AIU Insurance Company v. Omega Flex, Inc.

Filing 24

MEMORANDUM OPINION. Signed by Judge Norman K. Moon on 6/9/11. (jcj)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
CHARLOTTESVILLE DIVISION

AIU INSURANCE COMPANY ,
as subrogee of
GARTHLAND , LLC,

CIVIL ACTION NO . 3:11-CV -00023

Plaintiff,

MEMORANDUM OPINION

v.
OMEGA FLEX , INC .,

JUDGE NORMAN K. MOON
Defendant.

This matter, a tort case removed here from the Circuit Court of Albemarle County, is
before the court upon consideration of Defendant’s motion to dismiss, which has been fully
briefed and heard. For the reasons stated herein, the motion will be granted, in part, and denied,
in part.
I. STANDARD OF REVIEW
A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the
legal sufficiency of a complaint. See Randall v. United States, 30 F.3d 518, 522 (4th Cir.1994)
(citation omitted); Fed. R. Civ. P. 12(b)(6); Fed. R. Civ. P. 8. A court must take “the material
allegations of the complaint” as admitted, and liberally construe the complaint in favor of a
plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421 (1969) (citation omitted). However, upon
consideration of motions to dismiss for failure to state a claim upon which relief may be granted,
I apply the pleading standard as refined by Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and
Ashcroft v. Iqbal, 556 U.S. ___, 129 S. Ct. 1937 (2009). Plaintiffs must allege facts that “state a
claim to relief that is plausible on its face,” i.e., facts that “have nudged their claims across the

line from conceivable to plausible.” Twombly, 550 U.S. at 570. A claim is plausible if the
complaint contains “factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged,” and if there is “more than a sheer possibility
that a defendant has acted unlawfully.” Iqbal, 556 U.S. at ___, 129 S. Ct. at 1949.
II. FACTUAL BACKGROUND
Plaintiff, AIU Insurance Company, is the subrogee of Garthland LLC,1 a limited liability
company owned and operated by Ms. Hunter Crosson. AIU insured Garthland’s property at
1347 Garth Road in Charlottesville (“the property”) for the policy period May 1, 2009, to May 1,
2010. Defendant, Omega Flex, Inc., is a Pennsylvania corporation engaged in the business of
designing, manufacturing, and supplying a flexible corrugated stainless steel tubing, commonly
known as “CSST,” which Defendant has branded as “TracPipe,” for use in various gas piping
applications.
Garthland contracted with Alexander Nicholson, Inc. (“Nicholson”), for extensive
renovations to a residence on the property at 1347 Garth Road. Nicholson was responsible for
the hiring, coordination, and supervision of the subcontractors who worked on the residence,
including contractors who installed the home’s plumbing system and CSST, which was Omega
Flex’s TracPipe. The CSST was installed in the basement of the residence, in close proximity to
duct work.
On June 3, 2009, lightning struck at or near the property, and the CSST was damaged by
the strike.

The CSST conducted the electricity produced by the lightning strike, and the

electricity arced and created a hole in the CSST. Natural gas escaped from the CSST, ignited,

1

The parties sometimes refer to “Garth Land.”
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and caused a fire, which resulted in sudden and significant damage to Garthland’s and Ms.
Crosson’s real and personal property, incurring substantial incidental and consequential damages
that were not caused by any acts or omissions on the part of AIU’s subrogee. AIU paid
$249,302.91 to its insured, pursuant to the policy, which subrogates to AIU Garthland’s rights
and claims against third parties.
III. DISCUSSION
Count I of the complaint alleges that Omega Flex was negligent, and Count II alleges that
Omega Flex breached its implied warranty of merchantability.2 Defendant contends that the
negligence count is barred under the common law’s privity requirement and Virginia’s economic
loss rule, and that the breach of implied warranty claim is “similarly flawed in that: (a) the UCC
does not apply to the facts of this case, and (b) even if it does, all of the damages the plaintiff
seeks are ‘consequential’ economic losses and thus barred under Virginia Code §8.2-715, for
lack of privity.”
A.

