Ohio Supreme Court Upholds Constitutionality of State Statute Prohibiting Local Residency Requirements for Public Construction Projects

Peter W. Hahn | Benesch | September 25, 2019

In a close 4 to 3 decision, the Ohio Supreme Court has affirmed the constitutionality of a state statute enacted in 2016 prohibiting public authorities, including municipalities and school districts, from requiring a certain percentage of construction workers on local public construction projects to be residents of the public authority. 

The state law, Revised Code Section 9.75, was enacted in response to a City of Cleveland ordinance, called the Fannie Lewis Law, which required public-construction contracts in excess of $100,000 to include a provision mandating that city residents perform 20 percent of the construction work. That ordinance also imposed penalties for a contractor’s failure to comply with this contractual requirement, including a fine and the possibility of disqualification from future bids.

In response to this ordinance, the General Assembly enacted a statute that prohibits public authorities from requiring contractors to employ a certain number or percentage of local resident laborers. The statute also prohibits public authorities from awarding bonuses or preferences to contractors as an incentive to employ local laborers. The City of Cleveland filed a lawsuit to have the statute determined to be an unconstitutional invasion of the City’s “home rule” power. Both the trial court and the appellate court in Cuyahoga County agreed with the City and found the statute unconstitutional.

The Ohio Supreme Court reversed the lower courts, relying on an Ohio constitutional provision that gives the General Assembly power to enact laws that advance employees’ comfort and general welfare and provide for the assistance, support, well-being, and prosperity of Ohio’s working people. This power, according to the Supreme Court, trumps another provision in the Ohio Constitution that grants municipalities authority to exercise all powers of local self-government (the so-called “home rule” power). The Supreme Court further concluded that “[p]rotectionist city-residency regulations [like Cleveland’s] affect all Ohio construction workers, because every resident of a political subdivision is disfavored by the residency restrictions imposed by another political subdivision. … By providing an equal opportunity for Ohioans to compete for work on public-improvement projects both inside and outside of the political subdivisions in which they reside, R.C. 9.75 provides for the comfort and general welfare of all citizens working in the construction trade.”

As a result of this decision, any local ordinance and any public construction contract provision requiring a certain percentage or number of construction workers employed for a public construction project, or offering an incentive to contractors to employ only local workers, are void and unenforceable.  Public authorities can no longer dictate where workers on local projects must live, nor can they provide incentives to contractors to employ only local labor.

The case is Cleveland vs. State, Slip Opinion No. 2019-Ohio-3820.

Ohio Supreme Court: All Claims for Defective Construction or Design Must Be Brought Within 10 Years of Substantial Completion

Peter Hahn | Benesch | July 19, 2019

The Ohio Supreme Court has ruled any lawsuit for defective and unsafe conditions arising from the design or construction of an improvement to real property must be brought within 10 years of substantial completion of the project—regardless of whether the lawsuit arises out of a breach of contract or a tort.

In a victory for Benesch’s Appellate Practice Group, the Court’s decision in New Riegel Local School District Board of Education, et al. v. The Buehrer Group Architecture & Engineering, Inc., et al. [1] interprets Ohio’s Statute of Repose, [2] which generally requires certain construction defect claims to be brought within 10 years of the date of substantial completion. At issue in the case was whether that statute applies only to tort claims (such as claims that the general contractor or architect negligently performed its work by failing to comply with the applicable standard of care), or also to breach of contract claims. In holding that the Statute of Repose applies to both types of claims, the Supreme Court reversed its own 1986 holding that the statute applied only to tort claims. 

In the New Riegel case, the New Riegel Local School District filed a lawsuit against its architect, general contractor, roofing subcontractor, and a surety for damages arising out of condensation, moisture intrusion, and other deficiencies allegedly resulting from improper design and construction. The lawsuit was filed more than 10 years after substantial completion. At the time the lawsuit was filed, the statute of limitations for a breach of contract action was 15 years and the school district’s lawsuit was filed within that time period. (The statute of limitations for breach of contract claims has since been amended to 8 years.)  But because the school district’s claims were for breach of contract, it argued that the Statute of Repose did not apply and that its claims were not time-barred.

Benesch represented the surety, Ohio Farmers Insurance, at oral argument before the Supreme Court. Tracing the history of the Statute of Repose, the Court first determined that the legislature materially amended that statute after the Supreme Court’s original 1986 decision limiting the application of the statute to tort claims. That earlier decision, therefore, did not apply to the current version of the Statute of Repose, giving the Court an opportunity for a fresh look at whether the legislature intended for the statute to apply to tort claims only or to both tort and contract claims.  The Court held that the new statute’s language made it clear that the legislature intended for the statute to apply to both types of claims.  The Court then sent the case back to the lower courts to determine whether, in view of the Supreme Court’s new interpretation of the Statute of Repose, New Riegel’s lawsuit should proceed or be dismissed.

