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Ohio Supreme Court Rules That Construction Defects in the Work of Subcontractors Are Not Covered Under a CGL Policy

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By Joseph E. Cavasinni and Timothy B. Spille

October 11, 2018

On October 9, 2018, in the case of Ohio N. Univ. v. Charles Constr. Servs. Inc., Slip Opinion No. 20018-Ohio-4057, the Ohio Supreme Court ruled that an insurer has no obligation to defend or indemnify a commercial general liability policyholder against a suit by a property owner since a subcontractor’s defective work does not constitute an occurrence necessary to trigger coverage. This was an extension of the Court’s prior decision in Westfield Ins. Co. v. Custom Agri Sys. Inc.,133 Ohio St.3d 476, 2012-Ohio-4712. 

In Westfield Ins. Co., the Ohio Supreme Court considered what counts as an “occurrence” as that term is defined in a commercial general liability (“CGL”) policy of insurance. The Court framed the coverage issue as whether the contractor’s alleged defective construction of, and workmanship on, a steel grain bin constituted property damage caused by an “occurrence.”  Westfield’s policy defined the word “occurrence” as “[…] an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” With this noted, the Court concluded that the spirit of fortuity is fundamental to insurance coverage and therefore, by the plain language of the insurance policy, to be an “occurrence,” the events precipitating the claim must be an accident, i.e., “unexpected, as well as unintended.” In the construction context, the Ohio Supreme Court held that “[…] claims of defective construction or workmanship are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy […].” Stated differently, building a bad house, commercial property, or in this case, a steel grain bin, isn’t an accident for which commercial general liability insurance coverage applies. 

The underlying facts giving rise to the claims in Ohio N. Univ. were different.  In 2008, Ohio Northern University (“ONU”) contracted with Charles Construction Services, Inc. (“CCS”) to build a new luxury hotel and conference center on ONU’s campus. CCS’ contract with ONU required it to maintain a CGL policy that included a products-completed operations hazard (“PCOH”) clause covering damages arising out of completed operations. CCS obtained a CGL policy through Cincinnati Insurance Company (“CIC”) that included a PCOH clause and terms specifically related to work performed by subcontractors.  

Like the policy at issue in Westfield Ins. Co., the CGL policy obtained by CCS from CIC defined an “occurrence” to be an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurance policy also provided that CIC would pay those sums that CCS became legally obligated to pay as damages due to “property damage” to which the insurance applied. Moreover, the CIC insurance policy contained an exclusion indicating that the insurance did not apply to property damage to any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it. “Your work” was defined to include work or operations performed by CCS or on its behalf (which would necessarily include a subcontractor’s work). The “your work” exclusion, however, did not apply to “property damage” included in the “products-completed operations hazard.” Further, the exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on [CCS’] behalf by a subcontractor.” CCS even paid an additional premium to CIC for the PCOH coverage.  

In September 2011, after the project was complete, ONU discovered extensive water damage from hidden leaks it believed were caused by the defective work of CCS and its subcontractors.  ONU also discovered other structural defects while in the process of making repairs.  Ultimately, ONU sued CCS in the Hancock County Court of Common Pleas in October 2012. CCS then filed third-party claims against several of its subcontractors. After CCS tendered the defense to CIC, CIC intervened, seeking declaratory relief that it had no duty to defend or indemnify CCS under the CGL policy. 

Relying on Custom Agri Sys. Inc., CIC filed a motion for summary judgment on the basis that claims for defective workmanship are not claims for “property damage” caused by an “occurrence.”  ONU and CCS filed cross-motions for summary judgment arguing, in part, that the PCOH clause and subcontractor-specific terms in the CIC policy distinguished this case from Custom Agri Sys. Inc. The trial court granted CIC’s summary judgment on the basis that it was “constrained” by the Ohio Supreme Court’s decision in Custom Agri Sys. Inc.   

CCS and ONU then appealed the coverage dispute to the Third District Court of Appeals, who determined that Custom Agri Sys. Inc. remains good law with respect to construction defects caused by an insured’s own work. The Third District noted, however, that Custom Agri Sys. Inc. did not address any PCOH or subcontractor-specific provisions under the CGL policy. As such, the Third District found CIC’s policy language to be ambiguous as to whether it covered claims for property damage caused by a subcontractor’s defective work and, when construing ambiguous language against the insurer, it reversed the judgment of the trial court. 

On appeal to the Ohio Supreme Court, the Court relied heavily on its prior reasoning in Custom Agri Sys. Inc.  Specifically, based on the language in the CIC policy, the Court noted that only an “occurrence” can trigger coverage for property damage. Without an “occurrence” as that term is defined by the insurance policy, the PCOH and subcontractor language in the CIC policy had no effect even though CCS paid additional money for it. Notably, the insurance policies construed in the Custom Agri Sys. Inc. and Ohio N. Univ. cases defined an “occurrence” to be an “accident including continuous or repeated exposure to substantially the same general harmful conditions.”  As such, the Court concluded that an accident was something that was “unexpected as well as unintended.” Underpinning this point, inherent in the plain meaning of word “accident” is the concept of fortuity. In this instance, however, the Court could not say the subcontractors’ faulty work was fortuitous and noted that CGL policies are not intended to protect owners from ordinary business risks “that are normal, frequent or predictable consequences of doing business that the insured can manage.” 

In its opinion, the Court recognized that parties to a construction contract understand that contractors can buy coverage for defects discovered after completion through the PCOH clause and that CGL policies and PCOH clauses have changed over time to assure that a subcontractor’s work is covered. The Court also noted that decisions from other states have found coverage under a CGL policy to be applicable in these instances and that its decision conflicts with these decisions from other states. Despite these legal trends in other states, the Court emphasized that it needed to look no further than the plain and ordinary meaning of the language in the CGL policy before it.  As such, in holding that property damage caused by a subcontractor’s faulty work is not fortuitous and does not meet the definition of an “occurrence” under a CGL policy, the Court reversed the judgment of the Third District Court of Appeals and reinstated the decision of the trial court granting summary judgment in favor of CIC.

Finally, in its opinion, the Ohio Supreme Court also acknowledged that the Arkansas legislature enacted a statute which required a CGL policy offered for sale in Arkansas to define an “occurrence” to include “property damage resulting from improper workmanship.” The Court noted that the Ohio General Assembly, if it were so inclined, could take similar action in response to its decision.

The net effect of the Ohio Supreme Court’s decision in Ohio N. Univ. is that, unless the legislature acts, owners, contractors and subcontractors can no longer rely on CGL policies to provide defense and indemnity for claims arising from construction defects. Moreover, for claims arising from projects in Ohio, parties to a construction contract cannot circumvent this result by either making any disputes subject to the law of another state or requiring them to be venued in another state. In that regard, R.C. §§4113.62(D)(1) and (2) provide that, for construction contracts involving real property situated in Ohio, any provisions of the contract requiring any dispute or claims to be decided according to the laws of another state or requiring litigation, arbitration or other dispute resolution process to take place in another state are void and unenforceable as against public policy. 

If you have any further questions regarding this decision, please do not hesitate to contact a member of our Architects and Engineers/Construction Liability Practice Group.