Property Damage, Not Economic Loss

The proposition that a party may not recover purely economic losses through tort law is
inapposite to the instant case. Plaintiff alleges that Defendant manufactured, supplied and placed
into the stream of commerce defective steel tubing, which was used as part of a project to add to
and renovate an existing house, and that, as a result of Defendant’s negligence, the house was
severely damaged. Plaintiff does not merely complain about the inability of the steel tubing to

2

Count III of the complaint further alleges that Omega Flex breached its implied warranty of fitness for a
particular purpose, but does not allege that Plaintiff intended to use the product for any purpose separate and apart
from its ordinary purpose. A claim for breach of warranty for a particular purpose requires a plaintiff to allege
that the product failed to serve a purpose other than its ordinary purpose and peculiar and unique to the plaintiff.
See Va. Code § 8.2-315. However, Plaintiff’s opposition to the motion to dismiss concedes the dismissal of this
count.
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attain some preconceived notion of performance or quality; rather, Plaintiff alleges substantial
consequential damages.
Virginia law makes a clear distinction between the two concepts.
[W]here personal injury is threatened, a duty in negligence has been readily
found. Property interests also have generally been found to merit protection from
physical harm. However, where mere deterioration or loss of bargain is claimed,
the concern is with a failure to meet some standard of quality. This standard of
quality must be defined by reference to that which the parties have agreed upon.
Blake Const. Co., Inc. v. Alley, 233 Va. 31, 35 (1987) (citation omitted; emphasis added). Here,
there is no claim of “deterioration or loss of bargain” or of “a failure to meet some standard of
quality. . . . defined by reference to that which the parties have agreed upon.” Id.
The distinction between economic loss and physical injury is one which has been
made . . . by courts and by commentators. With regard to products liability law,
for example, Prosser states the following:
Where there is no accident, and no physical damage, and the only
loss is a pecuniary one, through loss of the value or use of the
thing sold, or the cost of repairing it, the courts have adhered to the
rule ... that purely economic interests are not entitled to protection
against mere negligence, and so have denied the recovery.
Bryant Elec. Co., Inc. v. City of Fredericksburg, 762 F.2d 1192, 1195 n. 6 (4th Cir. 1985)
(involving a dispute between a contractor and the project owner’s architect and engineer to
recover the contractor’s additional expenses) (quoting Prosser, Law of Torts, 4th Ed. (1971) at
665).
USAA Property & Casualty Ins. Co. v. Armstrong Air Conditioning, Inc., 2004 WL
2331290 (Va. Cir. Ct., Fairfax County 2004), illustrates the distinction between economic loss
and property damage. USAA, as subrogee of its insureds, the Cooks, sued various parties in
connection with the sale and installation of a furnace, apparently in an existing home. Id. at *1.
Against the supplier of the furnace, USAA had alleged negligence in introducing a defective
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furnace into the marketplace and failure to warn potential consumers of its dangerous condition.
Id. The supplier, which had sold the furnace to another party which installed it, demurred. Id.
The court, considering whether the economic loss doctrine barred the tort claims against the
supplier, observed as follows:
The decisive issue here is whether the defective product was the Cooks’ residence
of which the furnace was a defective part, or whether the product was only the oil
burning furnace that harmed the Cooks’ other property, then [sic] residence. The
plaintiff’s motion for judgment plainly demonstrates that it was the latter.
Accordingly, the product, the oil burning furnace, did not injure itself as was the
case in Sensenbrenner [v. Rust, Orling & Neale, Architects, Inc., 236 Va. 419
(1988)], but rather injured other property, not the subject of the oil burning
furnace contract.
Id.
Similarly, Factory Mutual Ins. Co. v. DLR Contracting, Inc., 2005 WL 2704502 (E.D.
Va. 2005), held that, where the plaintiff had suffered property damage and economic loss, the
economic loss rule did not preclude recovery “if the alleged breach of the duty does not
implicate contractual provisions and if damages other than for economic losses are being sought,
e.g., damage to property not subject of the contract. . . .” Id. at *6. In Factory Mutual, a roof
truss system failed, causing damage to a shopping center which had opened for business a few
months earlier. Id. at *1. In the resulting subrogation action by the tenants’ insurers, the
defendant contractors argued that, pursuant to Sensenbrenner, the economic loss doctrine barred
the claims. Id. at *7. The court disagreed, observing that,
[a]lthough, as in Sensenbrenner, the various parties defendant here were not in
privity with the insured tenants, the subrogated cause of action by the Plaintiff
insurers can nevertheless be maintained for negligence against DLR and any other
party alleged to be negligent where more than only economic losses are being
sought. In fact, the Plaintiffs seek damages for both the “injury” to property that
was not the subject of contractual obligation between the parties, e.g., inventory,
display fixtures, etc. . . . as well as economic loss . . . resulting from the alleged
negligence of one or more of the Defendants. . . . Accordingly, the claims by the
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Plaintiffs against the primary defendants can proceed subject to a determination at
trial of the disputed material fact(s) regarding whether a particular defendant was
negligent and whether such negligence proximately caused any of the damages
alleged.
Id.
B.

