On October 9, 2018, the Ohio Supreme Court issued an important decision in Ohio N. Univ. v. Charles Constr. Servc., Inc., Slip Opinion No. 2018-Ohio-4057. Departing from the majority view, the Ohio Supreme Court held that a general contractor’s commercial general liability policy does not cover claims for property damage caused by a subcontractor’s faulty work because faulty work is not accidental or “fortuitous,” as contemplated within the policy’s definition of an “occurrence” triggering coverage.
The case arose out of a contract between Ohio Northern University (“ONU”) and Charles Construction Services (“CCS”) for CCS to build a luxury hotel and conference center on ONU’s campus. Following completion of construction, ONU discovered that the hotel suffered extensive water damage that ONU suspected was caused by defective work performed by CCS or its subtrades. Further, in the process of remediating the water damage, ONU uncovered significant structural defects with the hotel. ONU estimated the total remediation costs at six million dollars.
ONU filed a lawsuit against CCS in Hancock County Common Pleas Court. CCS, in turn, submitted a claim and tendered its defense to its commercial general liability carrier, Cincinnati Insurance Company (“Cincinnati Ins.”). Cincinnati Ins. intervened in the lawsuit seeking a declaratory judgment that it was not obligated to defend or indemnify CCS. Cincinnati Ins. argued that under the Ohio Supreme Court’s decision in Westfield Ins. Co. v. Custom Agri Sys., 133 Ohio St. 3d 476 (2012), property damage arising from defective work does not constitute an occurrence, regardless of whether the work was performed by the insured contractor or its subcontractors. CCS argued that Custom Agri was inapplicable because CCS (i.e. the insured) did not self-perform the work at issue and because CCS had purchased products-completed operations coverage, which applied to defective construction claims arising from the work of its subcontractors, like the claims at issue.
The trial court granted summary judgment to Cincinnati Ins., but Ohio’s Third District Court of Appeals reversed. The Third District held in CCS’s favor based on the exclusions to the applicable CGL policy, which expressly preserved coverage for damaged work or damages arising from faulty work if (1) the work was performed by a subcontractor, and (2) the damage occurred after construction was completed. Further, the Third District found that if it were to adopt Cincinnati Ins.’s interpretation of Custom Agri, it would render these bargained for provisions of the policy meaningless and thus, at a minimum, the provisions created an ambiguity that must be resolved in favor of the insured, CCS.
The Ohio Supreme Court, however, in applying its holding in Custom Agri, reversed the Third District by finding that Cincinnati Ins. did not have a duty to defend and indemnify CCS. Specifically, the Court held that under the plain language of the CGL policy, coverage for property damage may only be triggered by an occurrence and property damage caused by a subcontractor’s faulty work does not meet the definition of an “occurrence” because faulty work in not fortuitous. The Ohio Supreme Court further explained that unless there was an “occurrence,” the language of the policy exclusions attempting to preserve coverage for property damage caused by a subcontractor’s defective work had no effect, despite the fact that CCS paid additional money for this coverage.
The practical impact is that contractors must now anticipate that claims for property damage arising from faulty work—regardless of whether the work was self-performed by the insured or performed by the insured’s subcontractors—will not be covered under their existing CGL policy, even if the policy includes language that appears on its face to cover these claims. Based on this holding, absent legislative intervention, the only means to effectively cover these claims in Ohio is for CGL carriers to revise their industry standard definition of “occurrence” or develop endorsements that will restore coverage, all of which will likely be available to insured contractors at an increased cost.