Fed. Ins. Co. v. Fredericks, Inc.

• Citation: 29 N.E.3d 313
• Decision Date: 27 February 2015
• Docket Number: No. 26230.,26230.
• Parties: FEDERAL INSURANCE COMPANY, et al., Plaintiffs–Appellants v. FREDERICKS, Inc., et al., Defendants–Appellees.
• Court: United States Court of Appeals (Ohio)

29 N.E.3d 313

FEDERAL INSURANCE COMPANY, et al., Plaintiffs–Appellants

v.FREDERICKS, Inc., et al., Defendants–Appellees.

No. 26230.

Court of Appeals of Ohio, Second District, Montgomery County.

Feb. 27, 2015.

Paul Bartolacci, Philadelphia, PA, Andrew P. Avellano, Columbus, OH, for plaintiff-appellants-Carter Express, Inc., Carter Logistics, LLC, and J.P. Holding Co., Inc.

Kenneth A. Calderone, John R. Chlysta, Akron, OH, for Defendant–Appellee–Acuity, A Mutual Insurance Co.

William Fifner, Columbus, OH, for Defendant–Appellee–Skiles Construction, Inc.

OPINION

WELBAUM

, J.

{¶ 1} In this case, Plaintiff–Appellants, J.P. Holding Co., Inc., Carter Express, Inc., and Carter Logistics, LLC, appeal from a trial court judgment denying them any recovery on claims asserted against Defendant–Appellee, Skiles Construction, Inc. The trial court also found, after a bench trial, that Intervenor/Third Party Defendant–Appellee, Acuity, A Mutual Insurance Company, had no duty to defend or to indemnify Skiles under a general commercial liability policy issued to Skiles on July 15, 2011.¹

{¶ 2} Appellants contend that the trial court erred in concluding that their claims against Skiles were barred by the economic loss doctrine, and that they were not third-party beneficiaries to a subcontract entered into by Skiles and Fredericks, Inc. (“Fredericks”). In addition, Appellants contend that the trial court erred in failing to address the “common ownership” among Appellants, and erred in finding that their damages did not arise from physical damage to their property. Finally, Appellants contend that the trial court erred by failing to address whether Acuity's policy precluded coverage for consequential and incidental damage caused by Skiles' work.

{¶ 3} We conclude that the trial court did not err in applying the economic loss doctrine, which prevents recovery in tort of damages for purely economic loss. As will be explained below, in the absence of privity or a substitute for privity, the economic loss doctrine prevents recovery in tort of damages for purely economic loss where the defendant breached a duty that even partially arose by contract. Appellants are not entitled to recover because they were not in privity with Skiles, nor were there facts establishing a substitute for privity between Appellants and Skiles.

{¶ 4} Another method of establishing privity is where a party is a third-party beneficiary to a contract. However, Appellants were not third-party beneficiaries to the subcontract entered into by Skiles and Fredericks, a general contractor. The subcontract identifies another entity as the owner, and extends indemnification for damages only to the owner.

{¶ 5} Indirect economic damages are allowed in tort where physical damage to property occurs. However this doctrine also does not apply, because there was no direct causal nexus between Appellants' losses and the tangible damage to the property, which was owned by another.

{¶ 6} Finally, we conclude that the trial court did not err by failing to consider whether Appellants' collateral and consequential damages should be covered under Acuity's policy of insurance. Acuity's duty to pay was conditioned upon its insured (Skiles) having been found legally liable to pay damages. However, Skiles was not liable for any economic damages of Appellants, and Acuity would have no duty to pay for those damages. Accordingly, the judgment of the trial court will be affirmed.

I. Facts and Course of Proceedings

{¶ 7} This case arose from a windstorm that occurred on September 3, 2011, which damaged a construction project on property owned by Pasco Enterprises (“Pasco”). Pasco was one of several companies, including Express and Logistics, that were 100% owned by J.P. Holding. Pasco owned real estate holdings, and Logistics and Express were the tenants in Pasco's buildings. Logistics held contracts with customers, billed customers, and contracted with carriers, including Express, to transport freight. About 85% of Logistics' freight was transported by Express, which is a licensed motor carrier. The companies owned by J.P. Holding were all separately formed or incorporated, but they shared the same officers and the same principal place of business and location in Anderson, Indiana.

