers and because the contaminated tube-scale caused physical injury to the containers manufactured by Owens. The Sixth District also held that none of the umbrella policy’s exclusions applied.

Motorist appealed the judgment of the Sixth District to the Ohio Supreme Court. It raised the issue of whether “the incorporation of a defective ingredient into an integrated product or system constitutes damage to ‘other’ property for purposes of liability coverage under commercial general liability and umbrella policies.”

The court ruled that Motorists’ umbrella policy provided liability coverage for claims against an insured for supplying the contaminated ingredient (tube-scale) that was incorporated into another’s final product (Owens’ glass containers). The court began its analysis by looking to the policy language because Motorists had two main arguments: Ironics’ contaminated tube scale (1) did not cause “property damage” and (2) was not an “accident.”

First, the court noted that, for this situation to be covered, there must be an “occurrence,” which was defined within the policy as an “accident” that results in “property damage.” “Property damage” was defined as “physical injury to or destruction of tangible property, including all resulting loss of use of that property.”

The focus of whether property damage occurred revolved around the fact that Ironics’s tube-scale caused damage only after it was incorporated into Owens’ containers. At that point, Motorist argued, “tangible property,” in the property damage definition, does not include their insured’s property. In support of its argument, Motorist relied on the Integrated System Rule, which provides that the “incorporation of a defective ingredient into an integrated product or system does not constitute damage to ‘other’ property for purposes of liability coverage.”

The Ohio Supreme Court rejected Motorists’ argument and relied, instead, on the plain language of the policy. The court used the basic definition of “tangible property” and noted the parts in this case—the glass bottle and tube scale—were akin to a smart phone and its accompanying microchip, battery or other component within. Just like these parts are not the equivalent of a smart phone itself, Ironics’ tube scale was property separate from Owens’ glass containers. Also, the court noted, while the property includes Ironics’ tube scale, it is the integration of the tube scale into Owens’ product that caused the damage.

The court went on:

We see no support for Motorists’ interpretation of ‘property damage.’ Nothing in the term itself or in the term’s definition in the policy indicates that damage to a multicomponent product is to be regarded as damage to the insured’s product. If that were what the parties intended, Motorists could have included language in its umbrella policy making that intention clear, but it did not do so.

Motorists also tried to argue that providing faulty work was not an “accident.” The court explained that the “the principle of fortuity” is “central to the notion of what constitutes insurance,” stating, “[t]he parties to an insurance agreement ‘in effect, wager against the occurrence or non-occurrence of a specified event; the carrier insures against a risk, not a certainty.’”

The court acknowledged that insurance policies “are not intended to insure ‘business risks’—risks that are the ‘normal, frequent, or predictable consequences of doing business, and which business management can and should control or manage.’” Instead, insurance policies insure “consequential risks that stem from the insured’s work, not the insured’s work itself.”

The Ohio Supreme Court agreed with Ironics that “defective work” and providing a defective non-conforming product are materially different, which is evidenced by the policy’s “your work” and “your product” exclusions. There was no evidence that Ironics was aware of the contaminated tube scale or controlled the process in which Owens used the tube scale to make glass containers.

The Supreme Court discussed that there are three different exclusions that include no coverage for “your product,” “your work,” or “impaired property.” Further, the Court noted that none of these exclusions applied. The court opined that this also supported its decision that there was coverage.

Further, this case reinforces that Ohio courts are reluctant to expand the plain policy language to establish a coverage denial. Accordingly, insurance companies and their underwriters must carefully consider what their insureds are doing for “work” and/or to know their insureds’ “products” so as to accurately draft language that reinforces and clarifies what risks are to be insured.

*Donielle is an associate in our Cincinnati, Ohio, office. She can be reached at 513.372.6818 or dswillis@mdwcg.com.

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