Ohio Court Holds No Coverage for Suit Involving Insured’s Defective Component Parts

In its recent decision in Park-Ohio Holdings Corp. v. Liberty Mut. Fire Ins. Co., 2015 U.S. Dist. LEXIS 147602 (N.D. Ohio Oct. 30, 2015), the United States District Court for the Northern District of Ohio had occasion to consider whether a general liability policy affords coverage for costs associated with removing the insured’s defective product incorporated into a larger product.

Liberty’s insured, Supply Technologies, entered into a contract with Schneider Electric to provide cap screws for use in Schneider’s electrical applications.  As a result of defective manufacturing, the screws were susceptible to cracking, thus causing the products into which they were incorporated to have a high risk of electrical arcing.  After observing the cracking, Schneider replaced some 7,000 of the washers at customer locations, or its own warehouse, and then it asserted a claim against Supply for $14 million.  Supply sought coverage for the claim under its general liability policy.  Liberty denied coverage on several grounds, including lack of occurrence, the contractual liability exclusion, and its policy’s various business risk exclusions.

The court began its decision with the observation that under Ohio law, a general liability policy “does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident.”  With this principle in mind, the court concluded that the underlying claim for costs associated with replacing the insured’s defective washers was, at its very core, a warranty claim limited to damages sounding in warranty.  In other words, the underlying claimant was seeking the benefit of its bargain rather than for damages as a consequence of the defective washers.  As such, the court concluded that the underlying claim did not allege “property damage” resulting from an “occurrence” as required under the Liberty policy’s insuring agreement.

The court also concluded that the policy’s contractual liability exclusion applied to the underlying claim.  Under Ohio law, explained the court, such exclusions are not limited to the insured’s indemnity obligations, but also apply to breach of contract claims and thus serve as another business risk exclusion.  The court observed that the underlying claim essentially was a breach of contract claim alleging that Supply provided defective parts and that the claimant incurred costs to replace those defective parts.  The court, therefore, concluded that the underlying claim sounded in breach of contract and therefore came entirely within the contractual liability exclusion.

In addition, the court concluded that the policy’s “your product” and product recall exclusions applied to bar coverage.