{¶ 8} In 2009, Logistics obtained a contract from Toyota for the transportation of materials to five different Toyota assembly plants. As a result, Logistics leased a building in West Carrollton, Ohio, in October 2009, for a period of 18 months at a rental price of about $33,333.33 per month. This was the best facility available at the time. However, the most efficient location for what was called a “cross-dock facility” was near the intersection of Interstates 70 and 75. The intent, therefore, was that a new warehouse would eventually be built in Vandalia, Ohio, with Express and Logistics as tenants. Although Logistics was the lessee on the West Carrollton lease, the lease agreement provided that Logistics would have the right during the lease to assign the lease to any related entity of Logistics or of J.P. Holding, without having to obtain the lessor's consent. Plaintiff's Ex. 1, p. 5, ¶ 17(b). The lease also contained an option for two additional six-month terms, with a slight increase in rent.

{¶ 9} In January 2011, Pasco entered into a purchase agreement with the City of Vandalia for 26 acres of land at a discounted price, based on the expectation that the decrease in price (about $140,400) would be offset by payroll taxes generated by Express. Express also signed the purchase agreement, solely for the purpose of allowing Vandalia to review pertinent income tax records. If Vandalia failed to net $140,400 in increased income tax during a three-year period, Pasco would have to pay the difference between the tax collected and $140,400. John Paugh, the President of Express, Logistics, Pasco, and J.P. Holding, signed the contract on behalf of Pasco and Express. The land was located at 1655 Capstone Way, in Vandalia, Ohio.

{¶ 10} Paugh had a long-standing relationship with William Fredericks, who was the president of Fredericks, a construction company. At Paugh's request, Fredericks prepared a budget and estimate for construction of a cross-deck facility at the Vandalia site. The estimate included a steel building pre-engineered by Varco Pruden, Inc. (“Varco”). After receiving the estimate and budget, which bore the designation, “Carter Express Cross Dock Facility,” Paugh told Fredericks to proceed with construction. Because of their relationship, no written contact was prepared; Paugh and Fredericks proceeded on a “handshake” basis. The anticipated completion date of the facility was January 2012.

{¶ 11} Over the years, Fredericks had worked with Skiles, which was a company in the business of constructing pre-engineered metal buildings. Both Skiles and Fredericks were Indiana corporations. In April 2011, Fredericks and Skiles entered into a written subcontract.

{¶ 12} The subcontract indicated that Fredericks was the contractor, Skiles was the subcontractor, and Pasco was the owner, with whom Fredericks had made a contract for construction of the Carter Cross Dock Facility. Joint Ex. B., p. 1. In addition, the subcontract provided that a copy of the contract between Fredericks and Pasco had been made available to Skiles. When Skiles entered into the subcontract, he thought Express was the owner of the property and he intended Express to benefit from his construction work. Skiles had previously worked on other buildings for Paugh, and knew that the building in Vandalia would be used by Express for its operations. During his testimony at trial, Skiles stated that after he had an opportunity to review the contract, he realized that Pasco was the owner of the building, and the owner was the party he intended to benefit.

{¶ 13} Article 1 of the subcontract provided that it included both the contract and the prime contract, or agreement between the owner and contractor, and other contract documents, including drawings, specifications, and addenda issued prior to the execution of the prime contract. Joint Ex. B., p. 2, Section 1.1.

{¶ 14} Fredericks contracted with Varco to engineer and design the steel building, and paid for the steel framework to be delivered to the Vandalia job site. The pre-engineered materials were delivered, along with a “Basic Erection Guide,” which Skiles was required to follow when erecting the framework. In particular, Skiles was required to design and provide a temporary bracing plan before the steel framework was erected.

{¶ 15} In August 2014, Skiles began to erect the framework. Although Skiles put some temporary bracing in place, it was inadequate and did not meet a reasonable standard of workmanship. Joint Ex. I, p. 5, ¶ 23–25 (Stipulations). After Skiles' workers left the construction site on September 3, 2011, a wind and rain storm passed through the area, with wind gusts up to 47 miles per hour. Id. at ¶ 26. The following day, a substantial part of the steel framework was found collapsed on the ground at the site. “Skiles' negligence and failure to perform in a workmanlike manner under its contract was a legal and proximate cause of the collapse.” Id. at ¶ 28.

{¶ 16} At the time of the collapse, Skiles was insured by Acuity under Commercial General Liability and Excess Liability Policy No. K950060. Appellants, as well as Pasco, were insured by Federal Insurance Company (“Federal”), which paid Pasco for the costs, expenses, and other damages proximately caused by the collapse. Federal then filed a subrogation suit against Fredericks and Skiles in August 2012, seeking recovery of the amounts it had paid. Subsequently, Acuity received permission to intervene in the case. The complaint was also later amended to add Pasco, J.P. Holding, Express, Logistics, and another J.P. Holding company (Astro) as plaintiffs, for the purpose of asserting claims for uninsured losses not paid by Federal.

{¶ 17} In February...