Opinion ID: 220938
Heading Depth: 2
Heading Rank: 2

Heading: the subcontractor exception

Text: This case requires that we interpret the term “subcontractor” as used in the subcontractor exception to the your-work exclusion in the insurance agreement, and to determine whether Gerken falls within that term under the circumstances presented. Because this is a diversity case, we apply Ohio law. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Pennington v. State Farm Mut. Auto. Ins. Co., 553 F.3d 447, 450 (6th Cir. 2009). Ohio courts have “consistently held that insurance contracts must be construed in accordance with 5 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. the same rules as other written contracts.” Hybud Equip. Corp. v. Sphere Drake Ins. Co., Ltd., 597 N.E.2d 1096, 1102 (Ohio 1992). Thus, “if the language of the policy’s provisions is clear and unambiguous, this court may not ‘resort to construction of that language.’” Id. (quoting Karabin v. State Auto. Mut. Ins. Co., 462 N.E.2d 403, 406 (Ohio 1984)). A contract term is unambiguous if it has a “plain and ordinary meaning.” Karabin, 462 N.E.2d at 406. If the meaning of a term is ambiguous, however, then that ambiguity should be “interpreted strictly against the drafter and in favor of the nondrafting party.” Westfield Ins. Co. v. Galatis, 797 N.E.2d 1256, 1262 (Ohio 2003). “Thus, an ambiguity in an insurance contract is ordinarily interpreted against the insurer and in favor of the insured.” Id. “[S]ince insurance policies are interpreted strictly against the insurer, ‘[i]t will not suffice for [the insurer] to demonstrate that its interpretation is more reasonable than the policyholder's.’” Andersen v. Highland House Co., 757 N.E.2d 329, 333 (Ohio 2001) (citation omitted) (second alteration in original). The insurer, “having prepared the policy, must also be prepared to accept any reasonable interpretation, consistent with the foregoing, in favor of the insured.” Gomolka v. State Auto. Mut. Ins. Co., 436 N.E.2d 1347, 1348 (Ohio 1982). Exclusions in insurance policies are construed narrowly such that “that which is not clearly excluded from the operation of the contract is included in the operation thereof.” Southside River-Rail Terminal, Inc. v. Crum & Forster Underwriters of Ohio, 811 N.E.2d 150, 154 (Ohio Ct. App. 2004) (quoting Home Indemn. Co. of New York v. Plymouth, 64 N.E.2d 248, 248 (Ohio 1945) (paragraph two of the syllabus)). The burden is on the insurer to show that an exclusion specifically applies. Neal-Pettit v. Lahman, 928 N.E.2d 421, 424 (Ohio 2010). “[O]nce the insurer establishes 6 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. that an exclusion is applicable, the burden shifts back to the insured to establish the applicability of an exception to the exclusion.” Goodrich Corp. v. Commercial Union Ins. Co., 2008 WL 2581579, at  (Ohio Ct. App. June 30, 2008). If a term in an exception to an exclusion is unambiguous, and if “the context in which it is employed does not indicate that it should be given any other meaning,” then we must give that term its plain meaning. Hybud Equip., 597 N.E.2d at 1102. If a term is ambiguous, however, then, as with terms in the main body of the contract, it must be construed broadly in favor of the insured and against the insurer. See Cincinnati Ins. Co. v. G.L.H., Inc., 2008 WL 2940663,  (Ohio Ct. App. Aug. 1, 2008) (unpublished); see also TRB Invs., Inc. v. Fireman’s Fund Ins. Co., 145 P.3d 472, 477 (Cal. 2006); St. Paul Fire & Marine Ins. Co. v. Lefton Iron & Metal Co., Inc., 694 N.E.2d 1049, 1057 (Ill. App. Ct. 1998); Rufener v. State Farm Fire & Cas. Co. 585 N.W.2d 696, 699 (Wis. Ct. App. 1998); Hughes v. State Farm Fire & Cas. Co., 2007 WL 2874849, at  (W.D. Pa. Sept. 27, 2007). The your-work exclusion and the subcontractor exception are standard insurance contract terms that are used widely in the industry. See 9A Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 129:18 (3d ed. 2010) (available on Westlaw) (hereinafter “Couch on Insurance”). Neither the insurance agreement between Travelers and Mosser nor the commonly-used standard commercial general liability policy on which it is based define “subcontractor.” Further, no Ohio court has defined the term “subcontractor” in this context. Dictionary definitions of “subcontractor” provide limited guidance. Older editions of Black’s Law Dictionary define “subcontractor” as 7 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. One who takes portion of a contract from principal contractor or another subcontractor. One who has entered into a contract, express or implied, for the performance of an act with the person who has already contracted for its performance. One who takes from