Airolite Co. v Valley Forge Ins. Co.

[*1] Airolite Co. v Valley Forge Ins. Co. 2007 NY Slip Op 51410(U) [16 Misc 3d 1113(A)] Decided on May 29, 2007 Supreme Court, New York County Stallman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 29, 2007
Supreme Court, New York County

The Airolite Company, Plaintiff,

against

Valley Forge Insurance Company, Defendant.



603741/05

Michael D. Stallman, J.

Motion sequence numbers 001 and 002 are consolidated for disposition.

In motion sequence number 001, plaintiff The Airolite Company (Airolite) moves, pursuant to CPLR 3001, for a declaratory judgment that defendant Valley Forge Insurance Company (Valley Forge) breached its duty to defend Airolite in a prior suit (Glassalum Intl. Corp. v The Airolite Company, No. 04 Civ 05796 [the Federal suit]) filed in the United States District Court for the Southern District of New York. Airolite additionally seeks a declaration that Valley Forge is obligated to pay the attorneys' fees and expenses it incurred in that Federal suit, as well as those it has incurred in the instant action.

In motion sequence number 002, Valley Forge moves, pursuant to CPLR 3001 and 3212 (b), for summary judgment declaring that all of Airolite's causes of action are dismissed. In the alternative, Valley Forge seeks an order either (1) dismissing Airolite's complaint on the ground of forum non conveniens, or (2) striking Airolite's note of issue.

BACKGROUND

Airolite is an Ohio corporation in the business of designing and constructing louvers. On November 12, 2001, Airolite entered into a contract to design and manufacture custom-made louvers for non-party Glassalum International Corporation (Glassalum), a company engaged in the business of designing and installing curtain walls on buildings and structures. Glassalum had agreed to install an exterior curtain wall on a 38-story building in Manhattan, pursuant to a contract with Turner Construction Company.

Under the terms of Airolite's contract with Glassalum, Airolite agreed to design and manufacture louvers that would meet certain performance criteria with regard to noise and vibration. Once completed, the louvers were to be delivered to Glassalum, which would perform the actual installation.

Airolite's louvers were delivered and subsequently installed by Glassalum in or around September 2003. Shortly thereafter, Glassalum began complaining to Airolite about problems with excessive noise and vibration from the louvers. Glassalum attributed these problems to a design change that Airolite had made to the louvers prior to manufacture.

Apparently, Airolite's original louver design had incorporated a horizontal "Tee" stiffener [*2]on each blade, to stabilize the blade section. After producing a prototype of this design, however, Airolite's project engineer had determined that the Tee stiffener would not be necessary, as the blades appeared more rigid than had been anticipated. Airolite had then proposed to delete the Tee stiffener. At the request of Glassalum, on August 28, 2002, Airolite provided Glassalum with written notification of the proposed change; the notification contained a statement by Airolite's project engineer that the louvers would not be affected structurally by the design change (see Murray Aff., Exh. 6).[FN1]

In November 2003, Glassalum began demanding that Airolite take steps to correct the noise and vibration problems, and bring the louvers into compliance with the performance criteria in their contract. Glassalum indicated that if Airolite refused to do so, Glassalum would be required to remediate the problems itself, and would charge Airolite for the cost thereof.

In December 2003, Airolite contacted non-party the Barengo Insurance Agency, Inc. (Barengo), to inquire about whether any of its insurance policies might provide coverage for such costs. At the time, Airolite was covered by a commercial general liability policy, issued by defendant Valley Forge, which it had purchased through Barengo (see Greenhill Affirm., Exhs. A and B).

The Valley Forge policy provided coverage for "property damage" caused by an "occurrence" (id.: Commercial General Liability Coverage Form, Section I, ¶ 1). The policy [*3]defined "occurrence" as

an accident, including continuous or repeated exposure to substantially the same general harmful conditions

(id., Section V, ¶ 13). The policy defined "property damage" as a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; orb. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it

(id., Section V, ¶ 17).

