The Ohio Supreme Court has declined to adopt the "integrated system" rule as a means of avoiding coverage for losses involving property damage due to the incorporation of the insured's product into a larger whole. The case is Motorists Mutual Ins. Co., v. Ironics, Inc., 2022-Ohio 841 (Ohio Mar. 23, 2022).
Ironics was a buyer and seller of metal products, including steel mill waste. The case involves material that was originally generated as waste by a steel mill in Youngstown, Ohio that makes tubular products. Ironics obtained the waste product, called "tube scale," in raw form, processed it and sold it to several customers.
Owens, a manufacturer of glass containers, purchased tube scale from Ironics to use as a coloring agent to color glass containers amber and brown. After using the tube scale for the intended purpose, though, Owens discovered that there were chrome stones embedded in the containers, which increases the likelihood that the containers would break. The stones could not be removed from the containers, nor could the containers otherwise be restored to use. The company had to scrap more than 1,850 tons of glass containers. Ironics investigated and found that the tube scale had been contaminated by its materials processor.
Owens asserted claims against Ironics for breach of contract, breach of warranties, violations of the UCC, negligence, and product liability. Ironics asked Motorists, its insurer, to defend and indemnify it against the claims through its CGL policy and commercial umbrella policy. Motorists sought a declaratory judgment that it had no duty to defend or indemnify Ironics against Owens's claims under either policy. The trial court held that neither policy covered the claims.
The Sixth District Court of Appeals affirmed in part and reversed in part, holding that Ironics was not entitled under the CGL policy but was entitled under the umbrella policy because both parties had stipulated that Ironics was not aware that the tube scale was contaminated.
Motorists appealed asking the Ohio Supreme Court to review a single proposition of law: "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 ruled that the insured was entitled to coverage under the umbrella policy. The court rejected the insurer's argument that the "tangible property" that must be injured in order for there to be "property damage" must be property other than the insured's own product and that in this case, the incorporation of the insured's materials into the customer's product had made it the insured's own product.
Further, the court ruled that this argument ran contrary to various provisions in the insurance policy, notably the impaired property exclusion which addressed situations in which "impaired property" is defined as tangible property other than "your product" that cannot be used or is not useful because it "incorporates your product."
In finding "property damage" and rejecting the "integrated system" rule, the court rejected an analysis by the Wisconsin Supreme Court in Wisconsin Pharmacal, declaring that the ruling was both wrong on its merits and had not been followed by a single court in the six years since it was decided. Rather, the court ruled that the "integrated system" rule is a matter of tort law concerning the scope of the economic loss doctrine and does not undo the express terms of the insurance policies.
After finding that the "property damage" resulted from an occurrence, the court further ruled that Motorists failed to show that the losses were subject to the "your product," your "impaired property" exclusions. The court ruled that the claims were for damage to the glass containers and not for the tube scale that the insured provided, and that this was not "impaired property" since the damage could not be fixed by simply removing the contaminated tube scale which was embedded in the glass containers.
Editor's Note: The "integrated system rule" is that when a defective product causes damage beyond itself and damages the system of which it is a part, that property damage is not sufficient to allow the injured part to pursue tort action. For reference, the CG 00 01 has the following "your product", "your work" , and impaired property exclusions:
k. Damage To Your Product "Property damage" to "your product" arising out of it or any part of it. l. Damage To Your Work "Property damage" to "your work" arising out of it or any part of it and included in the "products completed operations hazard". This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
Damage To Impaired Property Or Property Not Physically Injured "Property damage" to "impaired property" or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.
The "products-completed operations hazard" includes all "bodily injury" and "property damage" occurring away from the premises you own or rent and arising out of "your product" or "your work" except for certain situations.