the principal or prime contractor a specific part of the work undertaken by the principal contractor. Black’s Law Dictionary (6th ed. 1990). Newer editions provide a similar definition: “One who is awarded a portion of an existing contract by a contractor, esp. a general contractor. • For example, a contractor who builds houses typically retains subcontractors to perform specialty work such as installing plumbing, laying carpet, making cabinetry, and landscaping . . . .” Black’s Law Dictionary (9th ed. 2009). Webster’s Third New International Dictionary defines “subcontractor” as “an individual or business firm that contracts to perform part or all of another’s contract.” Webster’s Third New International Dictionary (Unabridged) (2002); see also American Heritage Dictionary of the English Language (available at http://education.yahoo.com/reference/dictionary/- entry/subcontractor) (“One that enters into a subcontract and assumes some of the obligations of the primary contractor.”). These definitions are broad, and could be read to encompass a material supplier like Gerken because, read literally, Gerken contracted (via the backfill purchase order) to take a portion of Mosser’s general contract, the obligation to provide backfill. The parties urge us to define “subcontractor” with reference to cases interpreting the Miller Act, 40 U.S.C. § 3131, which “requires a prime contractor of a federal project to furnish a payment bond to insure payment to individuals who supply labor and/or materials for federal projects.” United States for the Use and Benefit of Consol. Pipe & Supply Co. v. Morrison-Knudson Co., 687 F.2d 129, 131 (6th Cir. 1982). Under the Miller Act, “the payment bond protects only those persons who have a contractual agreement with a prime contractor or subcontractor engaged in a federal 8 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. project. Persons supplying labor or material to a mere materialman are not protected.” United States for the Use and Benefit of Conveyor Rental & Sales Co. v. Aetna Cas. & Surety Co., 981 F.2d 448, 450 (9th Cir. 1992) (citation omitted). Therefore, in Miller Act cases, courts frequently must decide whether an entity is a subcontractor or merely a material supplier under the Act. In Clifford F. MacEvoy Co. v. United States for Use and Benefit of Calvin Tomkins Co., 322 U.S. 102 (1944), the Supreme Court held that under the Miller Act “a subcontractor is one who performs for and takes from the prime contractor a specific part of the labor or material requirements of the original contract, thus excluding ordinary laborers and materialmen.” Id. at 109. Subsequent cases have held that subcontractor status is determined by the “substantiality and importance of [the purported subcontractor’s] relationship with the prime contractor.” F.D. Rich Co. v. United States for the Use of Indus. Lumber Co., 417 U.S. 116, 123 (1974). Courts have looked to multiple factors in making this determination, including whether “the product supplied is custom fabricated,” whether “the supplier is required to perform on site,” and whether or not the materials supplied come from existing inventory. Conveyor Rental & Sales, 981 F.2d at 451-52 (listing 18 factors and citing cases applying them). Under the general definition advanced in MacEvoy, Gerken could be a subcontractor because it performed and took from Mosser “a specific part of the . . . material requirements of the original contract.” Gerken might not be considered a contractor under Conveyor Rental and similar cases, as it performed no on-site work and supplied the backfill from existing inventory. The parties also debate the significance of J.T Weybrecht’s Sons Co. v. Hartford Accident & Indemnity Co., 119 N.E.2d 836 (Ohio 1954). There, the Ohio Supreme Court interpreted the term 9 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. “subcontractor” as used in a state statute governing contractors’ performance-bond requirements. The court held that “[t]he ordinary meaning of the word ‘subcontractor’ will include such a materialman who contracts to furnish material to a contractor for use in performing his contract.” Id. at 839. Thus, “the word ‘subcontractor’ as used in [the statute] should be given its ordinary meaning, so that it may include one who contracts with the general contractor for performance of part of the work to be performed under the general contract, even though the part contracted for involves only the furnishing of material.” Id. at 842. Under this definition, Gerken would qualify as a subcontractor. Although the Miller Act cases and Weybrecht’s are instructive, they are not controlling because they interpret “subcontractor” in contexts different from that at issue here. No Ohio court has discussed the meaning of “subcontractor” in the your-work exclusion, but several courts applying the law of other states have done so. 