In its recent decision in Westfield Ins. Co. v. Custom Agri Systems, 2012 Ohio 4712 (Ohio Oct. 16, 2012), the Supreme Court of Ohio, answering a question certified by the United States Court of Appeals for the Sixth Circuit, had occasion to consider whether “claims of defective construction/workmanship brought by a property owner are claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.” The court also had before it the certified question of whether the contractual liability exclusion applies to bar coverage for such claims.
The coverage dispute in Westfield arose out of Younglove Construction’s contract with PSD Development to build a feed-manufacturing plant in Sandusky, Ohio. Younglove brought suit against PSD for non-payment of funds, which resulted in PSD filing a counterclaim for defective construction of a steel bin that had been built by Younglove’s subcontractor, Custom Agri Systems. Younglove subsequently brought a third-party action against Custom, alleging defective construction and consequential damages resulting from the defective construction. Custom, in turn, tendered its defense to its general liability insurer Westfield. Westfield intervened in the lawsuit to seek a declaration that it had no coverage obligation to Custom, as Younglove’s third-party claim did not allege “property damage” arising out of an “occurrence.” Westfield also sought a declaration with respect to the application of its policy’s contractual liability exclusion. The Northern District of Ohio acknowledged that there was an open question under Ohio law as to whether construction defect claims qualify for coverage under general liability policies, but nevertheless granted summary judgment in Westfield’s favor. The matter was appealed to the Sixth Circuit, which certified the question to the Ohio Supreme Court.
Citing to the Ohio Appellate Court decision in Heile v. Herrmann, 736 N.E.2d 566 (1st Dist.1999), as well as insurance treatises and case law from other states, the Ohio Supreme Court agreed with the general proposition that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured's own work.” The court nevertheless stated that these general principles did not end the inquiry, but instead, the court was required to determine whether “Custom's alleged defective construction of and workmanship on the steel grain bin constitute ‘property damage’ caused by an ‘occurrence.’”
The court began its analysis with an overview of what constitutes an “occurrence,” defined by the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” It noted that the term “accident” was not defined by the Westfield policy, but that the term has an inherent “fortuity principle,” and thus is generally defined to mean “unexpected as well as unintended.” Relying on the concept of fortuity, as well the decisions by lower Ohio courts and by the Arkansas Supreme Court in Essex Ins. Co. v. Holder, 37261 S.W.3d 456 (2008), the court concluded that faulty workmanship is not an occurrence for the purpose of a general liability policy, explaining:
… 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. In keeping with the spirit of fortuity that is fundamental to insurance coverage, we hold that the CGL policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin. Our holding is consistent with the majority of Ohio courts that have denied coverage for this type of claim. The majority view is that claims of defective construction or workmanship are not claims for "property damage" caused by an "occurrence" under a CGL policy.
In light of its holding on this issue, the Ohio Supreme Court did not need to reach the second certified question concerning the application of the Westfield policy’s contractual liability exclusion.