Defective Construction Not an Occurrence
October 29, 2012
The Ohio Supreme Court has ruled that defective construction (faulty workmanship) is not an occurrence and thus, not covered by the general liability policy. This case is Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012 WL 4944305.
Younglove Construction entered into a contract with PSD Development for the construction of a feed-manufacturing plant. PSD eventually withheld payment, alleging that it had sustained damages as a result of defects in a steel grain bin. The bin had been constructed by Custom Agri Systems as a subcontractor. Younglove filed a complaint against Custom Agri and Custom Agri sought coverage under its general liability policy with Westfield.
Custom was being sued under two general theories: defective construction and consequential damages resulting from the defective construction. Westfield argued that none of the claims against Custom sought compensation for property damage caused by an occurrence and so, none of the claims were covered under the general liability policy. Westfield and Custom filed cross-motions for summary judgment in federal court. That court ruled in favor of Westfield and an appeal was made to the Sixth Circuit. The Circuit Court found that there was no controlling precedent on the issue in Ohio and it certified the following two questions to the Ohio Supreme Court: are the claims of defective construction/workmanship brought by a property owner claims for property damage caused by an occurrence under a commercial general liability policy; and, if such claims are considered property damage caused by an occurrence, does the contractual liability exclusion in the commercial general liability policy preclude coverage for claims for defective construction/workmanship?
The Ohio Supreme Court found that it is a widely accepted principle that defective construction claims are not covered by the general liability policy. However, the court went on, the issue to decide here is whether Custom's alleged defective construction of and workmanship on the steel grain bin constitute property damage caused by an occurrence. The court noted that “occurrence” is defined in the policy as an accident, and an accident has been defined by the court as “unexpected, as well as unintended”; moreover, inherent in the plain meaning of accident is the doctrine of fortuity. Therefore, faulty workmanship claims are generally not covered, except for their consequential damages, because they are not fortuitous.
In keeping with the spirit of fortuity that is fundamental to insurance coverage, the Supreme Court ruled that the general liability policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin. The court also noted that the majority view of Ohio appellate courts is that claims of defective construction or workmanship are not claims for property damage caused by an occurrence. Defective workmanship does not constitute an accident and without an accident, there can be no occurrence as such term is defined in the insurance policy.
The court answered the first certified question in the negative and did not reach the second question since it was unnecessary to do so.
Editor's Note: The Ohio Supreme Court established precedent in the state with this decision. Basically, the court ruled that general liability policies do not insure an insured's work itself; rather, the policies generally insure consequential risks that stem from the insured's work. Claims for defective workmanship are not covered by the general liability policy.