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.

Completed-Operations Coverage: What Is Included and Excluded from Your Commercial General Liability Policy?

Barbara Jordan and Donald Leach | Dinsmore & Shohl LLP | January 31, 2017

In 2008, Ohio Northern University (ONU) entered into a contract with Charles Construction Services, Inc. (CCS) for the construction of The Inn, a new luxury hotel and conference center on ONU’s Campus, consisting of 57,000 square feet of space, including guest rooms, meeting rooms, kitchen, laundry, spa, front desk lobby, office area and support areas. After construction was complete, ONU discovered damage to the Inn caused by water intrusion and moisture in The Inn’s wall coverings, dry wall, insulation and exterior walls.1Remediation of this damage led to the discovery of additional structural defects.2 ONU subsequently brought a claim against CCS in 2012 seeking damages relating to the deficient construction services. CCS then brought third-party claims against many of its subcontractors that performed the work, which resulted in the alleged property damage.

CCS’s insurer, Cincinnati Insurance Company (CIC), intervened in the lawsuit and filed a motion for summary judgment, asking the Hancock County Court of Common Pleas3 to dismiss it from its obligation to defend CCS, relying upon the Ohio Supreme Court’s precedent from Westfield Ins. Co. v. Custom Agri Systems, Inc.4 In Westfield Ins., the Supreme Court of Ohio held “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.”5

“Courts generally conclude that commercial general liability 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 . . . . In other words, the policies do not insure an insured’s work itself; rather, the policies generally insure consequential risks that stem from the insured’s work.”6

The Hancock County Court of Common Pleas granted CIC’s motion on September 16, 20157, dismissing CIC from its obligation to defend CCS. The dismissal relied completely upon the holding in Westfield Ins. by finding that CCS’s subcontractors’ defective work was not consequential property damage that amounted to an “occurrence” under CIC’s commercial general liability policy. Instead, it was damage to the insured’s own work—whether that work was performed by the contractor or its subcontractors did not matter.

On appeal, ONU and CCS each challenged the trial court’s reliance on the decision in Westfield Ins. by drawing a distinction between the facts of the Westfield Ins. case and the damages alleged by ONU. ONU’s motion in opposition explained that its claims against CCS involved damages arising after the conclusion of construction, not during the project (as was the case in Westfield Ins.) and the claims were for property damage resulting from the defective workmanship of CCS’s subcontractors, not the defective work itself. Further, both “ONU and CCS argued that CCS purchased additional ‘products-completed operations’ coverage as an add-on to its commercial general liability policy, which expressly contemplates and provides coverage for ONU’s claims against CCS.”8

On Monday, January 23, 2017, the Ohio Second District Court of Appeals reversed and remanded the judgment of the Hancock County Court of Common Pleas.9 The Court of Appeals analyzed the provision of CCS’s policy relating to products-completed operations. The Court agreed with ONU and CCS in that this provision specifically contemplated coverage for property damage arising after the completion of the project. However, the products-completed operations coverage in CCS’s policy included an exclusion from coverage for “property damage” arising due to “your work.” Therefore, property damage occurring after completion of construction, which arose due to CCS’s work, was excluded from the products-completed operations coverage.

But, does CCS’s “work” encompass the “work” of CCS’s subcontractors? Maybe not. The exclusion to the products-completed operations coverage included an exception: “[t]his exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”10 Therefore, products-completed operations coverage seems to apply in CCS’s case because: “(1) the project was completed at the time the claim arose and; (2) the claim involved ‘property damage’ caused by work performed on [CCS’s] behalf ‘by a subcontractor.’”

The Court of Appeals concluded that, at the very least, the combination of the products-completed operations coverage and the exclusions and exceptions thereto created an ambiguity as to whether “the parties intended and specifically contracted for ‘property damage’ caused by a subcontractor’s faulty workmanship in a completed project.”11Because the well-established rule of contract construction states that ambiguities will be strictly construed against the drafter (in this case, CIC) and liberally in favor of the non-drafter (CCS)12, the trial court’s grant of summary judgment relieving CIC from its obligation to defend CCS was reversed.

In summary, review your commercial general liability policy. Does it include completed-operations coverage? Be prudent about reviewing any exceptions or exclusions from that coverage, as well as any other provisions of your commercial general liability coverage. You can bet that your insurer will now be taking a closer look at these provisions. Contact your Dinsmore attorney with any questions or concerns.

1 Ohio N. Univ. v. Charles Constr. Servs., 3d Dist. Hancock No. 5-16-01, 2017-Ohio-258, at ¶ 3.
2 Id.
3 Id. at ¶ 6.
4 Westfield Ins. Co. v. Custom Agri Sys., 133 Ohio St.3d 476, 2012-Ohio-4712, 979 N.E.2d 269.
5 Ohio N. Univ. v. Charles Constr. Servs., 3d Dist. Hancock No. 5-16-01, 2017-Ohio-258.
6 Id. at ¶ 21 (citing Westfield Ins. Co., at ¶ 9) (emphasis added).
7 Id. at ¶ 10.
8 Id. at ¶ 15.
9 Ohio N. Univ. v. Charles Constr. Servs., 3d Dist. Hancock No. 5-16-01, 2017-Ohio-258.
10 Id. at ¶ 33 (emphasis added).
11 Id. at ¶ 41.
12 Id. at ¶ 40.

Prospective Reasonableness: Assessing Liquidated Damages in Construction Contracts

Barbara Jordan | Dinsmore & Shohl LLP | February 24, 2016

Today, the Supreme Court of Ohio ruled that the reasonableness of a liquidated damages provision is determined by prospectively analyzing the per diem amount rather than the aggregate amount of damages assessed.

Piketon v. Boone Coleman Constr., Inc., Slip Opinion No. 2016-Ohio-628, involves the late delivery of roadway and traffic signal improvements at the intersection of U.S. 23 and Market Street in Piketon, Ohio. Boone Coleman Construction, Inc. (Boone) and the Village of Piketon (Village) entered into a contract in which the Village agreed to pay Boone a total of $683,300 to complete the project. The project was completed 397 days late. Applying the contract’s $700 per day liquidated damage provision to this delay equated to Boone being assessed $277,900 in liquidated damages.

In overturning the decision of the Court of Appeals for Pike County, the Supreme Court of Ohio stated that the appellate court was incorrect in its conclusion that “because the ‘resulting amount [of liquidated damages] is manifestly inequitable and unrealistic, courts are justified in determining the provision to be an unenforceable penalty.’”1 Instead, the Supreme Court of Ohio held that courts must conduct a prospective analysis of the per diem amount of the liquidated damages provision at the time the contract is executed. If the provision was reasonable at the time the contract was signed and bears a reasonable relation to the actual damages incurred, the provision will be enforced. Therefore, the question the appellate court should have answered was whether assessing $700 per day was reasonable as opposed to the total amount of liquidated damages assessed.

The Court reiterated that an enforceable liquidated damage per diem amount must be a “genuine covenanted pre-estimate of damages”2 —meaning the parties evaluated and forecasted the probable loss resulting from a delay in completing the construction. In Piketon, it appears the per diem amount of $700 may have been roughly based off of…

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