This policy contained numerous exclusions to coverage, including, inter alia, an exclusion for "property damage" to [t]hat particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it

(id., Section I, ¶ 2 [j] [6]). Although the policy further provided that this particular exclusion did not apply to "property damage" included in the "products-completed operations hazard," which was defined to include all ... "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work"

(id., Section V, ¶ 16), the policy specifically excluded coverage for any " [p]roperty damage' to your product' arising out of it or any part of it," (id., Section I, ¶ 2 [k]), as well as any " [p]roperty damage' to your work' arising out of it or any part of it and included in the products-completed operations hazard'" (id., ¶ 2 [l]). In addition, the policy excluded coverage for "[p]roperty 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

(id., ¶ 2 [m]).[FN2]

In response to Airolite's coverage inquiry, Barengo allegedly informed Airolite that there was no coverage for the costs of the remediation under the Valley Forge policy. Thereafter, [*4]Airolite refused to respond to Glassalum's requests to correct the problem with the louvers.[FN3] After Glassalum performed the remediation, it sought to recover its costs from Airolite. Glassalum threatened to sue Airolite if these amounts were not paid.

In April 2004, after receiving Glassalum's threat of suit, Airolite again contacted Barengo to inquire about possible coverage. This time, Airolite sent a financial advisor, whom it had recently hired, to meet with an agent at Barengo and discuss possible coverage under different provisions of the Valley Forge policy, and in particular, under the "products-completed operation hazard" provision.

In response to this inquiry, the agent at Barengo allegedly informed Airolite's financial advisor that there was no coverage for such suit under the policy, but that he would check with Valley Forge to confirm. Shortly thereafter, on April 14, 2004, Airolite's financial advisor received a written memorandum from Barengo stating:

Per our conversation please find attached the general liability form for the Airolite Company. You mentioned that the louvers that were installed were considered unfit and unsafe by your client. It was your understanding that this was from a faulty design of the louvers. There is no professional liability coverage for design work. The product would have to cause bodily injury or property damage due to the unfit or unsafe condition of the louvers in order for the general liability coverage to be considered. There would be no coverage for Airolite to replace the louvers, only coverage would be for bodily injury or property damage that resulted from the louvers.

(Murray Aff., Exh. 8: Morosky Aff., Exh. B).

Based upon these representations, Airolite never submitted a formal claim for coverage to Valley Forge.

In July 2004, Glassalum commenced its Federal suit against Airolite, asserting a single cause of action for breach of contract. The complaint alleged that Airolite had contracted to provide exterior wall metal louvers to Glassalum that met certain performance criteria, which included the specifications that the louvers would not rattle, flutter or make noise; that the louvers provided by Airolite started experiencing vibration and noise problems shortly after installation; that Glassalum repeatedly asked Airolite to remediate the problems; that Airolite failed to respond in any meaningful fashion to such requests; and that Glassalum, at its own expense, had been forced to undertake and expend significant funds to correct Airolite's "defective louvers" to comply with the performance criteria (id., Exh. 1). As damages, Glassalum sought solely to recover the costs of that remediation.

On January 11, 2006, the district court awarded Glassalum summary judgment against Airolite on its breach of contract claim in the Federal suit (Mandelbaum Affirm., Exh. C). On March 29, 2006, the district court entered judgment against Airolite in the amount of $707,666.35, the total amount, with interest, that Glassalum had expended to remediate the problems with the louvers (id., Exh. F). Meanwhile, on October 20, 2005, while the Federal suit [*5]was still pending, Airolite commenced the instant action against Valley Forge, seeking, inter alia, a declaratory judgment that Valley Forge was obligated to defend and indemnify it in that suit.

In the instant motion, Airolite now seeks a declaratory judgment that Valley Forge breached its duty to defend Airolite in the Glassalum action, and therefore must pay all of the attorneys' fees it incurred in defending the Federal suit, as well as those incurred in prosecuting the instant action. Defendant Valley Forge opposes plaintiff's motion on the ground that defendant never had a duty to defend Airolite in the Federal suit. Valley Forge now moves for summary judgment declaring that all of plaintiff's causes of action are dismissed.

