In a decision that the court itself characterized as bucking a modern trend, the Ohio Supreme Court found no coverage for a general contractor under a standard commercial general liability policy’s “occurrence” requirement for property damage caused by its subcontractor’s faulty work. Ohio Northern University v. Charles Construction Services, Inc., 2018 Ohio LEXIS 2375 (Ohio, Oct. 9, 2018) expanded the scope of the court’s prior holding in Westfield Insurance Co. v. Custom Agricultural Systems, Inc., 133 Ohio St. 3d 476 (2012), in which it held that property damage caused by an insured contractor’s own faulty workmanship did not involve an occurrence such that its CGL policy would provide coverage for the loss.

Factual and Procedural Background

Ohio Northern University (ONU) contracted with Charles Construction Services, Inc. (Charles Construction) to build The University Inn and Conference Center. Cincinnati Insurance Company (CIC) issued a standard CGL policy to Charles Construction that contained a products-completed operations-hazard (PCOH) clause and an exception to the “Damage to Your Work” exclusion related to subcontractors.

Following the completion of the project, ONU discovered extensive water damage from latent leaks it believed were caused by defective work by Charles Construction and its subcontractors. While repairing the water damage, ONU discovered further significant structural defects, which it repaired for approximately $6 million. ONU then filed suit against Charles Construction, which in turn filed third-party complaints against several of its subcontractors. Charles Construction submitted a claim to CIC and sought a defense and indemnity under its CGL policy. CIC intervened in the lawsuit and sought a declaration that it had no duty to defend or indemnify Charles Construction.

CIC argued in the lower courts that claims for defective workmanship were not claims for property damage caused by an occurrence. Charles Construction argued that the PCOH clause and the subcontractor-specific language in the policy distinguished the matter from Custom Agricultural.

The trial court issued a judgment in favor of CIC and the Third District Court of Appeals reversed the decision, agreeing with Charles Construction that a subcontractor’s faulty workmanship was an occurrence, Custom Agricultural notwithstanding.

The Ohio Supreme Court Upholds Plain Meaning of Occurrence as Requiring a Fortuity

The Ohio Supreme Court grounded its holding in the concept of fortuity and in the plain language of the policy. Relying on Custom Agricultural, the court maintained that claims for faulty workmanship are ordinary business risks, not fortuitous events in the CGL context, and are thus not claims for property damage caused by an occurrence.

While the Custom Agricultural holding is consistent with the law in many other jurisdictions, ONU’s extension of Custom Agricultural to subcontractor work is a departure from some neighboring courts. The appellate court held, consistent with decisions in Iowa, Arizona, Indiana, and West Virginia, that the language of the “modern standard-form CGL policy” demonstrates a drafting intent that a subcontractor’s faulty work is covered, and is, therefore, an occurrence. See Ohio N. Univ. v. Charles Constr. Servs., Inc., 77 N.E.3d 538, 551 (Ohio Ct. App.). The Ohio Supreme Court was not compelled by the recent trend and found that the PCOH clause and the subcontractor-specific language do not create coverage where the claim is not rooted in a fortuitous occurrence.

Respecting the “Damage to Your Work” exclusion, the court held that the exception to the exclusion for “damaged work … performed on your behalf by a subcontractor” is surplusage if the subcontractor’s faulty work is not an occurrence in the first instance. Similarly, the “Damage to Property” exclusion excepts property damage included in the PCOH, which includes property damage occurring away from the insured’s premises and arising out work performed on the insured’s behalf. Again, the court reasoned that where such work does not qualify as an occurrence, there can be no coverage.

The court acknowledged its deviation from the recent trend followed by the appellate court but held that the “nuanced” interpretation of the policies in those decisions did not supersede the plain requirement for coverage of property damage caused by an occurrence, which does not encompass faulty workmanship.