As a result of this decision, parties to a construction project should assume that claims for defective and unsafe conditions arising from the design or construction of an improvement to real estate will expire 10 years after substantial completion, subject to certain exceptions in the statute (including, for example, claims discovered within two years of the expiration of the 10-year period).  It no longer matters whether those claims arise out of a breach of the parties’ contract or the neglect of a duty under tort law.

Ohio Supreme Court Crushes “Fannie Lewis Law” in Cleveland – Reverses Court of Appeals in Hot Debate

Tara Rose and John Swansinger | Buckingham, Doolittle & Burrooughs | September 27, 2019

Ohio local hiring laws affecting contractors are destroyed, for now.

Municipalities will no longer be able to force local hiring upon contractors for various jobs. This especially impacts large cities and their citizens with the ambition to work in construction. The winners are contractors who want to bid on all public work throughout the state on a level playing field and not be forced to hire certain workers or pay fines.

Click here to read opinion

THE RULING: On September 24, 2019, the Supreme Court of Ohio ruled that the State of Ohio legislature prevails over Cleveland’s Fannie Lewis law. In the majority opinion, Justice Kennedy leaned on Article II, Section 34 of the Ohio Constitution which grants the Ohio General Assembly broad authority to legislate the welfare of the working people of Ohio. Justice Kennedy asserted that the Ohio legislature “…exercised that authority in enacting R.C. 9.75, which protects all employees engaged in the construction trades from public-improvement contracts that impose conditions on employment favoring a public authority’s own residents to the detriment of other construction workers in the state. Because every resident of a political subdivision is affected by the residency restrictions imposed by another political subdivision, the statute (R.C. 9.75) provides for the comfort and general welfare of all Ohio construction employees and therefore supersedes conflicting local ordinances.”

THE BACKGROUND: In 2003, the City of Cleveland passed the “Fannie Lewis Law.” The Fannie Lewis Law is an ordinance requiring that 20% of all hours worked by employees from the state of Ohio on a $100,000+ public construction project in the City must be completed by residents of the City of Cleveland. If a contractor fails to meet this quota, they are charged a fine. The City passed this law because, after much study and review, it believed its residents were not receiving adequate opportunities on local construction projects. Other cities throughout the state have passed similar requirements, with some requiring residency quotas as high as 50%. Here is the rub: Ohio Revised Code Section 9.75, which was passed in May of 2016, bars public authorities from requiring workers on public projects to reside in the geographic area of the project. Thus, the City of Cleveland sued the State of Ohio over this Revised Code Section one week before its effective date.

CITY OF CLEVELAND. The City of Cleveland argued that its authority to make public improvements is included within the powers of local self-government guaranteed by the constitution and R.C. 9.75 directly infringes on that right. The City also argued that construction employees already have the choice to live where they please, so no fundamental right is being infringed by enforcing the residency quotas. Instead, the City argued that the law provides much needed jobs to City residents who are trained and willing to work, but who are otherwise not being offered employment on these types of projects. The City has also provided data that purports to show that the ordinance has had a positive impact on the City’s work force. The City took the stance that R.C. 9.75 is not a general law of the State and, as such, it infringes on the City’s home-rule power. Lastly, the City argued that the Supreme Court should affirm the lower courts because R.C. 9.75 does not arise pursuant to the State’s employee-welfare powers and does not provide for the comfort, health, safety and general welfare of all employees engaged in construction work. Obviously, the court by a 4-3 margin disagreed.

IMPACT: Local hiring laws in Ohio are destroyed, for now. Municipalities will no longer be able to force local hiring upon contractors for various jobs. This especially impacts large cities and their citizens with the ambition to work in construction. The winners are contractors who want to bid on all public work throughout the state on a level playing field and not be forced to hire certain workers or pay fines.

The question remaining, is R.C. 9.75 being used as a tool for discrimination? We expect new local laws and additional state and federal constitutional challenges.

Ohio Supreme Court Bucks Recent Trend and Holds No Coverage for Construction Defects Under Commercial General Liability Policy

Heather Howell Wright | Bradley | December 2018

The insurance coverage analysis under a commercial general liability (“CGL”) insurance policy begins with the “insuring agreement.” The standard CGL policy provides coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” The standard CGL policy further provides that the property damage must be caused by an “occurrence,” which is in turn defined as “an accident.” Traditionally, courts had held that a construction defect was not an “accident,” and thus losses associated with such defects or faulty workmanship were not covered under a CGL policy. However, the recent trend has been for courts to find that construction defects or faulty workmanship do satisfy the “occurrence” and “property damage” requirements for CGL coverage. Yet, a recent decision out of Ohio bucks this trend of finding that claims of faulty workmanship may be covered under a CGL policy.

In Ohio N. Univ. v. Charles Constr. Servs. Inc., the Ohio Supreme Court recently held that construction defects do not constitute an occurrence under a standard-form CGL policy, and that an insurer has no obligation to defend or indemnify claims for defective work. The underlying claim in this case involved a contract between Ohio Northern University (“Owner”) and Charles Construction Services, Inc. (“Contractor”) to build a new conference center and hotel. After the project was complete, Owner discovered extensive water damage and structural defects. Owner filed suit against Contractor, which in turn filed third-party claims against its subcontractors. Contractor tendered the defense to its insurer, Cincinnati Insurance Company (“Cincinnati”), which intervened and sought a declaration that it had no duty to defend or indemnify Contractor.

