Wyoming Sawmills, Inc. v. Transportation Ins. Co.

• Decision Date: 23 May 1978
• Citation: 282 Or. 401,578 P.2d 1253
• Parties: WYOMING SAWMILLS, INC., Respondent, v. TRANSPORTATION INSURANCE COMPANY, a corporation, Appellant. . *
• Court: Oregon Supreme Court

Page 1253

578 P.2d 1253

282 Or. 401

WYOMING SAWMILLS, INC., Respondent, v. TRANSPORTATION INSURANCE COMPANY, a corporation, Appellant.

Supreme Court of Oregon,In Banc. ^*

Argued and Submitted Dec. 7, 1977.

Decided May 23, 1978.

William L. Hallmark of Jones, Lang, Klein, Wolf & Smith, Portland, argued the cause and filed briefs for appellant.

Edwin J. Peterson of Tooze, Kerr, Peterson, Marshall & Shenker, Portland, argued the cause and filed a brief for respondent.

HOLMAN, Justice.

This is an action by an insured against an insurance company to recover the amount of a claim paid by the insured and asserted by it to have been covered by a policy of comprehensive general liability insurance. The action was tried by the court sitting without a jury upon a stipulated statement of facts and documentary exhibits. Defendant appeals from a judgment for plaintiff.

Plaintiff, a lumber manufacturer, sold 2 X 4 studs to North Pacific Lumber Company which, in turn, sold them to Morris-Knudsen Company, a building contractor. Morris-Knudsen then used the studs in the construction of buildings at Lowry Air Force Base, Colorado. In April 1974 plaintiff received notice from North Pacific that some of the studs had warped, twisted, or were otherwise defective and would have to be replaced. Negotiations resulted in plaintiff's settling any claims North Pacific might have in exchange for two releases. One of the settlement instruments covered the labor expenses involved in replacing the defective studs; the other dealt with the cost of acquiring new studs. This case involves only the claim based on labor expenses. It does not include the claim for the cost of acquiring new studs. Plaintiff advised defendant of the claim against plaintiff and tendered its defense. It also notified defendant that if the tender was not accepted, plaintiff would settle the claim and seek reimbursement.

After plaintiff settled North Pacific's claim, defendant advised plaintiff that it was denying liability on the basis of policy exclusion (n) which excludes coverage for damage to the named insured's products. Plaintiff then initiated the present action.

In the action defendant denied the existence of "property damage" as covered by the policy. It also contended that exclusions (m), (n), and (p) excluded coverage. In its reply, plaintiff alleged that defendant was estopped to deny coverage on any basis other than exclusion (n). The trial judge held exclusion (n) inapplicable, agreed with plaintiff's estoppel argument, and concluded that the loss was the result of property damage as covered by the policy.

The policy provided that the insurer was responsible for

" * * * all sums which the insured shall become legally obligated to pay as damages because of

" * * * .l §

" * * * property damage * * * ."

Property damage was defined as follows:

"(1) physical injury to or destruction of tangible property * * * ." (Emphasis added.) ¹

The stipulation of the parties provided, in part:

"In April of 1974, plaintiff received word that M-K was experiencing problems with the buildings under construction, due to the fact that some of the studs furnished by the plaintiff would require removal from the buildings under construction because of warping, twisting, bowing and crooking. It was necessary to remove the defective studs and replace them with nondefective studs.

" * * * .ng,

" * * * no part of the plaintiff's claim is for the replacement cost of the studs themselves, and that the plaintiff's claim is for expenses incurred incident to the removal and replacement of the defective studs."

The exhibits, which include the correspondence between the parties, show that plaintiff's attorney wrote to defendant, stating that

"Wyoming Sawmills' coverage claim * * * is only with respect to Item No. 2 expenses incurred in replacing the allegedly defective studs. In other words, Wyoming Sawmills is not making any claim * * * for defects in the product itself, or for replacement of the product itself. The entire claim of $17,888.63 is for consequential damages allegedly sustained by Morrison-Knudsen for labor in removing and replacing the studs. It is Wyoming Sawmills' position that that item is covered by the * * * policy."

