No “Occurrence” in Ohio for Contractor’s or Sub-Contractor’s Defective Work

An “Occurrence” Must Be Fortuitous

Ohio, bucking the majority of court opinions, has interpreted the standard Commercial General Liability (CGL) policy to require for coverage to exist that a loss is fortuitous. An “occurrence” to Ohio courts require that the damage is accidental, fortuitous, and not a normal business risk of a person in the construction business. Policies are interpreted by Ohio to not insure an insured’s work itself; rather, the policies generally insure consequential risks that stem from the insured’s work.

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 Ohio Northern University v. Charles Construction Services, Inc., Et Al.; Cincinnati Insurance Company, No. 2017-0514, 2018 OHIO 4057, Supreme Court Of Ohio, (October 9, 2018) the Ohio Supreme Court followed its 2012 decision that held that an insurance claim filed by a contractor under its commercial general liability (“CGL”) insurance policy for property damage caused by the contractor’s own faulty workmanship does not involve an “occurrence” such that the CGL policy would cover the loss. [Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 2012-Ohio-4712, 979 N.E.2d 269, syllabus.]

That decision turned on the CGL policy’s definition of “occurrence” as an ” ‘accident, including continuous or repeated exposure to substantially the same general harmful conditions.’ ” quoting the policy. Because the CGL policy did not define “accident,” the Supreme Court looked to the word’s common meaning and concluded that an “accident” involves “fortuity. As a result the Supreme Court held that under the language of the CGL policy, property damage caused by a contractor’s own faulty work is not accidental and is therefore not covered.

Here, the question is whether the general contractor’s CGL policy covers claims for property damage caused by a subcontractor’s faulty work.

FACTS

In 2008 Ohio Northern University (“ONU”) contracted with Charles Construction Services, Inc., to build The University Inn and Conference Center, a new luxury hotel and conference center on ONU’s campus.

Charles Construction promised to perform all the work itself or through subcontractors. The contract required Charles Construction to maintain a CGL policy.

Charles Construction obtained from appellant, Cincinnati Insurance Company (“CIC”), a CGL policy. The general liability maximum payout under the CGL policy was $2 million.

The project’s estimated cost was $8 million. In September 2011, after work was completed, ONU discovered that the inn had suffered extensive water damage from hidden leaks that it believed were caused by the defective work of Charles Construction and its subcontractors. In the course of repairing the water damage, ONU discovered other serious structural defects. ONU estimated its repair costs at approximately $6 million.

ONU sued Charles Construction for breach of contract and other claims related to the inn’s damage. Charles Construction answered and filed third-party complaints against several of its subcontractors. Charles Construction submitted to CIC a CGL-policy claim and asked CIC to defend it in court and indemnify it against any damages. CIC intervened in order to pursue a declaratory judgment against Charles Construction and to submit jury interrogatories related to insurance coverage. CIC explained that it would defend Charles Construction while reserving its right to argue that the CGL policy did not cover ONU’s claim.

After CIC intervened, it sought a declaratory judgment that it did not have to defend or indemnify Charles Construction under the CGL policy. In January 2015, CIC filed a motion for summary judgment relying on Custom Agri, which it characterized as holding that “claims for defective workmanship are not claims for ‘property damage’ caused by an ‘occurrence.’ ” The trial court issued judgments in favor of CIC, reasoning that this court’s decision in Custom Agri “constrained” it and that consequently, CIC could deny Charles Construction’s claim and had no duty to defend Charles Construction.

Charles Construction and ONU appealed to the Third District Court of Appeals. The Third District read Custom Agri narrowly and noted that it did not address any subcontractor-specific CGL-policy terms. It found the CGL policy language to be ambiguous as to whether it covers claims for property damage caused by subcontractors’ defective work, and because ambiguous language is construed against the insurer, it reversed the judgment of the trial court.

ANALYSIS

Custom Agri

The Supreme Court noted that the general principle underlying CGL policies is that they are not intended to protect business owners from ordinary business risks. Courts generally conclude that the policies are intended to insure the risks of an insured causing damage to other persons and their property, but that the policies are not intended to insure the risks of an insured causing damage to the insured’s own work.

The CGL policy is not intended to insure business risks that are the normal, frequent, or predictable consequences of doing business and which businesses can control and manage. A CGL policy does not insure the insured’s work itself; rather, it insures consequential damages that stem from that work. As a result, a CGL policy may provide coverage for claims arising out of tort, breaches of contract, and statutory liabilities as long as the requisite accidental occurrence and property damage are present.

Faulty workmanship claims generally are not covered, except for their consequential damages, because they are not fortuitous. In short, contractors’ “business risks” are not covered by insurance, but derivative damages are. The key issues are whether the contractor controlled the process leading to the damages and whether the damages were anticipated.

The Supreme Court in Custom Agri concluded that “claims for faulty workmanship, such as the one in the present case, are not fortuitous in the context of a CGL policy like the one here.” Therefore, they are not claims for ‘property damage’ caused by an ‘occurrence’ under a CGL policy such as the one in the present case.

The CGL policy

As in Custom Agri, the decision depends on the specific terms of the CGL policy, including the PCOH and subcontractor-specific language.

By its terms, the CGL policy emphasizes that only “an occurrence” can trigger coverage for property damage. But the damage must be due to an “occurrence,” which is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” There is no question that the damage to the inn was “property damage” that was discovered after work was completed. But without an “occurrence” as defined in the CGL policy, there is no coverage for any property damage.

Under the CGL policy’s plain language, property damage caused by a subcontractor’s faulty work does not meet the definition of an “occurrence” because faulty work is not fortuitous

The Ohio Supreme Court made a determination that the claims “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy” because faulty work is not fortuitous in Custom Agri. Here, the Supreme Court similarly held that a subcontractor’s faulty work does not meet the definition of an “occurrence” because it is not based in fortuity.

There is no question that the water-related damage to the inn was “property damage” and was discovered after work had been completed. But unless there was an “occurrence,” the subcontractor language has no effect.

The Supreme Court concluded that the subcontractors’ faulty work was not fortuitous. It acknowledged that its reasoning in this case contrasts with recent decisions of other courts. The language requiring that “property damage” be caused by an “occurrence” remains a constant in the policies. And under Ohio precedent, faulty workmanship is not an occurrence as defined in CGL polices like the one before it.

Regardless of any trend in the law, the Ohio Supreme Court concluded it must look to the plain and ordinary meaning of the language used in the CGL policy before it. When the language of a written contract is clear, the Supreme Court may look no further than the writing itself to find the intent of the parties.

Property damage caused by a subcontractor’s faulty work is not fortuitous and does meet the definition of an “occurrence” under a CGL policy. CIC was not required to defend Charles Construction against ONU’s lawsuit or indemnify Charles Construction against any damages.

The Supreme Court concluded that property damage caused by a subcontractor’s faulty work is not an “occurrence” under a CGL policy because it cannot be deemed fortuitous.

ZALMA OPINION

Ohio courts do not feel a need to follow what they believe to be the errors of their brother courts in other states. They read the insurance contracts in light of their interpretation of the law regardless of the fact that they are in the minority. The Supreme Court noted, however, that the Supreme Court of Arkansas reached the same conclusion only to have its legislature pass a statute that states that a CGL policy offered for sale in Arkansas shall define “occurrence” to include “[p]roperty damage * * * resulting from faulty workmanship.” The Ohio Supreme Court made clear that if it were so inclined the Ohio General Assembly could take similar action in response to its opinion.