Definition of a Subcontractor
In this diversity lawsuit, Mosser Construction (the insured) alleges that its insurer (Travelers) wrongfully declined to defend and indemnify Mosser against an underlying claim based on faulty work. This case is Mosser Construction, Inc. v. The Travelers Indemnity Company, 2011 WL 2728213 (C.A.6, Ohio ). Note that this case has not been selected for publication in the Federal Reporter.
Mosser is a construction firm and was hired by Port Clinton to make improvements to Port Clinton's waste-water treatment facility. Mosser contracted with Gerken Materials for the purchase of structural backfill. Mosser picked up the backfill and completed the on-site work itself. After the construction was complete, the walls of the new odor-control building began to crack. An investigation revealed that the cracking was due to failure of the structural backfill beneath and around the foundation of the building. Port Clinton sued Mosser, and Mosser notified Travelers. Travelers denied coverage and a lawsuit was filed. The trial court ruled in favor of the insurer and this appeal followed.
The insurer's argument was that Gerken was not a subcontractor and thus any damage caused by defective backfill it produced was not covered under the insurance policy issued to Mosser because of the “your work” exclusion. Mosser's counter was that Gerken was a subcontractor and thus the subcontractor exception to the exclusion preserved coverage. The appeals court said then that the case required that it interpret the term “subcontractor” as used in the exception to the exclusion and to determine whether Gerken falls within that term under the circumstances presented.
The court found that neither the insurance policy nor the commonly-used standard commercial general liability policy define “subcontractor”, and no Ohio court ever ruled on the definition. Black's Law Dictionary defined the word as “one who is awarded a portion of an existing contract by a contractor”. The standard dictionary defined a subcontractor as “an individual or business firm that contracts to perform part or all of another's contract”. The court also looked to other states' rulings on the subject and found that they have all concluded that material suppliers can be subcontractors, but that some combination of fabrication to custom specifications or on-site work is required.
The court found that all of these definitions and judicial opinions leave considerable uncertainty regarding where exactly to draw the line between subcontractors and mere material suppliers. Therefore, the court ruled that the term “subcontractor” as used in the exclusion in this policy was ambiguous. This meant, of course, that because the term is held to be ambiguous, it is strictly construed against Travelers.
For a material supplier who does not perform work at the site to be a subcontractor, the court said that the supplier must manufacture the material according to specifications supplied by the general contractor, and its materials contract with the general contractor must explicitly incorporate terms from the master contract or otherwise explicitly indicate that the materials at issue are manufactured or supplied specifically for the master contract's project. Gerken qualified as a subcontractor in this instance under this description.
The circumstances of the case were enough for the court to see Gerken nudging over the line separating mere material suppliers from subcontractors. Therefore, the judgment of the trial court was reversed. Based on the holding that Gerken was a subcontractor, Travelers had a duty to defend Mosser against the underlying Port Clinton lawsuit.
Editor's Note: The CGL form does have a subcontractor exception to the “damage to your work exclusion”, but as this circuit court points out, the policy does not define “subcontractor”. This leaves it up to the individual court to define the word and, as in this case, this can lead to a finding of ambiguity.
Note that the court did list findings from other jurisdictions (Minnesota, Missouri, Pennsylvania, the Ninth Circuit, and Texas ) on the subject and these rulings all concluded that material suppliers can be subcontractors, but that some combination of fabrication to custom specifications or on-site work is required. In this case, Gerken did not do any of the work on-site, but it did manufacture the material according to specifications and that convinced the appeals court to qualify Gerken as a subcontractor. This made the exception to the exclusion applicable to the claim.