This statement is further confirmed by the release taken by plaintiff from North Pacific, which release included the language

" * * * for the expenses incurred in labor to replace the allegedly defective lumber purchased by Morrison-Knudsen for use and construction at Lowry Air Force Base, Colorado."

It is thus evident that the claim is exclusively for labor expense in taking out the defective studs and in replacing them with nondefective ones.

Defendant contends that any expense incurred by the removal and replacement of plaintiff's product is not the result of "property damage" as contemplated by the policy. It contends that the property damage that is covered by the policy is damage occasioned by the defective studs to other property, i. e., the balance of the building, and that the stipulation and exhibits do not demonstrate that the labor expense incurred was occasioned by the repair of such damages.

On the other hand, plaintiff contends that the defective studs became integrated into and were made a part of the building and their subsequent warping was damage to the building whether the damage was limited to the studs or not. It cites a series of cases, ² which are the progeny of Hauenstein v. St. Paul-Mercury Indem. Co., 242 Minn. 354, 65 N.W.2d 122 (1954), which hold that despite the lack of physical damage to the larger entity into which the defective product has been integrated, the value of the larger entity has been depreciated by the defective product which has been integrated into it, and that such depreciation in value constitutes "property damage."

Insofar as we can determine, none of the policies involved in the cases on which plaintiff relies contained the same definition of "property damage" as that which is contained in the present policy. The present policy defines property damage as "physical injury to * * * tangible property." (Emphasis added.) Apparently, none of the policies involved in the cases which are the basis for plaintiff's contention included the word "physical." The inclusion of this word negates any possibility that the policy was intended to include "consequential or intangible damage," ³ such as depreciation in value, within the term "property damage." The intention to exclude such coverage can be the only reason for the addition of the word. As a result, in the absence of a showing that any physical damage was caused to the rest of the building by the defective studs and that the labor cost was for the rectification of any such damage, plaintiff cannot recover.

In an attempt at clarity, we wish to state what we do not hold. We do not hold that if damage was occasioned to any part of the building, other than the studs, during the process of replacing the studs, such damage is not covered. Neither do we hold that if damage had occurred to the balance of the building as the result of the defective studs and the only way such damage could have been repaired was to install new studs also (of which there is no evidence), the cost of the labor of such installation would not be covered.

This leads us to a problem with the proof in this case concerning whether damage was occasioned to any part of the building other than the studs by the process of replacement. In a letter written by defendant to plaintiff's attorney, the following is found:

" * * * .nd:

"There is some indication that in the loss, certain drywall, bottom plates, soffits had to be replaced getting at the 2 X 4's that may have been bad. * * * ."

Apparently, no expense was incurred for damaged material used in the balance of the building occasioned by the replacement of the studs since the claim which plaintiff was forced to pay was for labor only. However, the labor attributable to the repair of damage to the balance of the building necessitated in getting to the studs in order to replace them would be labor expended for the repair of physical damage to the building caused by plaintiff's defective product. Seemingly, the parties contemplated that some such inquiry might be important, depending on how the provisions of the policy were construed, because as part of their stipulation they inserted the following:

"If the court decides that part of the $17,888.63 is recoverable by the plaintiff, but cannot decide how much of that amount is recoverable (there being no detailed breakdown included in this stipulation), it shall advise the parties, and a supplemental hearing will be held to determine what part of the plaintiff's claim is recoverable, and whether attorneys' fees are recoverable in connection with such covered claim."

We hold, therefore, that such portion, if any, of the labor expense for which claim is made as might be attributable to tearing out and putting back other parts of the building (as compared with the labor attributable to the actual removal and replacement of the studs after they have been uncovered) in order to replace the studs is within the coverage of the policy.

Because of the possibility of there being a claim for the labor attributable to tearing out and replacing parts of the building...