In the trial court, Cincinnati filed a motion for summary judgment on the declaratory judgment claim and asserted that claims for defective workmanship are not claims for “property damage” caused by an “occurrence.” The trial court granted Cincinnati’s motion for summary judgment, finding there was no duty to defend or indemnify for faulty workmanship.

On appeal, the Ohio Supreme Court considered the CGL policy definition of “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.” The court opined that an accident was unexpected or unintended – involving fortuity. Because a subcontractor’s faulty work is not fortuitous, it could not satisfy the “occurrence” requirement in the CGL.

Importantly, the Ohio Supreme Court recognized that its decision conflicted with decisions in other states as well as the trend of finding coverage for construction defects – but the court explained that “[r]egardless of any trend in the law,” it was required to interpret the plain and unambiguous language of the policy. The court also noted that the Arkansas legislature had enacted a statute requiring that a CGL policy sold in Arkansas must define “occurrence” as including “property damage resulting from improper workmanship.” The Ohio N. Univ. Court noted that the Ohio General Assembly could pass similar legislation in response to the decision.

While the recent trend across the country has been for courts to find that construction defects may be covered under a CGL policy, this case may indicate a pendulum swing in the other direction. Even if it proves to be an outlier, it highlights the importance of knowing which law will apply to the interpretation of insurance policies, because the law can vary significantly from one jurisdiction to another.

The Importance of Careful Coverage Analysis

Heather Howell Wright | Bradley | July 2017

Ohio has joined the majority of jurisdictions in holding that a general liability policy may provide coverage for claims made by a project owner for property damage allegedly caused by the defective work of a subcontractor. In Ohio Northern Univ. v. Charles Constr. Serv., Inc., an Ohio appeals court found coverage. It distinguished a 2012 decision of the Ohio Supreme Court, Westfield Ins. Co. v. Custom Agri Systems, Inc. that seemed to hold, broadly, that “claims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.” A close comparison of the two cases reveals their consistency and demonstrates that the “devil is in the details” of any coverage analysis.

Coverage for Defective Work

Most commercial general liability policies are written on standardized forms developed by the Insurance Services Offices. The standard general liability policy provides that it applies to “property damage” caused by an “occurrence.” Whether faulty or defective workmanship constitutes an “occurrence” under the general liability policy is a state specific question, and courts across the country are divided on this issue. While some states have held that faulty workmanship or improper construction is not an “occurrence” because it can never be an “accident,” others have held that faulty workmanship can be an “accident” if the resulting damage occurs without the insured’s expectation or foresight. The recent trend has been for courts to find that construction defects or faulty workmanship satisfy the “occurrence” and “property damage” requirements under a general liability policy, and that losses sustained as a result of such defects may be covered.

The Ohio Cases

Ohio Northern University (the “Owner”) contracted with Charles Construction Services, Inc. (the “Contractor”) to build a luxury hotel and conference center on the Ohio Northern campus (the “Project”). The Contractor subcontracted most of the work to various trade and supplier subcontractors. After construction was complete, the Owner discovered evidence of water intrusion and moisture damage to wall coverings, dry wall, and insulation. Remediation of the damage led to the discovery of additional structural defects.

The Owner sued the Contractor, who, in turn, filed claims against its subcontractors. The Contractor’s insurer, The Cincinnati Insurance Company (the “Insurer”), intervened in the lawsuit and sought a declaration that it had no obligation to defend or indemnify the Contractor. In a motion for summary judgment, the insurer relied on the Ohio Supreme Court’s decision in Custom Agri to support its claim that it had no duty to defend or indemnify the Contractor. The trial court held in favor of the insurer holding that, under Custom Agri, defective construction was not an occurrence and, therefore, that there was no coverage.

On appeal, the Court of Appeals explicitly rejected the Insurer’s argument that Custom Agri stood for the “expansive proposition that all claims for defective workmanship, regardless of who performed it, are barred from coverage under a [general liability] policy because such claims” can never constitute a claim for “property damage” caused by an “occurrence” under a general liability policy. The Court of Appeals noted that, unlike Custom Agri, the property damage sustained by Ohio Northern was caused by the defective work of subcontractors, not by the work of the insured Contractor. Moreover, the property damage occurred after the project was completed. Thus, the property damage was within the “Products-Completed Operations Hazard,” and the insured Contractor had paid supplemental premiums to obtain “Products-Completed Operations Hazard” coverage. In considering each of these facts, the Court of Appeals reversed the trial court’s entry of summary judgment for the Insurer.

Conclusion

Comparison of these two Ohio cases demonstrates the necessity of conducting a close review of the facts and procedural posture of any coverage case to identify possible bases for establishing coverage.