DISCUSSION

A motion for summary judgment will be granted when the movant has tendered sufficient evidence to establish entitlement to such relief as a matter of law (CPLR 3212; Winegrad v New York Univ. Med. Ctr., 64 NY2d 851 [1985]). When the movant has established such entitlement, the party opposing the motion must tender evidentiary proof in admissible form, sufficient to require a trial of material questions of fact (Zuckerman v City of New York, 49 NY2d 557 [1980]).

It is well established that an insurer's duty to defend its insured is broader than its duty to indemnify (see Fitzpatrick v American Honda Motor Co., Inc., 78 NY2d 61 [1991]). An insurer's duty to defend is triggered whenever the allegations in the underlying complaint potentially give rise to a covered claim, or the insurer has actual knowledge of facts establishing a reasonable possibility of coverage (Frontier Insulation Contrs., Inc. v Merchants Mut. Ins. Co., 91 NY2d 169 [1997]). However, an insurer may be relieved of its duty to defend on the basis of a policy exclusion if the insurer can demonstrate that the allegations of the complaint cast the pleadings wholly and entirely within that exclusion, and the allegations are subject to no other interpretation (see Allstate Ins. Co. v Mugavero, 79 NY2d 153 [1992]).

Airolite concedes that if this case were decided under New York law, defendant Valley Forge would be entitled to a declaratory judgment that it had no duty to defend Airolite in the Federal suit. The gravamen of the underlying Federal suit was that Airolite had designed and delivered louvers that were "defective" by failing to meet the contract's performance criteria. The complaint contained no allegation that the louvers sustained any kind of physical injury after installation, or that they had caused physical injury to, or loss of use of, any other tangible property.

In New York, it is well settled that the issuer of a commercial general liability insurance policy is not a surety for a construction contractor's defective work product (see George A. Fuller Co. v United States Fid. & Guar. Co., 200 AD2d 255 [1st Dept], lv denied 84 NY2d 806 [1994]). Our courts consistently have held that commercial general liability policies, containing "work product" exclusions similar to those in the Valley Forge policy, do[] not insure against faulty workmanship in the work product itself but rather faulty workmanship in the work product which creates a legal liability by causing bodily injury or property damage to something other than the work product. [Such policies were] never intended to provide contractual indemnification for economic loss to a contracting party because the work product contracted for is defectively produced

(id. at 259; see also Bonded Concrete, Inc. v Transcontinental Ins. Co., 12 AD3d 761 [3rd Dept [*6]2004]; Zandri Constr. Co., Inc. v Firemen's Ins. Co. of Newark, 81 AD2d 106 [3rd Dept], affd sub nom. Zandri Constr. Co. v Calkins, Inc., 54 NY2d 999 [1981]).

Here, the only damages alleged or sought by Glassalum in the underlying Federal suit were the costs to correct the alleged defect in the louvers, and not for any injury to, or loss of use of, any other tangible property. Where, as here, the commercial general liability policy specifically excludes coverage for a defect in the insured's own work product that does not cause injury to, or loss of use of, other tangible property, New York courts decline to find a duty to defend (see Bonded Concrete, Inc. v Transcontinental Ins. Co., 12 AD3d 761, supra; Baker Residential Ltd. Partnership v Travelers Ins. Co., 10 AD3d 586 [1st Dept 2004]; Basil Dev. Corp. v General Acc. Ins. Co., 229 AD2d 640 [3rd Dept 1996], affd 89 NY2d 1057 [1997]; Zandri Constr. Co. v Firemen's Ins. Co. of Newark, 81 AD2d 106, supra).

Airolite argues, however, that under New York's choice of law principles, Ohio law should govern the instant coverage dispute.Airolite contends that, unlike New York, Ohio courts recognize a design defect and/or faulty construction as an accident, and thus an "occurrence" under commercial general liability policies such as the one at issue (citing to Zanco, Inc. v Michigan Mut. Ins. Co., 11 Ohio St 3d 114 [1984]; National Eng'g & Contr. Co. v U.S. Fid. & Guar. Co., 2004-Ohio-2503 [Ohio App 10th Dist 2004]; Acme Constr. Co. Inc. v Continental Nat. Indemn. Co., 2003-Ohio-431 [Ohio App 8th Dist 2003]). Airolite further argues that Ohio courts recognize "economic loss," in the form of money spent to do remedial work, as a loss of use of other tangible property not physically injured, and thus "property damage" within the coverage of such policies (citing to Hartzell Indus., Inc. v Federal Ins. Co., 168 F Supp 2d 789 [SD Ohio 2001]; and Fortney & Weygandt, Inc. v American Mfrs. Mut. Ins. Co., 2005 WL 1566744 [ND Ohio 2005]).

