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.