Subcontractor Versus Material Supplier
The insured contractor sued its liability insurer, seeking a defense against a project owner's claims. The coverage issue revolved around the interpretation of the term “subcontractor”. This case is Mosser Construction, Inc. v. The Travelers Indemnity Company, 430 Fed.Appx. 417 (2011). Note that this case was not selected for publication in the Federal Reporter.
Mosser entered into a construction contract with Port Clinton to make improvements to Port Clinton's waste water treatment facility. The contract required Mosser to furnish all labor, materials, and supplies, with a specific requirement that the backfill meet the size and grading requirements for AASHTO #57, coarse aggregate. Mosser contracted with Gerken Materials for the purchase of the specified structural backfill.
After the project was completed, Port Clinton noticed the walls of the building began to crack. An investigation indicated that the cracking was due to failure of the structural backfill beneath and around the foundation of the building. Port Clinton alleged that the backfill material was defective. A claim was made against Mosser and the insured forwarded it to its insurer, The Travelers. The insurer denied coverage, citing the damage to your work exclusion in the general liability policy. Mosser filed a lawsuit seeking a declaratory judgment that Travelers had a duty to defend and indemnify Mosser in the underlying action. The U.S. District Court granted summary judgment for the insurer and the insured appealed.
The U.S. Court of Appeals said that the case required it to interpret the term “subcontractor” as used in the subcontractor exception to the damage to your work exclusion in the policy, and to then determine whether Gerken falls within that term under the circumstances presented. The policy did not defined “subcontractor” and the court found no Ohio court ruling on the subject in the context of the damage to your work exclusion. Therefore, the court looked to the standard dictionary, Black's Law Dictionary, cases from other jurisdictions, and even Couch on Insurance. The court found that the definitions from these sources were broad and could be read to encompass a material supplier like Gerken because, read literally, Gerken contracted to take a portion of Mosser's general contract, that is, the obligation to provide backfill.
Concluding that the term is ambiguous, the court construed it strictly against the insurer. Now, the court did not accept Mosser's argument that any materials supplier is a subcontractor. Rather, the court said that for a material supplier that does not perform work at the site to be a subcontractor, the supplier must do the following: manufacture the material according to specifications supplied by the general contractor; and, have the materials contract with the general contractor 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.
The court found that, in accordance with these guidelines, Gerken manufactured the #57 coarse aggregate at its own facility using its own equipment; it did not purchase the aggregate from another supplier like a hardware store would with off-the-shelf nails. Moreover, the purchase order explicitly identifies the Port Clinton project as the job for which Gerken supplied the aggregate at issue. The circumstances of the case were enough for the court to say that Gerken was nudged over the line separating mere material suppliers from subcontractors.
The ruling of the district court was reversed.
Editor's Note: The variety of opinions that the U.S. Circuit Court found on the meaning of “subcontractor” simply reinforced its opinion that the term is an ambiguous one, justifying a ruling against the insurer. However, the court did find a definite point that helped clarify the distinction between a subcontractor and a material supplier: courts applying the law of other jurisdictions 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 perform any on-site work, but it did manufacture materials to the custom specifications of the project contract. This was enough, as the court said, to “nudge Gerken over the line separating mere material suppliers from subcontractors”.