Northern District of Ohio Finds Supplier of Crushed Stone Backfill Not To Be a "Subcontractor" Within the Meaning of an Insurance Policy

In Mosser Construction, Inc. v. The Travelers Indemnity Company, 2009 Westlaw 3426484 (N.D. Ohio), October 26, 2009, the district court determined that a supplier of crushed stone backfill to a general contractor was not a “subcontractor” within the meaning of an insurance policy, but was rather a “material supplier,” and as a result the general contractor was not entitled to defense or indemnification from the insurance company.

Mosser, a general contractor, was sued by the City of Port Clinton relating to improvements to a wastewater treatment facility. Port Clinton sued Mosser for damages after the walls of the facility began to crack, allegedly due to the failure of structural backfill beneath and around the foundation of the building. Gerkin Materials, Inc. supplied the crushed limestone backfill under a purchase order from Mosser. Port Clinton alleged that the backfill Gerkin supplied was defective because it contained gypsum, which leached out of the material when exposed to groundwater, causing improper settling.

Travelers was Mosser’s liability insurer. Mosser sought defense and indemnity from Travelers for Port Clinton’s lawsuit. Travelers declined coverage, relying on the “your work exclusion,” which excluded property damage arising out of Mosser’s own work, but allowed coverage for damage to work performed on Mosser’s behalf by a “subcontractor.” The insurance policy did not define "subcontractor," so the parties looked to the court to give the term its ordinary, commonly accepted meaning.

In determining the meaning of "subcontractor" under the policy, the court noted that since the insurance policy is a contract, it is to be given a reasonable construction that conforms with the parties intentions. Where a contract provision is reasonably susceptible to more than one meaning, the provision is strictly construed against the insurer. The court placed the onus on Travelers to show that the only reasonable definition of “subcontractor” in its insurance policy does not include Gerkin, the backfill supplier.

The Court looked to two sources when determining whether Gerkin is a subcontractor: federal cases interpreting the Miller Act and a 1954 Ohio Supreme Court case, Weybrecht. The Miller Act defines subcontractor very specifically, while the Ohio state case gave subcontractor a broader definition.

The Miller Act, 40 U.S.C § 3131 requires general contractors of a federal project to supply performance and payment bonds to the federal government before undertaking the federal project. Payment bonds under the Miller Act protect those who have a contractual agreement with the general contractor or with a subcontractor; the Act does not protect those supplying labor or material to a mere material supplier. (Citations omitted). To decide who was protected under the Miller Act, federal courts developed tests to distinguish between subcontractors and material suppliers. While this Court acknowledged that definitions of subcontractor and material supplier adopted by federal courts interpreting the Miller Act are not binding on parties to a private insurance contract, the court explained that the definitions can nevertheless be evidence of what the terms mean in practice.

The court used the factors indicated in a Ninth Circuit case to determine whether one is a subcontractor or a material supplier under the Miller Act. U.S. for the Use and Benefit of Conveyer Rental & Sales Co. v. Aetna Cas. & Sur. Co., 981 F.2d 448, 451-52 (9th Cir.1992). The Court noted that the touchstone of the subcontractor inquiry under the Miller Act is “the substantiality and importance of [the] relationship with the prime contractor.” (Citations omitted). In other words, the court noted that it was its role to determine whether Gerkin’s involvement in the project was “substantial and important” enough to warrant the label “subcontractor” and require Travelers to defend and indemnify Mosser. The court used the thirteen factors from Conveyor Rental to determine whether Gerkin was a subcontractor and made the following conclusions:

1. The stone supplied was not custom fabricated;
2. the stone supplied was not a complex integrated system;
3. there was no close financial relationship between Gerken and Mosser;
4. there was no "continuing relationship" between Gerken and Mosser because there was no requirement of shop drawing approval by Mosser and no requirement that Gerkin's representative be on the job site;
5. Gerken was not required to do any work at the job site;
6. Gerken had no contract to supply labor in addition to materials;
7. Gerken was not referred to as a "subcontractor";
8. the stone came from Gerken's existing inventory;
9. Gerken's contract was not a “substantial portion" of the prime contract because it was   only 0.5% of the prime contract;
10. there was no requirement that Gerkin furnish all the stone, although Gerken may have in fact done so;
11. Gerken was not required to post a performance bond;
12. and there was no backcharge system for correcting Gerkin's mistakes.

Factor thirteen ("there is a system of progressive or proportionate fee payment") may have applied because Gerkin billed Mosser for stone periodically, as the backfill was delivered to the job site. However, the court explained that progressive payments apply to percentage of work completed, not the sale of standard items that are invoiced upon delivery. In any event, one factor out of thirteen did not create a subcontractor relationship. However, Gerkin did in fact satisfy most of the factors indicating it was merely a material supplier:

1. The parties used a purchase order form; 
2. the materials came from preexisting inventory—the stone was "off the shelf"; 
3. the item supplied is relatively simple in nature—the crushed stone is stock material; 
4. the contract is a small percentage of the total construction cost—the contract was only 0.5% of the total contract cost; and 
5. sales tax is included in the contract price—the record was unclear as to whether Mosser paid sales tax on the stone.

Mosser offered an alternative definition of subcontractor relying primarily on the Ohio Supreme Court decision in J. T. Weybrecht’s Sons Company v. Hartford Acc. & Indem. Co., which defined subcontractor broadly as “one who contracts with a contractor to perform part of or all of the latter’s contract.” The Weybrecht court concluded that the “ordinary meaning” of “subcontractor” encompassed material suppliers for purposes of Ohio’s performance bond statute. However, the court did find not Weybrecht persuasive and did not find such a broad definition of subcontractor to be of any practical use in determining whether Gerkin was a subcontractor for purposes of the policy exclusion. Weybrecht was not persuasive because it was effectively overruled by Ohio statute when the Ohio General Assembly adopted separate definitions of "subcontractor" and "material supplier" in its performance bond statute. Weybrecht was not practically useful because under such a broad definition, "even a hardware store that provided the contractor with paintbrushes or nails" would be considered a "subcontractor." (Citation omitted). The Court found such an expansive definition "implausible and unworkable." (Citation omitted).

Thus, in relying upon federal courts' interpretation of the Miller Act and finding those cases’ interpretation of subcontractor to be more useful in resolving the parties’ dispute, the Court held that under such a common sense approach, based on the “substantiality and importance” of Gerkin’s involvement in the project, the only reasonable conclusion is that Gerkin was a material supplier rather than a subcontractor. Therefore, the “your work policy exclusion” applied and Travelers was not required to indemnify or defend Mosser in Port Clinton’s lawsuit.

Posted by: Daniel P. King

Categories: Construction Contracts, Current Developments / Legislation, Risk Management / Insurance