Tort, Not Contract

In this matter, Defendant was never directly involved in the project to add to and
renovate Ms. Croson’s home. There is no allegation that Defendant, as the supplier of a product,
was ever cognizant of the specific use to which its product would be put. To the extent
Plaintiff’s damages could be fairly construed to arise from a contract to renovate a house, a cause
of action in tort against the supplier of a product is not precluded.3 Plaintiff entered into no
contract with Defendant; however, even assuming arguendo that such a contract existed, a
defendant can nonetheless be held liable under both contract and tort law.
If the cause of complaint be for an act of omission or non-feasance which,
without proof of a contract to do what was left undone, would not give rise to any
cause of action (because no duty apart from contract to do what is complained of
exists) then the action is founded upon contract, and not upon tort. If, on the
other hand, the relation of the plaintiff and the defendants be such that a duty
arises from that relationship, irrespective of contract, to take due care, and the
defendants are negligent, then the action is one of tort.
Oleyar v. Kerr, 217 Va. 88, 90 (1976) (citation omitted). The allegedly breached tort duty must
have arisen independently of the contract. Foreign Mission Bd. of Southern Baptist Convention
v. Wade, 242 Va. 234, 241 (1991) (citing Spence v. Norfolk & W. R. Co., 92 Va. 102, 116 (1895).
The controlling policy consideration underlying tort law is the safety of persons
and property – the protection of persons and property from losses resulting from
injury. The controlling policy consideration underlying the law of contracts is the

3

Indeed, the only economic loss unrecoverable in tort in this case is damage to the steel tubing itself. See East
River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871-72, 875-76 (1986) (damage to defective product
itself not recoverable in tort).
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protection of expectations bargained for. If that distinction is kept in mind, the
damages claimed in a particular case may more readily be classified between
claims for injuries to persons or property on one hand and economic losses on the
other.
Sensenbrenner, 236 Va. at 425.
The manufacturer of tubing intended to carry natural gas, then, is subject to duties
independent of any contract, as
[i]t is a fundamental principle that the manufacturer of a product is held to a
standard of reasonable care. The duty of reasonable care is that care, skill, and
diligence in and about the process of manufacturing and preparing for market that
a reasonably skillful and diligent person or a reasonably prudent person would use
under the same or similar circumstances. Thus, a manufacturer of an article has
the duty of exercising reasonable care at least to see that there is no risk of injury
from negligent manufacture where the article is used in the ordinary manner for
which it is intended. The manufacturer has the duty to see that the article is free
of any potentially dangerous defect or defect that might be expected to produce
personal injuries or property damage. In addition, the manufacturer has the duty
of making the product reasonably safe for any anticipated emergency and he must
provide proper safety devices where required under the circumstances and under
the duty of reasonable care.
Such a duty of reasonable care is also applicable to manufacturers of
products which are designed to be component parts of other manufactured
products.
The lack of safety devices may constitute defective design. If the product
is unreasonably dangerous for its intended use, or for a use that can reasonably be
expected, without a safety device, then the manufacturer may have a duty to
install such a device. Cost, feasilibity [sic], and obviousness of the danger are
factors that must be considered in determining whether such a duty exists.
In a negligence action against a manufacturer in Virginia the plaintiff must
show: (1) that the goods were unreasonably dangerous either for the use to which
they would ordinarily be put or for some other reasonably foreseeable purpose,
and (2) that the unreasonably dangerous condition existed when the goods left the
defendant’s hands.
Dameron v. Fort Worth Steel & Machinery Corp., 1985 WL 306781, *3-4 (Va. Cir. Ct., City
of Richmond 1985) (citations omitted).

