The Supreme Court of Ohio held on March 23, 2022 that liability asserted for property damage is covered under the policyholder’s liability insurance policy despite the insurance company’s argument that the unsuitable ‘integrated-system rule,’ which the insurance company invoked to deny coverage for claims triggered by a defective ingredient in a completed product, somehow applied to eliminate coverage.
In Motorists Mut. Ins. Co. v. Ironics, Inc., Slip Opinion No. 2022-Ohio-841, the policyholder Ironics, Inc. is in the business of buying and selling metal products, including waste generated by steel mills and similar facilities. This case involves a material originally generated as waste by a steel mill in Youngstown 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.
A manufacturer of glass containers purchased tube scale from the policyholder to use as a coloring agent to make amber or brown containers. The manufacturer discovered that chrome stones were present within the containers, increasing the likelihood of breakage, and thus had to scrap 1850 tons of glass containers.
The manufacturer made claims against the policyholder for breach of contract, breach of warranties contained in the purchase orders for the tube scale, violations of the Uniform Commercial Code, negligence, and product liability. Ironics sought coverage under CGL and umbrella policies provided by Motorists.
The trial court granted the insurance companies’ motions granting summary judgment against Ironics finding no coverage. The Sixth District Court of Appeals in Ohio reversed in part and affirmed in part, finding no coverage under the CGL policy but coverage under the umbrella policy, which, according to the Ohio Supreme Court decision, “is a type of catchall policy providing that Motorists will pay Ironics for the “ultimate net loss” attributable to any “occurrence” that is either excluded or not covered by its CGL policy.” The Ohio Supreme Court left the finding of no coverage under the CGL policy undisturbed, as the issue of coverage under that policy was not before it. The case arrived at the Ohio Supreme Court with a proposition of law for the court’s review: “The incorporation of a defective ingredient into an integrated product or system does not constitute damage to ‘other’ property for purposes of liability coverage under commercial general liability and umbrella policies.” The Ohio Supreme Court affirmed the intermediate appellate court’s decision.
The Supreme Court of Ohio relied on principles of policy interpretation, and applied plain meaning to clear and unambiguous policy language. The court found that ambiguous terms must be construed against the insurance company and in favor of coverage. court rejected arguments from Motorists and found that the claims were for liability for property damage:
“We reject Motorists’s argument that there was no “property damage” in this case. Under the plain language of the umbrella policy, [manufacturer]’s claims against Ironics are for “property damage.” As a legal theory, the integrated-system rule is applied by courts to determine whether the economic-loss doctrine, which is discussed later in this opinion, bars recovery on a tort claim. There is no reason to apply that rule to the present case.”
The court also found that the damages sought by the manufacturer were based on the damage caused to containers, including the loss of the other components of the containers when the containers were destroyed. The Ohio Supreme Court determined that Motorists’ arguments based on a supposed lack of ‘fortuity’ and the absence of an ‘accident’ or ‘occurrence’ also must fail. The court concluded that:
“Ironics’s provision of contaminated tube scale resulted in property damage that was neither expected nor intended from the standpoint of the insured. If Motorists believes that claims such as those at issue here should not be covered under the terms of its policy, it remains free to seek agreement to language indicating such in its future contracts, consistent with applicable law.”
Similarly the Supreme Court of Ohio rejected Motorists assertion that the so called’ “your product,” “your work,” and “impaired property” exclusions applied.
William G. Passannante, co-chair of the Insurance Recovery Group at Anderson Kill P.C., who represented Amicus United Policyholders in support of Ironics in the appeal, noted, “The Supreme Court of Ohio has reaffirmed the availability of liability insurance in the face of over-reaching arguments by insurance companies made at claims time in an improper attempt to eliminate insurance. This ruling shows the importance of enforcing the terms of insurance policies, rather than permitting insurance companies incorrectly to avoid coverage.”
John M. Leonard, also a shareholder at Anderson Kill, observed, “The Ohio Supreme Court rightly found that Motorists’ argument that there was no ‘occurrence’ and no ‘property damage’ in the claims against Ironics was fallacious. With this ruling, the court has improved the ability of policyholders to rely on insurance policies.”
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