Ohio High Court: Subcontractor’s Faulty Work Not Covered by GC’s Policy

The Ohio Supreme Court in early October ruled that a general contractor’s commercial general liability policy (CGL) does not cover the faulty work of a subcontractor.

In its consideration of Ohio N. Univ. v. Charles Constr. Servs., Inc., the court relied on its 2012 ruling in Westfield Ins. Co. v. Custom Agri Sys., Inc., in which the court held that an insurance claim filed by a contractor under a CGL policy for property damages caused by its own faulty workmanship is not a covered occurrence under the policy. In that case the court looked at the definition of occurrence in the CGL policy and found that it is defined as an accident. The court, in Custom Agri, held that because the “property damage caused by a contractor’s own faulty work” was not an accident, it was not covered under the CGL policy.

The court said the issue in the appeal of Ohio N. Univ. v. Charles Constr. Servs. is virtually the same as the issue it considered in Custom Agri — with one difference. In Ohio Northern, the question “is whether the general contractor’s CGL policy covers claims for property damage caused by a subcontractor’s faulty work,” the court said.

By applying the holding of Custom Agri and considering that the damage to the property in the Ohio Northern case was caused by the faulty work of a subcontractor, the court held once again that the damage is not covered under the general contractor’s CGL policy, because the damage was not caused by an accident.

The case stems from 2008 and an approximately $8 million contract between Ohio Northern University and Charles Construction Service, under which Charles Construction was to build The University Inn and Conference Center at Ohio Northern in Ada. The complex was completed in September 2011 but shortly after its opening extensive water damage was discovered.

According to the Ohio Supreme Court’s written slip opinion, under the contract “Charles Construction promised to perform all the work itself or through subcontractors.” Charles Construction was required to secure and maintain a CGL policy that included a products completed operations hazard (PCOH) clause, which “covers damages ‘arising out of completed operations,’ and terms that specifically apply to work performed by subcontractors,” the court’s document states.

Charles Construction obtained the CGL with the PCOH clause from Cincinnati Insurance Co. The CGL provided a maximum payout of $2 million and the maximum payout for the PCOH was another $2 million.

In the course of repairing the water damage to the Ohio Northern complex, other serious structural defects were found. The cost of repairing the property damage caused by those defects came to about $6 million.

Ohio Northern sued Charles Construction for breach of contract and other claims related to damage to the hotel complex.

Charles Construction filed third-party complaints against some of its contractors and submitted a claim to CIC, asking the insurer “to defend it in court and indemnify it against any damages,” the court’s opinion states. CIC sought a declaratory judgment against Charles Construction and stated “that it would defend Charles Construction while reserving its right to argue that the CGL policy did not cover ONU’s claim.”

CIC later sought declaratory judgment that it did not have to defend Charles Construction and in 2015 the trial court agreed. The Third District Court of Appeals reversed the trial court’s decision, noting that Custom Agri applies to construction defects caused by the insured’s own work but does not address PCOH or subcontractor-specific claims. It also found the CGL policy language regarding subcontractors to be ambiguous and so found in favor of the insured.

The Ohio Supreme Court disagreed, reversed the decision of the appeals court, and reinstated the trial court’s finding that CIC had no duty to defend Charles Construction.

In its opinion, the court noted that after the Arkansas Supreme Court in a similar case found that the language in the CGL policy did not include coverage for damage caused by a subcontractor’s faulty workmanship, that state’s legislature amended the insurance code to provide that a CGL policy sold in Arkansas must define occurrence to include property damage resulting from faulty workmanship.

“If it were so inclined, the Ohio General Assembly could take similar action in response to our opinion today,” the Ohio Supreme Court suggested.