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Manufacturers are expected reasonably to foresee (i) that a person may be injured
while the product is being used for the purposes for which it was manufactured
and sold and (ii) that a person may be injured while the product is being used in
surroundings which are normal for the use of that product.
Richmond, Fredericksburg and Potomac R. Co. v. Davis Industries, Inc., 787 F. Supp. 572, 577
(E.D. Va. 1992) (citations omitted).
Production of an unreasonably dangerous product is not the only basis for holding a
manufacturer liable for negligence in Virginia. For example, a manufacturer may also be held
liable for failure to warn, as it has been stated that
[t]he manufacturer of a chattel will be subject to liability when he
(a) knows or has reason to know that the chattel is or is likely to be dangerous
for the use for which it is supplied, and
(b) has no reason to believe that those for whose use the chattel is supplied will
realize its dangerous condition, and
(c) fails to exercise reasonable care to inform them of its dangerous condition
or of the facts which make it likely to be dangerous.
Featherall v. Firestone Tire and Rubber Co., 219 Va. 949, 962 (1979) (quoting Restatement
(Second) of Torts § 388); see also French v. York International Corp., 72 Va. Cir. 538, 2007 WL
6006671, *2 (Albemarle County 2007) (allegation of failure to warn of known hazards of air
conditioner refrigerant states independent cause of action in tort against builder of new house).
Defendant in the instant case manufactured a product that was utilized during the
renovation of a house. The complaint does not allege that Defendant specified any criteria for
the installation of its product at the house, or that Defendant ever visited the site. Instead, it
alleges that Defendant manufactured a defective product, resulting in property damage through
its failure to use reasonable care and failure to warn. Defendant is not entitled to dismissal of the
complaint.
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C.

Privity

Defendant insists that Plaintiff’s negligence count is barred by a lack of privity. To the
contrary, that AIU’s subrogor may not have been in privity with Defendant is irrelevant. “In
cases not provided for in [Va. Code] § 8.2-318 where recovery of damages for injury
to . . . property resulting from negligence is sought, lack of privity between the parties shall be
no defense.” Va. Code § 8.01-223. Consequently, a party which alleges negligent destruction of
property is not subject to a privity requirement. See also Blake Construction, supra, 233 Va. at
34.
The case of Leesburg Auto Center, LLC v. Leo Construction Company, 45 Va. Cir. 102,
1997 WL 1070482 (Loudon County 1997), is instructive.

In Leesburg Auto Center, the

defendant struck a power line while working on property adjacent to the plaintiff’s business. Id.
at *1. The resulting power surge damaged the plaintiff’s equipment, including computers and
fax machines, and caused monetary losses arising from business interruption. Id. The defendant
demurred, arguing that the economic loss doctrine barred the plaintiff’s negligence claim. Id.
The court disagreed, overruling the demurrer, noting that “Leesburg Auto Center is alleging
damage to property, both direct and consequential.

It is not a cause of action for solely

economic loss. Hence, privity is not required.” Id. Like the parties in that case, Plaintiff’s
subrogor and Defendant had no direct contractual relationship, and Plaintiff must therefore be
permitted to attempt to recover in tort.
D.

