Commercial General Liability Policies in the Construction Industry: Ohio Moves to the Norm
Disputes over responsibility for damages arising from defective construction are a persistent problem in commercial construction. The vast majority of such incidents are created by water penetration and ensuing damage to furnishings, fixtures and structures. Effective settlement of resulting claims is typically dependent on insurance coverage, even with a construction manager and subcontractors who are solvent. Where the responsible players are judgment proof, insurance coverage is an owner’s only recourse. Over the years, insurers have come up with creative arguments, which many courts have accepted, that defeat coverage. A recent Ohio case is now moving Ohio in the opposite direction.
By way of background, court decisions over the extent of coverage have yielded widely varying results based on widely differing rationales. Differing interpretations of "occurrence" and "accident" have accounted for most of the divergent results. Courts have often held that any defective construction was not an accident, and therefore not an occurrence, meaning there was no coverage. At a more abstract level, judicial attitudes toward contractors’ "business risks" have often played into the non-coverage outcomes, as has the doctrine of "fortuitous losses." Those courts have reasoned that defective construction is a business risk and not the kind of loss insurance was intended to cover. On the other hand, the history of development of the commercial general liability ("CGL") provisions, when referenced at all by courts, typically has weighed in favor of a finding of coverage.
At issue is the broad form policy covering property damage for completed operations. For purposes of completed operations, it is the exception to the "your work" exclusion of the standard CGL policy that is important. The exclusion precludes coverage for "property damage" to "your work" arising out of that work or any part of it. The exception applies where the defective work giving rise to the damage was performed on the named insured’s behalf by a subcontractor. While damage caused by the named insured to its own work is excluded, coverage still applies to damage caused by defective work of a subcontractor.
Looking back over the last 20 years of state and federal court decisions construing CGL policy provisions in construction defect litigation, consternation is justified. By contrast, however, from the more limited perspective of state supreme court opinions issued in the last decade, there appears to be a strong, emerging consensus that construction defects are occurrences, until proven otherwise, that come within the initial broad grant of coverage of the CGL policy.
In 2012, the Ohio Supreme Court weighed in on the issue of coverage for damages arising from defective work in Westfield Ins. Co. v. Custom Agri Systems, Inc., 133 Ohio St.3d 476, 979 N.E.2d 269 (2012). The court held that construction defects were not "occurrences," as defined in the contractor’s CGL policy, and therefore did not trigger insurance coverage. The decision was based on the analysis that "occurrence" is defined in the CGL policy as "an accident." The court had previously defined "accidental" as "unexpected, as well as unintended." Hybud Equip. Corp. v. Sphere Drake Ins. Co., 64 Ohio St.3d 657, 666, 597 N.E.2d 1096 (1992). It further cited a Kentucky Supreme Court decision, which held that "[i]nherent in the plain meaning of accident is the doctrine of fortuity. Indeed, [t]he fortuity principle is central to the notion of what constitutes insurance. ..." (citing Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W. 3d 69, 74 (Ky. 2011)). And, without the triggering event being "fortuitous," i.e., accidental, there would be no coverage.
The Custom Agri Systems, Inc. case resulted in much consternation in Ohio’s construction industry. One of the key foundations critical to fair resolution of construction disputes seemingly had been eliminated. On closer examination, however, a different picture has emerged. The question that was at issue in the Custom Agri Systems case was in the form of a certified question posed to the Ohio Supreme Court by the United States 6th Circuit Court of Appeals. The actual lawsuit was in federal court, and the federal appellate court effectively asked the Ohio Supreme Court to tell it the law of Ohio on this question. Custom Agri, the defendant, neither filed a brief with the Ohio Supreme Court nor had counsel appear on its behalf at oral argument. It is hard to imagine the Ohio Supreme Court reaching a conclusion favorable to Custom Agri’s position without effective advocacy. Secondly, the damage the insurer was being asked to cover related to Custom Agri’s own work, not that of a subcontractor. This proved to be a critical distinction in a subsequent lawsuit, notwithstanding the court’s broad language regarding "occurrence," which had become the source of the above-noted consternation.
That subsequent case, Ohio Northern University v. Charles Construction Services, Inc., 2017 WL 334151, --- N.E. 3d ---- (2017), involved the construction of a luxury hotel and conference center by Charles Construction on behalf of Ohio Northern University. After project completion, the university discovered evidence of water intrusion and moisture damage. In the course of remediation, Ohio Northern discovered serious structural defects. The university initiated a lawsuit against Charles Construction, which brought in many of its subcontractors. Charles Construction’s insurer then filed a successful motion to intervene. In a motion for summary judgment, the insurer relied on Custom Agri to support its claim that it had no duty to defend and indemnify Ohio Northern. In response, the university distinguished its case by noting that it was the subcontractors of Charles Construction who were responsible for the defective work and ensuing damage. The trial court held in favor of the insurer, finding that Custom Agri was specifically applicable, that the defective construction was not an occurrence and, therefore, that there was no coverage. The university promptly appealed.
In its decision, the 3rd District Court of Appeals found that the Custom Agri holding confirmed "the well-established principles that CGL policies are not intended to protect against a contractor’s own defective work" (emphasis added). Because Ohio Northern was asserting claims that arose after construction was complete, the court looked to see if there was coverage under the products-completed operations provision. It first found that there was no coverage for "property damage" to "that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it." It then focused on an express exception to this exclusion, namely, where the work was performed by a subcontractor. Due to this exception, the court found coverage under the products-completed operations provision. The work in question had been performed by the subcontractor and not the insured contractor’s own forces.
In its finding, the court explicitly rejected the insurer’s position that Custom Agri established that "all property damage" — regardless of who performed it — can as a matter of law never constitute an "occurrence." In so ruling, the court found it noteworthy that the insurer failed to explain sufficiently what purpose the exclusions and corresponding exceptions cited above would have had if the insurer’s conclusions were accepted. The court found it persuasive that other jurisdictions confronted with the same question reached the same conclusion.
In summary, Charles Construction is a well-reasoned opinion that deftly addresses the decision in Custom Agri and would place Ohio in alignment with recent state supreme court opinions, if it is upheld by the Ohio Supreme Court. While that court has yet to affirm the decision in Charles Construction, the case presents a compelling argument justifying coverage for damages to or arising out of a subcontractor’s work. At least for the present, owners and the construction industry in Ohio can point to this decision as a much-needed resource for addressing damages arising from defective construction.
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