Construction Defects by Subcontractors are Not Covered under CGL Policy in Ohio
October 15, 2018
After a decision by the Supreme Court of Ohio, Ohio has joined a small minority of states by deciding that an insurer has no obligation to defend or indemnify a CGL policyholder against a suit by a property owner because a subcontractor's defective work does not constitute an occurrence necessary to trigger coverage. The case is Ohio N. Univ. v. Charles Constr. Servs., 2018-Ohio-4057.
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 promised to perform all of the work itself or through subcontractors. The contract between CCS and ONU required that CCS held CGL insurance that included a Products-Completed Operations Hazard (PCOH) clause which would cover damages that arose out of completed operations. CCS obtained insurance through Cincinnati Insurance Company that included a PCOH clause which applied specifically to work performed by subcontractors. The policy defined “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy stipulated that CIC would pay those sums that CCS became legally obligated to pay as damages due to “property damage” to which the insurance applied. The CIC policy also contained an exclusion indicating that the insurance would not apply to any damage to property that must be repaired or replaced because “your work” was incorrectly performed. “Your work” was defined to include the work of CCS or on its behalf, including subcontractors work. The
“Your work” exclusion contained a caveat that the exclusion did not apply to
property damage included in the PCOH clause. The exclusion also did not apply if the damaged work or the work out of which the damage arises was performed on the insured's behalf by a subcontractor. CCS paid additional premium for PCOH coverage.
After the project was completed in 2011, ONU discovered extensive water damage from latent leaks which ONU believed were caused by the defective work of CCS and its subcontractors. Other structural defects were discovered while ONU was making repairs. ONU sued CCS in October 2012. CCS filed third-party claims against several contractors that had worked on the building. CCS asked CIC to defend and indemnify, and CIC sought declaratory relief that it had not duty to defend or indemnify CCS under the applicable CGL policy. CIC relied on prior caselaw (discussed in the Editors Note) in filing 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-claims for summary judgment citing the PCOH clause and it's subcontractor-specific terms, as they were different than those in the cited case.
The Ohio Supreme Court relied heavily on the reasoning it put forth in Westfield Ins. Co. v. Custom Agri Sys. Inc. Specifically, the Court noted that only an “occurrence” can trigger coverage for property damage, and without an “occurrence” as defined by the policy, the PCOH and subcontractor language in the policy has no effect, even though CCS paid more money for that coverage. The policies contained language that indicated that in order to be an occurrence, the incident must be unexpected as well as unintended. The Court noted that CGL policies are not made to protect owners from the “normal, frequent, or predictable consequences of doing business” that an insurer can manage.
The Court recognized in its opinion that the parties to a construction contract understand that contractors can buy coverage for defects that are discovered after completion of construction through the PCOH clause, and also noted that CGL policies and PCOH clauses now ensure that a subcontractors work is covered. The Court pointed out that other states have found coverage under the CGL policy to be applicable in similar instances, and that this opinion is in conflict with those states decisions. The Court said that despite legal trends, they needed to look no further than the plain and ordinary meaning of the language in the policy. The Court mentioned that other states have enacted a statute requiring the CGL policy to define “occurrence” to include “property damage resulting from improper workmanship,” and that Ohio could take similar action.
Editor's Note:
This is 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, where the Court considered the definition of “Occurrence” in the policy “an accident including continuous or repeated exposure to substantially the same general harmful conditions”, and in order to be an occurrence by definition the incident has to be an accident. In the construction context, the Court determined essentially that building a bad commercial building, house, or steel grain bin is not considered an accident for which CGL insurance applies.
Unless the Ohio legislature makes some changes, owners, contractors, and subcontractors in Ohio can no longer rely on CGL policies for defense and indemnity for claims that arise out of construction defects. Also, due to the Ohio Revised Code, parties cannot get around this clause by making disputes subject to another states laws, or requiring them to be moved to another venue. R.C. §§ 4113.62.