Supreme Court of Ohio Holds Damage Caused by a Contaminated Product Incorporated into a Larger Product Is “Property Damage” Caused by an “Occurrence”

On March 23, 2022, the Supreme Court of Ohio decided that damage caused by a contaminated product incorporated into a larger product is “property damage” caused by an “occurrence”.  See Motorists Mut. Ins. Co. v. Ironics, Inc., Slip Opinion No. 2022-Ohio-841.

Ironics, Inc. (Ironics) obtained tube scale, a steel mill waste product to process and resell. Ironic’s material processor subcontracted the tube scale screening to another company, and the tube scale was contaminated during screening. Unaware of the contamination, Ironics sold the tube scale to a glass container manufacturer. The tube scale was used to make glass containers, and the containers had to be scrapped because the contaminant increased the likelihood that the glass containers would break.

Motorists Mut. Ins. Co. (Motorists) sought a declaratory judgment that it did not owe Ironics defense or indemnity of the manufacturer’s claims under a commercial general liability (CGL) policy and an umbrella policy issued to Ironics. The trial court entered summary judgment in favor of Motorists. The court of appeals affirmed in part and reversed in part the trial court’s decision. The court of appeals held that Ironics was not entitled to coverage under the CGL policy but was entitled to coverage under the umbrella policy.

Motorists appealed the court of appeals decision to the Supreme Court of Ohio asserting a single proposition of law for 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.”

In effectively a unanimous decision, the Supreme Court affirmed the court of appeals decision. Two justices concurred in judgment only and a third justice concurred in judgment only and dissented in part. The third justice disagreed with the majority’s decision not to express any opinion as to the court of appeals’ interpretation of the CGL policy. The majority found that Motorists lacked standing to challenge the court of appeals.

The majority opinion concluded that the incorporation of a contaminated product into an integrated product or system constituted “property damage” to other property caused by an “occurrence” under the Motorists’ umbrella policy, and none of the exclusions in the umbrella policy cited by Motorists applied to the damage to the integrated product or system.

The Court held that the manufacturer’s claims against Ironic were for “property damage” under the plain language of the umbrella policy and that the integrated-system rule applied by courts to determine whether the economic-loss doctrine bars recovery on a tort claim did not apply in the parties’ coverage action.

The Court held that the definition of “property damage” in the umbrella policy was clear and unambiguous: “[p]hysical injury to or destruction of tangible property * * *, including all resulting loss of use of that property”; and rejected Motorists’ argument that the “tangible property” injured or destroyed was Ironic’s product. The Court stated, “Multicomponent objects such as glass containers are ubiquitous and not identifiable as any particular product.” The court agreed that reading the coverage provisions in the context of the entire policy there was “property damage”; that the policy’s “impaired property” exclusion indicated that damage to a multicomponent product is not be viewed as merely damage to the insured’s own product.

The Court did not agree with Motorists that Westfield Ins. Co. v. Custom Agri System, Inc., 133 Ohio St.3d 476, 2012-Ohio-4712, 979 N.E.2d 269, controlled whether the sale of contaminated tube scale constituted an “occurrence.” The Court found the dispositive fact here was that the manufacturer’s claims were based on Ironic’s supplying the manufacturer with contaminated tube scale that caused the manufacturer’s glass containers to be more likely to crack and therefore to be unusable. The Court emphasized that in Custom-Agri, supra at ¶10, it was repeated that “commercial general-liability policies are not intended to insure an insured’s work itself, they are intended to insure the risks of insured causing damage to other persons and their property.” Ironic’s supplying the manufacturer with contaminated tube scale was an “occurrence” because there was no evidence that Ironics was aware of any contamination and or that Ironics had control over the process by which the manufacturer used the tube scale to make glass containers. Also, the manufacturer did not seek the cost of procuring replacement tube scale. The manufacturer’s damages included the loss of other components of its glass containers when the containers had to be scrapped.

The Court held that none of the exclusions in the umbrella policy cited by Motorists applied because the “your product” exclusion did not apply to damage to the manufacturer’s glass containers; the “your work” exclusion did not apply where Ironics only provided a product; and the “impaired property” exclusion did not apply because the manufacturer’s containers could not be restored to use by repair, replacement, adjustment, or removal of the contaminated tube scale.

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