The Ohio Supreme Court’s October 9, 2018 decision in Ohio Northern University v. Charles Construction Services, Inc., 2018-Ohio-4057 issued a blow to general contractors attempting to obtain insurance coverage under their commercial general liability (CGL) policies for property damage caused by their subcontractor’s faulty work. The Ohio Supreme Court held that faulty work is not “accidental” or “fortuitous,” as contemplated within the policy’s definition of an “occurrence,” and found that the general contractor had no coverage under its CGL policy.
Ohio Northern University (University) sued the general contractor, Charles Construction Services, Inc. (CCS) arising out of a contract to build a luxury hotel and conference center (Project) on the University’s campus. After completion of the Project, the University discovered extensive water damage from hidden leaks and other serious structural defects that it believed were caused by the defective work of CCS and its subcontractors. In response to the University filing suit, CCS sought coverage under its CGL policy, relying on the products/completed operations (PCO) coverage available for claims involving property damage caused by the faulty work of a subcontractor.
Cincinnati Insurance Company (Cincinnati), CCS’s CGL carrier, intervened in the case and argued that it did not have to provide coverage to CCS. Cincinnati relied on the Ohio Supreme Court’s holding in Westfield Ins. Co. v. Custom Agri Sys. Inc., 2012-Ohio-4712, which ruled that there is no coverage under a CGL policy for a defective work claim because such faulty workmanship is not considered “accidental” or “fortuitous.” Therefore, the defective work is not an “occurrence” as defined under a CGL policy.
The University case made its way up to the Ohio Supreme Court, which ruled in Cincinnati’s favor, holding that it did not owe coverage to CCS. Notwithstanding the policy provisions that provide PCO coverage for property damages caused by the faulty work of a subcontractor, the Court applied Custom Agri. In doing so, it explained that there would be coverage for property damage claims caused by a subcontractor’s faulty workmanship if the faulty work was fortuitous. Ultimately, the Court ruled in Cincinnati’s favor because the subcontractors’ faulty work was not “accidental” or “fortuitous.” Therefore, there was no “occurrence” that triggered coverage under the policy.
In deciding this case, Ohio has unfortunately joined a small minority of states, including Ohio’s neighbor, Pennsylvania, in limiting coverage to general contractors for claims brought against them involving damage caused by the faulty workmanship of its subcontractors. The practical implications of this case are extremely significant for general contractors who have CGL policies issued in Ohio. In response to similar decisions in other states, the insurance industry has developed specific endorsements that effectively restore the coverage stripped away by cases like Ohio Northern University. The endorsement (often referred to as a “resultant property endorsement”) modifies the definition of “occurrence” to include property damage caused by the faulty workmanship of a subcontractor. Accordingly, it is important that you discuss this issue with your insurance agent/broker to confirm that this endorsement can be added to your CGL (and excess) policy.