Airolite argues that, under Ohio law, the money spent by Glassalum to remediate the louvers was "property damage" caused by the defective louvers, incurred by a third party. Airolite argues that since this "property damage" was alleged to have occurred both after the work by Airolite had been completed, and away from Airolite's premises, the allegations arguably set forth a claim potentially falling within the coverage afforded under the "products completed operations hazard" of the Valley Forge policy. Thus, the allegations in the complaint were sufficient to have triggered Valley Forge's duty to defend.

"The first step in choice of law analysis is determining whether an actual conflict exists between the jurisdictions involved" (K.T. v Dash, 37 AD3d 107, 111 [1st Dept 2006], citing Matter of Allstate Ins. Co. [Stolarz - N.J. Mfrs. Ins. Co.], 81 NY2d 219, 223 [1993]). "Where no conflict exists between the laws of the jurisdictions involved, there is no reason to engage in a choice of law analysis" (Elson v Defren, 283 AD2d 109, 114 [1st Dept 2001], citing Portanova v Trump Taj Mahal Assocs., 270 AD2d 757, 759-760 [3rd Dept], lv denied 95 NY2d 765 [2000]).

Airolite is correct that some Ohio courts have held that allegations of faulty workmanship and/or design by a contractor may constitute an accident, and thus be considered an "occurrence," under commercial general liability policies, such as the one at issue (see e.g. Zanco, Inc. v Michigan Mut. Ins. Co., 11 Ohio St 3d 114, supra; Erie Ins. Exch. v Colony Dev. Corp., 136 Ohio App 3d 406, 412 [Ohio App 10th Dist 1999]; but see Heile v Herrmann, 136 Ohio App 3d 351 [Ohio App 1st Dist 1999] [holding that faulty workmanship does not constitute an occurrence); Royal Plastics, Inc. v State Automobile Mut. Ins. Co., 99 Ohio App 3d 221 [Ohio App 8th Dist 1994][same]). However, this court has found no Ohio cases to support [*7]Airolite's apparent contention that the cost of remediating the defective louvers would be considered a "loss of tangible property not physically injured" under such policies, or that such loss would fall outside the "work product" exclusions in the Valley Forge policy.

In Hartzell, the primary case cited by plaintiff in support of its contention that such losses fall within the policy definition of "property damage," the plaintiff sought defense and indemnification from its insurer in an underlying suit brought by a purchaser of its product. Hartzell had supplied its customer, a power company, with roof fans to cool its boiler house. After the propellers on some of the fans were found to be defective, the power company felt compelled to shut down all of the fans for investigation and repair. In the underlying suit, the power company had sought damages against Hartzell for the costs of repairing and replacing the defective fan parts, as well as for losses due to reduced worker productivity caused by the partial loss of use of the boiler house, which had resulted from the increased temperatures caused by the inability to use the roof fans.

The insurer in Hartzell had argued that there was no coverage for the losses due to reduced worker productivity, as these were "purely economic losses," which did not constitute the loss of use of "tangible property." The court disagreed, finding that the power company had sustained such losses as a result of the partial loss of use of its boiler house due to the failure Hartzell's fans. Although the boiler house itself was not physically harmed, the ... policy defines "property damage" to include the "loss of use of tangible property that is not physically injured." The Court cannot conceive of damages for the loss of use of tangible property that is not physically injured being anything other than "purely economic losses"