Warranty

Citing § 8.2-715 of Virginia’s Uniform Commercial Code (“U.C.C.”), Va. Code §
8.2-101, et seq., Defendant contends that, because Plaintiff was not in privity with Defendant,
Plaintiff is not entitled to recover from Defendant for breach of warranty. Defendant’s argument
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is unavailing.
Under Article 2 of the Virginia U.C.C., an implied warranty of merchantability attached
to the sale of the steel tubing. Va. Code § 8.2-314. Defendant thus warranted, inter alia, that the
tubing was “fit for the ordinary purposes for which such goods are used.” Id. § 8.2-314(2)(c).
Section 8.2-318 of the U.C.C. generally eliminates privity as a defense to such warranty
claims. It provides as follows:
Lack of privity between plaintiff and defendant shall be no defense in any action
brought against the manufacturer or seller of goods to recover damages for breach
of warranty, express or implied, or for negligence, although the plaintiff did not
purchase the goods from the defendant, if the plaintiff was a person whom the
manufacturer or seller might reasonably have expected to use, consume, or be
affected by the goods; however, this section shall not be construed to affect any
litigation pending on June 29, 1962.
To be sure, § 8.2-715, “Buyer’s incidental and consequential damages,” imposes a
contract requirement under certain circumstances, not applicable here. Section 8.2-715 states as
follows:
(1) Incidental damages resulting from the seller’s breach include expenses
reasonably incurred in inspection, receipt, transportation and care and custody of
goods rightfully rejected, any commercially reasonable charges, expenses or
commissions in connection with effecting cover and any other reasonable expense
incident to the delay or other breach.
(2) Consequential damages resulting from the seller’s breach include:
(a) any loss resulting from general or particular requirements and needs of which
the seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting from any breach of
warranty.
§ 8.2-715. Specifically regarding § 8.2-715(2)(a), the Supreme Court of Virginia has held that
[t]he phrase “at the time of contracting” in subparagraph (a) conveys the
understanding of a contract between two parties. . . . [W]e conclude that § 8.2-10-

715(2)(a) requires a contract between the parties for the recovery of consequential
economic loss damages incurred as a result of a breach of warranty by the seller.
Beard Plumbing and Heating, Inc. v. Thompson Plastics, Inc., 254 Va. 240, 245 (1997).
Addressing the apparent conflict between § 8.2-318 and § 8.2-715(2)(a), the court held that “§
8.2-715(2)(a) requires a contract between the parties for recovery of consequential economic loss
damages in a claim for breach of the implied warranty of merchantability. . . .” 254 Va. at 246
(emphasis added.). See also Pulte Home Corp. v. Parex, Inc., 265 Va. 518, 525 (2003) (under
§ 8.2-715(2)(a), home builder, which had settled with new-home buyers as to defective stucco,
was precluded from recovering from manufacturer of stucco in the absence of a contract).
When property damage has occurred, involving more than merely disappointed economic
expectations, § 8.2-715(2)(b), not § 8.2-715(2)(a), governs the extent of recoverable
consequential damages. According to the Comment to § 8.2-715,
[s]ubsection (2)(b) states the usual rule as to breach of warranty, allowing
recovery for injuries “proximately” resulting from the breach. Where the injury
involved follows the use of goods without discovery of the defect causing the
damage, the question of “proximate” cause turns on whether it was reasonable for
the buyer to use the goods without such inspection as would have revealed the
defects. If it was not reasonable for him to do so, or if he did in fact discover the
defect prior to his use, the injury would not proximately result from the breach of
warranty.
In the instant matter, involving a natural gas supply line installed in real property,
Plaintiff’s subrogor, Garthland (or Ms. Croson), could not have inspected the item in question
prior to putting it to use. As long as there was proximate cause linking the breach of warranty
with Plaintiff’s property damage, a cause of action in warranty lies. In Count II of its complaint,
alleging breach of the implied warranty of merchantability, Plaintiff alleges proximate cause.
Thus, Plaintiff has stated a cause of action for consequential damages resulting from the breach
of the warranty. As long as a plaintiff states facts which, if proven, would “plausibly” entitle him
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to relief, a motion to dismiss cannot be granted. See Twombly, 550 U.S. at 570; Iqbal, 556 U.S.
at ___, 129 S. Ct. at 1949.
Defendant cites a number of cases for the principle that a plaintiff may not recover in tort
for damage cause by a defective product integrated into construction. These cases are easily
distinguishable from the instant case, because in each of the cited cases, the plaintiffs sued for
defects in new residential construction for which the plaintiffs had contracted. Indeed, in each
case, the item purchased was the entire structure, and each case but one involved the plaintiff’s
disappointed economic damages.4 The courts’ reasoning in those cases, regarding why the
Virginia U.C.C. did not apply to those plaintiffs’ claims, highlights the key distinction between
the cited cases and the instant case. Most of the cited cases rely upon Winchester Homes, Inc. v.
Hoover Universal, Inc., 30 Va. Cir. 22, 1992 WL 884933 (Fairfax County 1992), which involved
a claim by a builder against the supplier of defective roofing material. The court agreed with the
defendant that “the homeowners purchased realty, not ‘goods’ as defined under the UCC.” Id. at
*5. Finding that realty was not subject to the provisions of the U.C.C., the court reasoned as
follows:
[T]he UCC implied warranties do not pass to the purchasers of residential
housing. Rather, purchasers receive consumer protections under Virginia Code §
55-70.1 from the developer. Under § 55-70.1, the developer bears the economic
costs of faulty construction and may bargain with the purchaser and disclaim the
statutory warranties.
Id. at *6 (emphasis added).
In contrast to the facts of Winchester and its progeny, in the instant case Plaintiff’s
4

