Forrec Construction Company and Bruce Evans, Ltd, successor in interest (Forrec/Evans) was a subcontractor for the general contractor, Centrex Rooney Construction Company (Centrex) on a portion of the Animal Kingdom Lodge Resort project at Walt Disney World in Florida. Forrec/Evans obtained bids and limited quantities of cedar from West Orange Lumber Company, Inc. (West Orange) for completion of its subcontract. Forrec Evans requested "C" select or better cedar. West Orange submitted a quote and described the product as "No Hole Select Cedar." The Forrec/Evans purchase orders described the quality of lumber as "C" select or better and West Orange delivered lumber it described as "No Hole Select Cedar."

In February, 2000, Disney questioned the grade of cedar being installed. Centrex directed Forrec/Evans to stop the installation, remove what had been installed and take corrective action to secure the "C" or better grade of cedar as required in the specifications. Forrec/Evans did so and then filed a complaint against West Orange in September 2001, alleging the cedar supplied by them did not meet required specifications. It also claimed damages in replacing the cedar including, but not limited to, higher material cost, increased labor, subcontractor and transportation costs and additional overhead and legal fees, for a total of over $850,000.

Indiana Lumbermens Mutual Insurance Company (ILMIC) insured West Orange and initially defended them. In a declaratory judgment proceeding, they then took the position that they had no duty to defend or indemnify West Orange for the damages alleged in the complaint. They based their position on the general rule that an insurance company's duty to defend an insured is determined solely from the allegations in the complaint filed against the insured. The trial court agreed with ILMIC and concluded there were no allegations of property damage, with regard to coverage in the Commercial General Liability Policy, and determined the dispute involved a breach of contract, not a tort. Failure to supply a product specified in a contract was a business risk not covered by the liability policy issued by ILMIC. West Orange appealed.

The appellate court agreed with the trial court decision and held that the purpose of the liability coverage was to provide protection for personal injury or property damage caused by the completed product, not for the replacement and repair of that product or to insure construction or contract deficiencies. The allegations in the complaint showed no damage from the failure to provide the correct quality of lumber other than the cost or expense to the vendor to remove the defective product and supply an acceptable substitute. The court also held that the policy did not apply to damage to impaired property (property not physically injured but also not useable). It was also held to not apply to coverage for damages incurred by a vendor that supplied defective products and was then required to remove and replace them with the specified product (under the product recall exclusion). West Orange argued that this exclusion should not apply because the siding was not replaced because it was defective, deficient, inadequate or dangerous. The appellate court held that the exclusion encompassed deficient or inadequate materials and that this exclusion, coupled with the other exclusions, was sufficient to exclude coverage in this case, since there was no damage to the property or injury to persons. In the final analysis, this was a case where, through error, mistake or negligence, a good product was sold and delivered and then rejected only for failure to meet contract specifications. The trial court decision was affirmed.

West Orange Lumber Company, Inc., Appellant, v. Indiana Lumbermens Mutual Insurance Company, et al., Appellees. Florida District Court of Appeal. Case No. 5D04-1429. Filed April 1, 2005. Appeal from the Circuit Court, Orange County. Affirmed. 2005 CCH Personal and Commercial Liability Cases. Paragraph 8096.