Insurer Must Defend Portions of Claim Arising from Alleged Faulty Workmanship
The federal district court found that the insurer must defend portions of the underlying case based upon alleged faulty workmanship. Motorist Commercial Mutual Ins. Co. v. Ellison Distributing Inc., 2025 U.S. Dist. LEXIS 35279 (D. Ind,. Feb. 27, 2025).
Daily Feed & Grain, Inc. (DFG) farmed, produced and sold grain. Ellison Distributing, Inc. (Ellison) sold and distributed grain storage handling and drying equipment. DFG and Ellison entered a contract to construct and set up a non-GMO grain storage facility (the Non-GMO Project). "Non-GMO" meant "non-genetically modified." Non-GMO grain required very dry storage. GMO grain was sold a lower prices compared to Non-GMO grain. Under the contract, Ellison was to construct the Non-GMO Project to store, improve, dry, clean and process the grain into a non-GMO food grade product.
After completion, DFG found water leaks in the bins after a rain. Ellison tried to fix the storage bins but was unsuccessful. Mold occurred on the grain. The 2015 grain harvest was rejected for non-GMO sales. Some of the 2015 harvest was rotten, which required it to be thrown out, and the remainder was salvaged and sold as GMO grain.
Ellison resumed work on the Non-GMO Project in the spring of 2016. By September, 2016, Ellison had left the Non-GMO Project. The 2016 harvest was damaged and had to be blended and sold as GMO grain. DFG subsequently had the grain bins torn down and rebuilt.
DFG filed suit agains Ellison. Ellison tendered to its insurer, Motorist, which defended under a reservation of rights. Motorist filed an action for declaratory relief and filed a motion for summary judgment seeking a declaration that it had no duty to defend.
The court categorized the damages DFG sought as follows: (A) economic losses DFG incurred due to the damaged grain and lost profits based on DFG's inability to use the Non-GMO Project to store and process non-GMO grain during the repair and replacement of Ellson's work; (B) amounts paid to Ellison to construct the Non-GMO Project, and (C) the amounts paid to complete or replace Ellison's work.
The court first determined there was an occurrence because there was no expectation or foresight of faulty workmanship. Further, there was coverage for the products of the 2015 grain harvest that were damaged and destroyed. Motorist's Motion for Summary Judgment was denied as to damages DFG incurred for the products of the 2015 grain harvest that were destroyed.
Motorist argued that DFG's economic losses on the products from the 2015 and 2016 grain harvests that were re-blended and resold were bared under exclusion (j) (6), the Damage to Property exclusion, and exclusion (m), the Damage to Impaired Property exclusion. The Damage to Property exclusion barred coverage for "property damage" for "[t]hat particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The exclusion did not apply to work that was not complete. DFG put the work to its intended use by using the grain bins to store and process grain. Thus, the policy deemed the work completed and the Damage to Property exclusion did not apply to the economic losses of the damaged 2015 and 2016 grain harvests.
The Damage to Impaired Property exclusion barred coverage for "'property damage' to 'impaired property' or property that has not been physically injured, arising out of . . . a defect, deficiency, inadequacy, or dangerous condition in 'your product' or 'your work.'" Motorist contended that the products from the 2015 and 2016 grain harvests that DFG salvaged and sold constituted "impaired property" because selling the grain was useful to DFG and, therefore, the grain was restored to use.
The court determined that it was not enough to assert that the damaged grain could be used in its damaged condition for a lesser purpose. Thus, the Damage to Impaired Property exclusion did not apply to the economic losses from the damaged 2015 and 2016 grain harvests.
Because neither the Damage to Property exclusion nor the Damage to Impaired Property exclusion applied, Motorist's Motion for Summary Judgment was denied as to damages DFG incurred for the products of the 2015 and 2016 grain harvests that were re-blendeda nd sold as GMO grain.
The court found, however, that any damages DFG incurred after the allegedly faulty bins were removed were consequential damages attributable to a defective product failing to function as expected. Such damages could not have occurred as a result of the property damage to the 2015 and 2016 grain harvests. Therefore, Motorist's Motion for Summary Judgmne was granted as to the damages DFG incurred due to its inability to use the Non-GMO Project during the repair and replacement of Ellison's work.
Further, damages for amounts paid to complete or replace Ellison's work constituted a business risk rather than a risk of occurrences that gave rise to insurable liability. This was a contractual issue between DFG and Ellison and not one that gave rise to liability under Motorist's policy. Motorist's Motion for Summary Judgment was granted as to damage DFG incurred in the amounts DFG paid to repair and replace Ellison's work. The same reasoning applied to amounts DFG paid to Eiilson to complete the Non-GMO Project
