No Coverage For Insured’s Use Of Inferior Lumber

Forrec Construction Company and Bruce Evans, Ltd, successor in interest (Forrec/Evans), served as a subcontractor for the general contractor, Centrex Rooney Construction Company (Centrex), on a portion of the Animal Kingdom Lodge Resort project at Walt Disney World in Florida.

Forrec/Evans obtained bids and a limited amount of cedar from West Orange Lumber Company, Inc. (West Orange) to fulfill its subcontract. They specifically requested "C" select or better-grade cedar. West Orange provided a quote describing the product as "No Hole Select Cedar." The purchase orders from Forrec/Evans specified the lumber quality as "C" select or higher, and West Orange supplied lumber labeled as "No Hole Select Cedar."

In February 2000, Disney raised concerns about the grade of cedar being installed. Centrex then instructed Forrec/Evans to stop the installation, remove the already installed cedar, and take corrective steps to ensure the cedar met the specified minimum grade of "C" or higher. Following this, Forrec/Evans complied and later filed a complaint against West Orange in September 2001, claiming that the cedar they supplied did not meet the required specifications. They also sought damages for the costs incurred in replacing the cedar, including higher material costs, increased labor, subcontractor and transportation expenses, as well as additional overhead and legal fees, amounting to over $850,000.

Indiana Lumbermens Mutual Insurance Company (ILMIC) insured West Orange and initially defended them. In a declaratory judgment proceeding, they then took the position that they had no duty to defend or indemnify West Orange for the damages alleged in the complaint. They based their position on the general rule that an insurance company's duty to defend an insured is determined solely from the allegations in the complaint filed against the insured.

The trial court agreed with ILMIC and concluded there were no allegations of property damage, regarding coverage in the Commercial General Liability Policy, and determined the dispute involved a breach of contract, not a tort. Failure to supply a product specified in a contract was a business risk not covered by the liability policy issued by ILMIC. West Orange appealed.

The appellate court agreed with the trial court decision and held that the purpose of the liability coverage was to provide protection for personal injury or property damage caused by the completed product, not for the replacement and repair of that product or to insure construction or contract deficiencies. The allegations in the complaint did not claim damage from the failure to provide the correct quality of lumber other than the cost or expense to the vendor to remove the non-complying product and supply an acceptable substitute.

The court also held that the policy did not apply to damage to impaired property (property not physically injured but also not useable). It was also held to not apply to coverage for damages incurred by a vendor that supplied defective products and was then required to remove and replace them with the specified product (under the product recall exclusion).

West Orange argued that this exclusion should not apply because the siding was not replaced because it was defective, deficient, inadequate or dangerous. The appellate court held that the exclusion encompassed deficient or inadequate materials and that this exclusion, coupled with the other exclusions, was sufficient to exclude coverage in this case, since there was no damage to the property or injury to persons.

In the final analysis, this was a case where, through error, mistake or negligence, a legitimate product was sold and delivered and then rejected for failing to meet contract specifications. The trial court decision was affirmed.

West Orange Lumber Company, Inc., Appellant, v. Indiana Lumbermens Mutual Insurance Company, et al., Appellees. Florida District Court of Appeal. Case No. 5D04-1429. Filed April 1, 2005. Appeal from the Circuit Court, Orange County. Affirmed. 2005 CCH Personal and Commercial Liability Cases. Paragraph 8096.