The cited cases are: Glass v. Trafalgar House Property, Inc., 58 Va. Cir. 437 (Loudon County 2002); Bay Point
Condominium Associate v. RML Corp., 54 Va. Cir. 422 (City of Norfolk 2001); MacConkey v. F.J. Matter Design,
Inc., 54 Va. Cir. 1 (City of Virginia Beach 2000); Winchester Homes, Inc. v. Hoover Universal, Inc., 30 Va. Cir.
22 (Fairfax County 1992); and French v. York International Corp., 72 Va. Cir. 538 (Albemarle County 2007).
French involved personal injury to the plaintiffs.
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subrogor did not contract or otherwise arrange for the construction of new housing.

The

remedies prescribed by Va. Code § 55-70.1, “Implied warranties on new homes,” are simply
inapplicable here. Accordingly, the rationale of cases such as Winchester – that the costs
associated with defective building components should, as a matter of public policy, be shifted to
the home builder – is irrelevant here. In the Winchester-type case, “[t]he plaintiffs acquired a
home, not goods.”

Glass v. Trafalgar House Property, Inc., 58 Va. Cir. 437, 2002 WL

31431524, *4 (Loudon County 2002). Here, however, Plaintiff did not acquire a home.
IV. CONCLUSION
Plaintiff has alleged a set of facts that, if proved, support its claim for relief. Plaintiff
alleges not economic loss, but damage to property – property that was outside the scope of
Defendant’s obligation to Plaintiff’s subrogor.5 Under the laws of negligence and warranty, the
complaint states viable causes of action. Accordingly, the motion to dismiss will be denied, in
part, and granted, in part, as follows: regarding Counts I and II of the complaint, the motion to
dismiss will be denied; however, as Plaintiff has conceded that dismissal of Count III is
appropriate, the motion to dismiss will be granted regarding Count III.6 An appropriate order
follows.
9th
Entered this _____ day of June, 2011.

5

At the hearing on the instant motion, Defendant argued that the CSST, once installed in the pre-existing home,
became a “fixture” in the home and therefore was inseparable either from the home or from the contractor’s work.
I pause to add that, given the precedents discussed herein, there is no need for me to address this contention.
6

See n. 2, supra.
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