Ohio Supreme Court to consider “integrated system rule” within insurance coverage context

On May 12, 2020, the Ohio Supreme Court agreed to hear an insurance coverage case to decide whether the incorporation of a defective ingredient into a product, allegedly making the end product defective, constitutes damage to other property resulting from an occurrence so as to implicate insurance coverage.
 
Owens-Brockway contended that components it purchased from Ironics to use in the manufacture of its glass containers were defective, rendering the end product similarly defective. As a result, Owens-Brockway asserted claims against Ironics for breach of contract, breach of warranty, negligence, UCC violations and product liability. Ironics tendered the claim to Motorists Mutual, which denied coverage and filed a declaratory judgment action. The trial court held that the incorporation of a defective components into the glass containers did not constitute damage to “other” property, and thereby concluded that there was no coverage under the Motorist umbrella policy.  
 
The Sixth Appellate District reversed. The appellate court first ruled that Ironics was not entitled to coverage under the CGL policy because the glass containers into which the component was incorporated were not “other property” for purposes of the economic loss rule. Nevertheless, the court held the insured was entitled to coverage under the umbrella policy because the injury to the glass containers, by the incorporation of the defective component, constituted unintended and unexpected “property damage” as that term was defined under the policy. As such, the transfer met the definition of an “occurrence.” According to the court, the language of the Umbrella policy relieved the insured from showing allegations of damage to “other” property.
 
Counsel for Motorists Mutual urged the Ohio Supreme Court to review the case, arguing the decision by the court of appeals will “open the floodgates to unanticipated risks for insurers in Ohio.” The insurer maintains that the “integrated system rule,” employed by federal courts and some Ohio state courts, holds that an integrated product allegedly damaged by inclusion of a defective part is not “other” property, and therefore the economic loss rule precludes a negligence claim against the component manufacturer. Motorists contends that this same theory should apply in the context of insurance coverage.
 
Depending on how the Court decides to approach this issue, its decision could have significant implications on coverage for Ohio policyholders. We will report on any developments as this appeal proceeds.