(Hartzell Indus., Inc., 168 F Supp 2d at 796). The insurer additionally argued that such losses would be excluded by the "your product" exclusion in their policy, as these losses arose from the defect in the fan. Again, the court disagreed, finding that [o]n its face, the "damage to your product" provision only excludes coverage for property damage to the insured's product (i.e., Hartzell's fan) arising out of the insured's product. The exclusion does not preclude coverage for property damage to the property of a third-party (i.e., [the power company]'s partial loss of use of its boiler house) arising out of the insured's product

(id. at 798 [emphasis in original])

Unlike Hartzell, where the "economic losses" resulted from the loss of use of tangible property belonging to a third party, here, the economic losses, for which recovery was sought, were solely the costs incurred by Glassalum to remediate Airolite's own work product, i.e., the louvers themselves. Like New York, Ohio courts have held that commercial general liability policies containing "work product" exclusions, similar to those in the Valley Forge policy, were not intended to insure the integrity or quality of the contractor's product (see Zanco, Inc. v Michigan Mut. Ins. Co., 11 Ohio St 3d 114, supra). As in New York, Ohio courts decline to find a duty to defend where, as here, the only damages alleged in the underlying action were the costs of repairing or remediating the insured's defectively designed or damaged product (id.; see also Erie Ins. Exch. v Colony Dev. Corp., 136 Ohio App 3d 406, supra; Westfield Ins. Co. v Riehle, 113 Ohio App 3d 249 [Ohio App 6th Dist 1996]; and see Acme Constr. Co. Inc. v Continental [*8]Natl. Indem. Co., 2003-Ohio-434, supra; Hahn's Elec. Co. v Cochrane, 2002-Ohio-5009 [Ohio App 10th Dist 2002]).

As this Court finds that all of the damages alleged in the underlying Federal suit clearly fell within the "work product" exclusions of the Valley Forge policy, and as Ohio law, insofar as it pertains to the effect of these exclusions, is substantially similar, if not identical, to New York law, this court need not engage in a conflict of law analysis. In any event, Valley Forge would be entitled to a declaration that it had no duty to defend Airolite in the Federal suit under either Ohio or New York law.

Accordingly, it is

ORDERED that the motion by plaintiff The Airolite Company, for a declaratory judgment that defendant Valley Forge Insurance Company breached its duty to defend Airolite in the prior Federal suit captioned Glassalum Intl. Corp. v The Airolite Company, No. 04 Civ 05796, and is thereby obligated to pay Airolite's attorneys' fees and expenses incurred in that suit, as well as in the instant action, is denied; and it is further

ORDERED that defendant Valley Forge Insurance Company's motion for summary judgment declaring that all of Airolite's causes of action are dismissed, is granted to the extent that it is

ADJUDGED and DECLARED that Valley Forge had no obligation to defend or indemnify plaintiff in the prior Federal suit (Glassalum Intl. Corp. v The Airolite Company, No. 04 Civ 05796) and that Valley Forge has no obligation to pay Airolite's attorneys' fees and expenses in that action or this action.

This memorandum opinion constitutes the decision, order and judgment of this Court.

Dated: May, 2007ENTER:

New York, New York

_______________________

J.S.C. Footnotes

Footnote 1: Plaintiff insists that Glassalum never objected to the proposed design change. However, on August 29, 2002, Glassalum responded to Airolite's notification, as follows:

Thank you for your letter (by your [project engineer]) outlining Airolite's intent to delete the stiffener and weldments on the back of the L-2 louvers. Your letter has been forwarded to Turner Construction Co., for their file and distribution, along with this response letter as cover.



Your intent to delete the stiffener and your purpose for this is noted. As discussed previously, GIC cannot approve or disprove this action. This is Airolite's decision as the vendor and responsible party. Hence GIC's request for a qualifying letter from your Engineer, stating that your product is not affected structurally by the removal of the stiffener.

It is to be understood that Airolite is fully responsible for the performance of the product and by making this change the responsibility is understood and accepted by you.

(Murray Aff., Exh. 7).

Footnote 2: This latter exclusion did not apply to "the loss of use of other property arising out of a sudden and accidental physical injury to your product' or your work' after it has been put to its intended use" (id.).

Footnote 3: It appears that Airolite was experiencing severe financial difficulties at the time, and could not afford the costs of the remediation.