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. In Wanzek Construction, Inc. v. Employers Insurance of Wasau, 679 N.W.2d 322, 329 (Minn. 2004), the Supreme Court of Minnesota concluded that the term “subcontractor” was ambiguous because it was not defined in the policy or by statute or regulation. The court construed the ambiguity in favor of the insured and held that “where, as here, a supplier custom fabricates the materials to the owner’s specifications and provides on-site services in connection with the installation, the supplier meets the definition of subcontractor under the exception to the ‘your works’ exclusion.” Id. Similarly, in National Union Fire Insurance Co. v. Structural Systems 10 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. Technology, Inc., 756 F. Supp. 1232 (E.D. Mo. 1991), amended by 764 F. Supp. 145 (E.D. Mo. 1991), a district court interpreting Missouri law concluded that the supplier of steel rods for construction of a radio tower was a subcontractor and not “merely a materialman” because it fabricated the rods according to the specific design and manufacturing specifications and delivered them to the site. Id. at 1240. The Eighth Circuit affirmed the district court’s decision. Nat’l Union Fire Ins. Co. v. Structural Sys. Tech., Inc., 964 F.3d 759, 763 (8th Cir. 1992). The Fourth Circuit, interpreting Pennsylvania law, has cited National Union approvingly and held that a supplier that “custom manufactured . . . steam pipe in accordance with the shop drawings and project specifications, and [that] provided on-site installation instructions” was a subcontractor. Limbach Co. LLC v. Zurich Am. Ins. Co., 396 F.3d 358, 364-65 (4th Cir. 2005). The court further held that the term “subcontractor” was ambiguous and that it must therefore be construed in favor of the insured to preserve coverage. Id. at 365. Other courts agree that material suppliers that perform onsite work or manufacture materials to custom specifications fit within the definition of subcontractor. See CGU/Hawkeye Sec. Ins. Co. v. Oasis Las Vegas Motor Coach Park, L.P., 65 F. App’x 182, 18384 (9th Cir. May 22, 2003) (unpublished) (interpreting Nevada law); Bldg. Specialties, Inc. v. Liberty Mut. Fire Ins. Co., 712 F. Supp. 2d 628, 650-51 (S.D. Tex. 2010) (interpreting Texas law) (“Courts holding a supplier of building materials a ‘subcontractor’ for the purposes of the ‘your work’ exception typically do so on the basis of custom fabrication combined with an on-site presence.”). These cases provide guidance as to what entities do qualify as subcontractors, but there are few useful examples of cases identifying entities that are not subcontractors within the meaning of the subcontractor exception. See CGU/Hawkeye, 65 F. App’x at 184 (Graber, J., dissenting) 11 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. (offering dissenting view that “supplier and deliverer” of concrete was not a subcontractor, but merely a materialman); Collett v. Ins. Co. of the W., 75 Cal. Rptr. 2d 165, 169-70 (Cal. Ct. App. 1998) (holding that a building inspector hired by masonry contractor was not a “subcontractor,” even under the broadest definition of that term); see also Bldg. Specialties, 712 F. Supp. 2d at 651 (“The record is inadequate to permit this court to find that [the insulation supplier] is, or is not, a subcontractor as a matter of law.”); Web Constr. Inc. v. Cincinnati Ins. Co., 2007 WL 4230751, at  (D. Minn. Nov. 29, 2007) (holding that issues of material fact exist as to whether concrete supplier provided standard-mix or custom-fabricated concrete and whether it performed significant on-site work for purposes of qualifying as subcontractor). Thus, cases construing the subcontractor exception leave considerable uncertainty regarding where exactly to draw the line between subcontractors and mere material suppliers. Relevant cases require something more than mere supply of standard inventory items. Secondary sources agree. Couch on Insurance states that “[a] manufacturer or supplier will . . . typically only constitute a subcontractor for purposes of the exception where the manufacturer or supplier custom fabricates the materials to the owner’s specifications or otherwise performs part of the on-site construction work which the insured had contracted to perform.” 9A Couch on Insurance § 129:18. Similarly, Bruner and O’Connor on Construction Law states that “[a] supplier that fabricates or otherwise provides unique materials should have little difficulty meeting the requirement of being a subcontractor.” 4 Philip L. Bruner & Patrick J. O’Connor, Jr., Construction Law § 11:105 (2010) (available on Westlaw). Further, 12 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. [s]uppliers, regardless of whether they provide labor on site, that perform their services pursuant to the terms and conditions of the general contractor’s agreement are, in all material respects, “subcontractors.” While a bit more attenuated, a supplier that furnishes standard or “off-the-shelf” goods but does so pursuant to an agreement incorporating the terms and conditions of the owner/general contractor agreement should be deemed a “subcontractor.” A supplier that simply sells goods to a general contractor on an open account is not “taking” under the general contractor’s agreement with the owner and, therefore, is not a subcontractor. Id.3 Based on the foregoing, in the context of this case the term “subcontractor” as used in the your-work exclusion is ambiguous. Competing definitions of subcontractor from other contexts, including dictionaries, the Miller Act cases, and Weybrecht’s, establish that there are multiple reasonable interpretations of the term. The handful of cases defining the term in the context of the your-work exclusion also find ambiguity. Because the term is ambiguous, we must construe it strictly against Travelers and in favor of Mosser. Westfield Ins., 797 N.E.2d at 1262. This means that Travelers must “be prepared to accept any reasonable interpretation, consistent with the [policy], in favor of the insured.” Gomolka, 436 N.E.2d at 1348. Although this standard favors Mosser, we must still construe the term to determine whether Mosser’s interpretation is reasonable. Although Mosser’s interpretation need not be the most reasonable one, Andersen, 757 N.E.2d at 333, it cannot 3 Although some secondary sources provide more general definitions of subcontractor that could encompass any and all material suppliers, those sources provide little discussion and uniformly cite cases that require some combination of custom fabrication or on-site work. See 3 New Appleman on Insurance, Law Library Ed. § 18.03[12][d] (Jeffrey E. Thomas & Francis J. Mootz, III eds., 2010) (citing Nat’l Union, 964 F.2d at 759); 3 Allan D. Windt, Insurance Claims & Disputes § 11:10 (5th ed. 2010) (citing Limbach, 396 F.3d at 364-65). 13 No. 09-4449 Mosser Construction, Inc. v. The Travelers Indemnity Co. be a meaning that the words of the contract will not bear. Brannon v. Troutman, 598 N.E.2d 1333, 1336 (Ohio Ct. App. 1992) (citing Ohio Crane Co. v. Hicks, 143 N.E. 388, 389 (Ohio 1924)). At oral argument, Mosser proposed that any material supplier, even a hardware store selling standard-inventory nails, would qualify as a subcontractor. Mosser’s interpretation, that any materials supplier is a subcontractor, is not reasonable. Although the meaning of the term is ambiguous, its meaning is not as broad as Mosser urges. For a material supplier who does not perform work at the site to be a subcontractor, 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.4 Gerken qualifies as a subcontractor under the above definition. 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. The only reason Gerken already stocked the correct grade of crushed stone on its property, and thus did not need to custom fabricate it to order for Mosser for use in the Port Clinton project, is that the AASHTO sets industrywide standards for the production of coarse aggregate, and most or all purchasers will seek a grade of aggregate consistent with an AASHTO standard specifications. Moreover, the purchase order 4 We find the cases from other jurisdictions interpreting the your-work exclusion to be persuasive on this point. Ohio courts will look to judicial decisions from other jurisdictions to construe terms in standard Commercial General Liability policies when there are no Ohio decisions on point. Beaverdam Contracting, Inc. v. Erie Ins. Co., No. 1-08-17, 2008 WL 4378153, at  n.6 (Ohio Ct. App. Sept. 29, 2008) (unpublished). 14 No. 09-4449 Mosser Construction, Inc v. The Travelers Indemnity Co. explicitly identifies Mosser’s Port Clinton project — the subject-matter of the master contract — as the “Job” for which Gerken supplied the aggregate at issue. Although Gerken may have produced all or part of the backfill before entering into the purchase order with Mosser, the circumstances of this case are enough to nudge Gerken over the line separating mere material suppliers from subcontractors. Construing ambiguities in the contract in favor of Mosser, we conclude that Gerken was a subcontractor for purposes of the Travelers insurance policy. Therefore, we reverse the judgment of the district court granting summary judgment to Travelers.